Management Accounting Techniques
For example, manufacturing companies use management accounting techniques to sees their operations such as budgeting, variance analysis and breakable analysis. These methods help organizations to plan, direct and control operating costs and to achieve profitability. Furthermore, Management Accounting Practices (MAPS) can be dividing as 3 topics which are risk management topics, Performance management topics and performance measurement topics.
Besides, risk management topics can be defined as the ability to evaluate the strategic, operational, and financial risks and ensure that these are adequately measured, managed and controlled as well as establishing appropriate governance. For Instance, this Includes internal control evaluation and risk reduction strategies and governance activities. The ability to set performance targets and implement appropriate systems to support decision-making and monitoring of performance towards the achievement of these targets are belongs as the performance management topics.
Moreover, the performance measurement topics defined as the ability to evaluate performance consistent the organizations established strategy and targets, Below are a number of distinctions between financial and management accounting can be made which are as follow: Source: Figurer-l Comparison Of Financial And Managerial Accounting, n. D. * In addition, the types of decisions made by managers rely substantially on accounting information like management accounting practices.
We are further discuss the 5 MAPS at below such as AC, TTS, SIT, standard costing and budgetary control which used by manufacturing industry. Because of the financial accounting information does not provide enough detail for internal decisions, it must be broken Into more detail of the individual products or services provided by a company. “Not only do managers need to know the cost of a product or service, they need the costs Rosen into smaller components so they are able to perform What-if analyses and forecasts for the future” stated by (chapter I-Introduction To Managerial Accounting, n. . ). For example, some types of decisions which managers often make include pricing products, dropping a product or product line, buying new equipment to replace old, evaluating the performance of managers or divisions of a company, or making rather than buying a part or product. So, the two primary functions of managerial accounting are planning and controlling. 80th of these help managers accomplish decision making. 2.
Activity Based Costing (BBC) An Activity Based Costing (BBC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods. Williams et al. (2010) defines BBC as “an overhead allocation method that uses multiple overhead rates to track indirect costs by the activities that consume those costs. ” Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced. For this reason, this method has found its niche in the manufacturing sector.
Besides, BBC is used to identify the cost of a product or service within the activity. BBC is perceived to be a better method for costing a product or service based on the use of resources required to produce the product or service. BBC costing is usually used in manufacturing industry where a product is completed in more than two activities and BBC is applicable throughout company financing, costing and accounting such as can helps to find unnecessary costs that maybe eliminated, fixing the price of a product or service with any desired analytical resolution, etc.
However, revise industry such as banks, hospitals, airlines, and government agencies also use BBC. “Activity based costing has grown in importance in recent decades because (1) manufacturing overhead costs have increased significantly, (2) the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours, (3) the diversity of products and the diversity in customers’ demands have grown, and (4) some products are produced in large batches, while others are produced in small batches. ” (Accounting Coach, n. ) From the recent research on the renal of I-J food and drinks industry shown that the 2 conclusion of past research, firstly the industry lags in the monitoring and control of business results (Libretto et al, 1997; Mann et al, 1999), and secondly powerful retailers treat supplier’s cost management systems as an important criterion when developing supply chain relationships (Fear and Hughes, 1999). According to the findings which shown that at least 83% moderately important for the separation of costs into variable and fixed was acknowledged and almost half the companies the distinction is often or eve often applied.
Thus, this contrasted with lower levels of importance and usage of BBC and other full costing techniques are occurred. This resonates with the statement by Assure (2003) that food and drinks managers discounted the relevance of full cost information due to “inconsistency between the cost allocation criteria and their understanding of the production processes” Moreover, below are the following steps when implement BBC system (Abdullah Jan, n. D. ): 0 Identification of activities involved in the production process; 0 Classification of each activity according to the
Identification of the most appropriate cost driver for each activity; 0 Calculation of total units of the cost driver relevant to each activity; 0 Calculation of the activity rate I. E. The cost of each activity per unit of its relevant cost driver; 0 Application of the cost of each activity to products based on its activity usage by the product. The first step in BBC involves identifying activities and classifying them according to the cost hierarchy. Abdullah Jan (n. D. ) state that “Cost hierarchy is a framework that classifies activities based the ease at which they are traceable to a product.
The bevels are (a) unit level, (b) batch level, (c) product level, and (d) facility level. ” For instance, unit level activities are activities that are performed on each unit of product. Batch level activities are activities that are performed whenever a batch of the product is produced. Product level activities are activities that are carried out separately for each product. Facility level activities are activities that are carried out at the plant level. The unit-level activities are most easily traceable to products while facility-level activities are least traceable.
Besides, if the industry successfully implement the BBC will gain benefits such as product cost determination under BBC is more accurate and reliable because it focuses on the cause and effect linkage of costs and activities in the context of producing goods, integrates will with six sigma and other continuous improvement programs, makes visible waste and non-value added activities and so on. BBC system help managers manage overhead and understand profitability of products therefore is a powerful tool for decision making.
However, BBC also faced some challenges when implementing for example BBC produces numbers such as product margins, which are odds with the numbers reduced by traditional costing systems. But managers are accustomed to using traditional costing systems to run their operations so that traditional costing systems are often used in performance evaluations, so they are not easy to select the most suitable cost drive. Moreover, BBC are difficult to identify the overall activities that influence costs and not suitable for small manufacturing concerns.
Furthermore, the respondents perceived that management accounting practices enable management to obtain relevant information for meaningful decision making in the manufacturing industry. However, interestingly, popular techniques such as BBC and regression and learning curve techniques were not widely used. The comparative advantage of Activity-Based Budgeting (ABA) over BBC is that ABA is perceived to be more comprehensive and precise, since it gives a full breakdown of the costs to be expected.
Overall, Dry et al. (1993) concluded that surveys have shown that most companies preferred to use ABA over BBC costing systems in manufacturing industry. 2. 2 Standard Costing Although standard costing is one of the traditional management accounting method which develop in 1911 by G. Charter Harrison(Hosing Shark, et al, 2006) , but 71% of manufacturing factory in Malaysia (Sullivan et al. , 2005 cited in Bade, Origin and Dry, 2013,pig 83), 76 % of manufacturing factory in United Kingdom (Dry et al. 1993 cited in Bade, Origin and Dry, 2013, pig 82) and 74% of manufacturing factory in Turkey (Bade, Origin and Dry, 2013) still using this method. Besides that, there 2007). Standard costing rank number 17th indicated the widely use of another traditional management accounting approach in small and medium enterprise in the manufacturing sector in Malaysia (Madam, 2014). These data as above show that standard costing is one of the management accounting practices which commonly used in manufacturing sector around the world.
Standard costing involved a creation of standard. A standard is a benchmark or “norm” for measuring performance (Measured, 2007). Standards are found widely used in managerial accounting where they relate to the cost and quality of the outputs used in manufacturing products (Garrison and Noreen, 2004-2005 cited in Amazement, 2007,pig 12). Standard costing is the practice of substituting an expected cost for an actual cost in the accounting scores, and then periodically recording variances that are the difference between the expected and actual costs.
Standard costing is usually used in manufacturing industries where permanently produced the same products such as petroleum refinery, pharmaceuticals and chemistry industries, automotive, fast food industries (Williamson , 1996, p. 519 cited in Bade, Origin and Dry, 2013, pig 80). There are a few of method used to set the standard such as ideal standard, average past performance, currently available, normal standard, expected actual and estimated Hosing Shark, et al, 2006).
There are a standard called ideal standard, no firms in all the sectors in Bangladesh tends to use ideal standard(Hosing Shark, et al, 2006) as it caused the variance difficult to interpret and difficult to “manage by exception”. Normally, supplier firms mostly use average past performance than estimated or normal standard to set the standard as supplier firms are specialized in the production of a few products.
According to Hosing Shark, et al suggested that, standard must set based on expected actual or estimation of future circumstances instead of average past performance as past is not always the reflection of future as future is always uncertain. The uses of standard costing are budgeting, pricing, cost control, performance evaluation, inventory valuation and simplification of bookkeeping (Hosing Shark, et al, 2006). Budgeting is used in planning and controlling the product cost. Standard cost can indicate the different of the predetermined cost and the actual cost.
When the variance between the estimated and actual is too large, then this can help the management to be more concern on it and control the cost. Standard costing can indicate the performance of the business; also can help the management to know the problem occur in the business that affects the business performance. The advantage of using standard costing is help in management by exception. If the cost is allay with the standard, and then the management can focus in other issue. If the cost is too far away from the standard, the management can alert to the problem may exist that require attention.
Standard provide benchmarks to the employees to evaluate their own performance, thus the employees can increase the efficiency in their Job. Besides that, standard costs also help in simplified bookkeeping as it use direct materials, direct labor and overhead to charge the Job instead of record actual costs for each Job. However, standard cost also face some limitations when implement it to the business. Standard costing can be known as traditional management accounting technique due to the rapid development in business.
Standard costing become usefulness as the changes of advanced manufacturing technologies, intense global competition and shorten the product life cycles. The development of technology is declining direct labor force ND material costs. Shorten the product life cycles make the manufacturing factory plan their activities with other management accounting techniques such as Just-in- time techniques, Activity-based costing and others. Although the development of the world is change rapidly, but standard cost still using in different sectors of the business.
Other than manufacturing field, standard costing also suitable in services industry and non-profit industry (Hilton, 2001 cited in Bade, et al,2013). Specific repairs and maintenances services have introduced auto services or worker’s services time standard. 2. Budgetary Control A budget is a financial or qualitative statement prepared and approved prior to a defined period of time for the purpose of attaining a given objective. It may include income, expenditure and the employment of capital (Charted Institute of Management Accountants (COMA) cited in Occasional, 2013).
Budgetary control is the system of management control in which all the operations, as sales, purchase, and production and so on, are forecasted in advance, the planned target will compare with the actual results (Measured, 2007). Management has two distinct purposes which are planning and controlling. Planning refers to the way that management plan and they want people to perform, while controlling refers to the procedures employed to determine whether the actual performance comforts with the plan (Occasional and Raja, 2013).
An effective budgeting system must provide for both planning and controlling. If not, good planning without effective controlling is only waste of time. Budgetary control is very important to the many firms in the Malaysia. According to the Madam (2014) reports, techniques under budgeting system are dominating the ranks. Not only in Malaysia, others countries as well. For example, budgeting for planning financial position with other budgeting are placed on the high rank in Australia manufacturing firms (Channel and Landfill-Smith, 1998 cited in Madam, 2014, pig 243).
Budgeting for planning, controlling cost, performance evaluation based on financial measures and product profitability analysis were in the top four of the rank in British food and drinks industry in United Kingdom (Abide- Sadder and Luther, 2006 cited in Madam, 2014). There are several types of budgets which classify into short-term budget, long-term budget, flexible budget, fixed edged, zero based budget and etc. Different types of budget carry out different function and information given. For example, short term budget is established in short period of time, it helps in control purpose.
And this budget normally use in manufacturing industries due to complicate and dynamic environment in which they operate (Occasional, 2013). The purpose of budget includes improving planning and controlling with ultimate intention of increase the profit and financial position (Occasional, 2013). Alt means that formalizing the objective of the budget and to ensure the business can attain the goal. In addition, it also work in communication the organizational objectives across the firms as the budget is agree by the business, so that all the relevant manager and department are working to the same goal.
It also should be achieved. Budget is widely used in many sectors but it still has some limitations. There will be happened the budget information is accurate. Budget is the forecast oriented, not past event. The budget is set by human, there are occur human judgment, they may be some out-dated information, this caused the variance between the actual happened and budget higher. In this case, the budget must be adjusted. Moreover, there are the behavior problems of budget. Different people will think different to budget.
For example, employee will see the budget as “carrot” or “stick”, whether the budget is the goal that can attainable and motivate them in work or as a form of punishment. The budget must be set at the realistic level, cannot be too low level- easy to attainable, or too high level- caused the dysfunctional management. 2. 4 Total quality management (TTS) Total Quality Management (TTS) is a new concept for an organization to improve the laity of their product and services (Waddled and Mallet 2001 ; Young and Wilkinson 2001).
Juke at al. , 2001; Martins and Carols De Toledo, 2000; Dads et al, state that TTS establishes quality enhancement, which is important for long-term effectiveness, survival and financial performance. Jiffies et al. (1996, p. 1 5) define that TTS is a comprehensive and integrated way of managing organization in order to meet the needs of the customers consistently and achieve continuous improvement in every aspect of the organization.
Moreover, TTS requires that everyone in the organization just involved in the continuous improvement for the purpose of meeting customers’ expressed and implied requirements with the full commitment of top management (HOST, 1999). It is clear that TTS is a customer focused management philosophy that aims at the continuous improvement of the processes and management of an organization through statistical control, procedure design, policy deployment and human resource management techniques (Au and Choc 1999).
TTS is also a way of ridding people’s lives of wasted effort by bringing everyone into the processes of improvement, so that results are achieved in less time. In additional, TTS can be narrow as one department as one department within an educational institution or as wide as the whole institution. For instance, an Arizona high school implemented an aspect of TTS which calls as “statistic process control”. Arizona high school develops this TTS is using real data and proper analysis to monitoring students’ attendance or absences.
This led the principal of the high school and stuff understanding more of the process involved and has reduced the work of the staff. Moreover, this give the staff more time to focus on the education (Walker and Walker, 1993). Total Quality Management is being used because it increased the level of customer satisfaction. All of the other benefits of total quality management should result in a more positive customer experience, which is essential for creating a thriving business. For example, optimizing employee skills means the quality of products is also optimized.
This results in the best quality products ending up in the hands of customers. It’s only natural that this breeds satisfied customers who are likely to spread the word to others, improving the business’s reputation and success. Furthermore, it maintains a better organization within a business. Attempting to understand all aspects of a between departments. This means that, a business becomes more efficient. This is because different departments can more efficiently share information with one another.
The most important advantage of TTS is the money that it saves. Since this practice aims at improving and creating ideal products, it cuts down on inefficient product creation methods. TTS creates more successful products which generate higher profit margins. Total quality management also reduces unnecessary and unproductive tasks, which means employee duties can be altered to reduce wasteful pending. When implementing this practice, organization faced many challenges. First of all, it will face the cost in time and money.
It can take many years to implemented the TTS, in between employees come and go, with each of them requiring this training to stay up to speed with the rest of the organization’ s goals and members. On the other hand, training will take time and involves significant investment by the company in dollars and resources. For example, implementation of TTS is a long-term investment that will immediately improve process across all individuals and departments. Furthermore, it also lack of management commitment.
There are reasons that lead for lack of commitment in quality management, such as preoccupation with short-term profits and limited experience and training of many executives. Bother (1988) said that although the CEO does not have to be a quality expert, program fail when the CEO does not recognize the contribution these techniques make toward profitability and customers satisfaction. Lack of proper training also consider as a challenges for implementing TTS. There is evidence that lack of understanding and proper training exists at all levels of organization is a lager initiator to worker resistance.
Scheme (1990) state that, business school failure to teach relevant process skills contribution to manager ineffectiveness. If the company is to produce a quality product, employees need to know how to do their Job. Organization must commit to training employees at all levels in order to let the TTS successful. 2. 5 Just In Time (SIT) Just-in-time TIT) is a manufacturing pull system that used for planning and controlling operations. SIT also can be used for producing, manufacturing and supplying the needed products at the right place, when they are needed, and at the pacific ordered quantity. Zamia et al. (2004) state that philosophy of SIT eliminates all kinds of non-value adding activities by organizing the entire system of operations and activities. SIT represents the whole continuous improvement processes throughout the entire company system and it can be applied to all system within any company (McMullen, 2001; Bedim and Martinez, 2002). Henry, 2004; Hookah Khan and Hessian, 2007 define SIT as achieved through setting well-organized networks for producing and transporting precise requirements, through establishing a long-term legislations with suppliers to maintain good regulated shipments in order to minimize the total cost.
The Toyota Production System linking all production activity to real marketplace demand in order to fulfills customer demand efficiently and promptly. SIT production relies on finely tuned processes in the assembly sequence produce different type of product, where the total weekly demand for the range of products reduce by 25%, and the daily mix of product types is continuously changing. A planning challenge also a typical scenario in many types of business in which the manufacturing has to continuously respond to demand.
Toyota Production System has responded to this reality of life by developing an approach to meet the challenge in an efficient, cost-effective way. Successful of implementation of SIT can produce significant benefits for manufacturing firms, such as improving quality that consistently and continually meets customers requirements, minimizing levels of inventory and improving relationship with suppliers (Egghead, 2003), reducing the labor turnover rate, reducing manufacturing lead times, reducing set-up time (Waft and Yak’s, 1998). Other than that, it fulfills the customer need.
SIT balancing the goals of avoiding stock outs while minimizing inventory costs. One of the advantages of automated replenishment system is the company can quickly respond to reduced inventory levels. Furthermore, the primary driver for SIT practices is to minimizing of inventory management costs. When company reduce the amount of holding space and staff required with SIT, the company can invest the savings in business growth and other opportunities, point out the accounting for management website. The disadvantage for SIT is it requires significant coordination between retailer and appliers in the distribution channel.
Retailers often are syncing their computer system with suppliers so that the suppliers can more directly control inventory levels in distribution centers to initiate rapid response to low stock levels. It usually will more costly to build the infrastructure. Next disadvantages are risk. SIT risk is if company fails to adjust quickly to increased demand or if suppliers have distribution problems, the business risks upsetting customers with out of stock. If company buys too many inventories to avoid out of stock, the company might face problems of loading too many inventory or potential for waste. . 0 Conclusion These are the five management accounting practices that we choose to discuss. There are Activity Based Costing (BBC), Standard Costing, Budgetary Control, Total Quality Management (TTS) and Just in Time TIT). These five types of management accounting practices can be classified in two types, traditional and modern type. Modern managerial accounting practice is no longer correlating with direct material or direct labor while traditional still depend in direct labor and material. Modern managerial accounting practices are more toward the customer.
Nowadays, the world changes so rapidly. The development of technologies decreases the need of labor force, but increase the machines control knowledge to the labor. Customer is more important for the business, without customer, the industry will declined. Thus, the practices like Total Quality Management (TTS) and Just in Time TIT) are focus in improvement the quality of the product or services in order to meet the customer requirement. Traditional techniques such as standard costing and budgetary control are useful in the cost control in the production stage.