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Management Accounting Systems And Costing Strategies Accounting Essay

This document covers two areas within the business enterprise; in Part A we look at the advantages and negatives of three different management styles that can be applied to the organization within the Management Accounting Control System. These are

Cost Centre Professionals,

Profit Centre Managers

Investment Managers

This includes the impact on the organisation and consider how the individual manager's performance can be assessed for each of the particular portfolios whilst maximising income for the corporation as a whole.

Part B of the doc will contain a comparative and distinction of the following Key Approaches to relevant decision making related to product and service costs : -

Marginal or Variable Costing;

Full or absorption costing

Activity Established Costing (ABC)

This section includes a clear demonstration of every of the techniques with a final conclusive summary of the best suited way.

Outline your understanding of the article question and comment how you're going to treat it. Make sure that you define the aims of the essay clearly as they determine the range of your article, setting out exactly what you are achieving a realization for. You may want to include definitions of certain business terms here for the understanding of the audience.

Part A

Management Accounting Systems

"The first responsibility of business is to make enough revenue to cover the expenses for future years. If this sociable responsibility is not fulfilled, no other social responsibility can be fulfilled. " Peter Ducker (1955) The Practice of Management

Organisational Structure

As we are considering means of maximising earnings and measuring specific administrator performance then we have to adopt a strategy which will allow both goals to be achieved. It could not maintain the best interest of the organisation to appoint an individual style of manager due to the difficulty and size of the organisation

Within the business enterprise we have several dissimilar activities, hence it's important for the organisation to adopt a divisionalized framework. To make sure that the divisional framework is successful there are a variety of things which must be looked at.

One of the primary limitations of creating and operating a divisional framework over an operating structure is the internal affect on the other person this create may have. As argued by Solomons (1965) Divisions should be more than investment funds, their contributions are pivotal to the success of the company and to each other. The internal human relationships between the divisions need to be governed; this will ensure that by seeking its revenue, it cannot do it at the expense of the overall company profit. In order to avoid the conflict between divisions over revenue, Solomon does declare that any earnings which is gained at the expense of another division must offset and be greater than losing incurred.

To further ensure that performance is been able effectively it is vital that earnings or net belongings are controllable using the controllability principle. This is executed by getting rid of any uncontrollable items from the manager's area for which they are accountable for or by guaranteeing reports differentiate between what is managed/uncontrolled.

Three uncontrollable factors were determined by Product owner (1998), they are really:

Economic and competitive factors - e. g. changes in customer likes, business cycles and changing federal regulations

Acts of Aspect - likely to be one off occurrences beyond the control of the professionals, e. g. Recent Icelandic Volcanic Ash influencing English Airspace, impacted on many businesses ability to deliver products and services such as Tour Operators and vacations.

Interdependencies - when a responsibility centre shares a reference, therefore other products make a difference the performance of this learning resource e. g. IT Support Services, call handling can be delayed when the personnel are shared with an Operations unit (because of the technical knowledge necessity) and are onsite delivering work.

The above factors make interacting with them one of the very most frustrating areas for the execution of management accounting control systems hence the necessity for the controllability rule.

Responsibility Centres

There are a number of ways an organisation could work to increase its output and success, however to ensure that they are making the right decisions to help make the most profit, something needs to be in place which is watched correctly in any other case known as a Management Accounting Control System.

The Management Accounting Control System is put into two core components, the first part deals with the long-term planning and budget proposals. Whereas the next handles the control over the expenses, profit, investment money or revenues. They are known as Responsibility Centres and are grouped as Cost Centres, Income Centres, Investment Centres and Revenue Centres.

Each Responsibility Centre allows the allocation of accountability for its financial final results/results to individuals (professionals) within the company. Using this method the company can effectively screen the performance of the average person professionals against their place controls to ensure maximum profitability as they will be required to gather and report income and cost information for every single of their particular areas. Now why don't we evaluate the concepts of an Cost Centre, Revenue Centre and Investment Centre.

What is an expense Centre?

Cost or Price Centres are thought as part associated with an organisation that does not produce direct profit and adds to the price tag on running a company, such as Accounting or Marketing departments. The price centre administrator has responsibility over all controllable costs for the particular device. Here the cost can be discretionary cost and committed costs. This management style would be assessed by variable analysis, which is the difference between the standard costs (cost of inputs that should have been consumed creating the output) and the real cost incurred. Possible Appendix e. g.

The benefits are the following:

Costs can be supervised in a powerful manner, for e. g. The spend on Research & Development can analysed up against the comparison between New Products and Existing Product Development.

Cost Efficiency can be assessed - applies more to committed costs as the input/output relationship can simply measured.

Can help quantify costs of particular activity. E. g. Within an IT Support Service area, metrics such as degree of service, average handling time and cost of call will be used in conjunction with other statistics to validate current money or question to increase budget.

Hence cost centre helps in calculating both efficiency and effectiveness.

The negatives are:

It will not measure the advantage which may act as a hindrance for cost profit analysis of a particular activity.

Managers aren't judged on revenue and income under this technique.

Holistic view of a specific activity may be dismissed under this technique.

What is a Earnings Centre?

This product of responsibility allows the performance of each division, product line, geographical area or other quantifiable unit to be measured. That is done by using both costs and revenues in the diagnosis of the income performance with each section being cared for as another business entity with responsibility for creating its profit.

Thus under this the supervisor is in charge of both revenues and expenditures from any of their planning and control activities and this performance is measured by the Earnings achieved.

What is an Investment Centre?

An Investment Centre is similar to a Income Centre for the reason that it continues to be divisional and the administrator is accountable for the profits, but it addittionally includes an extra dimension for the reason that the responsible manager must also illustrate how efficiently they have used any invested capital of their department. Therefore any appraisal of the manager's performance must be structured not only on the earnings but also the Return on investment residual income (ROI).

Due to both Income Centre and Investment Centres writing similar positive and negatives for a divisional setup, they are both listed together below-

The benefits are:

Accountability is far greater than cost centre and helps in determining the advantages and weaknesses of the organisation.

Uses the Specialist Experience of the Director more effectively for decision making and speeds up this process

Market Information is more easily available as these professionals have day to day interaction within their respective areas.

This works as training mechanism to develop the younger managers

This gives increased overall flexibility in the organisation and makes organisations leaner and effective.

Motivation of the Director to achieve goals set; on top of that for the Investment Supervisor they can be linked to benefit system with the investment come back, therefore guaranteeing the Director achieves greater success not limited to their division and the whole company but also the shareholders investment.

Represents the highest degree of managerial autonomy, allowing Central professionals to concentrate on the organisations proper plans.

The constraints can be:

It can result in conflict between the revenue centres on issues of copy pricing and electric power sharing.

It may lead to narrow short term target and the professionals may miss the qualitative factors impacting the performance.

It could possibly lead to a detrimental have an impact on on inter-department associations, which could have an effect on the achievements of organisational goals resulting in a downturn in overall company revenue.

By delegating the decision making to the divisional professionals, central management may lose participation plus some control over these areas

Reporting may not be as in-depth as previous reporting

Performance Measures

In order to measure either the managerial or divisional performance there are three main techniques, that are:

Return on Investment (ROI) - determined on both most important and supplementary level and is recommended in Earnings Centres where the managers cannot influence or make investment decisions.


The profits on return is represented by the percentage

Used extensively by managers


Possibility that professionals will need less risk with assignments in order to ensure ROI and keep maintaining their performance.

Goal congruence is not encouraged

Net Residual Income (NRI or RI) - options controllable contribution less a cost of capital investment manipulated by the director - used within Investment


Method motivates Managers to execute well


It can be an absolute measure

Different Investment Sizes hard to compare

Economic Value Added (EVA) - During the 90's RI was renamed and refined to EVA. This was done with the formulation of 'Classic divisional earnings + accounting alterations - cost of capital demand on divisional investments'. This has been followed by approx 300 companies worldwide as reported by The Economist (1997). An additional UK study carried out by El-Shishni and Drury (2001) also reported EVA is employed in 23% of the responding organisations to screen divisional performance.


Encourages Goal Congruence

Reported high success rate in motivating and evaluating corporate and business and divisional managers

Reduction of unsafe side effects from using financial measures as managers do not endure full cost of discretionary expenditure

Do not rely closely on accounting options and use non financial methods like the balanced scorecard way.


To appreciate the mix of products, services and purchases the company should undertake a new company structure and make the key head divisional managers 'Investment Professionals'. We will be in a position to optimise performance and success for the division, organisation all together and the shareholders at the same time. However operating underneath these managers will be Cost Centre Professionals and Earnings Centre Professionals where appropriate.

In order to ensure that performance is monitored correctly, the next procedures will be used

Cost Centre/Earnings Managers - will be assessed by the ROI method, this is mainly because they will have no control over the capital investment decisions in support of have control over their costs.

Investment Professionals - will choose the EVA method as this lately has overtaken the NRI method and is used by a few of the world's most successful organisations such as AT & T, Coca-Cola and Boots. The Economist (1997). The technique isn't just a financial method but also talks about other factors which make a difference the investment performance. In addition, it keeps staff determined and can offer ownership of the performance stimulating the manager to perform high and reach the goals.

To put into action the new framework further action will be needed including the restructure of staff and specs of focuses on for the managers. To do this we have to ensure that all of the recognised costs and handles for every single responsibility centre are described and recorded with the contract of the personnel to be sure they are happy with what is expected of these.

Part B

Costing Approaches

It is essential with any organisation to know the relevant cost of most products and services they provide, as this will allow ease of all decision making situations.

There are a number of approaches which may be applied in this area and each procedure handles the situations differently as each one must be looked at relevant accordingly. In order to define the right approach we must look at the pursuing: -

Identify all relevant and irrelevant costs & earnings,

Consider any important qualitative factors in the relevant costs

Marginal or Varying Costing

Meaning of varying costing:

Variable costing means the technique of costing in which the costs to be inventoried is the changing making costs. Here, set over head costs are treated as the time cost along with the offering and administrative bills incurred through the particular period. Variable costing may also be referred to as the immediate costing and marginal costing.

Definition of variable costing:

Method where cost of a product or operation depends upon allocating to it an appropriate portion of adjustable (direct) costs. Direct costing treats set costs (overheads such as administrative and offering costs) as period costs (associated as time passes and not end result). It is also called contribution costing.

Variable costing pays to in the next cases:

1. Make or buy decision

2. Accepting the export order

3. Computation of Breakeven point

4. It is employed in CVP analysis.

5. Inventory valuation and income determination

6. Perseverance of product mix

7. Persistence of marketing blend.

8. Turn off or continue the operations

9. Perfect allocation of resources when some resources are restricting factor.

Advantages of Varying Costing

a. Corresponds to cost-volume-profit model.

b. Revenue fluctuate with sales-volume changes only, and aren't affected by inventory level changes

c. More attuned to management thinking.

d. Avoids issue of allocating joint costs.

Disadvantages of Adjustable Costing

a. Since prices must include all costs in the long run, variable costing may lead to under-pricing products in the long-term.

b. Not appropriate for external reporting.

c. Inventories are not shown at their full cost of creation.

d. Marginal costing is particularly useful in a nutshell revenue planning and decision-making. For decision of considerably reaching

Importance, is thinking about special goal cost rather than variability of costs.

e. It isn't acceptable by the Government for the intended purpose of the tax.

f. I t is not proper to disregard fixed cost for product for

product cost determination and inventory valuation.

g. Marginal costing technique disregards the utilization of recovering

fixed cost through product costs. For long haul continuity of business it isn't good. Assets need to be recovered of costs.

h. Creating variability of costs is no easy. I real life situations, varying costs are hardly ever completely changing and fixed costs are almost never completely set.

I. Exclusion of set cost from inventory valuation does not conform to admit accounting practice.

J. The income tax authorities do not realize the marginal cost for inventory valuation. This necessitates keeping of split books for distinct purposes

Difference between changing costing idea Vs absorption priced at concept.

In varying costing only variable manufacturing overhead is considered. However, in absorption costing, all costs including fixed costs are included.

In absorption costing, the merchandise cost of product A is computed as follows:

Therefore, the merchandise cost is more in absorption costing than the adjustable costing. The difference in product cost will have an impact on the income shown under different kinds of costing. When production exceeds sales, the absorption costing will show higher net income than the changing costing. When sales exceeds the creation, then variable charging show more revenue. The income under both the methods will be same when creation is the same as sales.

Likewise the display of income assertion is different in absorption costing and in variable costing

Income statement according to absorption priced at - removed if needed put in appendix

Absorption charging vs. normal costing

Normal Costing: Under normal costing actual direct materials and direct labour costs are given to the models produced and creation over head costs are given to the systems produced using the predetermined overhead rate. Then predetermined over head will be weighed against the Actual overhead. Then variance would occur:

a. If the under/over applied making overhead is relatively small, it is cared for as an modification to cost of goods sold

b. If the under/over applied processing over head is relatively large, it is prorated to the units produced

Normal costing systems calculate the overhead component of product cost:

Normal product cost = genuine D/M

+ real D/L

+ believed O/H (estimated rate put on actual level of driver)

Absorption costingvs. standard costing.

Standard Costing--Under standard priced at standard immediate materials and direct labour costs are given to the products produced and processing overhead costs are allocated to the products produced using the predetermined over head rate and the typical is set for each and every aspect of cost. Then standard cost is weighed against the real cost. The result is favourable or unfavorable variance.

a. If the direct materials, direct labour, and developing overhead variances are relatively small, these are cared for as an modification to cost of goods sold

b. When the direct materials, immediate labour, and making overhead variances are relatively large, they are simply prorated to the devices produced

Therefore absorption costing differs from the typical costing. To place simply, standard cost is the technique of managing costs. However, absorption costing is the method of finding out the cost of the products produced through the particular period. EEC uses standard costing for control of unfavorable variances.

Absorption priced at vs. Real Costing-

Under actual costing, actual direct materials, direct labour, and processing overhead costs are given to the products produced. Here, in actual costing, the changing costs and set costs are came into in actual conditions and there is absolutely no question of variance. In adjustable costing, adjustable costs are deducted from sales to reach at the contribution margin. But it is not regarding real costing. In absorption costing all the expenses are included in the price of production. If real costing is implemented, there is no issue of under or over absorption of over head.

Absorption costing Vs process costing;

Under process priced at all the expenses (direct material, direct labour, fixed manufacturing overhead and variable overhead) of each process are added and cost of the done goods will be cost of the product will be the accumulation of costs from the beginning process to the previous process. Process costing provides all the expenses both the fixed costs and varying costs. Here, absorption costing is applied for each processes of the organisation. If EEC undertakes manufacturing products on process basis, the process costing can be applied.

Job charging:

Job costing is the method of deposition of cost for each and every job performed by the organisation and the absorption costing method is followed for each and every job. If EEC undertakes the job based on job, then job charging can be applied.

Absorption Costing v

Absorption costing (also called 'Full Costing') is one of the original approaches which fundamentally imply all the making costs are absorbed. That is value of completed goods include immediate material, immediate labour, variable overhead, fixed overhead. Under the absorption charging method full cost i. e. , both changing cost and permanent cost are put into the price tag on the merchandise and certain ratio of earnings is put into the cost and value is set. However, under changing costing, changing cost is deducted from sales to reach at the contribution and set cost is deducted from the contribution to arrive at the income.

When pricing is manufactured based on full cost will be unsuccessful when the Company has unutilized capacity and the preset cost is distributed over the devices produced.

For example, the Company Z gets the plant and equipment having the capacity of producing 10000 devices of product X. Set cost of maintenance of the seed and equipment is $ 100000 per month. Then fixed cost per product will total $ 10 per unit. If the company is unable to make use of the full capacity, it might produced only 8 000 devices of product X, then your set cost per product should come to $ 12. 5. Here, the price per device is unduly inflated to the scope of $ 2. 5. This technique of charges under full costing make the merchandise uncompetitive on the market since it will increase the selling price per unit of the product. At the same time, rivals could sell the same quality of product at a cost less than $ 2. 5 per unit. This makes the company's product unsuccessful in the long run.

Therefore, poor decision making occur when the products are priced by adding a fixed percentage of earnings to the total cost.

When the absorption charging can be utilized?

Absorption charging can be employed when you can find full utilization of available capacity and the business has high market share and charges of product based on full cost won't influence the sales of the products in the market.

Advantages of absorption priced at:

This method is accepted by earnings officers as the stock is not undervalued.

It is certified by the federal government to prepare financial accounts.

It recognizes the importance of predetermined cost in creation.

When sales fluctuate from period to period and the development remains constant, you will see little fluctuation in online profit within the periods.

Marginal priced at distorts value of the closing stock which is not so in the case of absorption costing.

Disadvantages of absorption costing:

Since the manger focus on total cost, cost volume profit marriage is overlooked and the supervisor must use his intuition to use the decision.

Since absorption costing uses full costing, it is not useful for the management to make decisions, planning and control of the activities of the company.

Difference between absorption costing and marginal costing:

Identify 2 managerial decisions situ's where this approach is appropriate than the other 2 and justify in this decision making situ

This section - that ought to consists of several paragraphs - should go through all similarities you find in the two topics which you are writing. There should be at least three comparisons (essentially three short body paragraphs) where you give a good example from both topics of comparisons in each.

This section - that ought to contain several paragraphs - should go through all distinctions you discover in both topics which you are writing. There should be at least three contrasts (essentially three brief body paragraphs) in which you give an example from both issues of comparisons in each

Referring to the sources you've gathered; perform a detailed analysis of this issue at hand. Make sure that you critically study viewpoints from different creators to give a rational question and cover known reasons for and from the presented argument. Explore similarities and conflicting strategies and demonstrate self-reliance of thought giving your own view. Sequence your opinions correctly and link paragraphs so that the information presented flows seamlessly from one idea to some other. Remember to guide your citations throughout this section according to the referencing method recommended in your University suggestions e. g. Harvard or footnotes. Use quotation grades to indicate a precise phrase taken from a source. If you paraphrase, provide you with the reference at the end of the paraphrased word/s. The number of references to work with will rely upon the distance and nature of your essay although using ten personal references for each 1, 000 words is a powerful rule.

Activity Based Costing (ABC)

Activity Centered Costing System: is a changed absorption priced at system, where by the indirect costs are tracked to their cost swimming pools to reflect resource usage of indirect resources by the price object.

Activity-Based Costing (ABC) is a costing method that identifies activities in an company and assigns the price tag on each activity to products and services in line with the actual utilization by each in order to arrive at the actual cost of products and services.

In Activity based mostly costing costs of most organisations' resources are allocated to the merchandise and services that the organisation manufacture/render. The main intention behind the task of source cost to the product/services is to learn the cost of the merchandise and the resultant profitability.

Following are the steps to be adopted in ABC.

1. Identify cause and impact relationships of all the activities to assign costs to the activities.

2. Costs of the activities are to be computed.

3. Then the price of each activity is allocated to each product/service to the magnitude that the product/service uses the experience.

4. Then the products with high over head costs are to be discovered and the initiatives have to be made to decrease the costs of the expenses.

Identify 2 managerial decisions situ's where this process is more appropriate than the other 2 and justify in this decision making situ

This section - that ought to contains several paragraphs - is going through all similarities you discover in the two topics on which you are writing. There should be at least three comparisons (essentially three brief body paragraphs) in which you give an example from both issues of comparisons in each.

This section - which should contain several paragraphs - is going through all distinctions you will find in the two topics which you are writing. There should be at least three contrasts (essentially three brief body paragraphs) in which you give an example from both subject areas of comparisons in each

Referring to the options you've gathered; perform a detailed analysis of this issue at hand. Make sure that you critically look at viewpoints from different authors to provide a rational issue and cover reasons for and from the presented argument. Explore similarities and conflicting methods and demonstrate self-reliance of thought giving your own opinion. Sequence your ideas correctly and link paragraphs so the information presented flows seamlessly in one idea to another. Remember to research your citations throughout this section in line with the referencing method recommended in your University or college guidelines e. g. Harvard or footnotes. Use quotation marks to indicate an exact phrase extracted from a source. If you paraphrase, supply the reference by the end of the paraphrased word/s. The amount of references to work with will rely upon the length and aspect of your essay although using ten sources for each and every 1, 000 words is an effective guideline.


You should reach your final finish by logical reasoning, concisely pulling together the conversations undertaken in the primary body of the article. Explicitly point out your viewpoint as the final result, ensuring that you answer the question posed in the launch as fully as it can be. This last section should also be studied as an chance to express any suggestions for further investigation or future action.

Bibliography/List of References

If you've used the Harvard way for referencing, screen a list of all the referrals used in your essay in alphabetical order. If you've used footnotes on each site, simply add a bibliography here instead.

Drucker, P. (1955). The Practice of Management. London: Heinemann.

Drury, C. (2005). Management Accounting for Business, 3rd Model. London: Thomson.

Kaplan, R. a. (1998). Cost & Impact: Using Integrated Cost Systems to Drive Success. Harvard Business College Press.


This section involves any supportive material (graphs, charts or written wording) that is too big relating to the primary body as it could hinder the stream of the essay.

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