Strategic Accounting and Quality Costing - Assignment Example

? Strategic Accounting PART A Introduction Quality costs simply refer to the costs associated with preventing, looking for and identifying defects associated with products and services offered by a particular organization. Understanding of quality costs begins with a reviewal and treatment of quality from a customer’s point of view (Cole, 2003). By looking at quality from a customer’s point of view, the organization in question should be able to consider the following main projections of quality: performance, which refers to a product’s primary characteristics; features which refer to the secondary characteristics of a particular product; reliability which is a consideration of the frequency of a product to fail; conformance where the product matches with its required or intended function; durability which is an aspect that considers the life of a particular product and serviceability which is an understanding of the speed and competence of a particular service or product. Quality costing should therefore be understood as the cost of not producing a product, which bears the above components that gauge a quality product or service (Thompson, 2010). The aspect of quality cost arises from the third era of quality where it emerges as a tool of quality assurance with its main goal being to avoid problems, by giving room to coordination of activities. Quality control as a technique of management accounting has been improved over time through the contribution of various scholars, who added in more knowledge and insight to quality control. Crosby initiated the aspect of quality testing through inspection, quality management, quality assurance and improvement (Kilger, 2002). Deming on the other hand shared his contribution by introducing the aspect of companywide quality control, which was later revised by Juran through his total quality management technique (Nokes, 2000). Quality costs are mainly understood in four major groupings which are commonly referred to as the four types of quality costs. Prevention costs is a type of quality control and is considered as generally the most effective way to manage quality costs and avoid defects of products and services (Sadler, 2003). Prevention costs hold on a projection that it is better to prevent a defect from occurring at the first place than to correct it when it has already occurred, as it tends to be more expensive. Prevention costs make use of control activities such as statistical process control, quality engineering and training, which reduce defects. Prevention cost as a type of quality control also takes in activities relating to quality control, which consists of people who meet to discuss and solve quality problems. Statistical quality control as an activity of quality control is used to detect whether a specific product or service is in or out of quality (Samset, 2010). Prevention costs therefore take in the perspective of all activities that are designed to prevent the initial poor quality of products and services (Commission for local governance, 2000). Appraisal costs are also referred to as inspection costs and are incurred by an organization with the aim of identifying defective products in the production process, to make sure that defective products are not shipped to customers. Appraisal costs have the purpose of inspecting the production process and ensuring defective products are identified and eliminated. Many organizations however look at appraisal costs as expensive and ineffective to customers (Cadez, 2008). Other than employing appraisal costs, many companies encourage customers to be increasingly responsible for their own quality control through designing products that allow simple manufacturing, which gives a chance for quality to be built into the products (Morden, 2012). Internal failure costs on the other hand refer to cots incurred internally when a particular product fails to conform to design specifications that had been identified initially. Internal failure costs are always incurred through identifying the defects in products before the product are shipped by customers. Internal failure costs therefore tend to occur prior to shipping of a product (Clinton, 2010). External failure costs on the other hand refer to a type of quality cost that is associated with a defective product discovered by the customer. Managers have in the past tried to ignore this cost by shipping all the products to customers and having the defective products returned, but had to try and assimilate it as it often resulted to higher cost of defects and loss of customer loyalty (League, 1994). External failure cost should be mostly avoided by managers, especially because they normally result to intangible costs which refer to the hidden costs an organization is likely to incur as a result of trying to improve the destroyed image that has resulted from shipping defective products to their customers (Governor's Office of Planning and Research, 2012). Examples of each type of quality costs can be illustrated in the form of a table to promote a deeper understanding. Prevention costs Quality engineering and quality planning Design and development of quality of equipment Quality training and conduct of improvement projects Having quality data gathering, analysis and presentation Having statistical quality control activities Internal failure cost Scarp and rework Inspection of the rework Downgrading to make sure defects have been eliminated Counting losses incurred Downtime Costs Related to Appraisal Inspection Receiving Inspection which is in process within the organization Laboratory inspection and endorsements Providing right testing setup Maintaing the right testing equipments and conduct of regular conduct audits Failure Costs That Are External Adjustments of warranty Customer service and repairs Good inspection of goods that are returned Investigation of defects and product recalls Establishing suits related to product liability Quality cost information has several uses and benefits to an organization that make it possible for products and services to be of quality. It helps in monitoring of quality performance of products in an organization. It also helps in understanding the relationship between quality and costs in a particular organization. Also, it helps in suggesting alternative programs for the organization in production of goods and services (Sang, 2005). Finally, it guides the organization towards making decisions on how to establish, design and implement new programs within and outside the organization (Maher, 2011). Quality cost as a technique of strategic management is likely to result to accrued benefits to the organization, which are mostly helpful in assisting an organization to sustain a competitive position in the market place. Through quality costing, an organization is able to translate a particular organizational defect into monetary costs, thus placing it at a position of self awareness (Tony, 2002). By using this technique, an organization is able to build a good rapport in the market place and therefore achieve a competitive advantage, as it is able to continuously take corrective action over defects that occur in the products long before shipping to customers (Nik, 2010). Company employees are also a source of competitive advantage especially if they are involved in developing quality products. Through quality costs, the awareness of employees involved in production is raised as they are made aware of consequences of quality costs, which help in changing their thinking towards making mistakes (Clinton & Van, 2006). Part B The case is a reflection of the performance of Instrumental Ltd which for another year has managed to go beyond its profit target. David is a principal shareholder at Instrumental Ltd and is obviously happy with the results of the last quarter. A principal shareholder, David shows a command of understanding the position of Instrumental Ltd and seeks at reviewing the contribution of the main departments which are directly related to the customer, which are the marketing, research and development department (Professional Accountants in Business Committee, 2009). Instrumental as a company, groups its products into two main lines, electric motors and electric instruments. The main difference between the electric motors and electronic instruments is mainly reflected in reporting, where electric motors is based on mechanical and electronic technology while the electric instruments are based on microchip, with instrumental company using variable costing system for its internal reporting (Govindarajan & Shank, 1989). The profit and loss statement of Instrumental Ltd reflects an increase in profit from the previous budget, which stood at $2528, increasing to $ 3150 for the last period. From the additional information on Instrumental Ltd, it is evident that the standard selling prices of the electric motors and electric instruments are fair. The Instrumental Ltd has also presented the total number of units produced and number of units sold, which reflect only a minimal difference between the actual and planned analysis (Sharman, 2003). The contribution of various departments to the increased profits can also be understood by using the flexible budget analysis. By using the flexible budget analysis, various projections can be used: The actual sales for EM are 44m while EI sales stand at 76m. The proportion contributed by each sector to the profit therefore is: Actual profit before tax= $3150000 Total sales from EM and EI are 44m+76m= 120m. Proportion from EM= 44M/120M*3150000= $1155000 EI=76M/120*3150000=$1995000. The above represents the sales variance of EI and EM. As Jennifer, my first step in analyzing the budget of various organization functions will be to lay down the fundamentals and interlinking areas that make it possible for a complete reflection of performance to be achieved. I will first consider the contribution of the two departments to the profit that the organization has managed to earn within the last period. The second fundamental will be to consider output and input relationship in terms of productivity that has been contributed by the various departments (Van, 2011). As Jennifer, I will also consider how the various departments have been able to cater for the emphasis that has been laid down by different customers and how their needs are responded to. I will also consider how the departments have been able to respond to the going trend of innovation and use of technology in various business activities, and how the departments have adapted to the changes in technology (Dearden, 2010). As Jennifer, I will also be able to present to the principal shareholder a presentation that seeks at reporting against the internal budget for 2011 and the marked change that has been reported. This will help in explaining the importance of having all managers in the departments being involved in the process of budget monitoring (Fulton, 2012). I will talk to the managers in the manufacturing, marketing and research and development departments to try and establish whether they effectively managed to monitor the process of the assigned budget through being provided with timely and relevant information which is mostly useful in decision making. I will also talk to the managers on whether they helped in advancing budget monitoring through provision of feedback to their departmental members, and note the same in my report to David (Dutta, 2003). Budget monitoring is usually a very important process, and managers need to continuously be involved in the process to ensure that it goes on well. Management’s close involvement in the process also helps them in clearly understanding the firm’s or organizations financial requirements, hence knowing the loop holes to fill so as to facilitate growth and development of the organization (Accounting Education Change Commission, 1993). As Jennifer, I will also look at how the process of budget reporting was advanced by the different departments requested by David. The first step will be to look at internal processes that the departments used and whether they closely worked with the finance department as a way of ensuring they work within the specified budget close ups. In this step, I will report to David on how the managers involved the departmental members in understanding the critical factors that they faced in the process of matching objectives with the laid down budget. I will also establish whether the managers of the departments were made part of standardized reporting within the organization, as a way of matching the success of the organization with effective internal reporting and communication (Murphy, 2008). In my report to David, I will also answer the question of variance .Variance analysis is simply the process by which a difference between the actual and the budgeted amount is analyzed and explained (Ethics Scoreboard, 2006). Through the use of additional information in the accounting reporting, I will be able to establish how various departments used variance analysis to keep up with the period’s profit margin and even manage to work beyond the margin. In variance analysis, I will look at various departments and how they managed to understand and make use of profit variance per department, sales variance and cost variance (Govindarajan & Shank, 1989). Through a review and understanding of strategic and operational issues in organizations, I will also be able to determine and establish how the different departments have been able to assist in meeting the profit target and which departments have contributed the most. Through a review of strategic issues, I will seek at gathering from the managers the degree to which they looked at the unpredictability of the future and how they put measures to deal with the uncertainties. This will help me in reporting on the degree of preparedness by the various departments. I will also seek at establishing the extent to which different departmental heads involve their members the planning process (Jae & Shim, 2007). Through this, I will be able to establish the departments that took the right approach by looking at planning as a continuous process in the department and the organization in general. Strategic analysis will also help me in reviewing how the departments anticipate change (Smith, Thorpe, & Lowe, 2002). On this perspective, I will effectively report on the degree to which various departments perceive changes in terms of technology and new trends that help in improving the position of the firm, including the level to which the specific firm prepares and copes with the future changes and expectations. Strategic analysis of the different departments will also help me to review and report the extent to which departmental managers used resources in their plan towards the vision and mission of the organization (Bhattacharyya, 2011). Through operational analysis of the organizational departments, I will be abler to review the extent to which managers prepare the members of their departments in terms of having the right expectations for the future. On this note, good managers will be rated as those who view the future as a process that should be implemented immediately, which is the main argument of operational analysis (Henderson, 2006). I will also look at how various departments treat organizational objectives. Within the said context I will report on how managers are able to guide the members of their departments in establishing short-term objectives for their specific departments and holding regular meetings and briefs that seek at determining whether objectives are being continuously met and the challenges are being reviewed and dealt with (Maher, 2011). Through operational analysis of the departments, I will also be able to talk to the managers on their mode of planning. At this level, I will put down criteria that will rate managers with the highest contribution and those with the lowest contribution. The level of contribution will be rated on the extent to which the departmental manager plans on who will accomplish and how the objectives will be sufficiently addressed (Dearden, 2010). References Accounting Education Change Commission, 1993. Issues Statement Number 4: Improving the Early Employment Experience of Accountants. Sarasota, FL: American Accounting Association. Bhattacharyya, D., 2011. Management Accounting. New Delhi: Pearson Education India. Cadez, S., & Guilding, C., 2008. An exploratory investigation of an integrated contingency model of strategic management accounting. Accounting, Organizations and Society, 33, pp. 836-863. Clinton, B. D., & Van, A., 2006. Management Accounting - Approaches, Techniques, and Management Processes. New York: Thomas Reuters RIA Group. Clinton, B.D., Matuszewski, L., & Tidrick, D., 2011. Escaping Professional Dominance? New York: Thomas Reuters RIA Group. Cole, A., 2003. Strategic Management: Theory and Practic. 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Presentation at IMA's annual conference - Managerial Costing Conceptual Framework Session. Orlando, FL: Unpublished. Read More