INTRODUCTION
Hing Lun Toys Manufacturer Company Limited is a good example of a firm that is seeking competitive advantage. It has to do so if it wants to survive and compete in a more challenging environment and sophisticated customers. One area of management that can bring value to the company is cost control. In effect, this paper offers deeper understanding on the ways and means of how Hing Lun evaluates its costs. A modern and promising methodology is available such as activity-based costing (ABC) which perfectly fits the manufacturing nature of Hing Lun. Its activities and concepts will frame the ways and means of Hing Lun towards guided appraisal. Is the company practicing allocation bias on direct labor? Are the company’s processes can be seen holistically as one resembling activity-based management (ABM) which is crucial to ABC implementation? In its present situation, how Hing Lun would exploit the use/ augmentation of ABC?
The paper is designed by several sections to achieve the above objectives. First is the literature review. This section embodies background to accounting software, case study on cost accounting system which elaborates on the nature and use of cost accounting system through the ZTC case study, the difference between ABC and traditional cost systems, the difference between traditional and advanced manufacturing and different costing systems. The second section is the results and findings that highlight the interview and questionnaire outcomes in accounting and manufacturing departments of Hing Lun including the top-level managers' view. This section is composed of the role of the company's accountants in ABC implementation, how operations managers view just-in-time (JIT) concept, methods of income statement forecasting and technical processes in the plant which includes technical facts such as the critical diagram and economic order quantity. The third section is the conclusion that highlights the problems in the existing cost system of Hing Lun, their approach to solve this, appraisal of their action, EOQ situation and limitations of ABC. The last section is the recommendation part that is addressed to Hing Lun managers based on the study output.
Through this paper, the following research objectives will be addressed; namely, understanding of the company’s current cost control policy and practice with reference to the need of improvement, identification of the current product range, identification of current activities associated with the product lines, development of the cost driver and creation of cost pool for each activity. With this guide, the body of the paper is established to prevent difficulties at the middle of the research with clear objectives in mind. The paper is not intended to find managerial failure in terms of operations rather to focus the discussion on the processes rather people. As a result, there is readily-made questionnaire to avoid interview difficulties and potential problems. This paper endeavors to establish a guide not only for Hing Lun but to other manufacturing companies about the nature and effectiveness/ limitations of ABC approach. In fact, this is empirical evidence on how ABC, a promising but highly disregarded tool, can improve corporate performance.
LITERATURE REVIEW
Background on Accounting Software
In the world of computer software, there are several categories of software that are used in accounting. In the personal level, it is software that is capable of solving home user needs like payables, budget and account reconciliation. In similar industries, there is dedicated software which caters on the needs of the vertical market. It is a market that is usually present in industries such as medical services, banking institutions, retailing and construction. Most big clients prefer this kind of software because it can come as custom-made with indicated applications. In this way, they are cheaper and comprehensive which require cost-effective components including smaller enhancement group, minimal risk when the vendor fails to deliver and less employee training.
From the cost and design perspective, there are three market types. With cost-effective requirements in product development and simple accounting system, low-end market prefers to have software that do broad accounting processes not covering GASB or GAAP requirements with few security and auditing elements. For the middle market, it has deeper applications than the preceding type and probably components that can comply with accounting standards and needs of currency accounting. With this, it can penetrate cross-border markets which can aid management decision making on a regional and perhaps global scale. The high-end market is considered the most sophisticated client of software vendors. They latter would deliver enterprise planning software along with the accounting software. This type is very expensive, have an extended time frame to integrate to company's operations and extremely customize to ensure that client requirements are solved.
Although they are very helpful to companies, accounting software has setbacks. One controversial bottleneck is the minimal oversight on who manages and maintains them where non-accountants can mislead its processes. Lack of knowledge on accounting concepts or technical under-training can spoil the integrity of account records, reports and analysis of accounting outputs. To avoid this problem, system accountants are called for intervention. A second issue is the efficient accessibility but reduced quality of accounting software. Most software are available online and delivery to the client's computer upon online payment. Although the client receives up-to-date software in a on-click of transaction, improvements in technology lagged in this downloads while the search period is long, questionable and tiring. In the end, to understand the entire accounting system components is vital to both effectiveness and efficiency.
Cost Accounting System: Case Study
Many books denounce financial priority over strategic issues because the latter is more long-lasting and carries more potential for growth than the former. However, working capital (e.g. solvency) of the firm is achieved through robust current cash and assets. On the other hand, the inability of the company to spend for the sake of its overall goal attainment may only position it on minimal gains. Due to this, this paper discusses the strengths and limitations of a value-creating and financially-supporting method called cost accounting system (CAS) based on the case attached in the appendix. It allows us to evaluate the boundaries of CAS in terms on how well it solves financial and strategic issues.
Break-Even Analysis
This technique is only theoretical and may not reflect the true “break-even” of the company. This is because some of its products are new especially Centrex in which no competitor has ever tried to produce initially. As a result, the target market may not see the product as assurance of quality until tested. This complex part of consumer behavior is the ultimate hinder on the performance of the company. Therefore, the marketing side of break-even computations must be secured first through market research. As observed in the spreadsheet, the historical and past performance of the company is used in the derivation of the graph, break-even calculation and basis of computing margin of safety. However, its break-even estimation of Centrex is under different environment always. There is a need of understanding of the market and internal control to capitalize on the break-even knowledge.
Concepts and Measurements of Costs
Production cost center refers to the costing tool of the company that covers all direct costs that flow into the manufacturing process. Direct material and packing costs are not included in the production cost center because they are already covered in the job order. On the other hand, direct labor including semi-finished materials are charged in the cost center because both of this cost has a direct contribution in forming the finished product. Contribution pricing basis is a form of indicating a mark-up in the price of products through exclusive analysis of different products that composed the offerings of a business (i.e. mountain, Centrex, professional) and deriving their direct costs through production cost center. The price is said to be profitable or break-even when the pricing provides excesses in these costs with the potential use in covering overheads of the firm. As a result, overheads should be measured accurately to determine the right mark-up and break-even.
There are to ways in allocating overheads; namely, standard costing and ABC. Standard costing is widely used by manufacturing companies ( 1993 ). It is a system that absorbs direct materials, direct labor and factory overhead into the production costs. These three main costs are classified as standard costs which have close relationship with budgeted costs. Under the condition of normality in operations, it guides corporate managers to identify overall costs of production ( 2007). However, its effectiveness is blurred by three factors; namely, lean production does not fit standard costing, standard cost is too optimistic and it is overly-focused on statistical applications. However, effectiveness of standard costing is not yet proven in the service sector where main cost drivers are different (e.g. fewer types of machinery, overheads).
In general, activity-based costing (ABC) is much related to managerial accounting as it can assist in managerial decision-making and control functions ( 2000). It is a technique that embraces systems thinking, works with information technology and requires accounting knowledge. Due to this, it can be said that it is an indispensable tool for top-level managers who are known to possess and apply conceptual ability in their management and leadership. Without ABC assistance in concept building, managerial decision-making process may lack or distort the crucial quantitative factors needed to arrive with objective and measurable actions. Positive features circle ABC technique; namely, makes the firm price competitive against industry players, aids in strategy and continuous improvement and rejuvenates organizational cohesion.
Limits of Cost Accounting System
The appendix below shows how ZTC can benefit from a more accurate measurement of direct labor, direct materials and of course overheads. This can be achieved by using a certain cost accounting system (CAS). When CAS is installed, the most likely positive influence in the operations of the business is increased in profitability, improved in resource allocation and better managerial decision-making. However, these benefits are only attainable under specific conditions and the ability of the company to integrate CAS and other limiting factors to the extent of its effectiveness should be closely examined.
When CAS is implemented, it should be updated from time-to-time in an organized fashion because information is continuously acquired and can be used to include in the present CAS ( 1995 ). Such can result to a more dynamic and pro-active CAS. For example, the new policy of ZTC requires a tight annual cost control which may necessitate lesser use of electrical appliances (e.g. air-conditioning in certain parts of the company premises). Without the company updating its CAS, its overhead costs may obtain the projections of current years without reference to a tight electricity control. In effect, the quality of the current CAS is blemished.
The significance of CAS update has also implications to a more successful framework than totally replace the old with a new CAS. For its accounting department, a new manufacturing environment for ZTC is likely less affected compared to its manufacturing ( & 1993 ). In the contrary, CAS needs to be integrated and adjusted based on the operational changes of the company. The caution of this endeavor is to prevent the organizational culture of ZTC to be deflected by accounting adjustment. There should be harmony in case of culture shock after a change in manufacturing setting. Today, companies are aspiring to provide low-cost and high-quality products. This is a shift from the traditional one-sided strategy. As a result, the traditional way of accounting for overhead costs should be evaluated. For example, human resource requirements became more stringent which necessarily requires adjustment of direct labor due to higher salaries.
Simple adaptation is useful but drastic change in CAS structure can be destructive and unacceptable to the existing corporate culture (). Thus, resistance may ensue and strategic components of the company are at risk. In effect, accounting system must be change to measure the new values. CAS should be a follower to the manufacturing changes and be a diligent yardstick to control and account for cost and establish a reasonable profit. This is because, unlike the other departments in an organization, accountants are more in a reactive position (e.g. over-funded projects, costly acquisitions, expensive monetary incentives) which makes them form their own subculture away from the mainstream culture (). Due to this, adaptive and updating behavior of CAS should be in place to allow optimal benefit of an organizational strategy.
In the case of ZTC, its newly applied CAS is exposed to the adverse risk of recency effect ( 1995 ). It is a managerial mind-set in which the recently received information is given more weigh at times when there is information overload. In pricing, overhead costs can be understated or overstated negligibly if this theory applies. For example, ZTC has furnished a job quotation using the projected electric bill fees but decided to include the recently increased fees. Assuming that electricity is a primary component in carrying its business, the lack of “averaging” can lead to customer dissatisfaction due to abrupt increase in quote. In effect, its pricing is not really that effect when it customer relations is in focus.
Further, based on the case, ZTC has implemented records-keeping for works that are in-progress to organized and allocate cost at the end of every work. This can be applauded because records management has long been proved to be a tool to protect corporate assets and reduce business risk (1992). In analogy, financial assets (e.g. cash flows and revenues) and risk of not covering overhead and other costs are taken into consideration. However, the new CAS is no use to control customer bargaining especially when the latter is already embedded in the business history and current strategy (e.g. big customers, key partners, retailers). As a result, the records-keeping capability of the new CAS can undermine “personal transactions” between the president and vital customers. And because the president has the final decision in pricing, data in the records is revisable with just a simple guarantee from him.
ZTC is a closely-held and small corporation which makes it a potential customer-driven business ( 1985 ). In effect, all else equal, it is likely to make corporate polices flexible which necessarily undermines the usefulness of recording costs. This can be the reason why the new CAS is revised with little financial, human resource and managerial upheaval because the final determinant of decisions are the customers. Such tactic can also identify the planning rationale of the management in building the new CAS. On the other hand, measuring performance through record-keeping is very imminent. The effort given by individual employees, level of expended materials and new cost trends for the overheads are verifiable to obtain efficiency indicators.
When it comes to expertise in cost accounting, ZTC employee pool lacks the needed skill to maximize the benefits of the new CAS. The responsible accounting employee also does two tasks (e.g. records keeping and accounting) which can undermine emphasis on the cost management. In effect, the quality of advice he can provide the president would be in minimum. With the perceived improved process, the organization should not expect too much with the new CAS. There is no technology infused or skilled accountant integrated in the new system which only mitigate their problem on costing but far eliminated it. Its size is the foremost determinant of such minimal effort because the cost of a completed CAS overlaps its potential benefits. In the contrary, the learning curve of ZTC may not have enough experience to appreciate the full implementation of a CAS which made it more risk-averse.
Appendix
In its old cost accounting system (CAS), ZTC Sign Company failed to include overhead cost as well as accurate measure of labor costs when issuing quoted prices to their customers ( 1985 ). The president, who prices a job order, uses arbitrary values to cover overhead costs with regards to arrive at a profit. Such process is practical for ZTC because it is a small company which employs seven people. In the contrary, the company and the president cannot determine if the quoted prices really cover costs and provide profit due to lack of cost control particularly on overhead costs.
As a result, the company introduces a new system that would capture overhead costs in a more accurate manner (1985 ). There is a need to independently accumulate the overhead costs of each job so that customer will be charged at a “reasonable” price quotation. However, overhead costs such as depreciation, repairs, maintenance, heating and lighting cannot be allocated to specific jobs. This is aggravated by the fact that the management is only able to get such information at the end of an accounting month. In effect, the president would continue a subjective approach to pricing because quotation must be handed to customer before the work even started.
In view of this problem, the company used the overhead cost projection based on an annual basis (1985 ). The method might not be as accurate as it can be but considering the small size of the business it can be a practical as well as useful guide. In adapting the new system, the company does not want to increase the load of its accounting-secretary employee. It chose to undermine financial benefits of accurately capturing overhead head in favor of its human resources. This resulted in classifying overhead costs as cost of goods sold that are accumulated at the end of the accounting month. Coupled in this strategy, clock sheet (records direct labor costs) and material usage (records all materials used) are installed when a job order is on-going.
Conclusion
CAS has financial merits to obtain more accurate pricing. However, primarily due to the presence of customer approach and anonymity of accounting department, CAS is unable to surpass many strategy-related issues in decision-making, planning, control and performance measurement. This is because CAS can bring efficiency but less on profitability and growth. As reflected in ZTC’s minimal effort to support the new CAS, sustainability and persistence of system of costing is unshielded to the supremacy of other strategy-related issues (e.g. customer relations management). In the contrary, CAS is more relevant when a firm is very large, very known and very efficient. This would require less customer power (because they are diverse and numerous) and more pressure to use cost-related strategies (because cost is what makes most companies in an industry successful like in real estate).
Activity-Based Costing (ABC) versus Traditional Cost Systems (TCS)
ABC is a support cost accounting methodology to TCS primarily due to the change in manufacturing products or execution of service of modern businesses (Internet, Value Creation Group). TCS is appreciated in the previous era characterized by operations that are labor-intensive, semi-automatic, with limited differentiation and with minimal overhead costs. However, as technology and expertise advances through time, ABC is developed to capture a more accurate estimation of costs that can result to better allocation resources and setting pricing strategies. ABC is able to show the connection of resources consumed and produced outputs leading to increase cost visibility and sound budgeting.
TCS has the assumption that cost items exhaust resources, base costing in volume-related drivers and highly influence by structure (, ). On the other hand, ABC believes that cost is unmanageable that makes activity analysis more realistic. Another, ABC has cost basis on several stages and levels not merely on volume (e.g. unit level like direct labor hours) but also batch level (e.g. orders/ set-ups as in the case of Hing Lun), products level and facility level. Lastly, ABC is focused on organizational processes (e.g. quality control, packaging) rather than bureaucracy (e.g. departments like accounting, paint section, trucking). As a result, the organization can learn important information such as how to improve productivity and allocate resources efficiently.
The Difference of Traditional to Advanced Manufacturing
Traditional manufacturing is characterized by mass production with focus on machines rather than people. This is what Ford Motors did when it made its workers as robots in the assembly line using conveyors where people did the same thing over and over again. There is also minimal concern to customer feedback because the primary objective is on economies of scale and higher volumes. As a result margins tend to be high even though per unit price is cheaper. Cost leadership is the core focus of managers. On the other hand, advanced manufacturing uses efficiency theories and is highly customer-driven. This gave rise to high-tech products like computers to be sold at a premium price. Production is leaner and inventory is held at minimum level. People are also emphasized through training. Mass customization is also possible due to information technology which able to integrate the advantages of one geographical manufacturer to the other under one company name.
Different Costing Systems
Standard costing is widely used by manufacturing companies ( 1993 ). It is a system that absorbs direct materials, direct labor and factory overhead into the production costs. These three main costs are classified as standard costs which have close relationship with budgeted costs. Under the condition of normality in operations, it guides corporate managers to identify overall costs of production ( 2007). However, its effectiveness is blurred by three factors; namely, lean production does not fit standard costing, standard cost is too optimistic and it is overly-focused on statistical applications. However, effectiveness of standard costing is not yet proven in the service sector where main cost drivers are different (e.g. fewer types of machinery, overheads).
In general, activity-based costing (ABC) is much related to managerial accounting as it can assist in managerial decision-making and control functions ( 2000). It is a technique that embraces systems thinking, works with information technology and requires accounting knowledge. Due to this, it can be said that it is an indispensable tool for top-level managers who are known to possess and apply conceptual ability in their management and leadership. Without ABC assistance in concept building, managerial decision-making process may lack or distort the crucial quantitative factors needed to arrive with objective and measurable actions. Positive features circle ABC technique; namely, makes the firm price competitive against industry players, aids in strategy formulation and continuous improvement and rejuvenates organizational cohesion.
RESULTS AND FINDINGS
The Role of Hing Lun Accountants in ABC Implementation
Valuing and rationalizing cost-drivers to incorporate significant activities. ABC can be tedious and lengthy process which can aggravate when performed by a cooperative organization. Numerous factors can be identified by individual staffs and inter-departmental assessment can also occur. The technique can be an ideal panacea for a near-to-reality costing that would even tackle life cycle costing or performance measurement which are said to be outside its aptitude. This is not to mention that the organization can suffer from scanning burn-out which can affect their work. Generally, management accountants (MAs) provide one-side of the three conceptual elements of ABC which is accounting knowledge. In effect, MAs supply and interpret the necessary numerical information to determine cost drivers within the process view path. In this way, subjective views and speculations on figuring-out cost drivers can be minimized while staffs can focus on their responsibilities. As MAs worked together with engineers who can provide a detailed sketch of process flow, activities with significant cost variables can be segregated from lots of cost pools. With this achievement, the complex identification of overhead costs can be reduced. A US-based manufacturer Emerson has simple costing regimes that contribute to the 30-year growth of its profit and stocks.
Appraising activities that can be a source of competitive advantage. Since ABC technique compels an organization to trace significant operational, transaction and opportunity costs (and in the manner identifying non-critical activities), MAs can also take an extra-effort from pricing competitiveness per se to evaluating the possibility of strategy formulation. The former is a profit-maximizing endeavor (as the firm wants a fair price for their products) while the latter is value-creation regime (as the firm aspires a flexible pricing strategy that can deliver returns in a sustainable manner). For example, a detailed process view of purchasing is developed in a way that it captured several options on which requisition can be done like phone call, e-mail or personal visit to manufacturer. The present is conducted through phones but proved to result in frequent re-calling and re-ordering as number codes and specifications for supplier’s products are such a challenging task to converse in a phone. MAs can intervene by valuing the cost of delay which can have inter-cost effect as well as showing the direct telephone and personnel costs. In this way, MAs are helping the firm to recognize cost leadership strategy.
Initiating corporate restructuring. This is the behavioral side of the role of MAs. Since ABC uses systems approach to organization, it tends to decentralize the task of identifying activities within the process as well as cost drivers within these activities to expedite the course. Without the speed aspect, costing problems could aggravate for the time being while the findings from the ongoing technique application may be less useful. Due to this limitation including the workforce restraint in MA department, MAs should learn and accept the fact that delegation is necessary even if there are numerous rooms for other non-accounting departments to commit mistakes particularly in valuation. This is in view that accountants are prudent basically on financial matters. However, other staffs like engineers are also prudent in operations and running the assembly line while human resource personnel are prudent in workforce behavior analysis. In effect, MAs should be able to respect different functional lenses that were used in ABC implementation since they have lack or even distorted process knowledge on such areas. At the end, they should likewise be able to communicate any adjustments made to what they perceived as substantial valuation error to prevent conflicts.
Definition of JIT OF Hing Lun Managers
It is a manufacturing strategy that can significantly improve return on investment through reduced wastes like excesses in inventory. One of its core aspects is the Kanban system where the management has more control in the process in the plant through awareness in the level of supplies needed requiring less inventory and storage rooms. Its components involve historic forecast of demand of customers and the production schedule with three different standard deviations to allow seasonal and unexpected shocks in the historical forecasts. Quality can also be improved as bottlenecks of the production are eliminated and production lines are specialized according to product lines of the company. This makes human errors in the assembly like putting a different spare part to the product less eminent.
Methods of Forecasting in Hing Lun
According to (1986), there are three general methods of forecasting; namely, time series, causal/ econometric and judgmental. Under time series method, there are five sub-methods. First, moving average is used to smooth short-term fluctuations to provide a more long-term perspective to a phenomenon that can be a trend or cycle. Second, exponential smoothing tries to approximate the next value under sequence from a pool of observations that is assumed to be the sum of underlying the reality and disturbance variable. Third, extrapolation constructs new data points from an old set that contain only isolated points. Fourth, linear prediction estimates the future values of a discrete signal and assumed to be a function of previous samples. Fifth, trend estimation applies statistical techniques to justify statements about the trends in the data.
Under causal/ econometric methods, there are four sub-methods. First, regression analysis is used to represent relationships and its magnitude between variables where predictions can be based. Second, autoregressive moving average model is a tool that can interpret and predict future values from a given time series. Third, autoregressive integrated moving average is a mere generalization of the latter. And lastly, econometrics provides empirical framework to economic theories that are now subject to testing. Under judgmental methods, there are also there sub-methods. Surveys refer to statistical measurement applied to social sciences. Delphi method uses futuristic thinking aimed to arrive at an agreement through the employment of thesis, anti-thesis and synthesis of the two. Scenario analysis is the use of evaluating some future outcomes to derive conclusions regarding future events. Other methods include composite forecasts, technology forecasting and forecasts by analogy.
Operational Survey in the Manufacturing Site
The Critical Path Diagram
Computation
Activity
Activity Time (wks)
Early Start
Early Finish
Late Start
Late Finish
SLACK
(ES + AT)
(LF - AT)
(LF - EF)
A***
6
0
6
0
6
0
B
5
6
11
6
11
0
C***
5
6
11
9
14
3
D
5
11
16
14
19
3
E
4
11
15
16
20
5
F***
8
11
19
11
19
0
G*
8
19
27
19
27
0
H
7
15
22
20
27
5
I
8
19
27
26
34
7
J**
7
27
34
27
34
0
K**
2
34
36
34
36
0
* Activity G is a merged activity. Hence, its ES is accounted to the early finish time of F. This is derived because F has the largest finish time among the preceding activities for G; namely, activity A and D have only 6 and 16 EF times respectively compared to 19 of F.
** Activity J and K are also merged activities. The same process is done like that of G.
*** Activity C, F and A are burst activities. Hence their LF are derived from their immediate activity with the lowest LS.
Conclusion: The critical path is the longest path in the network with activities that have zero slack. Hence, A, B, F, G, J and K is the critical path with 36 weeks total activity time as shown in the next diagram .
Economic Order Quantity
Convert demand per week in a yearly basis assuming that there are 48 weeks in a year and so: 80 units/ week x 48 weeks = 3,840 units/ year. Get the EOQ with the following formula and derivation.
EOQ = Q = square root (2*C*R/ P*F) where,
Q = optimal order quantity
C = cost per order event
R = annual demand for the product
P = purchase cost per unit
F = holding cost factor
Q = square root (2*10*3840/ 10*0.25)
= square root (76800/ 2.5)
= square root (30720)
Q = 175.27
Number of orders in a year = Required units for the year/ Q
= 3840/ 175.27
= 21.9 or approximately 22 orders in a year
Total annual variable cost = holding cost + ordering cost. Getting initially the holding cost per unit, this is only equal to the product of total cost for the required units for the year ($3840/ year) and annual holding cost factor (25%/ year) which is equaled to $960/ year. On the other hand, deriving ordering cost is simply the product of number of orders (22 orders/ year) to cost per order ($10/ order) which is equaled to $220/ year. Hence, total annual variable cost is $960 + $220 = $1180/ year.
With 200 units ordering policy, the total annual variable cost will be change.
Number of orders in a year = Required units for the year/ Q
= 3840/ 200
= 19.2 or approximately 19 orders in a year
Computing for total annual variable cost, the holding cost value will remain constant just like in letter c but ordering cost value will be computed as: 19 orders/ year x $10/ order = $190/ year. Hence, the total annual variable cost = $960 + $190 = $1150
CONCLUSIONS
Problems with the Existing System
The first problem of the existing system in Hing Lun is the tedious task of tracing the budgeted overheads of the six departments. This strategy is like an aggravation in the process of determining a more accurate approach to costing because the organization will have to trace overheads that are initially been budgeted. In the process of tracing, application of costs uses only direct labor hours (DLH) that tends to distort the impact of material costs (MAT), machine hours (MCH) and other overheads. The different cost driver rate per department also implies traditional cost system’s assumption of bureaucratic approach leading to a more labor-intensive framework which should not be the case because MCH in MC, PL and AS departments are very significant.
As DLH is continuously used by Hing Lun, profitability was declining as the firm introduced newer products such as GT102 and GT103. As a result, costing errors occurred when Hing Lun tried to relate particular product attributes to unit products (e.g. DHL) when in fact costs can be related to batches, families and other products of the company. Automation limited the effectiveness of DHL in costing because labor hours became smaller and the necessary overhead costs were substantially reduced. Dollar costs were decreasing while time cycles took over the cost pressure seen in batch-related drivers. The overly focus of management in controlling the variance figures also led the organization to execute misleading actions to achieve cost efficiencies which can adversely affected product quality.
How ABC overcomes this Problem
Cost drivers are allocated in the form of direct labor, materials and overheads (e.g. machines) but are individually allocated to departments. This is the result of focusing on departmental costing which undermine the presence of other activity-related cost especially the presence of overheads. The ultimate measure is the DLH which also minimizes the opportunity to measure other cost drivers present in other departments. ABC minimizes the problem by creating homogenous cost pools for each department and allocates them to the three products based on their cost drivers. As a result, there is a more accurate inclusion of necessary costs especially the overhead according to the activity precedents and significance. ABC drives the company to focus cost controls from contributing activities from their planning and actual production of products. The approach of ABC is that products utilize activities while activities utilize costs (, ) which can promote integrative improvements to total quality management.
Measures to Improve Profitability
One measure is the inventory turnover as it may guide managers on how to detect problems in marketing or product quality. Inventory turnover can be seen in the order cost driver especially if Hing Lun would adopt flexible manufacturing systems such as lean and mean production. Another is the common-size analysis where overspending in one activity can be compared to the overall revenues and its contribution to the value of the firm. As a result, activities can be controlled to prevent excessive cost accumulation if it is proved to have minimal contribution.
Third asset turnover can show how efficient Hing Lun in using its assets that it can justify any large amount in cost drivers. When activities are inefficient, cost drivers can indicate the differences between production periods for comparison. Fourth, collection ratio (e.g. debtor and creditor days) can protect the working capital of Hing Lun and prevent it from going bankrupt. In this ratio, cost drivers can indicate how the company must prepare to borrow at times of crisis to be able to continue activities without delay or any disruption. Alternatively, Hing Lun can compare the contribution (e.g. outputs) of each activity to the total value of the firm and hence can prioritize in times of recession.
Limitations of ABC Approach
Like other costing methods, ABC is not compatible to all firms with dissimilar structures and strategies (e.g. in labor-intensive industries or those having limited products) (, 2002). Another is the problems and difficulties that may arise in its adoption by a first-timer where costs and human resistance impede integration, therefore, results to several costing failures and even operational delays. Lastly, ABC does not have all theoretical support and sometimes conflict with other well-established accounting principles that many practitioners are limited and even anxious in using the technique. Many protagonists in costing are also emphasizing that all techniques are within the boundaries of individual risk and cost preferences of firms such that product cost distortions may be seen as normal variances that firms must confront.
EOQ Situation
It is recommended to implement the current policy (also referred to as computation from letter d) than computations from the EOQ. This is because the total annual variable cost (excluding the merchandise amount) is smaller (with $30 difference) when the store will order at 200 units per order than with 175.27 units. This will also minimize the risk of loss or destruction from transportation to the store premises. The relative bulk ordering may be suspected deviation from the 25% holding cost which can be higher. However, the product in question is a typical consumer good that has a constant demand making it saleable.
RECOMMENDATIONS
Accounting transactions that can be process by accounting information system (AIS) are also referred to as functional modules which includes core modules such as accounts receivables, accounts payable, general ledger, billing, stock inventory, purchase orders and sales orders. There are also non-core modules like debt collection, expense, inquiries, payroll, reports and timesheet. According to & , AIS is a system of collection and process of data from transactions and the dissemination of the financial information to specific users. Selection of appropriate AIS such as the level of complexity of software depends of several corporate factors like nature of business, size, volume of data, and the vitality of the information.
Since AIS are regularly applied with audit, they must be free of typing errors to assure they will produce relevant and reliable information. The introduction of computers aids accountants to this feat but there are other requirements that are emphasized. AIS should have business focus which converge them to Accounting and Management Information Systems or A/MIS. A/MIS put accounting information to the context of decision relevance to the organization. They support the economics, strategies and development information systems of the business. Their central role is to manage the data flow between business processes with the use of databases on the operational level. In the long-run, this information can tackle more strategic issue with broader scope and time horizon ( and , ).
As suggested, when the business in well-aware with concepts circling AIS functions, it would be easy to select an accounting software from a vast selection of computer programs. Also, certain concerns must be answered to support AIS knowledge like why the need to change the current system, why add software, what are the benefits and when these benefits be realized ()? Vital stages of developing AIS includes the initial system design such as coding structures, report formats and level of security; the involvement of the top management in the implementation; installing several oversee groups in each project milestone; and robust documentation.
One example of decision-making applied to software is the extent of its user-friendly features. An organization with high emphasis to experienced and faster users would design a text-only menu which is not only compatible with high expertise but also provides traditional environment. On the other hand, graphical menu is useful for an organization that has novice bookkeepers which need proper guidance in inputting data into the system (, ). Coinciding with human resource focus, the amount of training required to integrate and run new AIS are often underestimated by firms because of cost and time bottlenecks. A solution to be considered is the recruitment of temporary staff to alleviate the task of running the old system while permanent staffs are implementing the new system. Advice can also be outsourced from consultants especially in the aspect of training employees.
The role of AIS adapts to the need of the business but there are two primary duties; namely, production of business forms and recording of important assets. The former emphasizes on design while the latter is on functionality. Special types of AIS such as industry-specific software packages can give additional value for the firm not only because it is more expensive but also only few SMEs can afford or need them. With this type of software, the business can take advantage of having wider and deeper profitability information. This benefit derives from the software’s capability to accurately figure where the areas in the corporate activities the business is making money. Getting consultancy services for the installation of the software also depended on the needs of the business and are not mandatory.
Due to continuous development of wide selection of AIS and software applications, simple programs can be purchased for less than $100 especially for the one-person services companies. As a rule of thumb, general-purpose programs like QuickBooks, Peachtree and MYOB are cheaper versions than extra-functional software that can cost thousands of dollars. Sophisticated software can also cost millions of dollars if bought. Once installed, accounting software can bring strings of benefits. One is the identification of profitable customers which can trigger the need of loyalty marketing to prevent shifting to competitors. Second, it avoids the possibility of corporate theft particularly from employees. Software has audit trails, classification of responsibilities and encryption which can deter and detect theft. Lastly, it can improve cash flows such greater tax deductions, better collection, prevention of bad debts, higher inventory turnover and robust cash assets.
There are software service companies such as The Accounting Library that promises cheap AIS without the need to undergo the critical process of determining and planning appropriate software. The company assures the software that will be purchased by its clients is within the latter requirements with proven-to-be-effective methodologies that can minimize cost of training, integrate real-time industry features ready to be exploited, avoidance of substantial loss from acquiring the wrong AIS, improved analysis and efficient second opinion for the exiting consultant. For the consultants themselves, they can use the Library to increase the efficiency of each project, provides ability to demonstrate the program in the client’s site and update their knowledge about the current risks in accounting software.
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