Management Accounting: Administrative Coordination - Essay Example

Management Accounting: Administrative Coordination Part I Q1. Briefly explain the structure and processes involved in ‘administrative coordination’. Answer. Chandler in the visible hand highlighted that traditional business organisations are being replaced by multiunit firm due to administrative coordination resulting to increased productivity, high profit and low underlying cost. According to the author, structure of administrative coordination is related to integration of mass production with mass distribution. Alexander noted in this regard that managerial coordination integrates organisational activities at a rather higher level beyond task integration and operational coordination. It has been also discussed by the authors that administrative has a relatively broad scope as its process not only focuses on narrow factors of various operations but also on behaviour, various decisions and interconnected activities of an organisation or its units. Consequently, its structure is spread across wide time horizon (Alexander, 1995; Chandler, 1993). Chandler (1993) explicitly discussed that administrative coordination integrates mass distribution with mass production and consequently offer opportunity for minimization of manufacturing cost and improving productivity. It should be noted that in this process, effective administration and coordination of distribution and production processes result in overall efficiency. Administrative coordination ultimately results in vertical and horizontal integration. The process interconnects all activities by means of a network. This administrative network delivers competitive advantage of pioneering firms through integration of new production and distribution process (Chandler, 1993). Q2. Define and distinguish between direct and indirect cost. Answer. When an organisation classifies various costs within its business, the identified costs are categorised in direct and indirect costs. Direct cost is defined as any cost that an organisation can relate directly to its activities, products or services. Direct costs are allocated and assigned straightaway without further evaluation with respect to a particular task. Direct cost is essentially classified in three categories: direct material, direct labour and direct expenses. Direct material cost comprises cost associated with various raw materials that are directly consumed for production purpose. Similarly, direct labour cost involve cost associated labour that are directly associated in production and distribution of products and services such as salary and wages, bonus and cost associated with direct labour turnover. Direct expenses are costs that are incurred during product development and management. Direct expenses include cost associated with power consumption, communication, transportation and so on and so forth (Finkler and Ward, 1999; Kaplan and Atkinson, 1998). Indirect cost comprises costs that are indirectly associated with product development and that significantly affect total cost structure of an organisation. Indirect costs are further classified in indirect material, indirect labour and overheads. Indirect material cost comprises cost associated with materials such as fittings and fasteners, oil, cleaning supplies and others. Indirect material cost is allocated under cost of goods sold. Indirect labour cost comprises cost associated with support labours that help in conversion of raw materials into finished goods. Indirect labours include staff involved in material handling, quality control and supervising. Indirect expenses are referred as overhead and comprise miscellaneous expenses associated with administration, general activities and selling and distribution (Goossens, et al., 2000; Finkler and Ward, 1999). Q3. Select one example of an ‘indirect cost’ category and explain how work which can be classified as indirect can contribute to management’s coordination in production department. Answer. One of the indirect costs associated with production department is transportation of indirect labours from one facility to another. Direct activities are essential aspect of management’s functionality within an organisation but indirect activities also play an important role in the production coordination. For instance, if indirect labours that perform various odd jobs in a production facility stop their work then the direct activities will be delayed and production process will be hampered. Indirect activities involve various indirect members such as technicians, support stuff and administrative members (Horngren and Bhimani, 2002). A number of indirect activities in production department can be washing, cleaning, oiling machinery, cleaning by-products, maintaining hygiene in the production area and so on. The list is relatively long and if these costs are included in direct cost then companies will have to bear relatively extra cost. All these activities make significant contribution towards production coordination. For instance, in a firm after production of every batch, machinery may require cleaning and oiling. Therefore, overall activities in the production area are coordinated by integrating various indirect and direct activities simultaneously (Foster and Gupta, 1990). Part II Q1. Should Hygiene continue to be an ‘indirect cost’ function or should it be seen as a ‘direct cost’ of production in the new set-up to signal its importance to the Production process? Answer. Prior answering to this question, it is necessary to understand the underlying dilemma associated therein. The primary dilemma that was recognized from the case is that ‘hygiene’ being an indirect cost; its measurement and allocation process is relatively complicated. Therefore, the firm has two choices: either to undertake intensive indirect cost management or consideration of ‘hygiene’ within direct costs. It was observed in the case that the company compiles total hygiene cost in a composite manner and consequently it become impossible to determine exact cost associated with each hygiene activity. This issue will affect the cost structure negatively even when included as a direct cost (Kaplan and Atkinson, 1998). Therefore, it can be suggested that the company should continue with ‘hygiene’ as an indirect cost function. However, the company requires making certain modifications in the costing process to enhance its effectiveness. QMF (Quality Meal Feast) needs to calculate indirect cost rate associated with each activity by dividing the cost pool by allocation base. Indirect cost rate will contribute significantly in minimization of total hygiene cost because then managers can conveniently make adjustment in each hygiene activity as per requirement and associated individual cost. Use of indirect cost will also enhance transparency in the cost structure of the company, as proper indirect cost allocation will generate similar outcome if hygiene cost has been accounted as a direct cost (Kaplan and Atkinson, 1998). Q2. In measuring Hygiene Team performance, should the primary focus be on cost control or on quality? Give reasons. Answer. The process of performance measurement differs from activity to activity. QMF is primarily associated with food production where hygiene is of utmost importance. It has already been discussed in the case that hygiene issue may result in long term reputational risk for the company. Therefore, it cannot be recommended that the company adopt a strict cost focused strategy for measuring performance. The justification for this is that if minimum time taken is the benchmark of better performance, then the team members will only focus on time consumed instead of quality. As a result, the scope of making error will increase by a significant proportion (Otley, 1999). Therefore, quality focused approach should be adopted by the firm for measuring performance of hygiene team. However, it should be noted that quality focused performance measurement process should neglect the time factor as that will hamper overall productivity of the production facility. Consequently, it is recommended that QMF sets such a benchmark that has time component as well as quality component. The performance benchmark should mention the number of products to be checked by each member within a specific time (for instance, checking 5 fruits in a minute). Additionally, the benchmark should not be extremely rigid because that will affect motivational level of team members. It can be expected that little relaxation will result in better productivity and achievement of ‘zero hygiene’ objective (Otley, 1999). Q3. Briefly consider how the Production Managers can be rewarded by top management if they succeed in reducing Hygiene activity costs while maintaining Hygiene quality. Answer. Performance appraisal and rewards has been surrounded by a number of controversies and contradicting opinions from a number of authors. However, authors such as Culbert (2010) and Grote (2011) acclaimed that if appropriately executed, rewards have significant positive impact on performance management. Continuing on their notion, it can be suggested that appropriate reward system will act as a motivating factor for managers as well as employees. However, monetary rewards should not be considered as the ultimate compensation. Instead, there should be non-cash incentives for managers as well. If managers are successful in achieving hygiene cost minimization without compromising on quality then the management can pay them off by means of additional paid holidays, performance based bonuses and certain percentage of salary as variable pay. As it has been highlighted that monetary incentives does not always satisfy managers, instead the company can adopt team bonus based on group performances. Yearly appraisal resulting to salary increase of managers can also be considered as reward. It has been observed that fixed rewards are more effective in enhancing performance instead of variable rewards. Other kinds of rewards can be consistent promotion for performing managers and motivational sessions for underperforming managers. In this regards, the top management should be considerate about punishments as it does not result in performance enhancement as discussed by McGregor in his motivation theory (Lebas, 1995). Therefore, it can be recommended that the reward system should be fair and justifiable instead of being pressurising and distorted. Reference list Alexander, E. R., 1995. How organizations act together: Inter-organizational coordination in theory and practice. UK: Psychology Press. Chandler, A. D., 1993. The visible hand. Harvard: Harvard University Press. Culbert, S.A., 2010. Get Rid of the Performance Review: How Companies Can Stop Intimidating, Start Managing—and Focus on What Really Matters. New York, NY: Business Plus. Finkler, S. A. and Ward, D. M., 1999. Essentials of cost accounting for health care organizations. Massachusetts: Jones & Bartlett Learning. Foster, G. and Gupta, M., 1990. Manufacturing overhead cost driver analysis. Journal of Accounting and Economics, 12(1), pp. 309-337. Goossens, M. E. Mölken, M. P., Vlaeyen, J. W. and van der Linden, S. M., 2000. The cost diary: a method to measure direct and indirect costs in cost-effectiveness research. Journal of clinical epidemiology, 53(7), pp. 688-695. Grote, D., 2011. How to Be Good at Performance Appraisals: simple, effective, done right. Boston, MA: Harvard Business Review. Horngren, C. T. and Bhimani, A., 2002. Management and cost accounting. Harlow: Financial Times/Prentice Hall. Kaplan, R. S. and Atkinson, A. A., 1998. Advanced management accounting (Vol. 3). Upper Saddle River, NJ: Prentice Hall. Lebas, M. J., 1995. Performance measurement and performance management. International journal of production economics, 41(1), pp. 23-35. Otley, D., 1999. Performance management: a framework for management control systems research. Management accounting research, 10(4), pp. 363-382. Bibliography Armstrong, M. and Baron, A., 2000. Performance management. Human resource management, pp. 69-84. Ferreira, A. and Otley, D., 2009. The design and use of performance management systems: An extended framework for analysis. Management Accounting Research, 20(4), pp. 263-282. Folan, P. and Browne, J., 2005. A review of performance measurement: Towards performance management. Computers in Industry, 56(7), pp. 663-680. Macintosh, N. B., 1995. Management Accounting and Control Systems: Organizational and Behavioural Approach. New Jersey: John Wiley & Sons, Inc. Read More