Traditional Management Accounting Techniques - Assignment Example

ARE TRADITIONAL MANAGEMENT ACCOUNTING TECHNIQUES STILL USEFUL WITH THE MODERN BUSINESS ENVIRONMENT Mr. R. Smith Director, Finance ABC Systems Co London H.O From: H. Brown Manager, Finance ABC Systems Co London Ref: The finance review meeting held on November 20, 2007 Mr. R. Todd, Senior Manager Finance, advised me to present my case to you after the recent conference. The enclosed report is a detailed overview of our present financial and management information systems and possible changes. The heavy equipment manufacturing industry has recently been through a crisis. The situation stems from a lack of focused effort on operating efficiency systems and an emphasis on outdated reporting techniques which negatively impact decision making. I believe we are poised to gain competitive advantage from our recent organizational restructuring and having worked closely with our units in Europe and in the UK. The attached report is a proposal to introduce innovations in our management accounting techniques specifically with regard to Activity Based Budgeting related to Advanced Manufacturing Technology (AMT). The present techniques in place do not seem to be reflecting the changed industry dynamics and priorities. (Lucey, 1993) CONTENTS 1. Executive Summary 2. Mission 3. Routes to success 4. Company Summary 5. Market Analysis 6. Overview of Advanced Manufacturing Technology 7. Traditional Management Accounting practice within ABC 8. Innovations in Management accounting 9. Conclusion Executive Summary As discussed at the recent conference we are expecting to develop new products in the engineering cranes and automated fork lift equipment in the 'Premium' segment. These products are expected to be very popular with the automobile industries because of their versatility. Strong business contacts with both the above segment and a referral network are expected to help gain a rapid entry into the market. Mission ABC plans to offer the automobile industries high quality engineering equipment at prices which are competitive relative to other premium quality suppliers in the market. The management of the company believes that the inclusion of precision controls within our products will better serve the needs of the automobile industry. (Garrison, 2003) Routes to success ABC's key drivers of success will include: A high level of quality in its product lines backed by complementary standards of inventory control Significant amounts invested in research and development Improving efficiency of operations. Traditional Management Accounting Techniques Conventionally management accountants used forms of variance analysis in arriving at costs. Variance analysis compares the budgeted versus the actual costs of raw material during a manufacturing cycle. Variance can be calculated for both costs and revenue. When costs are allotted to material or labor a standard rate is the benchmark used to compare variances. The standard rate of material versus the actual material cost in the market determines the efficiency of a purchase or labor mechanism. The accepted product costing used volume based measures such as labor hours or labor dollar to allocate indirect costs. Traditional roles allocated to management accountants typically include:- Facilitating the preparation of financial reports Being a part of the strategy forming team Planning optimal resource use Planning and controlling business activity The management accountant is viewed as someone who oversees cost control through a strict regulation of unit prices and labor. (Hansen, 1997) In this context it should be stated that Cash is regarded as an asset that has the ability to generate opportunity cost. This because cash is the most liquid form of asset and these is available on a ready basis. Cash in hand, cash at bank are the most liquid form in terms of currency and checking. These can be enumerated as the instrument of short term fund or in other words the money market. The cash budget can be defied as a spreadsheet that would determine the cash inflow and outflow in advance and therefore can be stated as assumed formulation. In the process the ending amount of the cash flow can be well assumed in advance on a basis of stipulated timeframe. Usually this time frame is taken into account as quarterly or half yearly. Once the budget of cash flow is maintained the job of the manager would be to maintain a strong grip of circumstances and analysis the situation to control the entire inflow and out flow of cash transactions. The best possible measure would be to maintain a day schedule like banks. By acting like a banker or following the steps taken by the bank it would be easier to keep track on the daily procedure of the institution in terms of liquid cash. Once this is executed properly the quarter balance would remain the same in terms of maintenance and control. New purchasing and supply system comes within the parameter of supply chain management strategy and inventory analysis is on of the key players of this mode. Inventory cannot be defined as a financial element but it renders huge impacts on the overall system without fail. Thus supply chain management is instrument in the parameters of purchasing and transferring raw material to different section of utilitarian sections. The CFO comes into this scheme as personnel who verifies the logicalities of affairs of this section and certifies the validity by passing invoices. As the basic goal of the supply chain management principals are to minimize the cost the CFO comes into play with huge impact. Thus it could be mentioned that inventory and supply chain are regarded as current assets. However it should be considered that inventory is regarded as lazy assets and obviously enough there are no interest rates involved in it however it can incur opportunity cost as a result these form of assets should be monitored to prevent misuse. The main concern here is the value analysis of what to order and when to order and how much to order with the basic analysis of evaluation of ABC quality analysis. The ABC/EOQ framework judgment enables the manager to develop a value analysis of the materials with a better perspective. As a result it can enumerated that this is best possible value measure that can be stated for the assessment of inventory and for the smooth working of supply chain management principals. Budgets Budgets are essential components of a business as it determine the over all assumption of transaction and allocations of the organization fro a certain period of time which is in general sense used for a financial year. The basic components of a hospital budgeting system are much more difficult to handle in respect of other industries. This is because the nature of the hospital industry is based on service and not on goods. This is the main reason that the demands are not always measured in an accurate manner. However, to ascertain a certain budget control and implication different formulations are incorporated to achieve satisfactory target or goals. The base of the program can be enumerated as statistic budget which can be divided into two parts. One of them is ascertained as a mix of utilization staffing and acuity which could be developed into expense budget while the other can be denoted as mix of utilization and payer which would be developed into revenue budget. These two are equated with expense level of timing and revenue level of timing to yield the net value of cash budget. Another component of cash budget is the capital acquisition plan which is converted into capital budget and amalgamated into the cash budget with the interpretation of cash requirement. This entire process is combined together to from the net financial outcome of the ultimate budget. Activity Based Budgeting (ABB) is a very effective measure of budgeting as because it is dependent on the cost incurred in the process of activity taking place in the realm of a company or organization. These functional areas are recorded and analysis accordingly with formulated and structured format. There the relationship between the cost incurred and activities executed are well defined and analyzed. These activities are then structured and assimilated into methods of strategic goals that are beneficial for achieving competitive advantages in the market economy strata. Thus, when the relationship between the cost incurred and activities executed are well established it becomes relevant for the cost accounting department of the organization in creating the budgets with these components as benchmarking principals. As a result it can be stated that the aspects of Activity Based Budgeting are clearly in contrast with the fundamental viewpoints of traditional accounting systems that creates budgets primarily on the parameter of the cost base rather than the more modern activity base. The traditional view of budgeting is specifically focused on the budget structure that would be dependent on the prior period. This method is incorporated in the revenue growth principals or account for inflation and adjustments are made accordingly. In sharp contrast Activity Based Budgeting is an extremely important tool that enables the accounting department to align closely with the basic objective of the business and thus the improvement of business becomes evident as it streamlines the cost under which the performances had actually taken place. As a result the Activity Based Budgeting enables the organization to make financial forecasts. Variances However, it can well be stated that different variances can actually mislead the organization's financial forecasts. There are several forms of variances that are otherwise important but occasionally misleading in cases. There is the variance of Volatility Swap, diverse Volatility, Variance Swap, Standard Deviation, Semi variance, Mean, Heteroskedasticity, Ex-Post Risk and Coefficient of Variation. It can well be stated that these are methods that are used while formulating the fundamentals of financial parameters of an organization but if used or depended heavily can well become useless as these components tend to provide false forecasts in the context of organization's financial statements. These variances can be formulated as a measure of the dispersion that is dependent on a set of data that specifically tend to point around their mean value. It can be stated that Variance is an average in the context of mathematical expectation of the average squared deviations from the mean. Thus it is obvious that these variances are incorporated in the financial components as a measure the basic volatility or variability that is derived from an average. Thus it is the measure of risk or in other words it is a formulation of probable expectations but can never be termed as actual statement. As a result it is logical to believe that variances often mislead the financial statements of an organization. Innovations in Management Accounting The traditional costing models that management accountants use have changed. Advanced Manufacturing Technology (AMT) drastically changed the traditional models. The concern of management planners has now shifted from traditional unit costs to calculating a product will cost through its entire life cycle. So now, instead of direct allocation of labor/material cost, management accountants have to consider planning, research, development, salvage or disposal costs and even fault repairs. Traditional cost concerns will now have to shift from mere labor cost to the overheads which play a vital role. Due to faster cycle times from implementing AMT, we now have to factor in the implications of breakdowns or fault in machinery which might halt an entire assembly line thus reducing cycle time and efficiency. The overall impact on management decisions will be crucial as our management accounting responsibility will now have to consider the product mix which will make optimum profitability possible. The correct information system will also now help to take a decision in weeding out unprofitable lines of production. (Weetman, 2006) Conclusion The end concern of any manager is to formulate a strategy that would enable the organization and its stakeholders to get the actual and perfectly formulated picture of the near future with pinpoint accuracy. Presenting a flawless financial picture for the health center during the next fiscal period would develop enough credibility of the concern and the moral level at the same time. As a result it would be logical to state that the best possible method would to juxtapose both traditional and modern techniques in a well formulated manner. References: LUCEY, T. (1993), Costing, (4th edition), D.P. Publications, London GARRISON, R. H. & NOREEN, W. E., (2003), Managerial Accounting,(10th edition) Mc Graw-Hill, New York STONER, J.A., & WANKEL, C., (1986), Management (3rd edition), Prentice Hall, Englewood Cliffs, New Jersey. HORNGREN, C.T., (1981), Introduction to Management Accounting (5th edition), Prentice-Hall Inc., Englewood Cliffs. HANSEN, D.R., & MOWEN, M.M., (1997), Management Accounting (4th edition), South-western College Publishing, Cincinnati, Ohio. HORNGREN, C.T. & FOSTER, G. (1991), Cost Accounting: A Marginal Emphasis (7th edition), prentice-Hall, Englewood Cliffs. HORNGREN, C., BHIMANI, A. et al (1999), Management and cost Accounting, European edition, Hemel Hempstead. CIMA, (1996), Management Accounting official Terminology, London. Weetman, P (2006), Management Accounting, Ft Prentice Hall DRURY, COLIN; (May 13, 2004) Management and Cost Accounting; Alliance Publications Appendix: 1. EOQ Formula 2. ABC Analysis 3. Activity Based Budgeting Read More