Academic journal article Journal of Small Business Management

Job Order Cost Accounting Information Systems

Academic journal article Journal of Small Business Management

Job Order Cost Accounting Information Systems

Article excerpt

JOB ORDER COST ACCOUNTING INFORMATION SYSTEMS

The ^cost accounting information system (CAIS) is one of the most important information systems in any business. It is the key to management's assessment of the company's efforts to achieve a profit. Since it is so important, the CAIS must be carefully designed and properly maintained.

Small businesses are the backbone of the American economy. They provide, in the aggregate, most of the jobs for "working America.' They account for 38 percent of all sales, 44 percent of assets, and 55 percent of private sector employment.1 Therefore, it is extremely important that these businesses survive and grow. A properly functioning CAIS is an essential ingredient for survival and growth. It keeps management informed by monitoring and reporting the results of operations, and provides information essential for planning, controlling, and other decisionmaking needs of management.

1 McKinsey & Company, Inc., "The Winning Performance of the Midsized Growth Companies' (unpublished report), 1983. A study commissioned by the American Business Conference.

Many small businesses are cash poor, especially in the critical early years. Thus, many small business managers feel they are in a very difficult situation--they cannot afford a "good' CAIS, but they can't afford to be without one. This is especially true of managers of small manufactruring concerns operating on a job-cost basis. The cause of this seeming paradox is management's misconception of what constitutes a "good' CAIS. Cost accounting concepts and techniques usually taught in business courses are presented in the context of large companies. Therefore, even those who have some formal accounting education sometimes experience difficulty in applying these concepts and techniques in a small business context. A good (optimal) CAIS is one that provides management with needed information that is (1) cost/benefit justifiable; (2) presented in a form that management can work with; and (3) available when it is needed.

To gain a better understanding of how small businesses can utilize conventional managerial accounting concepts and techniques in designing and implementing an effective Job-Order Cost Accounting Information System, the following case example is presented.

THE COMPANY

ZTC Sign Company is a small closely-held corporation with the only stockholders being its two managers. The company employs seven people, including the managers. It manufactures metal, plastic, and painted (wood) signs to specifications and provides contract maintenance services (e.g., keeping signs clean, replacing burned-out bulbs, and keeping electrical wiring in good repair). The company has four departmental functions: (1) accounting and administrative services; (2) plastic and metal signs; (3) painted signs; and (4) service contract work.

The major stockholder and president of the company believed that profit margins were not what they should be and that his pricing policy was the major cause. The pricing decisions were made based on "ball-park' estimates of costs. Management failed to explicitly include any overhead costs. In most instances, estimates of total labor hours expended on a job were used because there was no complete accounting for employees' time. Compounding these problems was the fact that prices often had to be quoted before any work was done. Since the owners had no clear idea of overhead and labor costs, there was no way of knowing whether the quoted prices would cover costs and provide a profit. Thus, the president wanted an accounting system that would provide more complete information on the cost of individual jobs. Due to the "jobshop' nature of the production process (producing to specification), a Job-Order CAIS was implemented.

THE PLANNING PHASE

The following plan of action can be followed as a guide when developing a new CAIS with the aid of a knowledgable consultant. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.