Management Accounting System for Watson Circuits Plc - Essay Example

Management Accounting System for Watson Circuits Plc Management accounting exists to meet the information needs of managers. Drury (2004) delineatesthat management accounting “aims to provide the right information, to the right people, in the right quantity, at the right time and at minimum cost…” Watson Circuits plc has been confronting with problems like cost information, identification and reduction because of a lack of management accounting system. This report aims to develop a blueprint for the implementation of management accounting system for the company according to its specific needs, nature of production, market state and cost structure etc. This report covers considerations for management accounting system like the suitable costing technique, pricing method and budget preparation. It also points out certain behavioural, organisational and management factors that need to be considered for design, implementation and functioning of a management accounting system for the company. Process Costing Process costing is one of the best management accounting technique for Watson Circuits plc because this company manufactures products in a multi-stage process. Process costing is ideal for manufacturing concerns where there is a continuous production characterised by transfer of material from one process to another. This costing system is beneficial for Watson Circuits plc also because the company produces in batches and the cost structure of the production remains the same for years. Under process costing, cost is not assigned to individual units of production, rather it is calculated on the average basis i.e. all production costs are spread over the units produced. This costing technique requires establishment of process control accounts for each process allocation of direct and indirect costs to each process. Once a process of production ends, its costs are transferred to the next process and so forth. The calculation of cost, under this method, is thus cumulative i.e. the costs of previous process are added to the cost of current process. The cost accumulation process continues until the production ends. Watson Circuits plc needs such a costing technique because it will provide management accounting information in terms of different processes through which the production runs. This is the best suitable method calculating costs on the basis of processes and batches. Management’s need for unit production costs can be met as this costing technique provides for calculation of unit costs as well as costs that are incurred in each process. It is very important for the company so as to control costs at the process where it critically needs to. Because the company’s production is actually process-based, it is important to identify and reduce costs in different processes. The process costing system also provides a solution to the problem of the output containing faults that has to be scrapped. In this method, the loss that occurs normally is absorbed by the good output and the scrap value of such loss is offset against the costs of the process. On the other hand, the abnormal loss is valued at the cost per unit of normal production and the scrap value of such loss is offset against the cost of abnormal loss. The loss on faulty units that are produced in Watson Circuits plc can be allocated to entire production units or charged at the cost of lost units. Process costing system is effective in identifying faulty units at the end of every single process and allows for cost allocation. With process costing, management can figure which processes are yielding high rates of faulty units so as take any corrective actions. Pricing For Watson Circuits plc, market-based pricing is a better approach for pricing its products because of the fact that its market is very competitive in terms of pricing. This technique is applied by companies that produce homogenous products in batches. Under this technique, product price is set after analysing the market behaviour and demand trends. The reaction of competitors to a certain price and the acceptance of buyers are used as basis for price setting. Knowledge and research about market price is very important for market based pricing. Because Watson Circuits plc is over 30 years old, it can used its past information concerning market situation, recessions and demand patterns to charge the right price for its products. Because of the existence of so many competitors is the market and changing demand pattern, the best pricing technique for Watson Circuits plc is market-based pricing. The pricing policy that fits this company’s case is target pricing, in which selling price is set after analysing the market conditions and demand patterns. Under this pricing policy, Watson Circuits plc will price its products based on market research and charge the price that the customers are willing to pay for the products. This type of pricing policy can help the company to achieve a desired level of market share and increase sales volume. In recessions and slumps etc. the company can stabilise its sales volume by adopting a target pricing policy so as to charge a price that could be borne by the customers. Budgeting and Performance Measurement Having designed the costing and pricing techniques for Watson Circuits plc, it is very important that management implement budgeting so as to ensure that the management accounting system is achieving the desired outcomes. Budgeting can also be used to evaluate performance of managers towards cost control and cost targets. Budgeting helps managers to realise the deficiencies in the environment pertaining to the achievement of cost reduction targets and take the necessary actions. Budgeting can also help resolving conflicts and help enhance coordination among different departments. For examples, in Watson Circuits plc, budgeting can enhance interaction and coordination between the production and accounting department so as to workout the desired plan. To implement a sound and workable budget plan, it is very import to communicate the policies and goals to the responsible departments so that every one should feel a need to participate in the process. For instance, in Watson Circuits plc, budget preparation in the year 2000-01 did not reap the desired outcomes because of insufficient information available to the company accountant as well as lack of participation from line management. In fact, line management was itself unable to provide reliable information because of a lack of management accounting system. In the preparation of budgets, a very important element is the determination of a factor that mainly restricts outputs. In case of Watson Circuits plc, it would be demand for sales because it likely to vary from time to time. Therefore, sales demand becomes the basis for budget preparation because sale demand is the factor that limits output. Budgeting will thus prove to be a very difficult process because it will depend on various uncontrollable factors such as action of customers, state of economy, and competitor activities etc. Management should estimate quantities based on past data and ensure that the finally prepared budget is achievable. For Watson Circuits plc, the most suitable approach for budgeting is the Kaizen budgeting. Under this approach, budgeting involves including continuous improvement in budget numbers. This approach is based on future improvements rather than current practices with respect to cost management. It takes into account learning curve effects and thus an organisation can utilise its past learning to estimate future improvements. It helps management to strive to reduce costs in certain areas over time and on continuous basis. If management fails to achieve budgeted targets in a certain area, then this approach requires more efforts and emphasis to be put into that. For example, the case shows that Watson Circuits plc incurs scrap costs each year. This type of budgeting will help the management to continuously strive towards cost reduction over time. Watson Circuits plc incurs high unexpected costs because of unpredicted financing requirements because of lack of effective capital budgeting decisions. Kaizen budgeting would allow the management to utilise its previous learning with respect to financing costs. Management should analyse the previous expense data and work towards continuous improvement with respect to reduction of costs over time. Setting budget targets will also help to put pressure on management to achieve certain level of cost reduction. Behavioural, Organisational and Management Functions The various behavioural, organisational and management perspective that are to be considered in the implementation of management accounting system in Watson Circuits plc are as follows: Behavioural: The implementation of management accounting system blueprint requires participative behaviour from all responsible managers and workers. The case illustrates that most of the problem arise out of non-cooperation on the part of line management therefore coordination and interaction between line management and accounting staff is very crucial in this regard. Process costing system flows through all production departments therefore every one should consider their role in this flow as very important. Because cost accounting inform has to flow smoothly from one department from another, as a requisite of process costing technique, provision of relevant and reliable information on the part of all departments is also very essential. Most importantly, management and staff should be educated on the importance of management accounting towards effective performance and decision making so as to ensure coordination of activities. Organisational and Management The company needs to employ professional and qualified accountants to ensure a smooth implementation and functioning of management accounting system. The design and implementation of management accounting system depends upon the nature of production process. Process costing has been chosen for Watson Circuits plc because the case illuminates that the production runs through different processes. All the processes therefore are equally important in the success of management accounting information system. The managers and accountant should ensure smooth flow of information from one department from another. The policies and goals with respect to the management accounting system should be communicated well to the managers of all the relevant departments so as to ensure participation from all aspects. It is the responsibility of line managers to inform production staff about flow of information through process. Management should also implement control systems to ensure that the desired behaviour on the part of employees is achieved. The performance of managers should be evaluated on the basis of budget control and achievement of targets. Reference Drury, C. (2004), “Management & Cost Accounting”, 6th ed. London: Thomson Press Read More