Advanced Managerial Accounting - Quality Cost, Costing Mechanism, and Control Issues - Case Study Example

Table of Contents Introduction 2 Present Situation 2 Issues in the organization 2 Quality Cost 4 Costing Mechanism to be used 5 Control Issues to be identified 6 Role of Bob in the future 8 Conclusion 8 References 10 Introduction This report looks at analyzing the manner in which a private limited company has performed till date and the different steps they need to take to improve the performance. The report will begin by presenting the actual situation where the company is. This will be followed by identifying the issues which the management is facing. The report will thereby look to present the solutions for the different issues through different costing mechanism and controls which needs to be addressed within the organization. Finally, the report will look towards identifying the role of Bob with the company in the future and the manner in which he can contribute towards the success of the organization. Present Situation The organization at the moment is performing well but better results could have been achieved it the business would have made the required changes in costing, controlled cost and looked towards being more efficient. In addition to it Tom who looks after the business hasn’t been able to ensure effectiveness in business proceeding and is retiring and the managing director wants Bob to prove that he is worth carrying out the role and will be able to fulfil his duties. This thereby requires that the business looks towards identifying the different gaps which the business has and based on it provides advice through which improvements can be made and the performance of the business can be improved in the near future. Issues in the organization The organization at the moment is facing certain issues which have forced the management to look at alternatives so that performance of the organization can be enhanced. Some of the issues which are prevalent in the organization is as The costing mechanism which the organization is using is outdated and the company cannot ascertain the actual cost correctly. The organization has to look at making changes in the costing method so that evaluation of the cost becomes better. This is increasing the risk for the business as inaccurate costing measures could lead towards selling the goods at lower than cost which is fatal and would lead towards long term loss for the business. The amount of expenditure which the organization is making is not being tracked. In addition to it the different directions where the money is being spent is uncertain which would mean that the funds of the business is misused. This also creates an opportunity where people can misuse the funds for their own personal use and no tracking would leave them uncaught. The organization doesn’t have quality control issues in pace which would help them to gauge the raw materials based on certain specific criteria. In addition to it lack of control also means that inventory loss is taking place and the business is uncertain regarding the manner in which inventory is controlled. This is matched by the fact that the business doesn’t have a proper monitoring process to manage the inflows and outflows of money which is making the business risky and would lead towards huge losses in the business. The present finance manager is about to retire and finding a prospective candidate who can carry out the responsibilities properly is another area which the organization needs to look at. The organization with regard to manpower for finance needs a person who is well versed in costing methods, have knowledge about inventory management, activity based costing and balance score card. This will help to make the required changes which the business requires and would help to formulate strategies through which improvement in business can be achieved in the future. The organization also is working based on different assumptions which don’t seem to be correct and has thereby resulted in reduced profits. The organization is using outdated ways to develop strategies which are impacting their business potential and thereby have to look at finding ways through which managerial and operational efficiency can be achieved in carrying out business. Quality Cost The business due to lack of proper management and policies have to continuously face issues associated with additional cost which is impacting the overall quality. This has resulted in different cost which needs to be controlled and the cost are as Internal Failure Cost: This cost relates to lack of proper management, lack of policies and strategies which would help to improve the inventory and accounting management process. External Failure Cost: This relates to the cost of searching new customers and retaining them due to lack of quality products, poor ascertainment of cost and improper mechanism to attract people towards the product and services Appraisal Cost: This relates to developing mechanism through which cost can be properly ascertained and mechanism can be identified to control cost and leakages which the system is presenting. Prevention Cost: This relates to cost associated with improved monitoring, auditing and other measures which would bring a check on performance and would guide the management in developing policies to control overall business perspective. Costing Mechanism to be used The organization based on the present situation and future needs have to develop a costing mechanism which ensures better ascertainment of cost (Jokhi, 2011). This will require looking at different costing methods and based on the needs choosing a method which is most appropriate for the organization. Some of the mechanisms which the organization can look to use are Activity Based Costing: This method of costing helps to find out the actual cost for each product and services by allocating the cost to each activity based on actual usage. The mechanism helps to convert the indirect cost into direct cost by developing cost pools so that ascertainment of cost is proper. This is a different method from the one which the organization is using and it will help to find the cost of each unit appropriately (ABC. 2008). This method differs from the present method where total cost is divided among all the products as assigning cost of each product differently based on the usage will help to understand whether the product or service is profitable or not and will thereby help to use appropriate steps based on the business needs (Plowman, 2008) Attribute Costing: This mechanism of costing will look to find out the cost of the product or services based on product feature, purchase agreement and after sales service (Kaihara, 2001). This mechanism ensures that the entire cost for the product is included which will ensure better cost ascertainment. The mechanism will also help to cover cost and determine the profits which the business looks to earn in the future. The Balance Score Card: Using a balance score card approach will also help business to take decisions after including a lot of different parameters like vision, mission and business strategy (Bovet and Martha, 2000). This will help to take business decisions keeping in mind the long term perspective of the business and would thereby help the business to ascertain the manner in which business development would become possible. Value Chain Costing: This method of costing will look towards linking the different activities which are being carried out while delivering a product or services (Cokins, 2009). This will help to find out the areas through which business can be improved and would also help to ascertain the cost of different activities in a proper way. The overall phenomenon will result in better cost estimation and would thereby enable to take better decisions. There are different dimensions and areas which the business can look into to improve their process of decision making in relation to costing. Bob has knowledge in this area and can thereby being about the required changes in the manner decisions are taken. This will help to improve the overall relevance and would help to ascertain cost in a better way. Control Issues to be identified The organization has to look at identifying the different control measures which they need to have in place so that performance is improved. This will require managing both the inventory and finance so that business is able to gauge their performance. This will help to improve operational efficiency and would provide an opportunity through which resources will be optimally used. This thereby requires that the organization looks at the following ways for better control Inventory Management System: The organization has to develop the inventory management system where they look to maintain different register where inward and outward goods are recorded. This has to be matched by using bar codes and other methods through which management of inventory becomes better. The process will look at ensuring that inventory is not misused or lost and would prevent the organization from better management (Hilton, Michael & Setto, 2000). Also using barcodes will ensure better tracking and would provide the organization with the opportunity to manage the resources better. Accounting Information System: The organization has to further aim to develop the required accounting information system where the process will look at positing correct entries in correct books, maintaining books of debtors and garnering a process through which finances are better managed (Flint & Woodruff, 2001). This will help to reduce over spending and will ensure better control over spending. Improved Monitoring: The organization has to look towards improved monitoring by developing a mechanism where continuous feedback and operations are carried out to ensure proper functioning (Iwarere, 2000). This will require increased supervision and audit work so that business funds are not misused and will thereby enable to track all the expenses. This mechanism will develop the required fear in the mind of concerned authorities and would enable better operational efficiency. The business will thereby need to focus on important areas through which control is better exercised and the business is able to develop its fundamentals based on different directions. This will help the business to control expenses and monitor cost through which operational efficiency will be achieved Role of Bob in the future The organization can look towards employing Bob for the role of finance manager as can carry out the different roles which the position requires. Some of the reasons for employing Bob are as Bob has the required knowledge and experience which will help him to carry out the different roles assigned to him. He has been working in a similar position in other organizations and has been able to deliver positive results. This will help the organization to use the experience and bring about the change in the manner the organization works Bob has the required qualification which the position requires. He has knowledge with regard to quality costing, balance score card, activity based costing and similar other costing methods. This will be beneficial for the organization to carry out different costing methods and ensure better ascertainment of cost. The mechanism will help the business to develop the fundamentals through which business will gain The overall qualification, knowledge and experience highlights that Bob is fit for the job and will be able to justify his role in the organization. Hiring him for the position of the finance manager will provide rich rewards and will be able to ensure improvement in business performance. Conclusion The report thereby highlights the different areas where the business has to reflect on and the changes which is required in the costing methods. This has to be matched by developing appropriate control measures and hiring the correct person for the correct job so that business is able to grow and gain. The overall mechanism will be aimed towards improving the manner in which the business is being carried out and has to look at garnering operational efficiency. The overall business as a result will be better shaped and would turn around the long term fortunes of the business. This will help to gain long term profits and would lead towards improving the future business prospects. References ABC. 2008. Actvity Based Costing. Retrieved on March 14, 2016 from http://www.cimaglobal.com/Documents/Thought_leadership_docs/MigratedDocsMarch2010/Resouces%20%28pdfs%29/Topic%20gateways/Activity%20based%20costing.pdf Blocher, E., Chen, K. Lin, T. 2000. Cost Management – A Strategic Emphasis. USA, Irwin, McGraw Hill Bovet, D. and Martha, J. 2000. Value Nets – Breaking the Supply Chain to Unlock Hidden Profits. John Wiley and Sons Cokins, G. 2009. Advantages of activity Based Costing. Global Product Marketing Manager, SAS Institute Inc Croom, S., Romano, P. & Giannakis, M. 2000. Supply chain management: an analytical framework for critical literature review. European Journal of Purchasing & Supply Management 6, 67–83. Flint, D., & Woodruff, R. 2001. The initiators of changes in customers’ desired value—Results from a theory building study. Industrial Marketing Management, 30, 321– 337 Hilton, R., Michael, W. & Setto, F. 2000. Cost Management Strategies for Business Decisions. Illinois, New York: McGraw-Hill Iwarere, H. 2000. Contemporary Managerial Cost Accounting, Egbe: Bhoti International Publishing Ltd Jokhi, Y. 2011. Benchmarking & Cost Reduction. Retrieved from http://www.cimaglobal.com/Thought-leadership/Newsletters/Regional/The-CIMA-Edge-South-Asia-and-Middle-East/20111/January--February-2011/Benchmarking-and-cost-reduction/ on March 14, 2016 Kaihara, T. 2001. Supply chain management with market economies. International Journal of production Economics 73, 5–14 Plowman, B. 2008. Why ABM beats traditional costing & budgeting. Retrieved on March 14, 2016 from http://www.cimaglobal.com/Thought-leadership/Newsletters/Insight-e-magazine/Insight-October-2008/Why-ABM-beats-traditional-costing-and-budgeting/ Read More