Lean Management Accounting Strategies - Essay Example

?Accounting Report to the Board of Directors Agendas Discussed in the Report Being the financial director of Maniac Plc which deals with the production and sale of standard electrical goods. The organization needs a full review of costing in order to recognize those regions which have not convene budgeted expectations. At present the firm uses both standard costing and absorption costing as a part of its approach to strategic management accounting. For this, we first report on the models and concepts which affect the pricing decisions taken by organizations. There are various costing systems available to a firm like standard costing, marginal costing or activity based costing etc. Decision of which costing system should be adopted depends upon a number of concepts like the organizational design, the economic activity of the organization, the bargaining and the influence costs etc. The models and concepts which influence the pricing decisions of a firm are management accounting decisions. The pricing strategy of a firm is influenced by several factors which include the fixed and variable costs of the firm and the environmental factors which include legal analysis and competitor analysis. Some of the specific concepts in cost accounting are lean accounting, resource consumption accounting, transfer pricing etc. Manufacturers need to consider various fields like the supply chain process, the assets risk to low cost etc. while determining an appropriate costing strategy for the firm. The term Lean Management means the principles that are used for lean production. The basic idea of the concept of lean manufacturing is to reduce the wastages incurred in any form in the firm. The wastages of the firm which can be minimized through the use of Lean Management principles are the defects in production as there is no proper utility of the product. The overproduction factor in firms usually leads to excess finished stock, inappropriate inventory control and the efficient less production system used. The concept of Lean Management is a derivative of the Toyota Production Systems (TPS). The TPS policy reduces the time gap between the customers’ order and the delivery to the customer. The JIT system of inventory also helps in nil wastage of stocks. Resource consumption accounting is a type of principle based management accounting which provides the managers with a decision sustain system for the organization. Another concept which affects the pricing decision is transfer pricing. Transfer pricing is quite applicable in case of the manufacturing organizations. Transfer pricing helps in reducing the operating costs and also helps in lowering the effective tax cost of global operations. “Using transfer pricing economics to map all the transactions in which the new plant will participate, with suppliers and customers as well as with related parties, reveals hidden opportunities” (Transfer Pricing in the Automotive Industry 2006, p. 3). Resource consumption accounting is another model which provides managers with adequate management accounting system in order to support pricing or costing decisions in a firm. This concept was specially developed for advanced manufacturing. The resource based cost accounting involves resources, their costs, the quantity based modeling, the cost behavior. Lean management accounting and Toyota Production System are the most suitable models which can be quickly and beneficially applied in Maniac Plc. The lean management system will be useful in taking pricing decisions of the firm. “The lean management system is structured around three necessities of lean production: strategic planning, organizational structure and human resource capabilities” (Jackson & Jones 1996, p. 18). 2) Maniac Plc practices both standard costing as well as activity based costing system. Standard costing and variance costing are both costing types which play an important role in management accounting. The standard costing system is the estimation of the costs which are necessary for the procedure of manufacture. Standard costing is a tool which is used to plan budgets and manage and control costs which is useful for evaluating the cost management performance of the firms. Standard costing has both advantages and disadvantages. Advantages include standard costing enhances the decision making process in a firm while the disadvantages in using the standard costing are it is time consuming and a laborious task. Variance analysis is the difference between the actual and budgeted behavior. In finance, variance costing is the difference between the actual budget and the planned budget. “The difference between budgeted cost of work performed and actual cost of work performed” (Field & Keller 1998, p. 418). Example of a Standard Costing and Variance: Assuming for production of 1 widget raw material costs $2 while 1 hour labor costs $ 20. Expected production is 1000 units. Therefore, the standard costs would be $ 22000 which included $ 2000 raw material costs and $ 20000 total labor costs. But at the end, the company through its budget found that for 1000 units the total cost spent by the firm was $ 35000. Therefore it implies that the production process became very expensive and variance was found in labor which stated that the firm incurred $ 13000 extra as labor costs. In the above example standard cost is $ 22000 while the actual cost is $ 35000 which implies a variance of $ 13000. A standard cost is a forecast or planned unit cost for a service or product, which is supposed to hold high-quality given expected cost levels and efficiency within an organization. It stands for a target cost and is helpful for controlling, planning and motivating within an industry. Variance analysis is a budgetary control course, which evaluates budgeted or standard revenues and cost with the actual outcomes of an organization, so as to get information concerning any exemptions from budget. This data is also used to progress performance during control action for example, correcting problems. A standard cost is a prearranged cost of servicing, manufacturing and marketing an item throughout a specified future period. It is founded on projected and current future circumstances. The standard is also reliant on qualitative and quantitative measurements. The formulated standard has to be useful and accurate for control reasons. Standards are situating at the opening of the period. They can be in dollar and physical terms. Standards help in the dimension of both efficiency and effectiveness. For instance, standard costs, sales quotas, and standard volume. Variances are not independent; therefore, a positive variance in one dependability area may be the outcome of an unfavorable one in other parts of the business. Variances possibly as detailed as essential, considering the benefit/cost relationship. Assessment of variances may be performed quarterly, yearly, daily, monthly and hourly, depending on the significance of recognizing a problem rapidly. For the reason that actual figures are not recognized in anticipation of the end of the period, variances may be decided only at this period. A material variance needs to informing the person accountable and getting corrective action. Unimportant variances should not be looked into additional unless they recur constantly or reflect possible complexity. In general, a variance must be examined when the inquiry is anticipated to outcome in corrective action, which will decrease expenses by a quantity more than the cost of the inquiry. When the manufacture cycle are long, variances that are calculated at the time of product achievement possibly too late for prompt remedial action to be taken. In such a case, examination may be assumed at key points throughout the processing step. This permits for labor inefficiency, spoilage and other costs connected with troubles to be recognized previous to product completion. 3) The advantages and disadvantages of introducing an Activity Based costing system to replace the current Absorption Costing system (maximum mark 34%). Activity-based costing (ABC) is an accounting system that permits businesses to gather information regarding their operating costs. “Activity based costing generalizes the economists classic single product supply curve to capture the economics of multiproduct, multi customer businesses” (Kaplan & Anderson 2007, p. xi). Costs are assigned to particular performances for instance planning, manufacturing or engineering and then the actions are connected with different services or products. Thus, the ABC system enables a business to decide which services, products, and possessions are raising their profitability, and which are contributing to victims. Managers are then able to make data to make an enhanced budget and increase a better overall understanding of the costs that are required to maintain a soft and easy running of the company. In general, activity-based costing is largely useful when it is used for a long period of time, as against shorter-term solutions for instance the theory of constraints. A managerial accounting cost system of expensing every cost is connected with manufacturing a specific product. Absorption costing utilizes the overhead costs and total direct costs connected with manufacturing a product as the base cost. In case of general accepted accounting principles (GAAP), it needs absorption costing for outside reporting. Absorption costing contains anything i.e. a direct cost in creating a good as the cost base. This is difference with variable costing, wherein fixed manufacturing costs are not absorbed by the manufactured goods. Advocates promote absorption costing for the reason that fixed manufacturing costs give future profit. The important costs allocated to products under an absorption costing system are: Direct materials: Those resources that is contained in a finished product. Direct labour: The factory labour costs necessary to build a product. Fixed manufacturing overhead: The prices to function a manufacturing facility, which differ with production quantity. For example, electricity and supplies for production tools. Variable manufacturing overhead: The expenses to operate a manufacturing service, which do not differ with manufacture volume. For example, insurance and rent. “It is possible to use activity-based costing (ABC) to allocate overhead costs for inventory valuation purposes under the absorption costing methodology. However, ABC is a time-consuming and expensive system to implement and maintain, and so is not very cost-effective when all you want to do is allocate inventory to be in accordance with GAAP or IFRS” (Absorption Costing 2011). Since absorption costing needs the allocation of what can be a significant amount of overhead costs to goods, a big amount of a product's costs cannot be sprightly noticeable to the product. Direct costing does not need the distribution of overhead to manufactured goods, and so can be further helpful than absorption costing for incremental pricing choices where more affected with only the expenses are necessary to build the next incremental unit of manufactured goods. It is too probable that an entity could make extra incomes simply by manufacturing more goods that it does not sell. This circumstance happens because absorption costing needs permanent manufacturing overhead to be allocated to the whole number of units formed. If a number of those components are not consequently sold, then the permanent overhead costs allocated to the excess components are never charged to expense, thus resulting in better profits. A director could wrongly approve excess creation to make these additional profits, other than it burdens the unit with potentially obsolete stock, and also needs the savings of working capital in the additional inventory. Following are the advantages and disadvantages of introducing an Activity Based costing system to replace the current Absorption Costing system. Advantages: The primary and most significant advantage is the accuracy in the procedure of costing regarding the end-users of the product, the product line, the stock-keeping components employed by the organization and the channel and group which streamline the flow of the creation from the manufacturer to the end user. “It has been designed to cope up with the deficiencies of traditional costing system” (Bradtke 2004, p. 4). This scheme better helps in the procedure of considerate the idea of overhead costs that is the allocation of ordinary business incomes as they are used by particular product lines and their relation to certain cost driver. The technique is easy to pursue and recognize; it is usable, accessible and practically implementable across every standard of business set-ups. This procedure utilizes marginal cost or unitary cost as the calculation base in difference to the traditional cost accounting processes which utilize total cost. The recognition of cost drivers and cost pools is not always a straightforward use and it is sometimes essential to rationalise the amount of cost drivers and cost pools in the interests of reducing the difficulty and price of ABC. This can be regarded as a compromise to the ABC method. The method works very well with quality development and up gradation plans This method is mainly useful in ear-marking and identifying some of the substances of business performances which are a stress or burden on the dealing that is non value or wasteful adding services. The method also works extremely with performance management scheme which are performed by mainly human resource sections in modern businesses. A further comprehensive analysis of cost drivers and cost pools than essential for absorption costing is typically necessary for an effective ABC method, with the resulting raise in the cost of management of the accounting system. This method permits companies to execute costing plans across a different diagonal of the company as business procedures, value addition channels and supply chains are optimally and ably analyzed in this procedure. ABC is considered by some as not so very diverse from absorption costing as absorption rates for all cost driver are still necessary, and also a better number of individual cost rates are essential to be computed under ABC to improve the costs for all cost pool. This system imitates the real business procedure as the appropriation of ordinary pool incomes takes place in the similar way as ordinary incomes are used in the business. This method aids in the procedure of benchmarking which is an essential part of parity control system. Disadvantages: •Data collection procedure for this method is very time consuming. •The capital expenditure on the activity based system and its following running costs can be a road block for company. •The method is very transparent which some managers would not support as they would like to maintain some belongings out of the vision of the proprietor of the company. “Activity Based Costing” (Gourdin n.d., p. 254) does not support the increase of finished goods stock similarly as absorption costing is inclined to do as explained earlier. In ABC, the over recoveries which support stock increase in absorption costing, do not happen to the similar extent for the reason that a better proportion of the expenses are treated as variable sooner than fixed. ABC reflects what occurring in the production surroundings and recognizes those parts which must be liable to managerial control. It identifies that cost management can best be attained during the management of those performances which reason costs to be incurred. Reference List Absorption Costing. 2011. Accounting Tools. [Online] Available at [Accessed on 06 January, 2012]. Bradtke, D 2004. Activity-Based-Costing: Scholarly Paper. GRIN Verlag. Available at [Accessed on 03 January, 2012]. Field, M & Keller, L 1998. Project Management. Print. Gourdin, KN n.d. Global Logistics Management: A Competitive Advantage for the New Millennium. Print. Jackson, TL & Jones, KR 1996. Implementing a Lean Management System. Productivity Press. Print. Kaplan, RS & Anderson, SR 2007. Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. Harvard Business School Press. Available at < http://books.google.co.in/books?id=k7LUVKYnFU8C&pg=PR11&lpg=PR11&dq=Activity+based+costing+generalizes+the+economists+classic+single+product+supply+curve+to+capture+the+economics+of+multiproduct,+multicustomer+businesses&source=bl&ots=hmqPQp6R9J&sig=R1HTK4HmppE5CKKshhIoh6tyquw&hl=en&sa=X&ei=WqwGT4qtK5C6iAferLCNCQ&ved=0CCYQ6AEwAA#v=onepage&q=Activity%20based%20costing%20generalizes%20the%20economists%20classic%20single%20product%20supply%20curve%20to%20capture%20the%20economics%20of%20multiproduct%2C%20multicustomer%20businesses&f=false> [Accessed on 06 January, 2012]. Transfer Pricing in the Automotive Industry. 2006. PriceWater HouseCoopers. [Online] Available at [Accessed on 03 January, 2012]. Read More