Enhancing financial reporting compliance in manufacturing companies: A governance context

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Abstract

This paper investigates the integration of activity-based costing (ABC) and process costing into the financial reports of the manufacturing sector in addressing the implementation of International Financial Reporting Standards (IFRS) in general and International Accounting Standard 2 (IAS 2). A solid literature review supports 27 semi-structured interviews of financial and cost managers from different sectors to highlight significant difficulties in using both costing techniques simultaneously. Further, ABC offers comprehensive information but opposes IAS 2 in inventory valuation. In contrast, process costing is more in line with compliance requirements for strictness (Elghaish & Abrishami, 2021). The research highlights that a strategic balancing act must be taken in compliance, continuous assessment, and training investment. The proposal for overcoming these challenges is piloting and partnering for effective financial reporting. This shows that the study ultimately provided invaluable insights into the application of dual-cost systems in financial reporting and proposed a framework for the effective integration of ABC and process costing, which helps in properly applying these methodologies within the manufacturing sector (Kaplan & Ramanna, 2021). It also stresses, therefore, that there is an allowance for production capacity in the allocation of costs to give room for appropriate judgments on issues of resource allocation and production management.

Keywords: Process Cost, Activity-Based Cost, ABS, International Accounting Standard 2, IAS 2, Manufacturing Companies, Manufacturing Capacity, Qualitative Methods

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: L60, M41, M48

Received: 05.04.2024
Accepted: 14.01.2025
Published online: 16.01.2025

How to cite this paper: Morshed, A. (2025). Enhancing financial reporting compliance in manufacturing companies: A governance context. Journal of Governance & Regulation, 14(1), 130–138. https://doi.org/10.22495/jgrv14i1art12