The key focus areas of management accounting are mainly categorised as the performance factor and the profitability factor. The practices of management accounting are mainly undertaken with the objective of improving the said areas by arranging, organising and delivering the necessary and material information in a systematic manner to assist any business in its decision making process. The management oriented practices keeps on changing rapidly with the changes in the business environment. The management accountant has to keep himself updated about the changes occurring in the business as a result of adopting environmental changes. Management accounting is considered as the most fundamental element of process of management. The management accountant has to ensure that the information delivered to the business managers is relevant enough for the respective areas of functions
Changes in the focus of management accounting practices
According to Charles T. Horngren, with the globalisation the businesses are expanding and competition in the market is increasing rapidly, it is important to deploy the advanced technologies in the business to meet the demands of the customers effectively and efficiently and also to grow and succeed (Dunning, 2014). These factors are imposing the requirement on the businesses to changes their ways of operating and managing various functions of business. With these changes the management has to make the changes in the way management accounting practices are undertaken as some of such changes have direct implications on the management accountant’s work (Fullerton, Kennedy& Widener, 2013).
With the introduction of new and advanced features of technologies it is made easy for the management accountant to perform some tasks and functions with the use of I.T services which will relinquish the problems of counting and calculations to be done in management accounting activities. New techniques of management accounting have been taken into the scope in the 21st century which are of advanced level to help the managers with the required information for better planning and decision making (Hirst, Thompson & Bromley, 2015).
These techniques have been introduced to implement modern practices of management accounting. Some of such techniques are Activity based management Costing, Throughout Accounting, Back flush Costing, marginal cost accounting, modern strategic management techniques etc. The introduction of such techniques have changed the focus of practices of management accounting from ‘plain and simple’ roles to ‘advanced’ roles since earlier the management accounts were only responsible for the cost identification and the financial reporting (DRURY, 2013). However, now the accountants have to be concerned about the creation of value using the resources (Grönroos & Ravald, 2011).
There is no set of accounting practices followed by every organisation rather each organisation has its practices of management accounting depending upon their applicability and suitability to the respective organisation (Htaybat & Alberti-Alhtaybat, 2013). The factors contributing to the selection of management accounting practices can be from internal environment such as the type and size of business, years of existence or they may be due to external concerns such as regulatory requirements, modernisation of techniques, inventory availability.
Management Accountant’s role in the contemporary business world
Jean E. Cunningham and Orest Fiume has defined the key responsibilities of a management accountant and the other executives of management. Management accountant has a wide array of functions to perform as a part of management accounting practices. The role of management accountant is essential for any organisation in its decision making process as they assist management with the necessary information on timely manner (Goretzki, Strauss & Weber, 2013). Following are the key roles of Management Accountant:
Reporting and analysis work:
The management accountant is responsible for preparation of reports on the functioning of various operations and to identify the root causes of any deficiency in the operations. Also the accountant is required to apply the analytical skills to the data of the company to compare the actual results with the benchmarks and to report the deviations, if any with the suitable recommendations.
Formulation of Strategies: The management accountants are responsible to formulate the strategies for the management and the effective implementation of the same so as to achieve the targets and the goals effectively.
Decision Making: The decision making function is the most crucial function in any organization as it require good amount of information to take important decisions for the company. The management accountant provides material and necessary to the top level management.
Interpretation of Information: Management accountant helps in the interpretation of financial information provided to the management so that it becomes easy for the managers to understand the operating results.
Advisor: Cost management is supposed to provide the best advice relation to various crucial matters on which management has to take firm decisions. The accountant is required to provide the advice which is best suitable to the company so as to improve the overall performance of the different functions of the company.
Change Manager: As organization has to adopt to the changes that are rapidly occurring in the environment in which it is operating, the management accountant will help the firm to cope up with the changes by identifying and assessing the need and implications of changes through provision of updated information (Christ, & Burritt 2013) (Needle, 2010).
Performance measurement: The management accountant helps the organization in measuring the performance of overall organization as well as the performance of individuals of the management such as employees and the managers.
Customer’s value and Shareholder’s wealth
Creation of customer’s value: customer’s value is the difference between the cost that the customer pays for the products and services and the benefits they receive from that particular product or the service provided to them by the seller or the service provider. Benefits are evaluated only on the customer’s perception about the level of satisfaction a product must provide to them in comparison to the alternate products available in the market.
Customer’s satisfaction may include various things at time such as the quality of the products and services, the price of product in comparison to the price of similar products supplied by the other firms, the brand value of the goods etc. (Gul, et al., (2012).
To create value for its customers a firm must have to be focused on the customer’s satisfaction through greater loyalty towards the customers and the quality maintenance so that excellent customer base can be formed and retained by the company over its competitors which will help it grow and expand the business.
Shareholder’s wealth: Shareholders are the individuals who invests their funds in the company in order to get returns their investments. The company in return gives them the dividend which may be fixed or varying depending upon the terms of company. Since the company finances most of its funds through the shareholders, the shareholders are often called as the owners of the company (Windsor & Boatright, 2010). Therefore the company must focus on wealth maximization of shareholders as to maximize the wealth of the shareholders the company will have to pay them higher dividends which will require the higher earnings of the company to be generated through its operations.
The two issues as explained above must work in harmony for any organization to be successful. Customer’s satisfaction is the important perspective for any organization, the strategy which strives to increase the customer satisfaction also helps in creating wealth for is shareholders as customer satisfaction will ultimately increase the company’s profitability thereby increasing the total earnings of the company through which higher dividends can be paid to the shareholders. However if there are any conflicts in both the objectives the company will have to suffer a huge loss (Barnea & Rubin,2010).
Contemporary techniques of resource management:
Resource management is the system of managing the resources of the company such as financial resources, human resources, Information technology resources etc. in an effective and efficient manner (Boxall & Purcell, 2011). Resource management is important for the smooth functioning of all the resources of the business so that that the business can achieve its targets and objectives in the best possible manner without any unnecessary wastages and within the minimum time. There are numerous techniques in today’s world which helps the organization in best suitable management of the crucial resources of the company. Any mismanagement in these resources may hinder the performance of the overall functioning of the business. Following are few set of techniques:
Economic batch quantity: This technique is also known as economic order quantity which is used to determine the appropriate level of inventory to be kept or maintained by the company
in order to avoid the stock out condition and to reduce the cost of carrying the inventories in the warehouses and stores. This technique provides the most efficient way of managing the inventory resources of any particular company (Schmidt & Nakajima, 2013) Inventory can be of any kind the raw materials or the finished goods which are to be used by the business either in the production process or to sell them in the market on the basis of demands.
ABC Costing: This is the technique which helps in identifying the cost of the different activities involved in the business and the outcomes of such activities (Bahar, 2014). It provides the logical basis on which the overheads are to be allocated to the products and the services.
Target costing: It is the technique used to determine the margin a company requires to maintain while producing and selling the products. The techniques used for the target costing are value chain analysis and value engineering.
Activity Based Budgeting: The technique which provides a transparent and précised methodology in decision making related to budgeting. The cost attributable to purposeful area of the business is recorded and then their association are set aside and analysed. Therefore Activity based budgeting is a technique of budgeting in which revenue from different activities is attributed directly to the departments or units accountable for the activity (Baker & English, 2011). Activity Based Budgeting uses different techniques for finding out the efficiencies in the organisation’s business activities after taking into account inflation or any development that have taken place prior to previous budgets. Activity Based Budgeting is more useful for the relatively newer organisations which do not possess any historical budget information to rely on or those organisations that are undergoing material changes like new businesses or new associations. The biggest strength of Activity Based Budgeting is that it provides an invariable control over the budgeting process while the biggest drawback of it is that it is a costly affair in comparison to traditional budgeting techniques
Total quality management: It is basically a management approach where an organisation in order to achieve success in a long run places its focus on customer satisfaction. The whole organisation from Top Level Management to Bottom Level Management contributes in improving the products, culture, processes and services of the organisation as whole. It is a never ending process for removing errors in manufacturing process of the organisation. In TQM organisation sets the benchmark that includes both internal priority and best industry standards in the current scenario ( Goetsch & Davis ,2014). Industry Standards also includes compliance to various laws and regulations which are applicable to the organisations in the industry. The biggest strength of TQM is that it includes a never ending process to improve the processes including products and services of the organisation which could be critical to the success of the organisation in the long run (Hoang, Igel & Laosirihongthong, 2010).
Resource levelling: It is a technique in which initiation and conclude points or dates are adjusted considering the constraints of resources with the objective that demand is balanced for the available resources with supplies available. It is used when the Machine or Labour hours are required more than they are available or the same machine or personnel say a supervisor is required in two specific tasks. Then such tasks should be rescheduled or managed in order to handle the constraint effectively. Resource Levelling is very useful in the business that includes maintenance management, as such organisations needs to create schedules for a pre-determined period of time.
Six sigma: It is a set of techniques used to be implemented on the processes of the business of any organization in order to ensure the accuracy of the processes or the products manufactured by the company using those processes (Pyzdek & Keller, 2014).
Logistic management: This is the technique used to transfer the resources from one place to another. It is the process of controlling and managing the flow of resources coming from outside the entity and the resources going out of the company. Use of various techniques such as optimal production technology etc.
Cost allocation Methods:
Deciding the basis on which the cost allocation is to be done is quite an important decision for any organisation as it will assist in determination of appropriate costs of the products of the company. Since cost determination helps a firm in its decision making process of price fixation for the products manufactured by the company, inventory valuations, buy-make decisions etc., it is therefore necessary to allocate the costs to the different products on a reasonably acceptable basis. There are various methods of allocation of costs and basically the cost management accounting covers the 3 primary methods which are as follows:
Direct Method: Under this method the each service department’s cost is allocated to all the operating departments on an appropriate basis i.e. share in the allocation base depending upon the set criteria. It is mostly used by the organisation.
Step Down Method: it allows each of the service department to share the cost with other service department and but once a service department’s cost is allocated fully no other cost can be allocated to it.
Reciprocal Method: the most correct method as it allows in recognition of corresponding services to the service departments. It is complicated enough to be used however provides the best results.
The direct cost is allocated directly to the related departments and the indirect costs are allocated to the production and the service departments separately on the basis of cost drivers. The cost driver for the variable costs actual hours of labour or machine.
On the basis of labours hours:
The cost is allocated to the different products manufactured on the basis of number of labour hours consumed by each unit of the products using the predetermined labour rate per hour.
On the basis of machine hours:
The cost can also be allocated to the different products on the basis of machine time consumed by the products.
port contains the detailed analysis of ABC costing technique and the traditional costing method which is as follows:
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Costing is the practice of determination of the cost of the various products produced by a manufacturing company. There are different overheads involved in the production of items, therefore costing system identifies and allocates all the overheads involved in the production activity to the products on an appropriate basis. There are two basic methods of allocation of overheads to the products so as to calculate the product costs. These methods are as follows: · Traditional costing · Activity based costing Traditional costing is the method in which overheads are allocated to the products on the basis of average rate of overheads such as direct labour hours machine hours etc. However ABC costing is the modern technique of costing which involves allocation of overheads to the products on the basis of different cost drivers which provides the suitable basis of allocation. The cost drivers can be of different kinds such as the number of production runs, number of inspections etc. Practical analysis of the problem As per Traditional Costing Cost of Basic & Telephone Systems as per Traditional Method of Costing is as follows :-
Assumption: It is assumed that the direct labours are equally consumed for both the products therefore the fixed overheads will be distributed in equal proportion for both the products. As per ABC Costing
Implications Activity-based costing is considered more logical, accurate and the best method to determine the costing of a product because it considers various factors into account before assigning a cost to a product. However, it is a bit complicated and time-consuming for the same reason. But It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs. The same can be observed as above in the illustration where for say Variable Overhead Cost, in which Basic Telephone requires different developments from Advanced Telephone and therefore labour hours required in Fixing Department and Testing departments are different. Traditional costing is considered a way of determining the cost of a product in an easier manner, since it relies solely on assigning single blanket overhead rates for say Direct Labour Hours or Direct Machine Hours or Direct Engineering Hours as per the nature of business whether it is labour intensive or machinery based or skilled labour based. This also implies that it won’t always be as accurate, because it doesn’t account in for nonmanufacturing expenses or administrative expenses and it’s not possible to withdraw the conclusion which overhead costs accounted for which product. The same can be observed in the above illustration where both in case of both Basic and Advanced Telephone Sets Direct Labour Hours is assigned as single blanket basis to determine the overhead costs to the Teletrix. Both Traditional Costing and ABC Costing have various payback as well as disadvantages. To determine which costing system is most appropriate for the business is determined on the nature of the business as well as its specific needs and other suitable factors. Activity-based costing is mostly recommended where accuracy and precision plays a very crucial role while determining the costing of the product. Considering the fact that it takes a considerable time and cost to implement, it is most suitable for following purposes: · When the overhead cost to the organisation is high and any small changes while determining the costing of the particular product can make a drastic impact on it. ABC Costing makes it simpler and easier to envisage and recognize the important and impactful indirect cost and various cost drivers. · Using this method it becomes easier to determine all the relevant and irrelevant costs to the management in an accurate and logical manner paving the way to document such costs and perform cost cutting procedures on such areas where resources of organisation are not fully utilised. Traditional costing is mostly recommended when time remains the constraint and accuracy doesn’t get drastically affected by production activities. Considering various other factors and nature of business in which organisation is engaged, Traditional Costing is most effective for the following purposes: · When Direct costs forms the major factor in determining the cost of the particular product because when overhead cost is low it is easy to be determined. This is most useful when the organisation is engaged in manufacturing single item (or large number of similar items). · Using this method it becomes easier for External factors like Government or Multi Nationals to determine the cost of products. Conclusion Therefore the managing director of Teletrix is recommended to opt for ABC costing as pricing the Telephones as it is giving the more accurate costs on the appropriate basis and also the costs are a little lower. Choosing an appropriate method could take some extra time and efforts but a correct decision would end the organisation with saving money in the future run and organisation would left with a better costing strategy and some extra money.
Variable Overhead Cost of Advanced System as per ABC Costing :-
Other Manufacturing Overhead Cost as per ABC Costing :-
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