Good Essay On Accounting (Management Accounting)
The competitive edge of a business depends on a successful business strategy. Strategic management accounting is a kind of management where emphasis is given on the materials that relates to the external factors and information that does not relate to the finances of a firm. Accounting provides adequate information for the decision making process. Management accounting reflects the strategic approach of the business because most of the organizational strategies are completed using the prevailing data, which is majorly financial records. Management accounting has gradually improved over the past, which has led to the categorization of traditional and modern management accounting. The traditional emphasis on cost & revenues may not reflect these strategies because it lacks detailed information on the accounting records that are necessary in developing a viable financial record. There are different elements of strategic management accounting with reference to work done by CIMA and other Research Surveys
Managerial accounting aims at increasing the revenue for the organization, which mainly illustrates the level of financial growth within the organization. Additionally, managerial account develops comparisons for different financial periods, which creates a comparative platform between financial performances within the organization. Managerial accounting also aims at providing adequate information for improved decision-making. Decision-making is a core aspect in the development of any institution. Every organization makes strategies and actualizes its aims using financial records. Financial records mainly indicate the actual returns of the organization. Managerial accounting provides relevant information for planning & control measures. Planning and control is a core aspect approach in every organization because it provides a framework for the enhancement of a viable development framework (Hyvonen, 2007). Most organizations succeed because of their strategic measures, which are determined by the planning segment of the organization.
Strategic Management Accounting is a continuous process, which includes planning, setting the target, ways to achieve the target, implementation and execution of the plan, control objectives and if any deviations are noted between the planned and executed, corrective and follow up actions are taken. Every organization’s strategic development is based on the framework that entails planning, allocation of tasks, and executing these tasks in order of chronology or importance. The planning phase also involves that categorization of tasks based on their complexity such that the organization can handle simple tasks and then start working on difficult tasks (Kenneth, 2008). Additionally, the organization is able to analyse its human resource requirement depending on the planning approaches and the corresponding strategies.
Traditionally Management accounting had an internal approach and it only catered to the needs of the managerial level staffs. However, Strategic Management focuses on the needs of different stakeholders. As per work done by CIMA and other research surveys, key elements of Strategic Management include; strategic analysis, strategic choice, and strategic implementation (Clifton, et al., 2004).
Strategic Analysis is analysing the strategic position of an organisation. It involves carrying out a PEST Analysis i.e. assessing the Political, Economical Social and Technological Environment in which the business operates, evaluate the resource of the organisation and its potential, and evaluate the needs of stakeholders. Strategic Choice involves a situation where the organization needs to generate strategic options, evaluate these options using various feasibility studies and finally selecting the best strategy. Options are necessary because they serve as fallback strategies that the organization considers in case the first strategic approach fails. Strategies are based on uncertainties whereby the organization engages an interplay of production factors that will optimize its financial returns. In strategic Implementation there is a planning of needs to be executed and therefore the plan of action needs to be decided accordingly. The resources needs to be allocated according to the planning and the strategy should follow a review procedure too.
In 1950s, the traditional product costing method began to be widely criticised. It was then the principles of Activity Based Costing (ABC) were enunciated by Cooper & Kaplan (). Traditional Product costing and activity based costing have various similarities and differences, which depend on their time and purpose of formulation. Traditional methods have been notably been eradicated in the market because of the current dynamics and the dictates of competitive strategies from various firms in the market. There are considerable differences between the traditional costing method and Activity Based Marketing, which have significantly contributed to the current market dynamics by most companies.
First, the traditional costing method offered a narrow range of products because there was reduced aggression in the market. Additionally support factors such as marketing platforms were constrained, which reduced the aggression of the market situation. On the other hand, Activity Based Marketing method offers a wide range of methods. Activity Based Marketing substituted the basic marketing approach following advancement in technology, which improved the market situation by through increased production and marketing approaches.
In the Traditional Product costing method, Raw Material and Labour formed significant factors of production and the overhead costs were significantly small. However, with the Activity Based Costing method, there were increased overhead costs to increase the increased wide of products. Factors such as time, and production methods formed a significant determinant in the production of goods and services (Ndiweni & Coo, 2007).
Traditional Product Costing Method mainly entailed minimal non-volume related costs because the core aim of production were to increase the amount of sales. Activity Based costing method entails the maximization of profits. Most organizations have concentrated on factors that ensure that the organization not only increases its sales, it also increases its profits. The modern organizational development has concentrated in meeting customer satisfaction through various methods such as differentiation of goods and products (Kenneth, 2008). Cost drive factors are based on the machine hour rate and the production rate of labour for the traditional method. However, Activity Based Costing method is based on the rate of processing of orders and the number of production runs (Hyvonen, 2007).
Traditionally, there was no competition in the market and most organizations operated as monopolies. The organizations focused on meeting their usual production requirements. However, the current organizational setup is focused on costing methods, which are aimed at reducing errors in the decision making process. The current precision approaches follow the increase in competition following an influx of firms in the market (Hiromoto, 1988).
Traditionally, the production is characterized by a one-product situation and the production is generally labour intensive. However, the current production is multiple product situation, which is characterized by differentiation of goods and services within the market. Currently, production is absolutely automated through technological approaches aimed at maximizing profits and meeting the exact market requirements (Dermer, 1990).
The benefits of the traditional production approach was extensively based on the ability of the form to meet their production requirements in the market. Currently, the benefits are dynamic are based on the ability of the firms to counter major competitive issues within the market. Most organizations are have engaged in a cutthroat competition, which implies that cost drives are key factors in determining the necessary approaches required in the production of goods and services (Burger, 2009).
Life Cycle Costing is a methodology through which costs related to a product are allocated over the life of the product. Generally a product life cycle consists of four phases namely; introduction, growth, maturity, and decline. Life cycle costing is essential in the fact that it can act as a Reporting Tool: The Cost of the product is apportioned into different phases of the life cycle of the product, which depicts a clearer picture on the weak and strong phase of the product. Additionally, it acts as a Planning Tool: Costs like Research & Development, marketing expense, designing expenses, warranty costs, cost related to after sales service are significant. Using Life Cycle costing could help in better planning of the cost. It is also used as a comparison Tool such that if a company adopts Life Cycle costing for all of its products, it can measure the performance of the launched product with that of past launched products (Cooper & Slagmulder, 1997). The Cost of each product can be determined phase wise unlike the Traditional approach, where entire cost of product is ascertained but cannot be split over the life of the product
A few products & their phase under Life Cycle Costing
Pager entered the Declining Stage at its Introduction Phase since immediately after the launch of pager, cellular phones were launched and that led to the destruction of the market of Pager. Certain products like Salt & Binoculars life cycle are continuous. It has never reached the declining stage since the demand for these products will remain perennial and there is no close substitute available in the market for these products. These products become obsolete with time because of the technological development; hence, it is essential to understand the precise dynamics that affect their traffic in the market. In case the firms produce a lot, there will be a lot of inventory, which might not be bought completely before the emergence of new products (Noordin, Zainuddin, and Tayles, 2007). Strategic planning in such cases ensures that these firms produce just enough products for the consumers and should only last for a short time. Life cycle costing ensures that all these products are consumed before they depreciate in value. With the current competition in the market, a small misappropriation will lead to huge loss, which could affect the productivity of the firm for a considerable period.
Target costing and life cycle costing are the modern developments in the field of management accounting. Market costing encompasses much marketing approach compared to target costing. Chartered institute of marketing definition of marketing is the management process, which is in charge for identifying, expecting, and fulfilling the requirement of a customer in a profitable manner. Target costing therefore involves target cost setting through subtracting the expected profit boundary from a market price that is relatively competitive. The fundamental concepts that encompass target costing are ,items should be based on accurate evaluation of wants and needs of the customers in various market sections, and the cost targets should be the outcome of a viable profit margin from the customer during production and onwards (Ax & Bjornenak, 2005). The major aim of target cost is direct and straightforward. It enhances a firm to manage the business to be profitable in a competitive market.
In 1980’s in Japan, companies like Sony and Toyota brought the concept of Target Costing. Previously Target Costing was widely used by Japanese companies but recently it is adopted by the American & European Companies too. Various companies have adopted the strategy because it enables them identify the actual returns on their investments, which enables them to eradicate market uncertainties. With the increased competition in the market, most firms have been compelled to conform to the requirements in the market.
Market costing ensures sustainability of a business organization, hence consists of various benefits that include target Costing is the reverse of Traditional Costing method. Under Traditional Costing we calculate the total estimated cost of the profit and add mark-up as a % of selling price and determine the expected Selling Price. Whereas in Target Costing, we first estimate the Target Selling Price through a market survey and then determine the Target Cost. It provides an overall framework for estimating the cost of future products. This method of costing is more customer-centric, and hence it helps in soaring up the market share of the product (Bromwich, 1990). Products having high sales volume should adopt Target Costing as it helps in judging more of customer’s expectations. According to Nanni, Dixon, and Vollmann (1992) a firm requires to concentrate on sustainability in the market. Sustainability is mostly caused by consistency with customer requirements and continuous improvement of the market trends that are essential in the relevance of the organization. Technological advancement has significantly affected production trends within the market, which has significantly increased the competition in the market while improving the quality of goods and services.
Real life Applications of Target Costing
An elicit example of well executed Target Costing is by the motor car Giant Toyota. The world famous car manufacturer went through a vigorous testing phase. The testing was carried out to compare the old and new designs. The company routed the traditional method of costing and adopted the new Japanese invented Target Costing Method. This method aimed at reduction of cost in its initial phase i.e. even before when the product gets into production phase by designing a quality product. Additionally, the approach has reduced the company’s inventory, which implies that the company has reduced storage costs and the corresponding uncertainties in the market.
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