Management accounting is a form of accounting process, which helps the management to analyze the performance of the operations for business decision-making objectives. For the analysis, the management accountants require various types of information, which are generally collected from different forms of financial and non-financial reports. Different reports are used for different objectives. The purposes of some mostly used managerial reports are described below:
- a) Profit & Loss Statement: Profit & loss statement is mainly used for determining the profit earning and return generating capacities of any business firm.
- b) Accounts Receivable Aging Report: Ageing receivable aging report helps to determine the total amount owed from debtors. It is also helpful for ascertaining the credit collection period of the firm and identifying the older debts.
- c) Operating Budget: Operating budget is prepared for estimating various operating expenses, to be incurred for achieving the revenue target. The firms can raise the necessary fund, required for the future operation, in advance with the help of this report (DRURY, 2013).
Control is one of the main four functions of management accounting. It can be described as methods of monitoring and evaluating the business operation and taking corrective measures to revise the actual outcomes to achieve the firm’s objectives.
The control function in management accounting helps to prepare the performance reports and control reports, which can be used for measuring the variances between the projected and actual performances. The management uses these variances to identify the factors, which are causing issues in achieving the target and take remedial actions for such factors.
Thus, the control function helps to identify the issues in the operations and to eliminate or reduce the negative issues to enhance the performances of the business operation (Lanen, 2016).
- To accumulate the relative production costs
- To assign the production costs to the unit of products
- To determine more production costs with more accuracy for multiple numbers of nearly identical products
- Better control over the production costs (Edmonds et al., 2016)
The first entry is recorded for the payment, incurred for labor cost. If, the payment is due then the cost should be debited to accrued payroll account. Otherwise, the cost would be debited to bank account, to record the cash outflow. The next entry is recorded to exhibit the amount of labor, used for production purpose.
oth the transactions are interlocked as the labors of the employees or the workers cannot be stored for future consumption. If any worker is paid for a certain period, then his labor should be utilized for production purpose within the period, except for advance payment. On the other hand, if workers are used for production for a certain period, then they must be paid within a certain timeline after the production period. Hence, it can be stated both the entries are related with each other and each entry is the consequence of the other entry (Balakrishnan et al., 2014).
The process of allocation under which overhead costs are allocated to each unit of goods that are manufactured based on single driver of costs is regarded as traditional method. Accountant faces difficulty in allocating indirect costs using single driver of costs. Sometimes, single cost driver would be related to some overhead costs (Jordan, 2014). Therefore, for allocating indirect costs in relation to cost drivers, activity based costing was developed. Individual indirect costs are allocated in accordance with individual activities of costs. Present report discusses about benefits of the method of activity based costing along with describing the superiority over the method of traditional costing.
Advantages of activity based costing:
Manufacturers of organization are provided with several advantages using the method of activity based costing that are listed below:
- The cost of production is determined by selecting the cost of such activities using the method of activity based costing.
- Method make use of relevant cost driver by allocating very individual that would use the process of allocation that are more accurate and relevant.
- The production costs concerning finished goods are ascertained using the method that helps management in making relevant decisions (Petty et al., 2015).
- The allocation of indirect costs under this method is not possible using single driver method for using the advanced cost of productions.
- ABC avoids the method of using single drivers and does not take into account any other drivers. The reason is that it may not be accountable for all types of costs.
- There is inappropriate cost of production is the result of improper allocation of costs and this is the reason that leads the management to take decisions regarding cost of control and pricing system (Brigham &Ehrhardt, 2013).
Manufacturers are enforced to reduce the cost of production because of increasing competitiveness in the world. In comparison to traditional method, a proper cost of production is provide by the method of activity based costing. From the above discussion, it can be said that manufacturers are able to gain competitive advantage over their competitors using the method of activity based costing. For employment of this method, substantial resources are required the business and the organization having limited funds are not capable to employ this methods.
As per the allocation process,
a) Total Cost of S1 Department (x) = Direct Centre Cost of S1 + [20% x Total Cost of S2 (y) ]
Or, x = $15000 + (20% X y)
b) Total Cost of S2 Department (y) = Direct Centre Cost of S2 + [ 10% x Total Cost of S1 (x) ]
Or, y = $13000 + (10% X x)
Or, y= $13000 + [10% x ($15000 + 20%y)]
Or, y= $13000 + $1500 + 2%y
Or, y-0.02y = $14500
Or, 0.98y = $14500
Or, y = $14500/0.98 = $14796
x = $15000 + 20%y
Or, x = $15000 + (20% x $14796)
Or. x = $15000 + $2959 = $17959
Reference & Bibliography:
Balakrishnan, R., Labro, E., & Soderstrom, N. S. (2014). Cost structure and sticky costs. Journal of management accounting research, 26(2), 91-116
Brigham, E. F., &Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts. McGraw-Hill Education
Jordan, B. (2014). Fundamentals of investments. McGraw-Hill Higher Education.
Lanen, W. (2016). Fundamentals of cost accounting. McGraw-Hill Higher Education
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.