Article review for managerial accounting - Assignment Example

Article review for managerial accounting The article by Srikumar Rao d “Overhead Can Kill You” basicallydescribes events that can make a company incur losses. It generally discusses the decisions that a company can take in order to make profits by properly allocating costs and labour. For a company that is facing bankruptcy, the management can either increase the production of its best products or outsource it from another company. The author also discusses how overheads can be the main factor of a company’s downfall if they are not careful.

This is because some of the expenses can be reduced by use of direct labour instead of using machines. The allocation of overhead does not only lead to faulty choices in a business, but it assists managers to know which products to continue producing and which it should stop producing. This has been further elaborated by the use of Activity Based Accounting (ABC), which basically shows how to deal with cost allocation of items sold to big and small customers. This way, the management is able to make decisions in the best way to serve their customers.

For instance, in the TTI case, the company had to walk away from the old way of doing things and make sure that each and every customer was satisfied. The large customers as well as small customers were given an option of ensuring that they get many goods but also get fair prices that will enable them to make revenues. This not only benefited the customers, but it also helped the company grow and make substantial returns. ABC is also used to assist in eliminating unnecessary activities as well as unprofitable production line that cause extra overheads.

The cartoon shows one person enjoying a meal at the expense of the other three who will also foot the bill as per the portion allocated. This is not fair since each person should be charged the amount they consume, and that is what the companies should adopt in order to have better profits and avoid extra expenses. The cost of an item is determined by many factors. Therefore, the cost-volume-profit-relationship is an aspect that is utilized in managing businesses. However, there are factors that need consideration since one must understand how customers respond to the change of the cost in terms of volume and how this factor affects the revenues on profits.

For instance, in the case of TTI, a private electronic distributor, they made revenues worth $400 by distributing capacitors, resistors and other peripheries, but they realized that in one financial year, they could make more than 80% but a 5% less amount in cost. Therefore, they had to convince large manufacturers to buy components since it cost almost the same amount of money for small orders, too. Many small orders made were by people that knew the prices and thus could buy some component from them and the other elsewhere.

When TTI discovered that, they established ABC software and persuaded five customers to utilize it. This made them discover that by buying large volumes of all components from TTI they would spend less. There was a $7 million revenue increment from the five customers, which improved to $100 million from sixty customers. This shows that buying things in bulk is better than buying individual components. The customers experience low cost on items while the companies gain profitability (Garrison, Noreen, and Brewer 83).

This shows that ABC is a valuable aspect of that is extremely imperative in decision making. Variable Costing and Segment Reporting forms principal tools for Management. This is because when making key decisions for the company, the managers need to allocate costs in order to change workflows. The variable costs are assigned goods sold as well as inventory. The cost consists of direct labour and materials and variable manufacturing overhead. Variable costing only treat costs of production varying with the output by separating variables and fixed costs.

The fixed manufacturing overhead as well as administrative costs plus fixed selling are treated like period costs, which are further deducted from incurred revenue. These are the factors that are reported in segments so as to avoid having mixed up data in the final reports that is varying from the original correct value (Garrison, Noreen, and Brewer 249). Overheads, as learnt in Activity Based Accounting (ABC), basically deal with both manufacturing and non-manufacturing costs assigned to a product.

This is because some of the manufacturing costs can be excluded from product costs, thus basing overhead rates on activity at capacity. The overhead cost is usually more than half the total amount of the product cost. In many cases this happens because of missallocation of funds like in the example given of a restaurant when one has a cheaper dessert than the other members in the group and pays much more money than what one consumed regardless of the fact that others took expensive desserts. Direct labour is utilized as an allocation base for overhead in assumption that overhead cost is directly proportional to direct labour.

This is seen in the case of a company using 20% of the labour to produce a product. This was more profitable than when using automated machinery. This is because some of the machines were very expensive and also needed maintenance, thus costing more. Additionally, when companies are using automated machines, they are not able to tell when they are making losses or profits. In addition, the depreciation of the machine is also an item inclusive as an overhead item (Garrison, Noreen, and Brewer 272).

Work Cited Garrison, Ray, Eric Noreen, and Peter Brewer. Managerial Accounting (14th Edition), New York, NY: McGraw. 2011. Print. Rao, Srikumar S. “Overhead can kill you.” Forbes. Fobes.com Inc., 2 Oct. 1997. Web. 25 March 2013.