Question

what decisions must a managerial accountant make when designing a cost accounting system? What are the physical characteristics of production that would cause management to choose a job order costing system?

Answer 1

Answer to first question:

While designing a cost accounting system, a managerial accountant needs to be very much clear about the objectives for which he is trying to set up the system for and needs to be clear on the outcomes that could come because of the system that will be set up. There are certain key decisions that the managerial accountant needs to make which are listed down below:

1. Feasibility study - Whether as per the requirements is it feasible to design a cost accounting system for the business or not ?

2. Cost Benefit Analysis - This is a key factor that needs to be kept in mind i.e., Cost to develop the system should not blindfold the benefits that could occur from developing and installing the cost accounting system. That is the benefits from such installation should exceed the costs.

3. Legal requirements - Is there any legal requirement to maintain the cost records as per the applicable statutes, then the requirements of that should be kept in mind while making a cost accounting system.

4. Scope - The scope of the cost accounting system must be clearly decided upon beforehand the developing of the system.

5. Outcome requirements - What all outcomes are required from the system have to be decided upon before making a design of the system.

There are also many other factors which the managerial accountant can consider while developing the system according to the facts and circumstances of a particular business.

Answer to second question:

The job order costing system is chosen in a situation where the business model is such that it requires a differentiation in terms of output as per the clients requirement. The production in such cases is intermittent and not continuous. The production is generally against customer’s order but not for stock. So when the characteristics of production are as above mentioned in such cases, job order costing system is used.