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Section 1. Accounting
Duong Thi Quynh Lien, Vinh University, Vietnam E-mail: [email protected]
Organization for making production cost estimates system in business
Abstract: A good organization of management accounting, particularly the preparation of production cost estimation, is a critical condition to provide an appropriate, useful and timely information of the cost for the decision making of the managers. Through a review of cost estimation preparation status of enterprises, this essay presents three procedures for making cost estimation by senior-level management, grassroots-level and the module in which these two procedures are combined.
Keywords: cost estimation,, production costs, accounting, management accounting.
Introduction not be feasible and will likely affect to the actual control
In terms of production cost management, the man- of the cost. When cost norm is calculated for the total agement of expenses will be under the item and accord- number of products or services, this norm is called the
ing to the cost factor in financial accounting, in the meanwhile, it will be managed under the cost behavior in the managerial accounting.
The administration indicators are aggregated through cost estimation system. Preparation of cost estimation must be based on cost norms. Cost norm is indicators of cost estimates for each accounting unit, meanwhile the cost estimation is made for the whole project or construction item which are planned to be carried out in the period. Thus, estimation and cost norms are linked together tightly and both influence each other. If the cost norm is unreasonable and unreality, the estimation prepared based on that norm would
cost estimation.
Procedure for making cost estimates
Depending on business features, management level and business type requirements, one of the following three procedures could be selected to use for preparation of the business cost estimates:
Procedure for making cost estimates from seniorlevel management
Under this procedure, the cost estimates is prepared at the highest level of a business management, after that it will be reviewed and approved by medium executive level, and then continued being reviewed and approved by grassroots level to implement the cost estimation.
Fig. 1. Procedure for preparing cost estimates from senior manager level
Section 1. Accounting
The cost estimates prepared by the highest management level has the advantage of saving time and cost. However, as it is prepared from the highest management level, the senior managers should have knowledge of business activities of the enterprises as well as a strategic vision on future development of the enterprise. A part from this, a cost estimates which requires an imposed implementation would make the executors uncomfortable in spending the budget.
The procedure of preparing cost estimates by the highest-level management is only suitable for application in the centrally planned economy, or in some special industries which require a strict, consistent management or in small businesses.
Procedure for making cost estimates at grassroots level
Step 1: The criteria of the original cost estimate prepared by the implementation level is based on fact that acctually generated the cost, capacity of itself and then pro -
tect the estimates beforemiddle-level management. The middle-level management will associate the cost estimates from the grassroots level then carryout some adjustments for the criteria to make the cost estimates fit to the overall goals of the middle level. After that they will protect the cost estimates before the highest-level management.
Step 2: The highest-level management will corporate the cost estimates from the middle level then associated it with general objective of the business, after that they will adjust the criteria of the cost estimates. The cost estimates is finalized and allocated to the middle-level management. Then it will be continuously allocated to the grassroots level for execution.
The cost estimates prepared by grassroots level can overcome disadvantage of the combined one, it mobilizes knowledge and experience of managers of all levels meanwhile it can catch up with the items actuallyarise in the implementing body. So, it is obviously more feasible for application.
Fig. 2. Procedure for making cost estimates at grassroots level
However, for the cost estimates derived from the grassroots level, its criteria is normally built below the possibility of implementation of the units. Senior managers should understand this mentality in order to adjust the target accordingly and take advantage of maximum capacity of the enterprise.
Procedure for making combined cost estimates Step 1: Targets of the draft cost estimates are built at the highest levelmanagement. Based on the operational scale, these targets will be allocated to the middle-level management, then depending on the
management status it will be allocated to the grassroots level.
Step 2: Based on the criteria of the combined-mode cost estimates and associated with the cost actually incurred at the facility, the grassroots level will modify the cost estimates to make it more feasible and they will protect this revised cost estimates before the middle-level management. The middle level management will incorporate the cost estimates from the grassroots level, associated with their target to finalize it and afterall, they will protect it before the highest management level.
Fig. 3. Sequence for making Step 3: The highest-level management incorporates the cost estimates from middle-level management and revise it in which incorporating the target of the enterprise. After completion, the cost estimates will be allocated to the middle-level management basing on the operational scale. Then the middle-level management will allocate the cost estimates to the grassroots level units for implementation.
The cost estimates derived under combined model is feasible and reality to the costs which are actually incurred of the implementing units. This kind of cost estimates mobilizes experience and knowledge of various management levels.
combined cost estimates
However, it is very time consuming and costly to implement three steps ofthe above-mentioned cost estimates, as a result it also affects to the efficiency of the cost estimates. Since the plan already came into force meanwhile the cost estimates would have not been completed.
Conclusion
Preparation of cost estimates is an important part in the planning for all economic activities, this is also necessary for business, state-owned enterprises and individuals. Cost estimation is significant in management of production cost, it helps to detect discrepancy between the estimation and actual, and between result and targeted objective.
References:
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