Cost Accounting System for EPE: Memo to Vice President, Finance

Use the case approach and write a memo to the Vice President, Finance. Your memo should include Address to Controller, Introduction, Root Issues, Analysis and recommendation supported by all calculations. For more clarity, you are required to allocate the costs to products and calculate the profit by products.

The purpose of this report is to inspect and evaluate the existing costing system in order to ensure that the needs of EPE be met. The approach would be comprised of understanding the current system along with the needs for a cost accounting system, understanding the weaknesses of the existing system regarding the requirements, along with recommending a cost accounting system that would satisfy these requirements.

The current system is not up to par when considering two areas, including the cost of activities and business processes, and the cost and profitability of busines processes, products and services. Along this issue, the current system is also inadequate when providing useful feedback, which is essential for the improvement of overall processes.

The current system in use meets certain expectations, such as providing enough information to calculate the value of inventory for financial reporting and preparing financial reports periodically. These strengths, however, are weakened after considering the systems inability to accurately estimate activity and process costs. Currently the system uses direct labor hours to allocate indirect and support costs. This method lacks efficiency and accuracy as direct labor takes up a small portion of the company’s manufacturing conversion costs.

This adds disadvantages including the inability to endure the production of numerous products by EPE and failing to identify costly manufacturing resources, along with the economics of production batches and product varieties. It would make the most sense to use cost drivers in place of quantity drivers, which would in turn more accurately mirror the consumption of the overhead properties.

The system fails to provide designers and developers with information or when provided, it is greatly distorted information regarding production costs. This results with increase in costs and decrease in productivity as these errors lead to irreversible consequences when the defects are spotted during manufacturing phases.

Another shortcoming of the current system entails the failure of providing adequate and timely information to support organizational continuous learning and improvements. The absence of this role leads to managers and operators being less efficient and consumer focused. Alongside this lacking, there is close to no feedback provided on activity and process performances, which adds a major disadvantage as it leaves little room for improvements in processes, identifying irrelevant costs and delaying reports, etc.

Analyses

To increase the company’s overall efficiency when considering its current system, the company can try implementing systems such as ERP, ABC, SAP and Torii in order to mitigate the problems mentioned above. Enterprise Resource Planning (i.e. ERP) software can help boost efficiencies by programming data collection. It allows growth by managing complex business processes and lowers risk by implementing regulatory compliances and so on (Labarre, 2020).

An Activity Based Costing (i.e. ABC) system provides a more accurate method of product and service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers while identifying costly and non-value adding activities (Kenton, 2020), allowing managers to reduce or eliminate them. Systems Application and Products (i.e. SAP), another ERP system, is the market leader in enterprise application software, helping companies of all sizes and in all industries run at their best by implementing practices such as cost efficiency, data analysis and reporting, and so on (Makela, 2017). Lastly, Torii, a cloud-based platform for tracking, helps with controlling and optimizing usage and costs (Edelstein, 2019).

Based on the above analyses and the alternatives laid out in response to the current problems facing EPE, it is recommended that the entity adopt an enterprise resource planning (ERP) software. As EPE is in need of integration between its financial accounting processes, ABC, and operational feedback, this system will allow it to achieve just that. It would allow it to integrate its functions effectively, with functionalities to receive up to par financial accounting, cost accounting (i.e. improving ABC), and performance measurement systems (i.e. improving operational feedback).

To begin, ERP systems offer great functionalities for the enhancement of financial accounting processes, to be done in accordance with the appropriate financial reporting frameworks. Such functionalities would include the preparation of richly detailed financial reports, automation of various manual tasks (hence lower rate of errors), higher control, and much more (CCS Technology, 2019). This would overall increase the efficiency of its financial accounting processes and cut costs for EPE. With integration of functions being one of the major advantages of an ERP system, it would provide EPE with a much more efficient cost accounting process. This would be achieved through the ABC functionality that is offered by an ERP system. This would improve ABC comprehensively, throughout products, consumers, costing processes, and organizational expenses (such as for its services, consumers, etc.).

In addition to the ABC functionality described above, an ERP system would also allow EPE to have an activity-based performance measurement system as one of its functionalities. This would allow EPE to receive more reliable and useful performance information of the entity, helping with decision making and allowing EPE to improve processes and overall enhance its operational feedback.

Conclusion and Implementation

In order for EPE to improve its internal efficiency and cut costs, it needs to replace its current inadequate system with an ERP system as recommended above. This will allow EPE to improve its current financial accounting processes, cost accounting processes, as well as performance measurement processes, through the various functionalities offered in these areas within the ERP software. These functionalities include an advanced financial accounting system, comprehensive ABC system, as well as a performance measurement system to increase operational feedback. The ERP system should therefore be purchased through a well-known software provider such as NetSuite, and implemented as soon as possible, in order to improve integration and efficiency within EPE.