Product Cost and Budgetary Control Methodologies and Systems - Essay Example

? Product cost and budgetary control methodologies and systems The development and maintenance of costing and information systems in organizations is a principle function that ought to be undertaken by any organization that operates in the contemporary society. Cost accounting and information systems offer benefits to many companies; cost accounting is normally a method of accounting in any organization that is concerned with manufacturing of goods and goods sold at the same time. Cost accounting systems offers a means for performing an accurate inventory valuation of the inventory at hand. This involves the value of raw materials, the work in progress and the finished goods ready for sale. It is the work of the cost accountants to place all costs under consideration so that they are able to determine the value of all inventories (Martin & Wolf, 2008). Cost accounting system has a function of bringing maximum efficiency in an organization. Cost efficiency would ensure that direct material costs, labor and manufacturing are identified and cost controls performed well. This is done by calculating all these costs, adding them up and calculating the cost per unit. Cost accounting systems also facilitates the decision-making systems in any form of organization. The decisions made are both long-term strategic and short-term decisions. In decision making estimated costs are compared to the actual costs and this is only applicable in organizations, which undertake budgeting as one of their strategic objectives (Martin & Wolf, 2008). Product costs are major components of any product manufacturing system. Product costs are traced all the way from the costs of manufacturing up to the point when production is complete. When the company uses the throughput method costs are traced from the least cost methods all the way to the product cost, on the contrary the activity-based method would trace the cost of the product from the highest amount to the least product cost. There are four major costing methods:- Throughput method, direct costing method, full absorption costing method and the activity based costing method (Martin & Wolf, 2008). Throughput method was developed to complement the constraint theory, the method only charges direct material costs to the product cost with the other remaining costs being expensed in the process. The method is simple since it involves the subtraction of direct costs from the sales and there we have our product costs. This method is not recognized for external reporting since it does not provide proper matching as defined by the Generally Accepted Accounting Principles (GAAP), this is despite the fact that it provides rich data for internal reporting (Martin & Wolf, 2008). The other method is the Direct or variable method. Here capitalization if done on only variable manufacturing costs with the other costs being expensed in the period when they are incurred. This method is not also recommended for external reporting since like the throughput method it does not follow the matching principle as per the GAAP. Full absorption method also referred to as the full costing method applies all the manufacturing costs to the product hence the costs do not become expenses until all the goods are sold and therefore the method adheres to the GAAP principles in a bigger way. This method is therefore useful for external reporting by most companies. It is frequently used for internal reporting as well (Martin & Wolf, 2008). Activity based costing is the most modern approach and it is used mainly in product costing. This product cost method was devised to help in the determination of accurate product costs a challenge that is rampant in the operations of most companies. This method quantifies the costs by firstly tracing the costs to their respective activities and thereafter in the second phase, the costs are traced to the products that use the activities. This method is based on the fundamental claims that activities in normal occurrences consume resources and the products consume activities. Manufacturing and selling and distribution costs are linked to the products costs in the ABC model; this nullifies the use of this method for external reporting purposes. Therefore, it is recommended that Worplestrop Partnership Corporation use the full costing method, to value its products. This is since this method would place it in the international platform of competition (Martin & Wolf, 2008). Any planning system is successful only when there is a control system employed for the constant check of the plan. Budgeting is one of the control tools that are employed by most organizations today to constantly look into an organization’s operations; they also review the operations frequently making changes when necessary. The process involves the preparation of budgets, comparison of both actual and budgeted performance. Budgets should also be revised regularly. A budgetary control system should be flexible since this system is a tool for enhancing efficiency in organizations through cost controls to achieve organizational aims. Apart from control, budgets have other roles of ensuring wellness in coordination of activities within the organization. The three budgetary control tools are the balance sheet, income statement and the cash flow statements. These tools are highly applicable for controlling the organization’s activities since they are the same tools, which control the flow of the organization’s resources (Martin & Wolf, 2008). Budgetary control techniques or methodologies are integrated broadly and widely, they include the following: - variance analysis, the control centers and forecasting. Variance analysis undertakes budgetary control through the comparison of the budget to the actual results attained. It is done on defined time basis, which may be quarterly or half-yearly. The differences between the budgets and actual would support in decision making as to whether to reduce expenses or spread resource use. The method has the advantage of saving the organization from undergoing the cycles of comprehensively reviewing the organization repeatedly (Martin & Wolf, 2008). The second method, which is control centers, involves the creation of centers with groups in business. Control centers may be those for revenue, profit, expense and investment centers. The tools of budgetary control formerly represent the centers. This methodology uses the working capital formula to assess the company’s effectiveness and efficiency. If the working capital flow is slow then an organization is termed to be inefficient in its operations. Forecasting is the other methodology for budgeting, this is most important methodology and it is used in the formation of a detailed plan of the organization. This method can therefore be termed to depict growth prospects of the organization reason being that it is future oriented (Martin & Wolf, 2008). Information outputs to support management decision-making The information outputs would be geared towards supporting decisions at three decision-making levels, the lowest being operational levels, tactical levels and the strategic decision-making. At all levels, decisions are made after all the pertaining issues are thoroughly examined. These decisions are done in an organization to guide control of the organizations life, direction and aims hence strategic thinking and planning (Davis, 2005). The operational level involves making decisions that guide the daily operations the firm, the decisions made here support activities at the tactical level. Such decisions are structured and they are made to involve little thinking. This is because their impact is short lived, immediate and less costly. These decisions help the organization make decisions to determine how activities are actually undertaken in an organization. Necessary information to help in decision making at this level include- information on money resource availability and how to spend them within the specified period are considered, information on how to handle the customers, information on the procedure to deliver and the information on who is floated the responsibility of undertaking the tasks. Operation decisions are those that involve processes and procedures undertaken to make some changes to achieve desired aims (Fitzgerald, 2002). Those decisions made at the operational stage on the other hand support tactical level decisions. Tactical decisions in turn supports strategic decisions, it is the link between short-term decision-making and long-term strategic decisions. In our case, tactical decisions will involve deciding on then kind of products to produce and how the produce them. All the aspects of the product to be produced will be made here. In addition, the budgetary method to be used is of fundamental so that the organization realizes their aims (Davis, 2005). Strategic decisions are now the top-level decisions and they are what shape the direction of the organization. They are decisions that are future oriented apart from being external to the business. They are meant to create a force to propel the growth of the business. The decisions involve- decision on the kind of business you are dealing in, vision of the business, the business images and identity. Generally, they are a decision, which defines the Vision, Mission and Objectives of the organization. If such decisions are not clearly defined from the tactical decisions stagnation is detected in the firm’s operations (Fitzgerald, 2002). Routine and “on-demand” reports that might be made available to those employees Employees are most important resources of any organization and they need to be taken well care of alongside their welfare for the organization to run smoothly. The types of decisions faced by employees within an organization can be categorized as structured, semi-structured and unstructured depending on the level of organization. Senior employees within an organization are often faced with situations when they are required to make unstructured decisions. Such decisions requires that the person making them are evaluative, have insight and have consulted a wide variety of sources fro basis, they must as well be possessive of some experience in making such decisions. They must therefore be exposed to government reports, which have highly inclusive data. Another report that they should be provided with as and when they require them is those with industry views and high-level summaries of the organization’s performance (Hayes & Ninemeier, 2012). Both the tactical and the operational levels of management mostly are faced by more structured decisions to make despite facing some components of unstructured decision elements to make. Such levels of management are faced with scenarios such as those relating to the activities, effectiveness and efficiency of the organization in question. Therefore, reports that should be made available to such employees on demand are those for order fulfillment reports. Decisions on efficiency, effectiveness and organizational activities are part of the structured decisions made. The other aspect of unstructured decisions will be the one making investigations on the other partners of the firm to find out on the results above (Hayes & Ninemeier, 2012). More structured decisions are most of the time made by the rank-and-file employees. Therefore, they need reports for those on financial reports and those for the budgetary reports. It should be noted that the decisions made by employees of a firm could not be distinctly classified according to organizational levels. Therefore, the tasks can at times be mixed-up as structured, semi-structured or unstructured; in spite of this, reports outlined above are mandatory for the decisions above to be made constructively. References Davis, D 2005, Business research for decision making 6th ed, Thomson/Brooks/Cole: Belmont, CA. Fitzgerald, SP 2002, Decision making, Capstone Pub: Oxford, U.K. Hayes, DK & Ninemeier, JD 2012, Foundations of lodging management 2nd ed, Prentice Hall: Boston. Lefteri, C 2007, Making it: manufacturing techniques for product design, Laurence King: London. Martin, MS & Wolf, MT 2008, Budgeting for information access: managing the resource budget for absolute access, American Library Association: Chicago. Read More