MA620 Advanced Management Accounting - Free Samples to Students

Assist management decisions by appraising, integrating and prioritising appropriate financial management information to aid decision making.

Answer:

Introduction:

Costing systems are said to be information systems, requiring a particular type of information like direct labour hours and production of units, to be valued. It is systematic accounting procedure that starts from the input data that generates costs and other related information, which are identified as per the specified costing system based on defined methodology. Further, the outcomes will be based on the use of costing system, as the similar input data can be used in various ways (Strumickas and Valanciene, 2015). A costing system offer information that can assist in minimizing wastage. This indicates that the resources needed to develop, adopt and manage a costing system must be lower than the derived advantages from the implementation of system. In this situation, there are two systems which are; traditional costing system and activity based costing (Fullerton, Kennedyand Widener, 2013). Previously; majority of companies in Australia were making use of traditional costing system however with the improvement in accounting and costing principles this trend has been modified (Haroun, 2015). Present study has been based on evaluation of statement given by Langfield-Smith, Thorne & Hilton regarding traditional and activity based costing system by considering relevant literature.

Traditional costing system means the allocation of the industry-related overhead to products on the basis of production volume of the consumption of production resources. According to this method, overhead is generally applicable on the direct labour working hours amount of on the usage of machine hours(Halinen and Jokela, 2016). It assigns the indirect costs of factory to the produced based on volume like the number of units generated etc. Traditional system of costing implements indirect costs to commodities on the basis of a fixed overhead rate. Traditional costing system allots the overhead costs to the facts of productivity based on their comparative use of direct labour (Weygandt, Kimmel & Kieso, 2015).

Advantages of traditional costing system

Traditional costing can provide benefits when the company’s overhead is comparatively less than the direct cost of production.  It is helpful when there is less time or when accuracy will not be impacted by the production activities, it most effective for the times when the overhead is running low. Conventional costing method is also relatively cost-effective and inexpensive to use. Generally, companies use traditional costing for the outer reports, it is because it is easy for externals to interpret and implement (Simatupang, Piboonrungroj and Williams, 2017).  Moreover, this method is a key determinant of the cost products, as it is solely based on allotting general overhead rates Along with this, there is high capability of conventional costing system to distort, and for the companies having large-scale production of few products; this methodology can offer better insight of production costs (Mitra, 2016). Issues with traditional costing system

Contemporary business, on the other hand have turned out to be less based on the utilization of labour while not keeping their machine operations running every time in order to cater the most appropriate outcomes. Rather than this, a business might resort towards technical advancement, while concentrating on rapid stock turnover and best-quality customer service to stimulate business progress, along with proper maintenance of pre-determined use in machine and labour(Simatupang, Piboonrungroj and Williams, 2017). By considering these changes in business environment might result in issues for conventional practices on accounting. In a situation where an accounting process has insufficient measures and actions to successfully trace the performance of new business or even lack of accurate measure required to fix wrong areas (Christopher, 2016).  

The issue with this approach is that for a lot of overhead activities, the extent of the activity used by a particular product, does not generally match up with singular cost driver. This grasp true findings for a lot contemporary corporations wherein production of products in done by integrating workforce and technology. Further, accounting model based on the traditional cost uses an approach based on volume like direct labour working hours and machine hours for the allotment of producing overhead costs (Almeida and Cunha, 2017). This model ends with costing of products sold on the basis of absorption costs and inclusive of only good costs as described in financial accounting. Essentially, conventional costing system attempts to allot cost directly to goods, instead of activities and then to the units of products. This cost report offers information on the spending and the reason of spending.

Activity based costing system

Activity based costing refers to a costing method that determined activities within an organization and allots the cost of every determined activity along with resources to all goods and services as per the consumption on actual basis by each. This method realizes and understands the connection amongst products, costs and activities and by considering this connection it allots indirect costs to the products with low arbitrarily (Bouten and Hoozée, 2013). This method clearly and carefully assigns overheads to the items which actually makes use of it. It helps improving the efficiency and accuracy in costing, while uncovering the real costs along with profitability of activities and products.

Adoption of Activity based costing system to resolve costing issues

ABC differs from conventional costing in its treatment of non-volume related overhead costs. Many significant overheads are related to specific activities which are relatively independent of production volume.

The ABC system allows companies across the world in free market to determine the real costs of procedures and products while making optimal decisions regarding the expenditure and profitability of the produced products, and the efficiency of production and business procedures (Mitra, 2016). Further ABC allows companies to attain and manage a competitive edge in the international market of 21^st century(Cho, Michelon and Patten, 2012). In the large-scale, the adoption of ABC is done successfully and findings are conducted by researches that ABC is the key to achieve competitiveness in SME’s.

Activity-based costing is a method for assigning overhead in an appropriate manner to the items which makes use of the same. The ABC terminology depicts tracking of consumption of resources and ultimate outputs of costing. Resources are assigned to activities and further activities are assigned to objects of costs (Bouten and Hoozée, 2013). ABC makes sense in complex situations, in which the approach is expected to offer some types of advantages which are accuracy in products and services costing methods, precise pricing decisions, offering accurate information to interpret drivers of costs and products overheads. ABC refers to a managerial system of accounting that assumes the products and services costs by allotting overhead costs to direct costs (Dale & Plunkett, 2017) .

Cost of implementing activity based costing system

ABC system requires an organizational change in terms of culture, learning knowledge and available resources (Francis and et al. 2015). The main rationale for the demise of any main project are insufficient flow of communication with management levels, weak planning or lack of process and managerial commitment.

Implementation of Activity based accounting requires considerable resources in financial terms. ABC system maintenance is also costly after the implementation too. Establishing an ABC system is costly yet time consuming.  Since the activities of business are analyses and are required to be classified into each individual elements of activity.  This overall procedure can demand valuable resources as data collection, measurement and entering in a new system needs substantial cost (Öker and Ad?güzel, 2016). Furthermore, business might also need aid of advisors specialized in the ABC system implementation and offer training on the same. Further expenditure can be created by using software to the application.

Case study of company using traditional costing

An old manufacturing company (Hypothetical) may look at two products –in this case one takes one labour hour to complete whereas the another takes two hours of labour to finish. Further all the indirect costs are taken into account and added. Once, the determination on spending are done, then the cost is divided with the metric amount in order to search for an indirect cost each hour that can be applied to the particular product.

Take an assumption that creates widgets create a net 1 million each year. To do so, it needs five working employees on full time bases, each on 2,000 hours along with three key supporters on the same duration. With procedure of creating widgets, $1 million was been spent. The rate of overhead would be caused by the dividing the $1 million by the 10,000 direct labour hours. This works out to overhead cost of $100 per hour.

The issue with conventional costing is that it makes use of flat rate in order o allocate the cost For example, if an industry creates two products, and a line manager is capable to make reduction in the cost of production hen the cost savings will be allocated throughput the production of products and diminishing of the effect of the success of manger. ABC system integrates further granularity levels, facilitating in more accurate allocation of costs.

It is a renowned fact that this system makes use of a singular, cost-driver based on labour cost.  This is the main rationale why the traditional costs system misrepresents the prices of products, due to which Australian business must cease traditional costing system (Gond et al. 2012). By considering this rationale, traditional costs system generally report wrong product cost. The main issue is the fundamental traditional costing methodology, the company to the estimation that products results into cost (Mahal and Hossain, 2015). When a product is product, it is expected that there is incurrence of cost. This estimation works with some direct costs. IT doesn’t not makes sense with activities that are not yet conducted directly on the units of products.

Case study of company using activity based costing

ABC allots costs to materials more precisely and reliably, plus assisting the users in interpreting and analyzing the utilization of resources throughout the value of firm while serving strategic results. A company operating in Australia namely Melco has made use of ABC costing, by this implementation the company has derived several benefits including accurate derivation of information and product pricing and thereby competitive edge in the market(Banker and Byzalov, 2014). By the application company entitled to identify suitable benchmarks which resulted helpful in staying top of competition. With this, better information has allowed with the outsourcing of the same on various products turning them into effective.

The effect of ABS on implementation is also studied the implementation of world-class manufacturing activities and plant progress. They look out for WTM exercises which entirely mediate the affirmative effect of ABC on plant progress and thereby enhance manufacturing skills and capabilities representing the crucial missing like in interpreting the entire effect of ABC (Weygandt, Kimmel and Kieso, 2015).  According to the study, ABC implementation by itself does not make improvement in plant progress, further the aim of the study is to establish an extent that effectively targets the perspective of practitioners related with ABC, plus the superiority of the same extent will also be considered (Figg and Hahn, 2013). The variable evaluates four key dimensions which are; entire performance, effectiveness, enhanced efficiency and strategic method of cost allocation.

The study aids in finding the ways of making improvement in financial health and performance that is related with the implementation of ABC and the terms related to the improvement of same. Indeed, an affirmative relation amongst ABC and ROI improvement while ABC is implemented alongside with four key conditions which are strategic moves, implementation in complex yet diversified firms. When the approach is implemented environment wherein costs are comparatively significant and there are several restrictions of transactions based on intra-company (Öker and Ad?güzel, 2016).  Also, the relationship between cost system, beliefs of manager regarding the reliability and usefulness of cost information and real financial performance are considered. The outcomes of this study suggests that system can offer better details on costs, greater classification of costs in accordance with the conduct, while reporting cost information on frequent basis.

Conclusion

The present study shows that ABC costing system improvises the overall costing methodology in order to assist management in making optimum utilisation of available resources. Therefore, Australian companies must cease to make use of traditional costing method for better assessment of their expenses and departmental profitability. Study shows that ABC makes sense on activities and by considering that cost are allocated which categorise expenses as per value-added activities as well as non-value added activities.  However cessation of traditional costing system is not viable for small companies having single product as it is cost consuming procedure and small medium enterprise is not feasible approach. Although; they can apply mix of activity based and traditional costing system to generate accurate results and keep cost accounting comparatively convenient.

References

Pazarceviren, S. Y., & Celayir, D. (2014). Target costing based on the activity-based costing method and a model proposal. European Scientific Journal, ESJ, 9(10).

CPIM, G. C., & Paul, D. D. (2016). Time-driven or driver rate-based ABC: how do you choose?. Strategic Finance, 97(8), 20.

Almeida, A. & Cunha, J., (2017). The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia Manufacturing, 13, pp.932-939.

Banker, R.D. & Byzalov, D., (2014). Symmetric cost behavior. Journal of Management Accounting Research, 26(2), pp.43-79.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

Mitra, A. (2016). Fundamentals of quality control and improvement. John Wiley & Sons.

Christopher, M. (2016). Logistics & supply chain management. Pearson UK.

Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.

Bouten, L., & Hoozée, S. (2013). On the interplay between environmental reporting and management accounting change. Management Accounting Research, 24(4), 333-348.

Cho, C. H., Michelon, G., & Patten, D. M. (2012). Impression management in sustainability reports: An empirical investigation of the use of graphs. Accounting and the Public Interest, 12(1), 16-37.

Figge, F., & Hahn, T. (2013). Value drivers of corporate eco-efficiency: Management accounting information for the efficient use of environmental resources. Management Accounting Research, 24(4), 387-400.

Francis, M., Fisher, R., Thomas, A. & Rowlands, H., (2014). The meaning of ‘value’in purchasing, logistics and operations management. International Journal of Production Research, 52(22), pp.6576-6589.

Fullerton, R.R., Kennedy, F.A. &Widener, S.K., (2013). Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1).Pp.50-71.

Gond, J. P., Grubnic, S., Herzig, C., & Moon, J. (2012). Configuring management control systems: Theorizing the integration of strategy and sustainability. Management Accounting Research, 23(3), 205-223.

Halinen, A. & Jokela, P., (2016). Exploring Ethics in Business Networks: Propositions for Future Research. In Extending the Business Network Approach (pp. 333-356). Palgrave Macmillan, London.

Mahal, I. & Hossain, A., (2015). Activity-Based Costing (ABC)–An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.

Mitra, A., (2016). Fundamentals of quality control and improvement. John Wiley & Sons.

Öker, F. & Ad?güzel, H., (2016).  Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

Haroun, A. E. (2015). Maintenance cost estimation: application of activity-based costing as a fair estimate method. Journal of Quality in Maintenance Engineering, 21(3), 258-270.

Öker, F. & Ad?güzel, H., (2016). Time?driven activity?based costing: An implementation in a manufacturing company. Journal of Corporate Accounting & Finance, 27(3), pp.39-56.

Simatupang, T.M., Piboonrungroj, P. & Williams, S.J., (2017). The emergence of value chain thinking. International Journal of Value Chain Management, 8(1), pp.40-57.

Strumickas, M. & Valanciene, L., (2015). Development of Modern Management Accounting System. Engineering Economics. 21(4).