ISSN 0798 1015

Vol. 38 (Nº 49) Year 2017. Page 2

Management of enterprise costs based on relevant information

The impact of market economic system on the enterprise management processes

Assiya Akanovna KORZHENGULOVA 1; Roza Kibjanova SERKEBAYEVA 2; Dina AIKUPESHEVA 3; Nurzhan Edilovich BABAKHANOB 4; Arthur Mazhitovich ZIYATDINOV 5

Received: 12/06/2017 • Approved: 30/06/2017

Content

1. Introduction

2. Methods of research

3. Results

4. Discussion of results

5. Conclusion

References

1. Introduction

In the performance of the production and economic function each enterprise spends certain funds, for example, on the payment of wages, deductions related to pension and social payments, preparation and consumption of raw materials, energy, and fuel. However, in a profitable enterprise these costs are constantly reimbursed at the expense of the enterprise's profit from the sale of goods and other products. Therefore, the production process is not interrupted.

Currently, the issue of determining recommendations for improving the results of the enterprises' financial and economic activities on the basis of information support for making managerial decisions becomes more urgent. The implementation of this goal depends on the definition of approaches and principles of enterprise management using modern methods.

Qualitative management of costs as a component of the overall management system of the enterprise directly affects the results of management, and efficient management of costs is impossible without economic justification of their appropriateness, materiality and effectiveness of occurrence.

The essence and importance of cost management in the management of an enterprise with the separation of relevant costs have been studied in the works of many domestic scientists: V.K. Radostovets (1997), K.K. Keulimzhayev, R.M. Rakhimbekova (2005), M.S. Erzhanova, A.A. Nurumova (2007) О.М. Karibzhanova (2010) et al. Among the foreign developments in the cost management the works of J. Williams (Williams, Jan, Haka, Susan, Bettner, Mark, Meigs and Robert 2002), G. Garrison (2007), D. Kaplan (2010) can be identified.

The theoretical, methodical and practical issues of the organization of a cost management system are fairly widely covered, and various approaches to the classification of costs, their analysis and control are proposed. At the same time, the scientific research practically lacks studies on relevant costs and relevant information as tools for information and analytical support for the effective cost management.

Increasing attention to cost management is due to the need to organize a management information system for making optimal management decisions in all activity areas of the enterprise.

In order to obtain the best management results, the management of the enterprise costs must be based on the relevant information.

In general, relevant information is the information that is necessary to solve the tasks, in our case - management tasks. Allocation of relevant information when making managerial decisions in any industry makes it possible to quickly respond to various aspects of activity, freely navigate in a constantly changing environment, and determine internal reserves to reduce costs. The relevant costs are the basis of relevant information. It is the minimization of costs that is the fundamental criterion for selection of an administrative decision.

The study of professional sources by the definition of the essence of the "relevant costs" category allowed drawing the following conclusions.

The study of foreign experience in determining the relevant costs category indicates that the relevant costs are considered as the costs that differ depending on the alternative choice (Williams, Jan, Haka, Susan, Bettner, Mark, Meigs and Robert 2002). G. Garrison defines the importance of "distinguishing between relevant and irrelevant costs in the analysis of alternatives, since wrongly defined irrelevant costs can lead to unreasonable business decisions" (Garrison 2007).

D. Caplan defines the relevant costs as costs related to a particular solution and change when choosing an alternative course of action (Caplan 2010). The above definitions almost equally recognize the essence of the relevant costs as such that arise with alternative solutions and save time and effort in estimating cash flows from a future solution.

N.D. Vrublevsky and V.F. Paliy give almost identical definitions of the "relevant costs" category: expected (relevant) costs are the costs that can be changed as a result of managerial decisions, that is, future costs. More precisely, these are the costs that distinguish one alternative from another (Vrublevsky 2004, Paliy 2006). A positive aspect of this definition is that it determines the relativity of these costs to management functions and assumes a choice from the alternatives selected. In this case, in our opinion, it does not reflect the essence of relevance.

To disclose this term, it is necessary to base on the interpretation of the word "relevant". The explanatory dictionary of foreign words defines "relevant" as important, essential (Krysin 2008). In this case, materiality must be considered from the position of influence on the financial result: the possibility of increasing profits or reducing damage.

According to L.V. Ustyuzhanina and N.Yu.Kruglov, "the costs that change as a result of the decision making" are called relevant "(Ustyuzhanina and Kruglov 2014, p. 50). The above definition has a very limited scope and does not specify which decisions are involved. According to the definition of S.V. Kuligina: "Relevant costs are the deferred costs, which affect cash flows as a result of the decision made" (Kuligina 2013, p.85). This definition contains an important point about the impact of relevant costs on cash flows, and from the point of view of the choice of a management decision it is relevant for business entities. However, as in the previous definitions, the evaluation of relevance does not require separating the activities.

In view of the foregoing, we propose the following definition: Relevant costs are significant costs for the purposes of future managerial decisions on certain types of activities of the business entity. By identifying relevant costs, it is possible to quickly respond to changes in the external and internal environment of the enterprise. At the same time, an important point is the understanding of the relevant approach - "focusing only on relevant information in the process of making managerial decisions, which, with a considerable amount of information, makes it easier and faster to make the best decision" (Yeribaeva 2012, p. 101).

This approach, in terms of rapid changes in economic processes that occur during the operation of economic entities, will allow the optimal performance of basic management functions.

Analysis of the studies and publications related to relevant costs has shown that the definition of the "relevant costs" category proposed by various scientists in most cases has only a theoretical aspect, and the examples of relevant costs have one trend and are not suitable for practical use in a real enterprise. Of course, each of them has its own list of costs, and the relevant costs are also special one for each business entity. Therefore, there is a need to define them taking into account industry specific features, which is relevant for the implementation of the managerial decision-making process.

Modern theoretical provisions on the relevant costs and relevant information, outlined in research papers and studies, are the fundamental basis for further study and systematization of the cost management functions implementation.

2. Methods of research

During the preparation and analysis of production information for making a management decision, it is necessary to know that some costs can be important for some decisions and not acceptable for others. There is the well-known Drury’s cost classification upon planning and deciding. The production records are characterized by the accounting of the actual expenses allocated for an estimation of stocks of production made and the profit receipt. Management accounting uses information that is issued to the controlling object or other persons who need it to make the right management decision. In production accounting, information on the costs of certain types of goods and products is also taken into account, as required by financial accounting that records the distribution of costs between the goods sold and the remainder for a specific period of time. This information system is not designed to reflect and accumulate information on cost price. Therefore, the information on the costs received in such a system, basically, should not influence the decision-making (Drury 1994).

When planning its work, any enterprise sets long-term and short-term goals aimed at fulfilling the plan in full and maximizing revenues. To obtain the maximum profit, first of all, when making managerial decisions, it is necessary to apply the management accounting, and to isolate therefrom relevant information, under which it is customary to understand information about the forecasted future costs and profits. The approach in managerial accounting is called relevant when there is the need for making decisions to eliminate a problem, and only relevant information is used (Syroizhko 2010).

By analyzing the situation in the industry, investigating the information, any decision will be announced and sent for execution if an important principle operates, which resides in the fact that if, with a possible performance of activities, profit and the enterprise income have risen, then this activity should be carried out. But, if it is initially known about the actions that will not lead the company to the expected profitability, then such actions should not be implemented.

Before making a certain decision, each enterprise considers several possible alternatives, conducts a comparative analysis, and then comes to a common opinion. At the same time, there are 2 groups of indicators compared: the unchanged ones, which upon all options are not subject to change, and the second ones, which vary and depend on the decision taken. If there are many options, and all of them are considered studied and have distinctive indicators, then the indicators of the second group, which have a variable characteristic, should be considered.

The relevant costs characterized by variability from option to option are very popular and known for their necessity in the implementation of management accounting and decision-making. When selecting information on costs, the indicators of the first group are usually not taken into account, therefore the relevant costs are so important in making a decision. There are such approaches when the amount of expenses and revenues directly depends on the decision taken. For example, the costs of the past periods cannot be relevant, because they can no longer be influenced. At the same time, implicit costs (lost profits) are relevant for making managerial decisions.

An important point is to determine the location of the relevant costs in the overall classification of costs. At present, in the Republic of Kazakhstan, common approaches to the organization of cost accounting and costing of the product are developed. Proceeding from Article 15 of the Law of the Republic of Kazakhstan No. 234-III "On Accounting and Financial Reporting" dated February 28, 2007, which defines the general principles for the preparation of financial statements, the cost of the finished goods sold (goods, works, services) includes the actual costs that are directly associated with the production of products (works, services), grouped according to their economic content by the following elements: material costs, labor costs, deductions for insurance, depreciation of fixed assets, other costs (Law of the Republic of Kazakhstan No. 234-III dated February 28, 2007).

The above classification does not contain such features as the adoption of managerial decisions. The need to supplement such a classification feature is due to the economic conditions of operation of any enterprise.

The components of the classification feature for making managerial decisions should contain a division into:

- Relevant and irrelevant costs;

- Actual and alternative costs.

The expediency of imposing a distribution into actual and alternative costs is due to the need to determine the lost profits. Thus, alternative costs should be considered to be those that measure the possibility or profit lost as a result of one of the selected options, when other options are rejected.

An equally important issue is the definition of the relevance criteria and rules. The relevance of costs is due to compliance with the following criteria:

- costs should be related to the objectives of the enterprise;

- costs should differ depending on some or other possible solution;

- costs can arise only in the future and are different for alternative solutions.

The above relevance criteria form the rules, and the most useful from the point of view of practical implementation are the following:

1. If the alternative choice affects the amount of costs, but the revenues remain unchanged, the best alternative is the one that leads to lower differential costs.

2. If the alternative choice affects both the cost and the amount of revenue, then the alternative option that provides the greater differential income is considered to be the better one.

3. To justify the choice of one or another alternative, it is necessary to compare the total values of revenues and costs, since the value of individual indicators per unit of output depends on the volume of activity.

Using the above criteria and rules of relevance in taking managerial decisions makes it possible to quickly respond to various aspects of activities, freely navigate in a constantly changing environment, and determine internal reserves to reduce costs. In addition, in today's work environment, often associated with instability and uneven production activity, as well as significant structural shifts in comparison of actual and planned indicators, the definition of relevant costs is a necessity, and making management decisions based on relevant information is the most significant one.

3. Results

A relevant approach to the analysis of costs in the management decision-making system involves focusing only on the relevant costs, and the question arises about the formation of information and analysis support on the basis of relevant information for management purposes, and the presentation of relevant information should be based on the second-level forms of reporting (administrative accounting) carefully drawn up for management purposes.

The second level forms of reporting are developed by enterprises independently and have an arbitrary form. The use of the second-level forms of reporting based on relevant information will allow management to focus on the most significant controlled indicators and, having a significant amount of information, to accelerate the process of making optimal management decisions. The company's relevant information on management decisions and activities is given in Table 1. 

Table 1. The company's relevant information on management decisions and activities 

The specified relevant information implies its adjustment in accordance with the current market conditions.

Thus, for the company, it will be possible to obtain the results of effective cost selection for making managerial decisions on certain types of activities and to accelerate the process of making optimal management decisions.

4. Discussion of results

Here are some examples of the relevant management decisions.

1) Some of the management goals set are solved by using relevant information, for example, when approving the types (assortment) of manufactured goods, when it is taken into account that one of the types brings a big profit in its sale, and a decision is made to increase its production. However, the company's management cannot make a decision on the production of this profitable product only, since it must take into account the volatile properties of the market in order not to become bankrupt.

Many goals, which are defined in connection with the development of types of products, the introduction of new changes in manufactured goods, the acceptance of a special order, etc. shall be solved on the basis of cost information.

For example, from information based on accounting and the method of accounting by the full cost of production, it is possible to find out which product brings losses and which is sold with profit even if the enterprise as a whole works successfully and has a constant profit.

A management entity that has received such information may have a desire, and then a decision to take this product out of production. But it is necessary to take into account that according to the cost accounting system, the information on the cost of goods may not be always correct. Then, other relevant information on the truncated cost of production will be required on the basis of variable costs, after which the decision on taking the product out of production or leaving it in the range will be taken.

This example clearly shows what incorrect results are given by the total cost accounting system, which is the basis of the relevant information for making management decisions.

2) Another type of management decisions is considering the issue of the range when the enterprise is fully loaded. In this case, the relevant, i.e. changing information will be information about workdays, hours, machine hours, so-called limiting factors of production and the amount of marginal revenue per unit of this limiting factor.

If the activity of the enterprise occurs at full capacity utilization, then it is necessary to know not only the amount of profit per unit of the product, but if there are bottlenecks or a limiting factor in the enterprise, the information on the amount of income per ULF (unit of the limiting factor) shall also be known.

3) When the issue of the production of a part of the components at the own enterprise or their purchase from the third parties is being considered, the relevant information can be useful for solving this problem: produce independently or acquire the necessary raw materials, spare parts, components, semi-finished products, etc.

At the same time, the question is always considered whether the enterprise will be able to do so or whether it is still necessary to make purchase from other owners, as well as how long will the relations with this owner be, whether the enterprise has additional production capacities, and if so, whether they will not stand idle if the decisions on the purchase of parts is adopted. At the enterprise there are also fixed costs, which are not taken into account, since they will occur in any case: whether a part is made at the enterprise or purchased from third parties. Thus, the management decision on the purchase of components from other owners can be made if it is determined that the price of this purchase will be lower than the variable costs upon production thereof.

4) Another type of management decision is the adoption of a special order. The decision can be applied in case of bad financial indicators at the enterprise at present to improve the situation for some time and increase the income through such an order at a price below the cost price. In case the situation is normal, it is also sometimes decided on a special order, but only if there is full confidence that price reduction for an order will not cause losses to the enterprise, or it is known that the price will not change in the future.

Under normal business conditions, a management entity usually refuses such orders, but there is time when the enterprise failed to form a portfolio of orders and its production capacity was not fully utilized. Then the management faces a problem: whether to accept such a proposal and whether to manufacture products at a price lower than the current one. V.K. Radostovets has his own opinion on this issue implying that “it is better to get at least some profit than not to have anything”. If the enterprise has free production capacities and the situation of competitive bidding is developing in the market, the order can be accepted, but again only if an increase in the revenues received from fulfilling orders exceeds the costs (Garrison 2007). Thus, in this case, it is also possible to use relevant information as a management accounting tool.

5. Conclusion

Based on theoretical data, the following conclusions can be drawn:

1. The main task of the management accounting is to provide operational information to the management entity, managers, whose functional duties include making the right, effective decisions to achieve high financial performance of the enterprise. Management accounting includes all types of accounting information. The necessary information is prepared with the help of management accounting based on the internal operational market.

2. The result of the activity of the enterprise depends on the quality, timeliness, correctness and efficiency of decision-making. To achieve the goal set, the management entity always chooses the solution of arising questions from several variants. Alternative options arise through the collection and analysis of information. There exists the classification of solutions, through which the decision methods are chosen, the situation is designated, and the parameters of solving the existing situation by the system are determined. The analysis made on the basis of classification improves the quality of solutions.

3. Step-by-step decision-making makes it possible to establish the right goals and, as a rule, efficiently solve the existing problems.

4. In order to make managerial decisions, management accounting tools - relevant information about the expected costs and incomes - are used which, depending on the different decision options, can vary and differ. The relevant approach to the analysis of the enterprise costs in the management decision-making system involves focusing only on relevant costs, and the presentation of relevant information should be based on the second-level forms of reporting (administrative accounting) carefully drawn up for management purposes. This will improve the ability to obtain the results of effective selection of costs for management purposes and accelerate the process of making managerial decisions in general and for certain types of activities.

5. In practice, the enterprise management entities and organizations make decisions using the relevant information system, and these decisions relate mainly to the following issues: the formation of a range of products, the establishment of the price of products sold, possible additional contracts, as well as decisions on own production, or the purchase of component parts. 

References

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Garrison R. H. (2007). Managerial Accounting. New York, NY: McGraw-Hill/Irwin, pp. 578

Williams, Jan R., Haka, Susan F., Bettner, Mark S., Meigs and Robert F. (2002). Financial and Managerial Accounting: The Basis for Business Decisions. New York, NY: McGraw-Hill/Irwin, 2002, 848 р.

Vrublevskiy, N.D. (2004). Upravlencheskiy uchet izderzhek proizvodstva i sebestoimosti produktsii v otraslyakh ekonomiki. [Managerial accounting of production costs and cost of production in economic industries.] Moscow. Bukhgalterskiy uchet, pp. 376

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Syroizhko, V.V. (2010). Sushchnost' i ispol'zovaniye relevantnogo podkhoda v upravlencheskom uchete pri prinyatii operativnykh resheniy. Sotsial'no-ekonomicheskiye problemy razvitiya Rossii v sovremennykh usloviyakh. [The essence and use of the relevant approach in management accounting when making operational decisions. Socio-economic problems of Russia's development in modern conditions.] Ministry of Education and Science of the Russian Federation, SEI HPE "VZFEI", pp: 146-148.

Ustyuzhanina, L.V. and Kruglova, N.Yu. (2014). Relevantnyye zatraty i effektivnost' upravlencheskikh resheniy. Aktual'nyye voprosy ekonomiki, upravleniya i prava: sbornik nauchnykh trudov (yezhegodnik) [Relevant costs and effectiveness of management decisions. Topical issues of economics, management and law: Collection of scientific works (yearbook)] pp: 5, 49-53

1. Turan-Astana university, Republik of Kazakhstan, 010000, Astana, Dukenuly St. 29

2. Turan-Astana university, Republik of Kazakhstan, 010000, Astana, Dukenuly St. 29 E-mail: serkebayevar@mail.ru

3. Saken Seifullin Kazakh Agro technical University, Kazahstan, Astana

4. Isik university, Istanbul

5. The branch of Federal State Budgetary Educational Institution of Higher Education “Ufa State Petroleum Technological University”, Russia, 452600, Bashkortostan, Oktyabrsky, Devonskaya Street, 54a