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A STUDY ON THE ROLE OF COST ACCOUNTING TECHNIQUE IN

MANUFACTURING INDUSTRIES

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© 2022 IJRAR March 2022, Volume 9, Issue 1 www.ijrar.org (E-ISSN 2348-1269, P- ISSN 2349-5138)

A STUDY ON THE ROLE OF COST

ACCOUNTING TECHNIQUE IN
MANUFACTURING INDUSTRIES
1
Sneha Sara Abraham, 2Dr. Kritika Tekwani, 3Prof (Dr). Ravi Kumar Goyal,4 Christopher Christudas Sujatha
1
Research Scholar, School of Commerce and Management, Nirwan University, Jaipur, Rajasthan.
2
Assistant Professor, School of Commerce and Management, Nirwan University, Jaipur, Rajasthan.
3
President, Nirwan University, Jaipur, Rajasthan.
Assistant Professor, Sree Narayana Guru Kripa College, Pothencode, Trivandrum, Kerala.

Abstract: This study is conducted to assess the influence of cost accounting techniques in today’s demand and developing the
cost accuracy. This study has mainly used the qualitative research design, where questionnaires were distributed to the
production department in the manufacturing industries. Finally, the result will help the managers and the organization to a
conclusion that which of these techniques will enhance effective cost control and effective management decision. From the
study researcher come to the conclusion that most of the manufacturing organizations do not have idea about kaizen costing,
throughput costing, back-flush costing, hybrid costing and life cycle costing techniques. There are few numbers of
manufacturing organizations which adopt these techniques at low rank. All surveyed manufacturing organizations know about
traditional costing, variable costing, absorption costing, standard costing, job order costing, and process costing technique.

Key terms - Cost Accounting Techniques, Manufacturing Organizations, Influence, Cost Accuracy, Cost Control

1 INTRODUCTION

This study is designed to evaluate the application of cost accounting technique in manufacturing industries. It therefore
examines the techniques of cost accounting technique as a tool of industrial survival in the present economy. The study will also
examine cost control system of Manufacturing Industries to know whether a control system exists.
In this highly competitive environment of business, profit of any business organization cannot be increased merely by
increasing the selling price. Therefore, to improve profit and profitability, Cost Management in the form of cost control and cost
reduction is the only remedy for industries engaged in manufacture and sale of product. Cost reduction is done with the
objective of producing goods at minimum cost without compromising the quality of products. It is aimed at developing a system
in which non-productive activates are minimized and efficiency of various factors is enhanced. Effective cost reduction
ultimately results into increase in profitability and profit.

II NEED AND SIGNIFICANCE OF THE STUDY

The main objective of cost accounting is communicating both financial and non-financial information to management for
planning, controlling, and evaluating resources (Rayburn, 1996). In its existence, cost accounting, as main part of management
accounting, is continuously changing. To produce the quality products with low-price, managers of the manufacturing
organizations are now using different types of cost accounting techniques. Some are traditional techniques; some are modern
techniques.

III OVERVIEW OF COST ACCOUNTING TECHNIQUES

Various types of cost accounting techniques are being used by the different types of manufacturing organizations in India.
Among those, some are traditional techniques, some are advanced techniques. Manufacturing organizations are using those
according to their requirements and limitations. The following table briefly describes the meaning of different types of cost
accounting techniques:

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Table-1: Cost Accounting Techniques

Techniques Descriptions
An approach where costs are allocated to products based on labour hour or machine
Traditional costing
hour.
An approach where costs are allocated to specific activities based on structural and
Activity Based
executional cost drivers. The activities require resources and the product/service uses
Costing (ABC)
activities.
Variable costing is a technique where only the variable costs are considered while
Variable costing computing a cost of a product. Fixed costs are charged against profit in the period in
which they arise.
Under this technique, both variable and fixed costs are charged to production, i.e. total
Absorption costing
costs include both variable and fixed cost.
A method used during product and process design that involves estimating a cost
calculated by subtracting a desired profit margin from an estimated (or market based)
Target Costing
price to arrive at a desired production, engineering or marketing cost. The product is then
designed to meet that cost.
Differential costing Differential cost is the difference in total cost between two alternatives
Standard cost is preset per unit and then actual cost is compared with the standard cost
Standard costing
and finally a variance is sought out and action is taken accordingly.
Opportunity costs are the expected benefits which the company would have derived from
Opportunity costing
those resources if they were not committed to the proposed project.
Kaizen costing ensures continuous improvement by supporting the cost reduction
Kaizen costing
process in the manufacturing phase.
Method of inventory costing in which only variable direct material costs are included as
Throughput costing
inventoriable costs.
The costing of specific product attributes that appeal to customers. Attributes considered
Attribute Costing
may include: reliability, warranty arrangements, after sale service.
The appraisal of costs along all the stages of a product or service’s life. In general these
Life Cycle Costing
stages may include design, introduction, growth, decline and eventually abandonment.
Identification and control of the costs associated with the creation, identification, repair
Quality Costing and prevention of defects. The target is to direct management attention to prioritize
quality (in a broader sense also safety and environment) problems.
The use of cost data based an strategic and marketing information to develop
Strategic Costing
and identify superior strategies that will produce a sustainable competitive advantage.
An activity-based approach where costs are allocated to activities required to design,
procure, produce, market, distribute and service a product/service along the entire
Value-chain costing
industry value chain. It embraces the consideration of the linkages with suppliers and
customers to attain higher efficiency.
Cost accountant adopts the zero-defects costing concept whose performance standard is
Zero-defects to do it right the first time. Operators are responsible for zero-defects. Operators will stop
costing the manufacturing process to take immediate corrective action on discovery of an error
or defect.
Job order costing is used in those business concerns where production is carried out as
Job order costing
per specific order and customers specifications.
Process costing Where manufacturing is carried out as a continuous process, process costing is used.

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Costing system that omits recording some or all of the journal entries relating to the
Back-flush costing
cycle from purchase of direct materials to the sale of finished goods.
Hybrid or mixed Costing system that blends characteristics from both job order costing systems and
costing process costing systems.

IV OBJECTIVES OF THE STUDY

Ob1: To overview the cost accounting techniques.

Ob2: To examine the adoption level of different types of cost accounting of manufacturing organizations.
Ob3: To study the effect of different types of cost accounting on performance improvement.
Ob4: To suggest some recommendations to the users of cost accounting techniques and decision-makers of manufacturing
organizations.

V RESEARCH METHODOLOGY

1. Target population

The target population for the purpose of the study is listed manufacturing organizations in India

2. Sample unit

For this study secondary data has been collected. From the website of KSE the monthly stock prices for the sample firms
are obtained from Jan 2019 to Dec 2021. And from the website of SBP the data for the macroeconomic variables are collected
for the period of three years.

3. Sample size

For this study a limited survey has been conducted covering a total of 50 listed manufacturing organizations in India, of
which 18 are Clothing and textile companies, 10 are Food Production, eight are Electronics and Computers, two Plastic
companies and two Wood product manufacturing companies.

4.Sampling technique

Stratified sampling technique has been used. A list of listed manufacturing organizations of five different categories has
been considered.

5. Data collection technique

This study is carried out using primary data which has been collected through a structured survey questionnaire.
Moreover, different local and international published articles were also reviewed to strengthen theoretical backgrounds of the
study. Different standard textbooks on accounting dealing with cost accounting techniques had also been gone through.

6. Data analysis

In this study Cronbach Co-efficient Alpha has been used to get the data on the variables considered. To measure the
adoption level of cost accounting techniques in listed manufacturing organizations 5-point Likert measurement scale where 1
denoted “no idea” and 5 denoted “highly adoption” and descriptive statistical analysis has been applied.

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VI FINDINGS AND CONCLUSION

In this study, reliability assessment was carried out using Cronbach Co-efficient Alpha. A low value of Cronbach Co-
efficient Alpha indicates the sample of items performs poorly in capturing the construct that motivated the measure and vice-
versa. Reliability/ internal consistency of the variables using Cronbach Co-efficient Alpha (Table-2) has been measured which
are shown below:

Table-2: Summary of the Reliability Measurement

Number Number
Dimensions α-value
of cases of items
Traditional costing, Activity Based Costing (ABC), Variable costing,

Absorption costing, Target Costing, Differential costing, Standard

costing, Opportunity costing, Kaizen costing, Throughput costing,

Attribute Costing, Life Cycle Costing, Quality Costing, Strategic

40 20 .8726
Costing, Value-chain costing, Zero-defects costing, Job order costing,

Process costing, Back-flush costing, Hybrid or mixed costing

The minimally acceptable reliability for primary research should be in the range of .50 to .60 (Nunnally, 1967). For this
study, Co-efficient Alpha value has been computed for five variables which is .8726.
Among the selected 20 cost accounting techniques, manufacturing organizations generally use several techniques
simultaneously. The adoption level of selected cost accounting techniques of manufacturing organizations is as follow:

Table-3: Adoption level of Cost Accounting Techniques

Cost Medium
No No Low High
Accounting Mean
idea adoption adoption adoption
Techniques
adoption

Traditional
0 4 11 15 10 2.225
costing

Activity
Based 2 2 8 16 12 2.15
Costing
Variable
0 1 8 13 18 1.8
costing

Absorption
0 10 9 11 10 2.475
costing

Target
3 4 7 11 15 2.225
Costing

Differential
2 10 12 8 8 2.75
costing

Standard
0 0 9 15 16 1.825
costing

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Opportunity
8 5 12 12 3 3.075
costing

Kaizen
20 11 9 0 0 4.275
costing

Throughput
18 13 9 0 0 4.225
costing

Attribute
6 15 11 8 0 3.475
Costing

Life Cycle
18 11 6 5 0 4.05
Costing

Quality
5 8 12 11 4 2.975
Costing
Strategic
3 6 13 12 6 2.7
Costing

Value-chain
2 5 16 15 2 2.75
costing

Zero-
defects 7 10 18 4 1 3.45
costing

Job order
0 9 11 11 9 2.5
costing

Process
0 2 8 15 15 1.925
costing

Back-flush
17 16 4 3 0 4.175
costing

Hybrid or
mixed 12 11 12 4 1 3.725
costing

The above table shows that most of the manufacturing organizations do not have idea about kaizen costing, throughput
costing, back-flush costing, hybrid costing and life cycle costing techniques. There are few numbers of manufacturing
organizations which adopt these techniques at low rank. All surveyed manufacturing organizations know about traditional
costing, variable costing, absorption costing, standard costing, job order costing, and process costing technique.

Highly used techniques are process costing, variable costing, standard costing, and target costing. If the mean scores
have been considered, the most usage techniques are variable costing. Then standard costing, target costing and process
costing possess 2nd, 3rd and 4th position. The least adopted technique is kaizen costing. Only activity-based costing in the
level of medium usage. Five techniques namely zero - defects costing, value - chain costing, strategic costing, quality costing
and differential costing are in level of low adoption.
The rest of the techniques are not well known to the manufacturing organizations. Though some organizations know,
they do not use. Very few number organizations use those. The response of the question “application of cost accounting
techniques affects performance improvement in your organization”, 11 manufacturing organizations agreed strongly, 19
agreed moderately, nine agreed slightly and one manufacturing organization was neutral. Manufacturing organizations are
using cost accounting techniques according to their requirements and limitations and the usage affects their performance
improvement.

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VII CONCLUSION

The boundaries of cost accounting have increased tremendously. It now refers to the gathering and providing of
information for decision needs of all sorts. The term cost management is widely used now-a-days. This concept has come
from the cost accounting. The cost management concept recognizes shift in cost structure when providing product cost
information. Before any project is taken up, it is appropriate to define the objectives to avoid any kind of cost over-runs. They
also help in keeping away over or underestimation of costs.
A well-defined project helps in facilitating appropriate management of the costs, making the project a profitable one for
the undertaker. Through cost management, unexpected costs can also be appropriately dealt with as and when they occur as
the forecast would reflect it. Therefore, beside the traditional techniques new methods appear. Global market, international
business processes, customers’ growing needs for high quality with low price focus managers’ attention to cost management.
The accounting profession, analyzing the costs behavior, attempts to improve the traditional costing systems, that is, to answer
the new challenges.
Activity-based costing, differential costing, kaizen costing, throughput costing are just a few examples of new
expressions that occur in nowadays cost accounting. Now, competition and complexity of the structure of production process
of goods have become increased. So, manufacturing organizations must think about production at lowest possible cost. On
these circumstances, traditional cost accounting techniques are not giving the fruitful result to response to the keen
competition.
At present, manufacturing organizations must adopt advanced cost accounting techniques. Unfortunately, some
companies have an aversion to new concept’s implementation, not recognizing their positive effect on organization’s
performance improvement. The reasons vary from cultural, through institutional, political, and behavioural to educational
reasons. Cost management is indeed one of the essential requisites for the success of any project or business for that matter.
When one knows the scope for the cost that the business can bear, it becomes much easier to set the goals and accordingly
work towards it.

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