Emerging issues in cost and management accounting

Management & Cost Accounting:Management accounting

or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.

Cost accounting is a managerial accounting activity designed to help managers identify, measure and control operating costs.

Emerging Concepts: Some of the emerging concepts in cost and

management accounting are as follows: Activity Based CostingTarget CostingLife Cycle CostingEnvironmental Management

Activity-Based Costing

Activity Based Costing: MeaningActivity-based costing (ABC) may be

defined as a technique which involves identification of costs with each cost driving activity and making it the basis for absorption of costs over different products or jobs.

In this way, an organization can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced.

USES:It helps to identify inefficient products,

departments and activitiesIt helps to allocate more resources on

profitable products, departments and activities

It helps to control the costs at an individual level and on a departmental level

It helps to find unnecessary costsIt helps fixing price of product or service

scientifically

DISADVANTAGES:It may be difficult to set up and establish,

particularly if an organisation is using more traditional accounting methodologies. (barriers to change)

Can be time consuming if all activities are to be costed .

May provide too much detail – obscuring the bigger picture.

EXAMPLE of Activity Based Costing:Let's discuss activity based costing by looking at two products

manufactured by the same company. Product A is a low volume item which requires certain activities such as special engineering, additional testing, and many machine setups because it is ordered in small quantities. A similar product, Product B, is a high volume product—running continuously—and requires little attention and no special activities. If this company used traditional costing, it might allocate or "spread" all of its overhead to products based on the number of machine hours. This will result in little overhead cost allocated to Product A, because it did not have many machine hours. However, it did demand lots of engineering, testing, and setup activities. In contrast, Product B will be allocated an enormous amount of overhead (due to all those machine hours), but it demanded little overhead activity. The result will be a miscalculation of each product's true cost of manufacturing overhead. Activity based costing will overcome this shortcoming by assigning overhead on more than the one activity, running the machine.

Target Costing:

Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum target cost figure. A number of companies--primarily in Japan--use target costing, including Compaq, Ford, Toyota etc.

Equation of Target Costing:The target costing for a product is

calculated by starting with the product's anticipated selling price and then deducting the desired profit. Following formula or equation further explains this concept:

[Target Cost = Anticipated selling price – Desired profit]

The product development team is then given the responsibility of designing the product so that it can be made for no more than the target cost.

Example of Target Costing:

ABC Company feels that there is a market niche for a hand mixer with certain new features. Surveying the features and prices of hand mixers already in the market, the marketing department believes that a price of $30 would be about right for the new mixer. At that price, marketing estimates that 40,000 of new mixers could be sold annually. To design, develop, and produce these new mixers, an investment of $2,000,000 would be required. The company desires a 15% return on investment (ROI). Given these data, the target cost to manufacture, sell, distribute, and service one mixer is $22.50 as calculated below:

  Projected sales (40,000 mixers  $30 per mixer ) $1,200,000   Less desired profit (15%  $2,000,000) $300,000       Target cost for 40,000 mixers $9,00,000       Target cost per mixer ($9,00,000 / 40,000 mixer) $22.50 This $22.5 target cost would be broken into target cost for the various

functions: manufacturing, marketing, distribution, after-sales service, and so on. Each functional area would be responsible for keeping its actual costs within target.

Life Cycle Costing:Life-cycle costing is a method of costing

that looks at a product’s entire value chain from a cost perspective. Other types of costing generally look only at the production process, whereas life-cycle costing tracks and evaluates costing from the research and development phase of a product’s life, through to the decline and eventual conclusion of a product’s life.

Advantages:This approach to costing makes sense for several

reasons. First of all, most of a product’s costs are committed before the product is in the production phase. This means that the majority of control management can exert over production and other costs is during the design phase of the product’s life-cycle.

Provides you with a more complete financial picture by considering first cost, and all costs and benefits over

the entire lifetime of the project.Reduces your investment risk by projecting a more

complete picture of the future.

Disadvantages:

Is harder to learn and apply.Getting input data can be challenging.

Environmental Management Accounting:Social accounting is the process of

communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large.

Environmental accounting (also known as Green accounting), is a subset of social accounting, focuses on the cost structure and environmental performance of a company. It principally describes the preparation, presentation, and communication of information related to an organisation’s interaction with the natural environment.

Environmental Costs:

Environmental costs can include costs to clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of pollution prevention technologies and waste management costs.

Reasons for Adopting Environmental Accounting: There are several reasons why businesses

may consider adopting environmental accounting as part of their accounting system:

Possible significant reduction or elimination of environmental costs.

Environmental costs and benefits may be overlooked or hidden in overhead accounts.

Reasons Continued…Possible competitive advantages as

customers may prefer environmentally friendly products and services.

It may be required for regulation of some types of businesses.

May result in more accurate costing or pricing of products and more environmentally desired processes.

Thank You

Throughput Costing:

Method of costing a product where only the unit-level direct costs are assigned to the product.

Throughput World

We want to maximizethe use of capacityLean Accounting

Lean Costing:

COST WORLD

We want to minimizethe cost of capacity