Management Accounting Report And Costing Systems

Role of management accounting reports in decision making

Question:

Discuss about the Interorganizational Cost Management in Supply Chains.

The primary objective of management accounting report is to provide information for internal decision making with large number of emphasis is paid on planning and controlling procedure. Decisions that are made by the managers substantially remain dependent on the accounting information obtained from the reports. The managers not only need the management accounting report to know the cost of product or service but they also need to break down the cost into smaller components (Drury, 2013). This enables the company to perform What-if analysis and create forecast for future. Some types of decision, which managers often take, includes the pricing of the products, dropping the product or the product line. The managers often make the use of management report for replacing the old, evaluating the performance of the managers or divisions of the company instead of purchasing the product. The primary function of management account is to help the managers in accomplishing decision making with planning and controlling.

The control functions of management accounting can be the determinant of the organizational success. After the strategies are set and the plans are made, the primary role of the management in management accounting is to take steps in order to make sure that the plans are carried effectively or if the conditions are warrant the plans are modified. This forms the critical control functions of the management; since management consists of directing the activities of other, a major part of the control function is to assure that managerial staff should discharge their responsibilities (Fayard et al., 2014). A better management control system involves creating standards, measuring performance against the standards and rectifying the deviation from the standard and plans. A better management control system helps in stimulating actions by marking the noteworthy deviation from the original plan and demonstrating them for the employees that can set the things right. The control functions of the management accounting assesses whether an organization plans are implemented sufficiently and regularly leads for future (Otley & Emmanuel, 2013). Several organizations often evaluate compare the actual outcomes from the planned outcomes with the budgeted plan to assess the performance of the employees, departments or the whole organization.

The four purposes of product costing are as follows

1. Decision making by the managers
2. External reporting
3. Profit maximization of the products by making the product the most cost efficient
4. Estimation of cost that is used in the absolute value

Direct Labour: Direct labour cost represents the gross cost of wages for all the labour that is associated with the particular job (Fayard et al., 2014). The labour must related to those employees that are directly working on the item that is being produced.

Indirect Labour: Indirect labour cost must be included in the factory overhead account. The indirect labour represents the cost of any labour that assist the production process but does not involve directly in the conversion of materials in the finished product.  

Control functions of management accounting

Overtime premium represents the amount, which is paid for the overtime worked beyond the normal wage rate. The overtime premium is treated as the direct labour cost and it is included in the manufacturing overhead cost. Overtime premium are considered as the direct labour costs at the normal rate and it is charged to the production on the identical basis since the time worked during the normal hours however the premium paid during the overtime is not considered as the direct charge against the production but it is recovered as the production overhead through the overhead recovery rate.

Costing systems represents the information systems. They usually require a specific type of information such as the direct labour hours and the unit produced (Otley & Emmanuel, 2013). A traditional system of costing assigns overhead with the single plant wide application of overhead or rates for the operating department are based on the volume based on using the application such as the direct labour hours or the machine hours. All the cost of overhead however does not fluctuate with the volume. Assigning these costs in accordance with the volume basis will distort the amount of costs assigned to the various lines of product.

As defined by Bhimani et al., (2013) activity cost on the other hand is the refinement of the traditional costing system of assigning the manufacturing overhead to the units produced. Putting forward an argument, the traditional system of costing always makes the use of the volume related measures such as direct labour hours or the machine hours to allocate the overhead cost of the manufactured products. On the other hand, ABC costing allocates the overhead cost to the products based on the resources that is consumed by each of the activity involved in the process of designing, producing and distributing the particular product. This is accompanied by assigning the cost to cost pools that is represent specified activities and allocating these costs by using appropriate the appropriate cost drivers to the product.

To argue with ABC implement a more focussed and detailed approach instead of using the department or the plant as the level for assembling the costs (Otley & Emmanuel, 2013). ABC costing provides the more appropriate and informative cost of products that leads to more accurate product profitability measurement to provide better information regarding the strategic decisions concerning the pricing, product line, consumer market and capital expenditure. ABC costing offers the managers with easy access to relevant costs for making business decisions that enables them to take more competitive position.

There are certain arguments against the ABC costing which includes the areas of allocations (Williams, 2014). Even though the data are available, there are some costs that require allocations to departments and products in terms of the arbitration volume that measures by discovering the specific activity that results in occurrence of cost that may not be at times feasible.     

ABC generally needs more than a year for the successful development and implementation (Cost, 2016). Since ABC generates large volume of information there are large number of information that misleads the managers into concentrating on the wrong data. However, it can be concluded that ABC provides the managers with easy identification and access of important cost for business decision making that enables them to be in more competitive position.

Reference List:

Bhimani, A., Horngren, C. T., Sundem, G. L., Stratton, W. O., & Schatzberg, J. (2013). Introduction to management accounting. Pearson Higher Ed.

Cost, T. M. I. (2016). Cost and Management Accounting.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Fayard, D., Lee, L. S., Leitch, R. A., & Kettinger, W. J. (2014). Interorganizational cost management in supply chains: Practices and payoffs. Management Accounting Quarterly, 15(3), 1.

Otley, D., & Emmanuel, K. M. C. (2013). Readings in accounting for management control. Springer.

Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.

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