MANAGEMENT ACCOUNTING QUESTIONS
Question 1
The entity charged with the design and development of the activity based costing system is the company’s a person who possess a host of leadership abilities and prior knowledge of ABC technology most probably a person from the company’s accounting department . This individual would be charged with the role of coming up with the most effective costing system that can significantly boost the company’s drive towards the achievement of its objectives. The person selected should however have the maximum to have the support of the top managers, line managers and the entire staff of the company. A steering company selected from the upper management of The Wholesale Distributor Company and which is comprised of the information systems major users can in addition avail guidance in the design, development and implementation of the activity based system. It is important for the two parties to have an initial sit down and have a comprehensive overview of the entire project.
Question 2
The traditional costing method was developed in the period between 1870 and 1920. This type of accounting was utilized by managers throughout the world because in those days, the business industry was very labor intensive. Automation was an unfamiliar feature and there was a small product variety. In addition, most companies’s overhead costs were lower than those of today. As such, there was no need to assign the company’s overhead costs into direct costs. Managers were therefore very fond of this accounting system. Another factor on why this type of accounting method was used by many was because of its less strenuous nature. In this method, a single overhead was utilized and object’s cost could therefore be allocated randomly based on cost factors such as machine hours and labor. However, this accounting system became obsolete as companies became bigger and their overheads increased therefore prompting the need for the development of a more accurate costing system.
Question 3
The company would benefit a lot by structuring its departments to match the defined activities used in ABC. This is because this structuring would ease the assignment of costs to activities. This is because structuring the departments would involve the assembling of collective or related activities whose costs can be traced with relative ease. This is possible because even if the cost drivers are resources are in different proportions, they are still classified in the same category of value chain. . Each department would be charged with role of producing a general ledger that reveals the resources utilized in each activity. He costs of each resource would then be assigned to each activity using the direct and driver tracing. For instance, the distribution company’s purchases department would come up with a general ledger showing the resources utilized in its departmental activities. Taking the labor resource for instance, the time spent on each purchase activity would then be used to assign labor costs to those particular activities. In addition to easing the costing process, the structuring of departments according to activities saves a lot of time.
Question 4
A company does need to have ABC management for it to use the activity based costing system. The company can implement the activity based costing system and gain significant value in the determination of better costs of products but not actually use the information’s fullness to influence or affect decision making. If the information obtained from activity based costing is utilized in the management of activities, activity based management is then used. The ABC can be used without management by the use of numbers. Numbers are often symbols for great information wealth but when utilized as symbols with a comprehsnion of their meaning , they can be helpful. However, if they are utilized without that understanding, they can in the same manner be dangerous. This scenario can apply to activity based costing and management. As a whole company approach, activity based costing works best when employed through activity based management and budgeting.
Question 5
Some unexpected scenarios in company may create the need for a refinement of the existing costing system, specifically ABC. However, there may not always be enough time to rectify all the defects that may have been created by the former system or even grasp advantages that may have been available some time back and that could have realized by utilizing the new costing system. A company might have waited too long to make adequate changes. The recognition of existence of a problem can be said to be the first step in the development of a solution. Managers should not have to wait until a complete system revamping is done to take advantage of information that is gained from the working towards the solution. Decision making or problem solving is usually a process and in some instances, in the course of solving a particular problem, other problems can be solved. This would therefore negate the need for or the requirement for the solving the ‘original” problem. In the decision to implement the ABC, this particular company could for example decide to initiate a refinement of their department’s indirect-cost rates through the use of multiple cost allocation bases and cost pools. ABC is not exactly appropriate for all companies. Study and consideration of ABC mat actually provide benefits to the company.
Question 1
Opportunity costs are defined as the value associated with a foregone activity at the expense of an alternative. Opportunity cost find huge usefulness in management accounting as they aid the decision making process. For instance in individuals, opportunity costs enable them to make prudent choices between hosts of competing wants. It also enables the efficient exploitation of resources that are scarce. In firms, opportunity cost also aids in the decision making process in that they assists organizations to formulate rational decisions about goods to produce and those to be sacrificed. In addition, the costs also assist manufacturing industries to make wise decision production techniques, for instance, whether to adopt labor intensive or capital intensive techniques. Individuals with CIMA qualifications are equipped with sufficient information on this feature and are therefore very useful in the decision making process in organizations.
Question 2
Constraining factors or resources can be viewed as a short run concept. However, accounting systems work to avail information for both the long range and the short range of a company. If a company’s operations are accurately reflected in its accounting systems, it is possible for an accountant to notice trends and consequently direct attention to them. For instance, in the constraint of limited machine hours, the contribution margin per machine hour can be reported. If there is a shortage in the supply of skilled labor, accounting reports can underscore the costs in terms of how they assist workers in the completion of tasks. Accounting systems of companies can be designed to ensure that companies acquire the maximum from the activities or objects that do a lot of work for it.
Question 3
The assigning of costs to cost objects includes elements of cost allocation and tracing. Regarding the decisions to add or drop customers or segments, there is a huge need for one to be careful of the costs allocated. The allocated costs should be viewed as a total for all cost objects for which they are related. The questions should be “does the total cost decrease as a result of dropping one particular cost object?” and does adding an extra cost object increase the total cost?” The total cost to be allocated is of more significant importance than its allocation procedure in making decision regarding the adding of customers or segments.
Question 4
The book value of a cost object that is has a definite likelihood to be written off in the foreseeable future is actually not a relevant cost. In regards to this, book value signifies a cost that has actually been realized already and that a decision made afterwards cannot change the initial decision that was made in purchasing the equipment or object. The above is an example of a cost that has no effect on decision and is therefore not relevant. A relevant cost is essentially one that has the capability to make a conspicuous difference among a set of alternatives. If there is virtually nothing that can be done to prevent the occurrence of the cost, the cost is no longer a matter of choice. A future cost whose ability to be prevented from occurring is none is not relevant. The choice of incurring the cost or not must be available for the cost to be relevant to choice or decision making.
Question 5
Explain why a corporation's customer base is considered an intangible asset. corporation's customer base is considered an intangible asset because it is an element owned by a corporation that does not have a physical existence and is non-current. The customer base as an asset is used to generate funds for the company in spite of its lack of a physical stature. The customer base is usually contained in the company’s customer list. This list contains information regarding the customers including their names as well as contact information. The list may also be in the form of a database that includes other relevant data such as demographics and order histories. From his it is easy to deduce that most companies regard their customer bases as intangible assets. Just like other intangible assets, the customer based can be manipulated by the company to generate funds to achieve a certain company objective. The intangible asset aspect regarding a company can also be deduced from goodwill which is actually a measure of the reputation of company which can be accordingly presumed from the company’s customer base.
References
Christensen, L. and Sharp, D 1993, How ABC Can Add Value to Decision Making, Management Accounting, vol 34, no.4.
Cokins, G 1999, Learning to Love ABC, Journal of Accountancy, 37-47.
Foster, G. and Swenson, D 1997, Measuring the Success of Activity-Based Cost Management and Its Determinants, Journal of Management Accounting Research, vol 7, no. 4.
McGowan, A 2008, Perceived Benefits of ABCM Implementation, Accounting Horizons, vol 9, no. 34.
Korn, S W., and T. Boyd 2000, Accounting for management planning and decision making, Wiley, New York.
