Cost Calculation Using Traditional And Modern Techniques & Management Accounting For Small Companies

Activity-based costing (ABC) is a highly sophisticated adaptation of the techniques pertaining to traditional absorption costing. Instead of using a single basis for absorbing overhead costs, ABC is involved in deploying a broader group of cost drivers for applying overheads to the products depending on usage of the same (Asongu 2015). Thus, the cost is associated closely with the activity, which causes it. Such association is central to the techniques of ABC and it would lead to effective distribution of overhead costs. Moreover, this association is valuable because it enables the attention of the management to places of greater cost-causing tasks. Therefore, cost could be controlled as well as minimised by concentrating on the task, instead of spend.

Since cost is utilised to compute sale price, inaccurate costs might have serious effects. From the above tables, it could be observed that if traditional approach is utilised for cost, the selling prices for X and Y are nearer or below true cost. In addition, Z is sold at a relatively higher price. Even though this might generate greater profits, the organisation might be in the risk of losing business to the cheaper rivals.

To: Keita, Managing Director of a courier company

Subject: Usefulness of management accounting

The major objectives of budgeting in a service organisation like a courier company are briefly discussed as follows:

• With the help of budget, planning could be made about the future steps of the organisation along with judging the employees of the organisation based on the set standard (Downen and Hyde 2016).
• The service organisations utilise the process of budgeting as a base for ascertaining the areas of distributing funds to different tasks like purchase of fixed assets.
• In addition, a set of budgets could be developed based on various scenarios for anticipating the financial outcomes of the strategic direction.
• Another objective of developing budget is to utilise it based for reviewing staff performance by using the variances from the budget (Gitman, Juchau and Flanagan 2015).

The major points of distinction between management accounting and financial accounting are discussed as follows:

The major points of distinction between fixed budgeting and flexible budgeting are demonstrated briefly as follows:

The use of variance within budgetary control is discussed briefly as follows:

• Variance analysis helps effective activity budgeting, since the management hopes to have lesser deviations from the planned budgets. As a result, it enables the managers to prepare highly detailed budgetary decisions.
• It acts as the mechanism of control. The evaluation of large deviation of the major items would enable Keita in obtaining an overview of the causes. This would help Keita to devise out the feasible ways of avoiding such deviation.
• It helps in apportioning responsibility along with involving control mechanism on the departments, in which it is needed. For instance, if the variances related to labour efficiency or raw material cost are not favourable, Keita could improve control of these departments for raising the overall efficiency.

References:

Asongu, S.A., 2015. Finance and growth: new evidence from meta-analysis. Managerial Finance, 41(6), pp.615-639.

Downen, T. and Hyde, B., 2016. Flipping the Managerial Accounting Principles Course: Effects on Student Performance, Evaluation, and Attendance. In Advances in Accounting Education: Teaching and Curriculum Innovations (pp. 61-87). Emerald Group Publishing Limited.

Dyson, J.R., 2010. Accounting for Non-Accounting Students, 8th edition. Prentice Hall.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.