Research in Management Accounting
Introduction
Every organization is clouded with many challenges most especially in terms of budgeting and costing. If the organization is not that effective in the market then, the organization should have a well defined accounting procedures that can secure their financial stability. The accounting department of every organization includes the crucial process. Accountants should be aligned on the computation of the expenses, appropriate allocation of the financial supports, and must be knowledgeable regarding the essential areas of operation. Various types of computation was introduced in the accounting sector and been allowed by GAAP all for the aim of appropriate and well defines information.
Part A: Financial Strategies
The Activity Based Costing (ABC) is part of the managerial accounting system that determines the cost of the involved activities without any distortion and can provide the management with relevant and timely information. The ABC does not represent the additional rules and techniques which gives value to the inventory but represented as another way to look at the operating costs. It provides the methods in which it can dissect the underlying activities within the operation, which is also the reason on the computation of the relative costs.
The management under the ABC is called Activity Based Management which acts as the extension of the ABC. It definitely allows the business leaders to examine the non-value-added activities that exists and to value the monetary benefits wherein can be associated with the activity’s possible elimination. In the beginning of the ABC implementation project, the people involved should first need to identify the specific actions wherein can be the essential part and to effectively use the ABC. The main purpose of the organization with the application of the ABC is to help them quickly identify the costs involved in their operation and be a center to implement economically. The design of the ABC in the organization emphasized the ability to achieve the sustainable results (Dunn, 2005).
Implementation of the ABC
Probably the biggest issue that lies within the ABC is its implementation within the organization. First of all, the firm should understand that ABC is an effective approach but only if it is implemented properly. In addition, the people as well as their mobilization are important part of the ABC processes. In the preparation of the organization regarding the approach of the ABC and its associated management, the leaders should set the appropriate mission, technical, organizational, cultural, and other related factors that can affect the implementation of the ABC.
Organizing the ABC for implementation should be reasonable and can value the necessary resources. More often, the failure or success of the organization lies on how well the role of the ABC is emphasized, its implementation, and process. Therefore, firms should use the ABC as guidance towards the various phases of their management. Furthermore, the integrity process can be developed and have an impact in any cost model applied within the organization. Using the essential data and valuable reports, the integrity process can be developed and with appropriate monitoring, the leaders can have the knowledge to identify the problems or anticipate the problems which are present in the operation. Through that process, the leaders can have the ability to create sound decisions and solve them successfully (Dunn, 2005).
Along with the process of ABC, the determination of the real resources or product costs is importance. Therefore, a well defined monitoring on the activities can help the people to identify and differentiate the various processes involved in their operation. The creation of the necessary general ledger in the accounting can be accurate if there is a successful integration of the ABC. The center of performance that includes in each activity is the most valued resource. The most basic problem that might include in the process of ABC is to determine the significant activity or activities that can be documented. In addition, through the identification of the important activities, there will be an appropriate development program that usually centers in either specific computing or customer centered service. ABC is characterized to have the most vital feature which describes in reducing the costs through the resource schedule and activity analysis. Other important factors that involves in the ABC process are the waste elimination and the proper mobilization of the employees which both can affect the results of the activities and their including costs (Pohlenm and La Londe, 1994).
The calculation of other values can be the tools that can be use of acquire, develop another line of products, and other development of business models. The most important part of the ABC is it can be the basis of the leaders to generate decisions. Most of the decisions can create a great impact in the labor, activities, overhead, and the product lines (Ruhl and Bailey, 1994). With the existing data and other related information can help the organization to build segments between the product line and the flow of their cost, and the reports that emphasizes the portfolios and financial reporting.
The Balanced Scorecard
The balanced scorecard has created enormous interest for it is based on the idea that manager need and have to evaluate their business from the four major perspectives enumerated as customers, internal business, innovation and learning, and financial. According to the proprietors of the balanced scoreboard, Kaplan and Norton, the performance of an organization can be measure according on how customers view a firm; the business processes that the firm should improve; the ability of the firm to continue the learning, be improve and create the value; and the capability of the firm in the eyes of the shareholders (Liberatore and Miller, 1998).
Part B
The implementation process of ABC enables the organization to overcome the problem in the allocation techniques. It directly addresses the management and control the overhead costs within the organization and increases the visibility into how products, customers, or supple channels consume work and resources. The application of the techniques recognizes the different cost relationship and the use of the multiple drivers to assign costs. The produced information of ABC facilitates the development of performance measures and continuous process improvement. Meanwhile, the balanced scoreboard is intentionally provided for the managers to have a proper view regarding the major activities. The ability of the balanced scorecard depends on the construction of the performance measures, which is a very challenging task (Pohlenm, and La Londe, 1994.).
Business analysts’ advices the leaders of every organization to implement the ABC according to the line of activities involved in the operation. It is more efficient if the organization can track the costs in activities and the objects incorporated on each activity (Dunn, 2005). Part of the production process for which management wants a separate reporting of the costs of the activity involved. The costs that based and vary within the activities are valuable in the computation of the rates. And at end of the ABC process, a comprehensive management reports can be made.
Objectives in Decision Making
The Activity Based Costing or ABC was measured by the business analysts to be an effective tool in making decisions. ABC provided the objective which is to understand the overhead and the profitability of the products and the customers. And if the organizational leaders will rely on the implementation of the ABC in their system, then it can be a good supplement to the traditional cost system. Ideally, the ABC can be based from both manufacturing and nonmanufacturing costs that where assigned on the various products. However, some manufacturing costs may be excluded form the product costs and there are a number of costs pools that are allocated using a unique measure of the activities, and these issues are critical in the ABC process. The leaders should pay attention on the difference the implementation of ABC with traditional costing system, such as the overhead which rates maybe based on activity at its capacity (Dunn, 2005).
Analysis
The used method of the organization is the Traditional Costing System. Specifically, the method they applied is least suggested by the business advisers because of the limitations and other disadvantages that involved in the calculation of the costs. The involved concept is clearly simple, but if the manager will take attention regarding the computation of the costs, they will realize that there is a relevant complexity. The unit cost included in the operation is the total costs associated with the units divided by the number of units being produced (Soenen, 2006.).
In calculating the unit cost indentified in the operation, there are key issues that should be addressed. Firstly, under the method of traditional costing method, the firm should identify the true meaning of the total cost. There are many variations regarding the total costs which can be the production costs, production costs plus the marketing costs, or the all the costs incurred in the organization. Secondly, the organization should make a clear interpretations in the values included in the computation. For example, is the costs appeared in the report is the actual costs of the estimated costs over the duration of the operation? If the organization settled this issue, they can set other rules for computation which is undoubtedly confusing for the entire accounting departments. Thirdly, the people should identify the association of the indirect costs or scraps within the product. When a firm says that they had incurred scrap, the organization is stating the entire category of the scrap, but which type of the scrap totally affects the product is the needed information in computing the true costs.
Traditional Costing System
Activity Based Costing
Revenue:
250000
Revenue:
250000
Product Cost:
-150000
Product Cost:
Direct Labor
-50000
Total Profit:
100000
Materials
-100000
Total Profit:
100000
**Simple presentation of the difference between the two types of costing system
The calculation of the product costs depends on the managerial objective and that is the first thing that an accountant should consider. For example, the product costs can be associated in the production costs that come in different varieties like the materials, direct and manufacturing overhead, and can be effective in financial reporting. But if the organization will use the information in decision making, there is great disadvantage that the firm can encounter. Most of the time, the product costs are broadly defined in accounting, particularly in the value-chain analysis, evaluating the efficiencies, and long-term pricing but this cannot be taken by the organization if they are attempting to find the true meaning of costs.
Conclusion
Leaders should determine the relationship of the costs sources that can be found between the production and support activity centers. Most of the time, the ABC teaches the leaders on how to allocate the individual costs partitions instead of taking the total activity at once. With this idea of dissecting the parts involved in the operation, the organization can generate a comprehensive cost flow map which in return, can help them to understand the imputed costs. As a tool in describing the total costs of each activity, the sequence in the operation can be analyze which can be a technique to various options, such as eliminating or postponing the activities, which may not that important and yet can cause great expense. There will be a new allocation of rules if the implementation of the ABC and its link on the operation is established. Leaders should also consider the importance of the training to develop the innovative cost reports such as the contribution of the included line of products. Training of the people is also important to establish the accounting rules, regulatory, statutory, and even the involved conflicts in accounting that can be used along the ABC process. Activity Based Costing or ABC systems and the Balanced Scorecard have generated extraordinary interest in many of the successful corporations. The methods are applied to help the economic value or worth of current and potential actions, strategies, and plans to the firms and its stakeholders. Overall, one can view these systems as two elements in a firm's kit of decision support tools. They are perceived as valuable ways to improve and clarify decision making and to monitor progress against goals. Given the current effort and investment devoted to them, the question arises of how, if at all, these two initiatives may complement each other.
References:
Dunn, A., 2005. Activity Based Costing, A Step-by-Step, Proven Path for Rapid Implementation [Online] Available at: http://www.irc.caltech.edu/pdf/courses/Activity%20Based%20Costing.pdf [Accessed 19 March 2010].
Liberatore, M., & Miller, T., 1998. A Framework for Integrating Activity-based Coating and the Balanced Scorecard in the Logistics Strategy Development and Monitoring Process, Journal of Business Logistics, Vol. 19, No. 2.
Pohlenm, T., & La Londe, B., 1994. Implementing Activity-Based Costing (ABC) in Logistics, Journal of Business Logistics, Vol. 15, No. 2.
Ruhl, J., & Bailey, T., 1994. Activity-Based Costing for the Total Business, The CPA Journal, Vol. 64, No. 2.
Soenen, M., 2006. Costing Methods for Clinical Trials: A Comparison of Activity Based Costing and Traditional Costing [Online] Available at: http://appliedclinicaltrialsonline.findpharma.com/appliedclinicaltrials/data/articlestandard//appliedclinicaltrials/222007/430483/article.pdf [Accessed 19 March 2010].
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