Management Accounting

2267 Words5 Pages

Abstract

The initial aim of this report is to layout the main differences of

the client's current basis of overhead absorption, compared to

activity - based costing (ABC). By showing the divergence of both

systems, it appears that information generated from traditional

overhead absorption does not properly equip client's management with

suitable information for decision making. An additional aim of this

paper focuses on the potential benefits of activity - based costing.

It illustrates the chances of ABC as a decision making tool to provide

management benefits regarding the accuracy of cost and the achievement

of goals and strategies. Lastly, this report highlights all

information required for the implementation of ABC into the client's

organisation. It also reveals the necessity to collect and process the

information needed in the correct format at a reasonable cost.

Introduction

Today, manufacturing firms are confronted with an increasing

competition in the global marketplace. The demand to increase

profitability and the need to control costs demand an optimisation of

entrepreneurial ability in managing them. Cost management can provide

the tools, techniques, and mechanisms needed by companies to help

achieve goals and strategies (Andersen, 1999). The augmentation of

automation and rationalisation in manufacture, as well as the steady

increase of complexity in production and distribution, has led to a

serious adjustment of the companies cost structure (Freidank, 1997).

Roztocki (1999) states that in order to be successful in this new

business environment companies have to be flexible and react quickly

in manufacture. Furthermore, the author emphasises the need to have

accurate and up-to date costing information to make decision-making

effective and proper. Scarlett (2002) and Roztocki (1999) argue that

traditional costing systems based on volume-allocation of overhead

(direct labour hours or machine hours) no longer provideany accurate

information for product calculation, due to the serious increase in

overhead and the subsequent decline in direct labour. They even

contribute to poor strategic decision making, owing to the tendency of

traditional costing systems to distort product costs (Johnson and

Woodward Farm Inc Case Study
1569 Words | 4 Pages
should not use the traditional method over the ABC costing method. Although the Traditional method is easier to implement, this method doesn’t take into account that Woodward Farm Inc. uses an automated process in order to produce goods.Therefore in this method, due to the automated process, direct labour hours is most frequently used in order to calculate the overhead cost. Under the traditional method other cost drivers such as quality control and soldering activities would not be accounted for which results in an inaccurate representation of the actual image of the company 's progress. Therefore if traditional method is used to compute the overhead, this could lead to inaccurate and wrong managerial
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ABC System Used by United Parcel Service (UPS)
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An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
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Time Driven Activity Based Costing
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Conventional Activity Based Costing (CABC) was first introduced by Robert Kaplan and Robin Cooper in the late 1980s through a series of papers published in the Harvard Business Review. The method aimed to correct deficiencies with the standard cost systems; the systems which attempted to cram all of a company’s costs into three broad categories – labor, materials, and overhead (Kaplan, 2007, p. 15). Such a system lacked the resiliency and versatile data management that was necessary to adapt to market demand changes that came with the twentieth century. While businesses improved to meet the market demands with services such as increased product variety, smaller order sizes, direct delivery, and specialized technical support, their traditional cost systems could not support efficient resource allocation for the rising costs to provide all those services. CABC sought to fix these issues. Cooper and Kaplan’s ABC system improved efficiency by assigning costs down to the product/orders level, enabling managers to better recognize where money was being wasted and where it needed to be invested. The basic model looked like this:
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Activity Based Costing (ABC)
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One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).
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Costing as defined by Blocher, Stout, Juras, and Cokins (2016) ‘is the process of accumulating, classifying, and assigning direct materials, direct labor, and factory overhead costs to cost objects, which most commonly are products, services, or projects” (p. 96). Further relayed by Blocher et al. (2016), is the type of costing system a company employs depends on the industry, product or service manufactured or provided, and the benefit versus the cost of the particular system chosen. Job and process costing systems are two different avenues by which companies can accumulate their costs as a first step in determining accurate pricing for their product or service. While one method tracks costs that can be specifically attached to a unique product, batch of products, or service, and then also allocates the overhead to the individual units or services, the other method also tracks the direct costs but accumulates the overhead costs for the shared services used to produce indistinguishable products, then assigns them to a functional department, and from there assigns them to products. Job and process costing system characteristics are examined in further detail, and examples of companies that use each are provided.
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Absorption/Full Costing, Variable/Marginal Costing, and Activity Based Accounting
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The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
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Activity-based costing
1171 Words | 3 Pages
Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.
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Accounting
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Management Accounting Essay
742 Words | 2 Pages
The nature of business has changed and evaluation. ‘New techniques have been developed and existing one has adapted to try to ensure that management accounting retains its relevance’ (Atrill, P. el at 2013, pg. 12). Then, what is management accounting? ‘The application of professional skills in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operations of the undertaking’ (Tyagi, C. el at 2003, pg.12). The management accounting is very significant thing in the operation which this might consider as tools that allows administrators to manage their enterprise, make internal stakeholder understand more and cooperate
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Costs
1217 Words | 3 Pages
Generally Accepted Accounting Practice The main purpose of searching for a new method to estimate cost if due to the erroneous practices of accounting. There is a wide recognition of this problem but most companies still have not gone to a different approach. The GAAP principles do not provide the kind of cost detail and information focus required in today’s capital intensive, automated, and complex manufacturing and distribution. It generates an erroneous and inverse relationship between computed product cost and current production volume. This is the major problem- the inverse relationship between production volume and inventory value because these indirect expenses are all fully charges to the current product. In periods of declining sales, the apparent cost of the product rises, bringing suggestions of price increases in the face of weak sales performance. In good sales periods, apparent cost of product declines, suggesting either a lowering of prices or higher profits. Neither inventory valuation reflects the true cost of manufacturing the product. The typical distribution an accrual accounting practice often distorts operating cost information and performance criteria to accommodate financial policy, management practice, and current tax law requirements. Some manufacturers even overproduce to absorb overhead in the false assumption that this reduces their product cost. Many different methods have been tried to fix this inaccuracy, such as activity bases costing, machine labor costing, process costing, productive hour rate costing, life cycle costing, and technology accounting. All of these methods have common weaknesses. None of these methods isolate the definition of the cost of the product form the definition of the overall performance of the business. All of these techniques cause the apparent cost of the product to vary with volume yet manufacturing has done nothing different when volume increase or decrease. Paradigm Shift One of the major philosophical changes is the conversion of the costing base from the variables of materials, labor, and volume to the constant of time and time use of capital facilities in each operation. By allocating all indirect expenses to time use of facilities, indirect and general and administrative expense can be fully absorbed and the correct share of these costs can be precisely assigned t...
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Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.” Compared to the traditional costing system, Activity Based Cost (ABC) is a lot more sophisticated and it is the most commonly used system within business although it is a lot more time consuming. For example, if a company has two products that they were selling and one was more demanding in ways that it needed a specific kind of engineering and it needed a unique way of testing. Then the other product was just manufactured through a machine the overhead activity would appear much great when the traditional system is used – absorption costing. Whereas with ABC each individual step of the process is priced which allows the company to see how much is owed in all aspects of manufacturing and selling. The use of ABC has increased rapidly over the past decades due to the fact that there is a more advanced technology in the world today and for competitors to compete they have to have top of the line products, and this is why activity based costing is being used as it ensures all aspects of costs are being considered within the price. With ABC it allows the accountant within the business to produce a more accurate representation of the product and by
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Management Accounting

Woodward Farm Inc Case Study

ABC System Used by United Parcel Service (UPS)

Time Driven Activity Based Costing

Activity Based Costing (ABC)