What Are the Key Roles Which a Strategic Management Accountant Would Undertake in an Organisation Such as Jessup?
What are the key roles which a strategic management accountant would undertake in an organisation such as Jessup? Strategic management accountant will be related with provisions and accounting information in an organization to the managers.
THE DECISION MAKING PROCESS Some activities like planning and control comes under decision making process. Because the management accountants give the information produced and those must be judged because one has to see what the outcome of those decisions made is. The decision making process plays an important role in management accounting.Planning and controlling comes under the making of decision process which is in the diagram below. PLANING Planning is one of the most important step of the decision making process. Planning is defined as making choices between alternatives that which one to choose and is an important decision making activity.
CONTROLLING Controlling is the process of comparing actual and planned outcomes to ensure that the alternatives chosen are correct and could be carried out. It is also the most important step of decision making in an organization IDENTIFYING OBJECTIVESIdentifying objectives mean that before we make a good decision, there will be a direction and an aim that enables the makers of decision access towards favour an action on another. The first stage of decision making in an organization should be to identify the goals and objectives. SELECT APPROPRIATE COURSES OF ACTION In the second stage of decision making model is to find possible courses of action because of which the objectives should be achieved. If the company concentrates entirely on its present range of product and markets, and market shares are fallen down, then a danger arises of surviving the company in future.
So to survive the company its important that the managers should find threats and opportunities in an environment and must take such steps that the organization would not be surprised if any development is made in future. The organization should use the following courses of action Making of new products in market Making the new products for the new markets Making the previous products for new markets APPROPRIATE ALTERNATIVE COURSES OF ACTION Information must be gathered accordingly to the growth rates of alternative activities which are not yet identified, the potential of company to make appropriate shares of market.The profits for every single product of the replacement of activity. The alternatives must be selected to appoints ways of action that specifies objectives of organization best. EXECUTION OF DECISIONS Once the ways of actions are chosen they also must be executed because of the long time planning process and budgeting. Budget is financial plan for the decision made by the management, to implement different decisions on them.
Budgets for various decisions are in cash outflows or inflows, expenses and sales revenues. Those of the budgets are collected into one statement of the organization assumptions for future periods.COMPARING PLANNED AND ACTUAL OUTCOMES This is the last stage of making of decision process. It responses to the changing of plans shown in the firms control process. Measurement, subsequent correction and reporting of performance to know that the firm has achieved its objectives is the managing function of controling. The accountant needs to produce performance reports and should present these reports to managing teams who are guilty for the making of different decisions.
Performing reports must consist of actual outcomes and planned outcomes and must be issued time to time.Those reports give feedback by comparing the results. The efficient control needs that correct action must be taken so the actual results changes to planned results. (Hiedmann, 2008) BY CHANGING PRODUCT LIFE CYCLES It can be defined as the period of time from starting expenses on development and the research to the time by which customers gets the product. Increasing technological innovation, competition together with rising discriminating and polite clients results in amazing downfall in life cycles of the product.
So to gain a high status, the company must the production of the new products fast to the market.If went late then the competitors can have an amazing effect on the products profit. To compete the competitor, companies may get their costs efficiently at the stage of designing. And the product must match the customer’s requirement and the company should bring new products fastly to the market. FOCUSING ON SATISFACTION OF CUSTIOMERS AND NEW MANAGEMENT GOALS To compete now a day’s competitive environment companies have to take a look on customer satisfaction as a high priority because they now a days demands improved products in quality, cost and reliability.And these are the key factors on which the organization must focus on and to consider those key factors, organizations must adopt new approaches of management to gain the satisfaction of customer.
We can examine every item in the figure shown below. COST EFFICIENCY Cost efficiency is the first factor in the figure shown above. The customers wish to buy the lowest priced product, all the other things equal, by keeping low costs and to be cost efficient, it gives an advantage to the organization. Because of the competition increasing day by day akes the organization to commit decision errors because of the poor cost information more probable and costly. So to improve the cost information to monitor trends in costs in future the company must make new developments.
MANAGEMENT OF TOTAL QUALITY At the same time when customer asks for the product of low cost, they also need high quality products and provided services. Many companies are doing this by keeping the management of total quality. Management of total quality means where the business is focused in continuous improvement of product quality and giving the products and services maintaining high quality.TIME AS A COMPETITIVE WEAPON Time as a competitive weapon means that the organization also increasing the customer satisfaction and at the same time they are doing it fast by responding to the customer request quickly, and delivering the product fast and also reduce the time to make a new product for the market. So, because of these reasons the strategic management accountant should now focus on time based measures. Management accountant should also focus on cycle time.
Cycle time means the completion of product and services from the starting point. INNOVATIONThe final key of the success is innovation. To find success the companies must be move steadily of innovating new products and the services and the company must have the ability to move along the customer requirements changing. A strategic management accountant should start to report performance measures relating to the innovation. An assessment of feedback of customer satisfaction with the new features matters. CONTINUOUS IMPROVEMENT Continuous improvement means that the companies must achieve the customer satisfaction by adopting this strategy named continuous improvement.
Management accountant must develop measurement and systems that compare predetermined standards with the actual results. So to be a successful company this strategy of continuous improvements must be adopted, it is a process in which the companies must do a search to improve quality, waste removal and improving the quality of the products accordingly to increase the customer satisfaction. Benchmarking is used for achieving continuous improvement of a product. VALUE-CHAIN STATS Value chain means making the customers more satisfied and handling more recisely the costs. It is a bundle of activities which starts from the raw material from the suppliers to the final use of product and in other words to deliver it to the customer. By managing each activity separately improves the satisfaction of customer, mainly in the terms of quality, efficiency of cost and the delivered service.
And one must also view the value chain from the customer’s point of view. A management accountant should provide information to help managers in the value chain. (Atrill and Mclaney, 2007) SOCIAL RESPONSIBILITY AND CORPORATE ETHICSThe figure above shows that the companies must also focus on corporate ethics and social responsibility to throw light on customer satisfaction. Customers will not be satisfied if organizations just deal with requirements of taking the activities. Companies must need the managers to be active in terms of social responsibility, environmental issues and safety.
(Hopper et al, 2007) Q2. What is meant by the terms relevant and irrelevant costs and revenues in Strategic Management Accounting decision making? Include several small numerical examples in your answer. RELEVANT COSTS AND REVENUESFor decision-making, costs and revenues are classified that either both links to each decision. Relevant costs can be defined as the future costs that we can change through some decision. In simple words we can say that relevant costs are those future costs that can be related to a specific decision. Let us consider an example, if we are given a choice to travel through a car or through a public transport, the cost of the patrol for the car will be related for making a decision and the will differentiate simultaneously which alternative for the travelling is selected.
Sometimes the term Avoidable costs is also used for relevant costs and avoidable costs can be defined as the costs that can be ignored by not taking given replacement. (Drury, 2009) Example: If we go in more deeply of classifying irrelevant and relevant costs. Let us consider a company has purchased the raw materials for ? 200 but this raw material is for no use in future production and either selling, apart from a previous customer, who is willing to purchase a product in which this raw material can be used. But he doesn’t want to pay any more than ? 350/ unit. So for converting the material into the desired product is ? 00, so the question arises that the company should take the order for ? 350 or not. Because the material is of ? 200 and the conversion cost of it is ? 200 as well, so the cost of the order makes ? 400 which is more than the price of the customer is willing to pay which is ? 350, but it will be incorrect just because the cost for the raw material which is ? 200 will stay the same whether the company accepts the order or rejects the order.
So if the company accepts the order conversion cost of ? 200 will be relevant cost. The calculation below shows that the decision is correct:Do not accept order Accept order (? ) (? ) ____________________________________________________________ ______________ Materials 200 200 Conversion costs 200 Revenue (350) Net costs 200 50The net cost of the company is ? 50 less, or you can say the company is ? 50 better because of accepting that order. So it says that the company gets ? 50 advantage using the relevant cost method. In the above example, the sales revenue will be relevant because the revenue of the future changed depending on the alternative which was selected. Cash flow items and incremental fixed costs are relevant.
(Drury, 2009) The areas where the relevant costs can be applied are some of these: Limiting factor because of less resourcesMaking or buying decision Either to continue or not to continue decisions Let us take another example: A photocopy enterprise is replacing a photocopy machine with a more advanced model. New machine has capability of automated quality testing and the new machine is more efficient then the old one. However the new machine has a shorter life. Data of replacement machine and existing machine are as follows: Original cost ? 500,000 ? 00,000 Useful life in years 5 2 Age in years 3 0 Useful life remaining 2 2 Accumulated depreciation ? 300,000 nil Book value ? 200,000 not taken yet Current price disposal ? 20,000 not taken yet Annual cash operating costs energy, maintenance, Coolants etc) ? 400,000 ? 230,000 In the example, cost of new machine and price of old machine are relevant because every item is a future cast outflow that can differentiate between the alternatives. So in making the decision either to replace or not, the relevant items are below: Cash operating costs 800,000 460,000 340,000 Current price of disposal of old machine – (20,000) 20,000 New machine, written offPeriodically as a depreciation – 300,000 (300,000) Total relevant costs 800,000 740,000 60,000 The new machine must be replaced because the costs involved are lower than by keeping the old machine. (Polimeni et al, 1994) IRRELEVANT COSTS AND REVENUES Irrelevant costs are those cost which is not affected by some decisions and are irrelevant to a specific decision.
Irrelevant costs are the future costs that cannot be changed by particular decision.As illustrated in the example above that if we have a choice of making a journey through a car or through a public transport. Tax of the car and insurance of the car will be irrelevant whatever the alternative is chosen. Then in the other example listed above also show irrelevant costs and revenues. In that example the material cost of ? 200 is irrelevant because it cannot be changed whether the order of the former customer is taken or not.
Sometimes the term Unavoidable costs may be also used for irrelevant costs. Unavoidable costs can be defined as the costs that may not be saved by a given replacement. Jain and Khan, 2007) While we have Sunk Costs as well in which the costs which are created through some decision taken in the back and those costs may not change in the future. Therefore the sunk costs will not be considered in the future activities. All the sunk costs cannot be said as irrelevant costs. Irrelevant costs can be defined as those future costs that will not change by a specific decision.
Let us mention some examples, a firm wants to use material which is in stock and is not in the regular use, material purchased was at ? 100 per unit. We have two alternatives; first one is to sell material at ? 0 per unit. The second alternative here is to convert material in product that is to be sold in the market at ? 40 per unit. The book value of material is sunk cost and is irrelevant in the decision that which one of the alternative is better. So it is better that we convert the material and go sell it because the net realisable value (NRV) at (? 110 – 40) is ? 70 which is higher than net realisable value of selling material as it is.
Book value of fixed asset already got is a sunk cost similarly. Sunk costs cannot be relevant for decision making but it does not mean that all the irrelevant costs are not the sunk costs.Let us take any example, if we are comparing two replacement methods of production which can result in alike direct material expenditure for all of the replacements, therefore the irrelevant cost will be the direct material cost because it must remain the same if any alternative we choose, but the material cost is not said to be sunk cost because it can be influenced in the future. Historical costs can be said as sunk costs because it does not relate in making any decision and the costs must differentiate in replacements. If the cost remains to be the same if any alternative A or B we choose, then it can be called as irrelevant cost.
A better example can be the rent of factory which will remain alike if the management desire to create any product of the both. (Mishra, 2009) CONCLUSION The relevant costing plays beneficial role in solving many problems. We can make very good decisions if we have a solid command and understand over the relevant costing. And those good decisions are necessary for the survival and for making profit of a company. So if we can understand relevant costing and have a command over it so a company can gain more and more profit.
(Jain and Khan, 2006) Q3.What are the benefits and problems of introducing activity based costing into an organisation such as Jessup? ACTIVITY BASED COSTING It is the costing model which point towards those activities in an organization and picks the cost of every single activity which is a resource to all of the services and products according to basic consumption by every single. It converts indirect costs to the direct costs. In such a way, an organization may estimate precisely the price of services and products individually in order to notify and separate those which are non profitable and help reduce the costs of those which are above the prices. Baker, 1998) COMPARISON OF ABC AND TRADITIONAL SYSTEMS Both of the systems use two stages of allocation process.
The traditional system sets apart overheads to service departments and production and after that again sets apart the costs of service departments into the departments of production. Where the activity based costing systems selects the overheads to every single of the main activity. A lot of the activity based cost centres which are also known as activity cost pools, are developed because of activity based costing. On the other hand traditional cost systems may normally be called cost centres.Activity based costing contains a heavy number of the centres of the costs.
And in second stage of the process it assigns costs from the centres of cost to any other objects of cost chosen or similarly to the products. The traditional system is used for tracking overheads of services and products by using a little number of the allocation of second stage bases and are directly related to the production of the volume. Instead of using allocation bases another word which is called cost driver is also used for activity based costing or the allocation rates of overhead.The bases of allocation which traditional costing systems use very often is machine hours and direct labour where activity based costing use a lot of types of cost drivers in second stage, which includes non volume bases drivers. Therefore, the main features of differentiating activity based costing systems rely on Greater value of cost centres Greater value of cost drivers in second stage (Drury, 2009) a.
TRADITIONAL COSTING SYSTEMS Overhead cost accountsFirst stage allocations (for every single expenses including property taxes etc)| v v Cost centre 1 (Normally departments)| | Cost centre 2 (Normally departments) | —–| Cost centre N (Normally departments)| Allocations of Second stage v v v Cost objects (products, customers and services)| ^ Direct costs . ACTIVITY BASED COSTING SYSTEMS Overhead cost accounts(for each individual category of expenses for example property tax etc) | First stage allocations v v v Activity cost centre 1| | Activity cost centre 2| | Activity cost centre N| Second stage allocations v v v Cost object (products, customers and services)| BENEFITS OF ACTIVITY BASED COSTING The primary advantage of activity based costing is more accurate costing of the product.That is why: 1. Activity based costing appoints the cost of overheads to the products by keeping aside of departmental pools and also plant wide pool and one cost driver. Companies use a lot of costs of activity pools which are more related to cost drivers.
Because of the usage of cost drivers the costs can be appointed straight away and also used to produce every single product. 2. Activity based costing leads an enhanced control on overhead costs. Using activity based costing companies may track a lot of costs directly relating to activities, give some chances to the indirect costs which lets it known as direct costs.So, the managers must become aware of responsibilities to handle those activities which are used in the production of those costs.
3. Activity based costing takes management decisions very good. More precisely the cost of product must take part to fix the selling prices which can help to make desired profit of the products. Also more precised costs data should be helpful in decision of whether to make or to buy the product component or part and sometimes even to ignore a product. Activity based costing do not changes the data of the overhead costs.
Activity based costing allocates the overhead costs in a more precised manner. If keeping the score more real and more appropriate the managers must understand the overall profitability and cost behaviour. (Blocher et al, 2002) PROBLEMS OF ACTIVITY BASED COSTING Although activity based costing has some advantages providing better data of product costs over traditional volume based system, there are also some limitations of using activity based costing in a company: 1. At times activity based costing can be expensive to use.Sometimes by using activity based costing the companies must be discouraged by higher cost of choosing more than one activity and applying many cost drivers. 2.
Activity based costing system is a lot more complicated if we compare it with traditional costing systems. Therefore, the companies may know that the cost of implementing higher than the benefits of higher accuracy. For some of the companies there is no need to use activity based costing because systems of those companies are already fulfilled. 3. If activity based costing cost climbs over the benefits then the company must not use activity based costing system.Some arbitrary allocation continues, even though a lot of overhead costs are appointed straight away on the products because the system of activity based costing multiple activity cost pools.
Some arbitrary volume based cost driver like machine hour or labour holds certain overhead costs allocated. (Anderson, 2007) TO USE ACTIVITY BASED COSTING SYSTEM Because of the following factors activity based costing can be used 1. When the product lines are very different from the manufacturing complexity and the volume. 2. When the overhead costs take the proper portion of the total costs.
. When the product lines are many and the support services of different degrees are required. 4. When the number of products and manufacturing process changes significantly. For example, from the labour intensive to capital intensive because of automation.
5. When the marketing and production managers ignores the data provided from the existing system and bootleg costing data is used instead or any other data when making other product or pricing decision. (Weygandt Kimmel Kieso team) REFERENCES 1. Jain, P and Khan, M (2007). Management Accounting.
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UK: Patick bond. ____________________________________________________________ _______________