Strategic Management Accounting (Term Paper Sample)

Strategic Management Accounting AA Name: Institution: Strategic Management Accounting AA a). Given the managing director’s concerns, it is clear that Vizou struggles to establish the right costing of its products that would yield desired results from the owner. Disconnect in the production mechanism seems to exist in the assets and processes used to making the product and the resultant returns that the company receives from sales of its products. Three costing methods shall be discussed in this section and a proposal made on the right costing method that would fit Vizou to understand and reduce its product costs. Standard Costing CIMA terminology explains standard costing as a control technique that facilitates management action through exception by reporting variances from comparison of actual costs and pre-set standards (Wolfe, 2017). This type of costing works in the assumption that the manufacturing firm or the production strategy employed has set costs and revenue standards to enable control of the production process and efficiency in allocation of resources. The control generated from this type of costing is dependent on variance analysis developed from the continual production process on the costs of producing the product or service and the projected revenue from such production (Cline, 2012). This is measured against the set standards by the management. For every cost element, the standards established are done on a scientific basis and for the present production process. The actual costs of production at that moment are measured against the standard, and the variances analyzed (Wolfe, 2017). From the variances, the management determines reasons for such and corrective measures are immediately taken to avert recurrence of the variances. This is to stop inefficient production of the good or service and saves the manufacturing firm on costs of production (Fisher &Raman, 2010). Information gathered through standard costing enables the management to act on processes such as controlling costs, computing production costs quickly and conveniently, pricing products, preparation of business budgets, and measuring how division managers are performing (Fisher &Raman, 2010). The best practices for standard costing is where a single product is permanently produced by a production firm, such as in automotive industries, petroleum refineries, and in fast food restaurants. The criticism for applicability of standard costing is that it lacks relevance in the present global economic environment where competition is high and production no longer targets a smaller market segment but to satisfy global consumer demand (Warfield et al., 2007). Some of the aspects of the present economic environment that have been singled out as making standard costing impossible to implement are the over-emphasis that is placed on benefits of direct labor, the inconsistencies in the approaches used by managers in this modern environment, constantly changing cost structures, and the delays experienced to get feedback on issues (Warfield et al., 2007). Absorption Costing In accounting platforms, absorption costing is referred to as full costing method. This is because it treats all costs in the production process as product costs, irrespective of whether those costs are fixed costs or variable costs (Zentes et al., 2017). There are experts who portend that its best use is when preparing financial statements that are used externally, because it provides the correct picture of the costs of production to people or institutions that would want to invest in the production firm. Other experts contend that when determining prices of a product or service, then absorption costing is the best option of all the costing methods because of its inclusive and comprehensive analysis of all costs that led to the production of a product or service (Zentes et al., 2017). With absorption costing, correct profit calculation is realized, accrual and matching concepts of accounting are adhered to, and all costs of production are covered (Kraft & Mantrala, 2010). This makes it provide credible information not only for pricing, but also for stock evaluation. The only criticism against absorption costing is that the traditional mechanisms used to implement it provide little value in production environments where the process of production is highly automated (Fernie et al., 2013). The criticism also stretches to the negligible influence of traditional absorption costing methods in a process where overhead costs of production are more significant in determining costs that direct labor. However, there are new ways of implementing absorption costing in a manufacturing environment that is highly automated, by use of computer algorithms that signal any variances that exists within the production process, albeit with significant accuracy than the traditional absorption costing mechanisms (Zentes et al., 2017). Marginal Costing This type of costing is also referred to as direct costing and variable costing. It is used to present managers with separate variable costs and fixed costs without merging the two (Schonberger, 2008). The essence of this is to aid the management in developing strategies and decisions that would boost the efficiency in the production process (Schonberger, 2008). This type of costing is viewed as a perfect fit for decision-making because it enables the management to focus on changes resulting from the decision that is under consideration. The criticism leveled against this type of costing method is that IT is only useful in providing information for short-term decisions like deletion of a segment or line of business, outsourcing of a production process, and accepting or rejecting special orders (Cadle, Paul, & Turner, 2010). Recommendation Of the three costing methods discussed, absorption costing could have been relevant for Vizou because it examines the variances that exist in production of a commodity after certain production cost standards have been set by the management (Gray, 2009). Where there are discrepancies in costs, the management can then propose actions that would correct the inefficiency discovered in production of the product. The only problem with this type of costing for Vizou is that production of Vizou’s products involves a process that cuts across several countries, making the implementation of this costing method complex and costly. Standard costing on the other hand requires a product that is standard, while it is clear that this is impossible in a fashion industry where products sometimes evolve and are produced in conformity to different tastes of customers (Schonberger, 2008). Marginal costing is therefore the absolute costing method that would fit Vizou because the different locations for production stages would involve either fixed or variable costs. The management would then single out stages of the production process that require immediate focus and changes implemented to reduce the overall costs of production. By separated the fixed and variable costs of production, the management would easily understand its own product costs. b). The difference between budget and budgeting is that budget is a quantitative expression of the management’s plan of action for a certain specified period (Morlidge & Player, 2010). Budget also includes an aid that will coordinate the actions to be taken to implement the formulated plan. Budgeting on the other hand is the process of allocating financial resources of an organization to its investments, units, and activities (Cangiano, 2013). Vizou struggles with its overhead costs, and this is an issue that can be corrected through use of a budgeting approach that is efficient. The remaining part of this part of the paper shall delve into three budgeting approaches, and then propose a budgeting technique that will best suit Vizou. Traditional budgeting This budgeting technique became popular in the 1920s where it emerged for managing cash flows and costs in industrial organizations (Bogsnes, 2013). Some of the organizations that used it were Siemens, General Motors, and DuPont. Before traditional budgeting, there was no evidence of any budgeting activity by manufacturing or industrial organizations. After the introduction of budgeting as a management tool in the 1920s, several companies began to implement it in their production processes (Cangiano, 2013). It was an enviable technique for standard management, and applauded for its success in providing an avenue for control and accountability of resources in manufacturing and production firms (Shim & Siegel, 2009). Recently, debate has emerged on its position in the modern environment where factors and variables to production have changed and others introduced. The contention is whether it is still effective and alive in present management, or of it needs to be abandoned because it is outdated (Chattered Institute of Management Accountants, 2005). There are other experts who argue that what it needs is improvements and adjustments that consider changing conditions to production and new developments that effectively have been brought about by technology (Hope, 2003). In its definition, traditional budgeting is a process that operates in a hierarchical top-down process with resources, rewards, and decisions flowing in a top-down format and information flows in an upward format (Chattered Institute of Management Accountants, 2005). Line managers’ job description and roles is to operate the established systems, personnel, and facilities, in accordance to rules and regulations provided by senior managers on pre-determined targets (Chattered Institute of Management Accountants, 2005). Reason for budgeting in traditional budgeting technique is to assist in maximizing of profits, forecasting the future, performance evaluation, motivating of employees, assisting in pricing and control decision, and a way to calculate rewards for empl...