Decision-making is a continuous process in which managers must engage daily. Advanced Management Accounting is the application of mathematical and accounting technique of analysis to assist the process of decision making. But the application of such techniques demands the knowledge of the various concepts to make the use of such techniques, hence an attempt has been made to discuss few of those concepts like activity-based management, activity flexible budgeting, quality costs, Lean Accounting with the help of practical solution (Awasthi, Omrani, & Gerber, 2018).
In day to day decision making it is often told that one of the important functions of the manager should be to control the costs without having any realistic approach to achieve it. It is the concept of activity-based management which provides the platform for the same. as it clearly establishes the link between the costs and activity associated with such cost.
It is a systematic and integrated approach of managerial decision making by using the tool of activity-based costing to carry out the re-engineering initiative or value chain analysis with a view to improving the quality of the strategic and operational decision-making. It is based on the two basic premises that activities are being consumed by the products and the resources are being consumed by the activities, hence if it is being intended that the product should be the competitive one in the market, then the knowledge of those activities which produce the products and services and the cost of those activities are required. At the same time, the reduction of the cost of products or services demands the change in those activities (Bennouna, Meredith, & Marchant, 2010).
ABM primarily is focussed on establishing a direct relationship between the activities and the costs associated with hose activities for which the ABM is divided into a set of activities then each of such activities are analysed using the tools of Cost benefit analysis. It is the measure to control the activities of the organisation. After analysis of the activities if any of the activities are found expensive, then an attempt is made either to increase the level of efficiency of such activity and if not possible then the elimination of such activity is opted for.
One of the important aspect on which the premise of the activity-based management is based that it is aimed at establishing the accountability on the activities not on its costs. Because costs are the results of the activities, hence control over the costs shall be possible only when there is control over those activities (Boghossian, 2017).
The Connection of ABM with the continuous improvement
Before knowing how the ABM contributes to the Continuous improvement, it is must to know how the continuous improvement is achieved. It consists of a five-step process, i.e., Identification of opportunities of the environment, Identification of root causes, identification of possible solution, implementation of the best solution and finally monitoring the result of the solution.
These steps are linked with the ABM, the first step is performed by classifying the activities between primary and secondary activities so that the resource utilisation can be accordingly divided between the two types of activities identified, then the next step is to identify the possible root causes such activities, then the possible solutions to such activities are identified following the implementation of the best solution and finally the monitoring of the performance of the result of the best solution implemented so that the possibility of further improvement can be decided and this process keeps on going in the ABM (Bouret, 2017).
To carry out the process of the continuous improvement, the first step being taken is the classification of the activities into the following matrixes, which are essential and value-added activity, essential and non-value-added activity, Non-essential and value-added activities and finally the non-essential cum non-value-added activity. The major focus for elimination is given to the non-essential and non-value-added activities and those non-essential but value adding activities are also planned to be eliminated through the tool of redesigning the product or the process or committing towards the reengineering. Again, as a measure for improvement the activities which are though essential but non-value adding activities, an attempt should be made to minimise such activities to the maximum possible extent. There should be the continuous effort to be made to increase the number of those activities which are essential and value adding activities (Carolus, Hanley, Olsen, & Pedersen, 2018).
Non-value-added costs are those costs which contribute towards the cost addition, but they don’t add any value to the product or service. In this case the major non-value-added costs are as under: Non-value-added activities can again be of two types one being essential but non-value-added activity and the other being the non-essential and non-value-added activity
Name of the Activity Amount ($)
Total Value-added cost 12, 78,000
Computation of the cost of savings per unit if the non-value-added activities are eliminated
=Total Non-value-added cost/Number of unites produced
=$12, 78,000/120000Units
=$10.65 per unit
Working Note:
Computation of the Number of the units produced
=Total Cost of the product/Unit cost of the product
=$2880000/$24
=120000 units
Yes, Inc the given case Dhobi was correct who said that as per his preliminary assessment for cost reduction at least $10.50 per unit can be made.
Actions that the Electronica Inch can take to eliminate the non-value-added activities are summarised hereunder:
Computation of the Target cost Per Unit
Target selling price – $27
Less: Target profit per Unit – $6
Target Cost – $21
The required cost reduction = $24-$21
=$3 per unit
Computation of the Target cost to achieve the target of the expanding the market share by 50%
Target Selling price per unit -$18
Less: Target profit per unit – $6
Target cost per unit $11
Cost reduction per unit=$24-$11
=$13 per unit.
Computation of the total potential Cost reduction per unit
Total possible cost reduction already suggested by Dhobi = $10.50 per unit
Total amount of additional cost reduction =$90,000+$135000
=$225000
Additional cost reduction per unit =Total additional cost to be reduced/ No of units
=$225000/120000
=$1.88 per unit
Hence total potential cost reduction per unit = $10.50+$1.88
=$12.38 per unit
Yes, with this much reduction of cost the company can achieve its current sales, but to increase it by 50% is not possible through this potential reduction as calculated above.
The form of activity analysis under kaizen approach adopted in this case is selection.
Calculation of Current income on current sales, prices and costs
Current Sales = $27*120000
=$32,40, 000
Current Cost= $28,80,000
Current Income =$32,40, 000-$28,80,000
=$360000
Calculation of Income if the price charged is Rs.21
Sales =21*120000
=$25,20,0000
Total Possible Cost Reduction = $3+$1.88
=$4.88
Total target cost per unit = $24-$4.88
=$20.12
Income = ($21-$20.12) *120000
=$105600
Income in case the price charged is $18 per unit
Total possible reduction per unit = $13+$1.88
=$14.88 per unit
Target cost per unit = $24-$14.88
=$9.12 per unit
Income= ($18-$9.12) *180000
=$15,98,400
It is better to select the target price of $18 per unit as the income in this case is the highest.
It is one of those techniques of budgeting under which each of the elements of the costs as presented through the budget is directly linked with the cost driver associated with it. It is because the cost driver decided the demand of resources by a specific activity. It is more dynamic and practical in nature (Cayon, Thorp, & Wu, 2017).
|
Actual (For 60 batches) |
As per Budget (for sixty batches) |
Remarks |
|
Direct Material=$220000 |
=$240000 |
Within budget |
|
Direct Labour =$177500 |
=$160000 |
$17500 (Overspent) |
|
Depreciation=$50000 |
=$50000 |
Within budget |
|
Maintaining equipment=$212500 |
=$217500 |
Within the budget and less spent |
|
Machining=$71000 |
=$68500 |
$2500(overspent) |
|
Moving material=$116250 |
=$120000 |
Within the budget |
|
Inspecting good=80000 |
=$60000 |
$20000(overspent) |
From the above analysis it is quite evident that in most of the cases Millrun met the standard set by its budget for the elements of cost in terms of material, maintaining equipment and material moving, but failed to meet the budgeting standard in terms of labour cost, inspection cost and machining cost. The remarks columns of the above table clearly reflect that the amount of Direct labour overspent was $17500 and that of the Machining is of $2500 and finally on the inspection of the Goods it is $20000 (Dan, 1995).
Working Notes:
In the given case it has been assumed that the depreciation is a fixed expenditure having no relation with the direct labour hour
Calculation of the variable and fixed cost using the High-Low method
Variable Cost per unit = DM cost at the highest level of activity-DM cost at the lowest level of activity/Highest level of activity-lowest level of activity
Direct material cost per unit= $300000-$150000/25000
=$6 per direct labour hour
Total direct material cost =$6*40000
=$24000.
Direct labour per unit =$200000-$100000/25000
=$4 per direct labour hour
Total direct labour cost = $4*40000
=$160000
Maintaining equipment cost =$255000-$180000/50000
=$1.5 per machine hour
Machining cost per unit =$81000-$56000/50000
=$.5 per machine hour
Moving materials cost per unit =$145000-$82500/10000
=$6.25 per move
Inspecting products per unit = $112500-$62500/50
=$1000 per batch
Fixed Maintaining equipment expenditure=$255000-150000*$1.5
=$30000
Fixed machining expenses=$81000-150000*$.5
=$60000
Moving material fixed expenses =$145000-20000*6.25
=$20000
Inspecting product fixed expenses=$112500-100*1000
=$12500
Statement of cost of the product
|
(Figures in $) |
|
Direct Material (5000*6) $30000 |
|
Direct Labour ($5000*4) $20000 |
|
Maintaining equipment cost $11250 |
|
(7500*$1.5) |
|
Machining $3750 |
|
(7500*$.5) |
|
Material moves $1562.50 |
|
(250*$6.25) |
|
Total cost $66562.50 |
Cost per unit = $66562.5/5000
=$13.31 per unit
Working:
Machine equipment maintenance cost per machine hour=$ 250000-$180000/150000-100000
=$1.5 per machine hour
Machining cost per machine hour = $81000-$56000/50000
=$.5machine per hour
Moving Materials=$145000-$82500/20000-10000
=$6.25per move
|
Particulars |
Level of activity |
Level of activity |
|
Driver: Direct labour hours |
25000 |
50000 |
|
Direct Material |
$150000 |
$300000 |
|
Direct labour |
$100000 |
$200000 |
|
Depreciation |
$50000 |
$50000 |
|
Subtotal |
$300000 |
$350000 |
|
Driver: Machine hour |
100000 |
150000 |
|
Maintaining equipment |
$180000 |
$255000 |
|
Machining |
$56000 |
$81000 |
|
Subtotal |
$236000 |
$336000 |
|
Driver: Material Moves |
||
|
Moving material |
$82500 |
$145000 |
|
Fuel cost |
$2500 |
$5000 |
|
Cost of fork-lifts |
$10000 |
$20000 |
|
Operator’s Salary |
$60000 |
$120000 |
|
Sub total |
$155000 |
$290000 |
|
Total costs |
$691000 |
$976000 |
When we talk about the quality it is the basic essential functions expected to be performed by the product or the service not of the luxury or comfort which we need to upgrade that is the meaning of the quality and the costs which are incurred to achieve this objective are called the quality costs (Johan, 2018).
There are basically four types of quality costs associated with the production environment which are described in brief as follows
Preventive Quality cost
As the quality management is an integral part of the production environment, hence the design, implementation and maintenance are given the priority for which the costs which are incurred to avoid the potential quality problems are known as preventive maintenance cost (Giacomo, Kamalesh, & Giovanna, 2013)
Appraisal quality cost
To ensure that the product manufactured by the entity meets the customer expectation along with the regulatory requirements set by the regulatory authority it is important to focus on the quality control aspect for which the appraisal costs need to be incurred (Ghofiqi, 2018).
Internal failure quality cost
To ensure the delivery of the quality products the regular inspection system is put in place before the product leaves the manufacturer’s premises. Hence internal failure costs are the result of the discovery made through the internal inspection system of the entity (Kaufmann, 2017).
External failure quality cost
These costs are such types of costs which are brought into the notice once it is delivered to the customer or in other words these are the costs to be incurred as they did not meet the quality requirements of the customers (Hansen, Otley, & Stede, 2003).
The following table provided the categorisation of the quality costs given in the question in to the aforesaid four categories.
|
Preventive Quality costs |
Appraisal Quality costs |
Internal Quality costs |
External Quality costs |
|
|
|
Scrap |
Warranty |
|
Inspection |
Incoming material Inspection |
Retesting |
Allowances |
|
|
|
Rework |
Complain adjustment |
|
|
|
Product acceptance |
|
|
|
New product review |
Downtime |
|
|
|
Quality training |
|
|
Before making the categorisation of the following quality costs into fixed and variable expenses better to understand the meaning of the same.
Variable expenses are those expenses which change with the level of activity or it varies in accordance with the changes in the quantity of the units produced (Borit & Olsen, 2012).
Fixed expenses are those expenses which remain constant up to a certain level of activity or which do not directly vary with the changes in the units of the product produced.
Keeping the above feature in mind the categorisation of the following quality costs has been done (Pereira, 2014).
The categorisation of the above four types of quality costs into variable and fixed overheads are as follows:
|
Fixed overhead variable overhead |
|
Inspection Scrap |
|
Incoming material inspection Warranty |
|
Product acceptance Retesting |
|
Rework |
|
Downtime |
|
Complain adjustment |
|
Product acceptance |
Statement showing the performance Report by comparing the budgeted quality cost with the actual quality cost for the month of April
|
Particulars |
Actual ($) |
Budgeted ($) |
remarks |
|
Quality Costs |
|||
|
Warranty |
26250 |
22500 |
$3750(overspent) |
|
Scrap |
18750 |
15000 |
$3750(overspent) |
|
Incoming material inspection |
3750 |
3750 |
Meet the target budget |
|
Product Acceptance |
21000 |
19500 |
$1500(overspent) |
|
Quality Planning Field |
3750 |
3000 |
$750(overspent) |
|
Inspection |
21000 |
18000 |
$3000(overspent) |
|
retesting |
10500 |
9000 |
$1500(overspent) |
|
Allowances |
12750 |
11250 |
$1000(overspent) |
|
New Product Review |
1050 |
750 |
$300(overspent) |
|
Rework |
16500 |
13500 |
$3000(overspent) |
|
Complain Adjustment |
3750 |
3750 |
Meet the target budget |
|
Downtime |
8250 |
7500 |
|
|
Quality Training |
1500 |
1500 |
Meet the target budget |
The above table showed that the Oticon failed to meet the standard set by the budget prepared for the month of April. The amount of the overspent quality costs is $3750. $3750, $1500, $750, $3000, $1500, $1000, $300 because of warranty, scrap, product acceptance, Quality planning field, inspection, retesting, allowances, new product review, rework respectively. Hence it is clear that it could not maintain the expenditure level as per its budgeting standard (Pereira, 2014).
No, in the given case the company is not moving towards the right direction in terms of balance among the quality cost categories.
Ans. To a). The time required to produce the 25 batches using the batch processing departmental structure
Total time required to produce new batch
Wait time = 10 minutes
Mixing= 12 minutes
Move and wait time= 15 minutes
Cooking = 24 minutes
Move and wait time= 30 minutes
Decoration =14 minutes
Move and wait time= 20 minutes
Packaging = 8 minutes
Total time required = 133 minutes or 2 hrs and 13 minutes
Hence the total time required to produce the five batches using the batch processing departmental structure = 133*25
=3325 minutes or 55 hours and 42 minutes
Ans. To b). Calculation of the time required to produce the 25 batches using the management decision of using the cellular manufacturing structure
The time required to produce one batch
Mixing = 12 minutes
Cooking = 24 minutes
Decoration = 14 minutes
Packaging = 8 minutes
Hence the total time required to produce the one batch under the cellular structure = 58 minutes
Hence the time required to produce the 25 batches
=25*58
1450 minutes or 24.16 hours
The manufacturing time to be saved in this case = 3325 minutes – 1450 minutes
= 1850 minutes or 31 hours and 25 minutes
Answer to c).
The new revised structure as suggested by the industrial engineer
Mixing = 8 minutes
Cooking = 24 minutes
Decoration = 10 minutes
Packaging = 8 minute
=50 minutes
Hence the available time required to produce the 25 batches = 25*50
=1250 minutes or 20.83 hours
Before going into the computation of the takt time it seems better to explain its meaning. It is the average time between the starting time of the production of one unit and the starting of the production of another unit. Calculation of the takt time in the areas of the batch level processing is very common in advanced management accounting (Coate & Mitschow, 2017).
Takt time = Available time of production/
Required units of production
=20.83/25
=.83 hours
When we talk about the technical efficiency of the input we simply mean that the amount of input that should be the minimum input amount of input to produce the desired quantity of the output. An input which is least demanded is the most technically efficient input to produce the product. At the same time, it is also to be kept in mind that the selection of the technically efficient product does not assure the achievement of the economic efficiency level too, as the economic efficiency relates to the production of the output with the least possible cost (Giacomo, Kamalesh, & Giovanna, 2013).
|
Input combinations Power Labour Components |
|
K 675 225 137.50 |
|
M 712.50 237.50 115.00 |
The reason behind choosing this combination is when talking about the technically efficient input combination, it is the power and labour that determines the technical efficiency level. In both above combination the least amount of labourer and power has been demanded hence, both are being considered the most technically efficient input combination (Webster, 2017).
Conclusion
From the above it is evident that the in the present day decision making the knowledge about the concept of key advanced management accounting concepts like Activity based management, Activity flexible budgeting along with the high-low method of allocation of cost, the concept of quality costs together with the various of its types and its further bifurcation into the variable and fixed cost and finally the lean accounting which explains the concept of takt time and technically efficient input combination are all equally important for a manager to make the day to day practical decision. This set of solution is expected to provide a deep-rooted understanding on the various concepts discussed herein.
References
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