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The Role of Cost Accounting in Business Planning

A. Assess the role of cost accounting in helping management plan, make decisions, and control the organization.
b. In light of the post-Enron, Sarbanes-Oxley world, assess the role of ethics in cost accounting.
c. Compare and contrast absorption and variable costing. What information does each include, and what information is missing from each approach?

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a. Assess the role of cost accounting in helping management plan, make decisions, and control the organization.

Cost accounting is providing information, which is helpful in monitoring and evaluating management performance
The function of Cost Accounting is to:
? Providing information to people inside the company
? To make internal investment decisions
The reporting is done mainly to the management of the organization. The timing, preparation and the format is decided by the requirements of the management.
Now the Accountant offer following:
1. Performance Measurement
2. Performance Evaluation
3. Evaluation of allocation of Decision Rights.
It helps in studying the relations between:

* fixed costs;
* variable costs; and
* profits.
Break-even analysis is one of the tools of the managerial accounting, a device for determining the point at which sales will just cover total costs.
or the break even point for a product is the point where total revenue received equals total costs (TR=TC). A break even point is typically calculated in order to determine if it would be worthwhile to sell a proposed product, or to try to figure out whether an existing product can be made profitable. If a firm's costs were all variable, the problem of break-even volume would never arise. By having some variable and some fixed costs, the firm must suffer losses up to a given volume.

Useful in decision making
This figure can be used to make advantageous decisions concerning rates, prices, effect on operating costs and profits. Break-even analysis is especially useful when considering volume and plant expansion. If the firm is to avoid losses, its sales must cover all costs?those that vary directly with production and those that do not change as production levels change.

Knowing the consequences of alternative prices
This analysis is also useful in comparing the consequences of alternative prices. By inserting different prices into the formula, you will obtain a number of break even points, one for each possible price charged.

Thus it seeks to provide answers to the following questions:
1. What sales volume is necessary to produce an X amount of operating profit.
2. What will be the operating profit or loss at X sales volume be.
3. What will be the effect on operating profit be if the company's fixed costs have increased or sales mix have been changed.
4. What sales volume is needed to achieve the budgeted profit or to cover the additional fixed charges from the proposed new project.

b. In light of the post-Enron, Sarbanes-Oxley world, assess the role of ethics in cost accounting.
1985: Enron formed
Oct 2001: Enron reports $638m third quarter loss and $1.2bn fall in shareholder equity
Oct 2001: Securities and Exchange Commission begins inquiry into firm
Nov 2001: Enron shares sink to 10-year lows as buyout deal falls through and further losses are revealed at the firm
Dec 2001: Enron files for Chapter 11 bankruptcy
2002: Criminal investigation launched
2004: Skilling and Lay charged over Enron collapse Former finance chief Andrew Fastow pleads guilty to criminal charges and agrees a 10-year jail term
Jan 2006: Enron trial begins
May 2006: Enron trial ends with guilty verdicts for Skilling and Lay on 25 out of 34 charges
Adapted from BBC Site

Enron was founded on January 1, 1985 with the merger of Houston Natural Gas (Houston, TX) and InterNorth (Omaha, NE), and became the nation's largest gas pipeline system with a network of more than 34,000 miles. The company was at a compound annual rate of more than 60 percent from 1995 through 2000. The highest and amazing growth came in 2000, which its revenues increased from $40 billion in 1999 to over $100 billion just a year later. But this growth was artificial and it was inaccurate. It filed for bankruptcy on December 2, 2001. The CFO Fastow led the team which created the off-books companies, and manipulated the deals to provide himself, his family and his friends with hundreds of millions of dollars in guaranteed profits, at the expense of the corporation he worked for and its stockholders. (BBC NEWS, 2002) At the time it filed for ...

Solution Summary

This solution answers three questions, addressing ethics in accounting, management plans and variable costing.