Management Accounting Essay

During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s

Manufacturing overheads represent the costs contained within any manufacturing process for goods, the manufacturing overhead commonly the cost not associated with the straight labor and material.

Barclays bank is one of the British multinational financial and banking service business companies that have its headquarters in London.

Statement of Cash Flows is the amount of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. The Cash Flow is often used to know the status or

In addition, it wrongly allocated its indirect costs at volume bases. The use of process technology mentioned in the case led to an increase in factory overheads Since direct labor hours was not a cost driver of them, allocating its large proportion of fixed factory overheads and other indirect batch-level costs on the basis of DLHs in this cost system did not accurately measure how resources were being used. As a result, these inaccurate allocations would have significant costs to Elkay. Moreover, it disregarded its cost structure in which most costs were “fixed” that would not vary in the short run and should be allocated based on its practical capacity. By using the “actual sales volume” as the allocation base for allocating its large corporate overheads, this standard costing system in fact over-pricing its products for its actual productivity was lower than the practical capacity under the intense competition. As a consequence of all problem within the standard costing system, PPD urgently needed an accurate costing system.

Management accounting change and the continuously changing roles of management accountants have dominated accounting literature for the past few decades and the theme of management accounting change procedures has been a topical issue of many studies such as Baines and Langfield-Smith, 2003; Kapla, 1985 and Granlund and Lukka, 1998, just to name a few.

Traditional system of costing assigns manufacturing overhead based on the volume of a cost driver, such as the amount of direct labor hours needed to produce an item. A cost driver is a factor that causes cost to be incurred, such as machine hours, direct labor hours and direct material hours. According to the Association for the Advancement of Cost Engineering (AACE) International, Activity based costing (ABC) ‘is a total quality management tool for cost and performance measurement of activities, resources and cost objects.’

Hence we can Estimated Indirect (overhead) cost per unit is quite different for each product, unlike the traditional costing where indirect costs per unit were the same for all four products. This approach recognizes that product W uses more activity pool resources than product X , product Y and product Z .

Accounting Accounting is the practice of “…maintaining, auditing and processing financial information…” (http://en.wikipedia.org/wiki/Accounting) for the purpose of a company, persons or organisation. There are some fundamental parts of accounting which are; “Identifying, measuring and communicating” (Black, 2000). You need to identify the important financial sections of a company, person or organisation which will include the companies assets, liabilities, capital, income and of course expenditure. You will also need to measure “… monetary values of the key financial components in a way which represents a true and fair view of the organisation” (Black, 2000).

In today’s business world, there is much debate about the future of standard costing and the determination of the system becoming obsolete. With some academicians making it clear that this method is inappropriate in a modern manufacturing environment, many others are still using this system. These systems are designed to properly allocate costs of direct labor, indirect labor, materials, overhead, and selling/ general/administrative accounts on a unit basis for the purpose of accurately costing products and the subsequent control of those costs in managing the production, marketing, purchasing, and administrative functions of the business. Even though these systems are still widely popular and used for many US manufacturing firms there is still much controversy surrounding these systems in deciding if the systems are the most effective or are useless? In fact, since the early 1980s standard cost systems (SCS) have been under attack as not providing the information needed for advanced manufacturers (Hansen and Mowen, 2013). The explanation of this claim is that standard costing does not meet the needs of business because of the introduction of advanced manufacturing technologies, shorter product life cycles, decreasing emphasis of labor cost in the total production costs, and intense global competition. However, with 74 percent of respondents verifying that they were using standard costing systems still and that it is the best method out there as of right now, a

Furthermore, traditional costing does not classify the specific overhead charges or resource used to fabricate a specific product and distributes costs by assigning average overhead rates. However, ABC categorizes specific activities employed for producing each individual product and allocates them based on their consumption of resources. Drilling Innovations used traditional costing, which in turn, caused them to assign overhead based on machine hours and ignore other overhead activities used to produce each product. However, by using ABC, the costs were allocated based on the activities used to produce each individual drilling head. Therefore, the cost was more accurately spread based on the overhead consumption of each product individually. Costs that were incurred to produce OS-367 were being allocated to GS-157 and HS-241 with the traditional costing method. Once

ABC should be distinguished from the traditional costing method. The traditional costing method (particularly the absorption costing) allocates direct costs to the corresponding products while the overhead costs for each set of products are allocated proportionately according to the proportion of chosen cost driver (Vazakidis & Karagiannis, 2011). By using the product cost systems, such as process costing, job costing, and activity base costing, managers can have well understanding about the cost allocation for their productions, so that they can make better decisions. Therefore, managers need to proper choice the product costing

Comparision two methods presents DRURY: “ Both use a two- stage allocation process. In the first stage a traditional system allocates overheads to production and service departments and then reallocates service departments costs to the production departments. An ABC systems assigns overheads to each major activity ( rather than departments). With ABC systems, many activity- based cost centres ( activity costs pools) are established, whereas with traditional systems overheads tend to be pooled by departments, although they are normally described as cost centres. (DRURY P.253) In other words the traditional method concludes that products cause the costs, ABC assumes that “ activities cause cost and that cost objects create the demand for activities” (Turney, p.51). Therofore, this system can be answer for companies seeking “true” cost information. Comparision of two methods is in ABC favour, as “is more accurate cost allocation method compared to traditional approach and, thus, is a better approach for managerial decisions such as pricing strategy, particularly, in heterogeneous product settings.” (RUHUPATTY P.5).

3) These standard costs were allocated for manufacturing overhead for determining the companies’ revenue and profit margins based off the final product and sales. These allocated cost were then measured by accounting, with primary focus on the utilization capacity of the manufacturing plant. The conventional quantities, for example labor utilization, selling price variance, production proficiencies, amongst other manufacturing identities procedures. These types of processes lead to a factory that produces large amounts of scrap, poor quality products, increased shipping costs, customer dissatisfaction, shortages, etc. These issues are common in factories however, can be avoided if Lean processes can be applied. Ideally this would incorporate understanding the necessary resources and unnecessary procedures.

Note that whether the proportions used are based on units of product, direct labor hours, or machine hours, each of these is volume-based. But if, as is usually the case, the usage of these activities is not proportional to the number of units produced, then some managers will be overcharged and others undercharged under the volume-based approach. For example, suppose Al insists on more frequent inspections of his production; then he should be fairly charged a higher proportion of overhead (inspection) than that based on units alone. Moreover, why should you pay any portion of fabric cutting if your bedroom furniture does not require fabric? Another consideration is that the volume-based method provides little incentive for the manager to control indirect costs. Unfortunately, the only way you could reduce your share of the indirect costs is to reduce your units produced (or hope that Joe and/or Al increase production)—not much of an incentive. On reflection, the approach that charges indirect costs to product based on units produced does not provide very accurate product cost for you or Joe or Al and certainly does not provide the appropriate incentives for managing the indirect costs. The solution is to use activity-based costing to charge these indirect costs to the products, using detailed information on the activities that make up the indirect costs—the materials handling, inspection, fabric cutting, and materials