Cost Allocation Methods - Assignment Example

Part A Section 1, Question A To calculate the cost based on activity based costing the total manufacturing cost is divided based on cost centers and helps to find the total cost to be as Manufacturing Overhead Cost Total Activity Cost Burley Points Burley Cost Gems Point Gems Cost Total Total Soldering Cost 942000 1185000 711000 385000 231000 1570000 Total Shipment Cost 860000 16200 696600 3800 163400 20000 Total Quality Control Cost 1240000 56200 899200 21,300 340800 77500 Total Purchase Order Cost 950400 80100 400500 109980 549900 190080 Total Machine Set Up Cost 807600 16000 430720 14000 376880 30000 Total Overhead Cost     3138020   1661980   This thereby helps to identify the total cost for all the units as   Burley Gems Units Produced 22,000 4,000 Direct Material Cost per Unit 208 584 Total Material Cost 4576000 2336000 Direct Labour Cost per Unit 18 42 Total Direct Labour Cost 396000 168000 Machine Cost per Unit 144 72 Total Machine Cost 3168000 288000 Total Overhead Cost 3138020 1661980 Total Cost 11278020 4453980 This thereby helps to identify the profits for both the units to be as   Burley ($) Gems ($) Total (S) Revenues 19800000 4600000 24400000 Cost of Goods Sold 11278020 4453980 15732000 Gross Margin 8521980 146020 8668000 Selling & Administrative Expenses 5830000 978000 6808000 Operating Profit 2691980 -831980 1860000 B. Using the activity based costing method helps to highlight different profits for both Burley and Gems as it looks to apportion the indirect cost based on the different cost centers which is used for producing the products. Since, this method ensures that the overhead cost is distributed among different cost centers which has been used by different products it ensure correct estimation of the cost. This thereby helps to ensure that the correct profits are identified. Activity based costing has the following benefits Helps to ascertain the cost of the product accurately Helps to find out the products which is yielding profits and which is yielding loss Helps in better estimation of the selling price Helps to find out the different cost centers which will help to reduce cost The disadvantage of the method is as Ascertaining the cost is difficult as finding out all the cost centers is difficult It is a lengthy process and created difficulty in estimating the cost Cost and time is required to find out the cost centers for estimating cost Section 2 A. Total Fixed Cost along with selling and adminsitrative cost is $6,360,000. Total cost to produce Burley is as   Burley Units Produced 22,000 Direct Material Cost per Unit 208 Total Material Cost 4576000 Direct Labour Cost per Unit 18 Total Direct Labour Cost 396000 Machine Cost per Unit 144 Total Machine Cost 3168000 Total Overhead Cost 6360000 Total Cost 14500000 To ensure that while selling NT Electronics no loss is involved it will require that NT Electronics produce and sells 14500000/65 = 223076.9 units b. To make a profit of $4,000,000 over and above the cost of $14500000, NT Electronics need to sell = (14500000 + 4000000) /65 units = 284615.4 units c. Installing a new machine would mean an additional cost of $1,600,000 This would help to reduce the machine cost by 50% Presently the machine cost is $3,168,000 Reducing the cost by 50% would mean the machine cost to be = $3,168,000 / 2 = $1,584,000 The new cost for the business is $1,600,000 This would mean an additional cost of (1600000 – 1584000) = $16,000 This would mean the NT electronics will have to spend an additional $16,000 to produce the same 22,000 units and would push the total cost up. This thereby means that the organization should not go ahead with the installation of a new machine as it would be a loss to the business Executive Summary Charles Darwin University has heard that using Strategic Management Accounting (SMA) techniques will improve their chances of achieving the strategic objectives and want to find out the manner in which Strategic Management Accounting will help them. Charles Darwin University should use SMA as it develops the traditional method of management accounting and provides the use of different tools and techniques which will have a positive impact on the overall development of organization. Since, the method uses different applications and provides results through different linkages through the use of balance score card, value chain, activity based costing, strategic costing and similar other test the results will be better. This will also help to improve the chances of developing the entire process through which Charles Darwin University works and is an area which could facilitate the development of the entire working mechanism. This will thereby improve the manner in which decisions are taken and will help to shape the performance of the organization. Table of Contents Introduction 7 Management Accounting & Decision Making 7 Strategic Management Accounting 8 Manner in which Strategic Management Accounting will help 9 Concerns Using Strategic Management Accounting 11 Recommendations 12 Conclusion 13 References 14 Introduction Charles Darwin University has heard that using Strategic Management Accounting (SMA) techniques will improve their chances of achieving the strategic objectives and want to find out the manner in which Strategic Management Accounting will help them. For this purpose a research is being carried out to find out the manner in which Charles Darwin University can use Strategic Management Accounting. This will thereby focus on different finding out the different tools and techniques which Strategic Management Accounting will provide and assist Charles Darwin University in accomplishing its objectives. This will thereby determine the future strategy for Darwin University and will assist whether they should go ahead with having Strategic Management Accounting software. Management Accounting & Decision Making The business environment has transformed tremendously and has changed due to growth in information and production technology which has been facilitated by the growth of Strategic Management Accounting Software (Burgstahler, Horngren, Schatzberg, Stratton and Sundem, 2007). These changes have affected the field of management accounting and have unfolded the realities that the traditional methods have to be replaced with new ones. Using Strategic Management Accounting software will help in value addition and instead of focusing on the internal affairs of the company the entire business opportunities and potential will be looked at (Chapman, 2005). This will thereby provide an opportunity through which management accounting decisions improves and Charles Darwin University will be able to perform better according to their requirements. Since, Strategic Management Accounting helps to improve the traditional method of accounting and increases its scope by covering different disciplines like strategy and marketing it will help to improve the overall efficiency and will help Charles Darwin University to be better placed to achieve its objectives. Strategic Management Accounting The field of management accounting requires changes and development so that it is able to gain its relevance (Baines and Langfield-Smith, 2003). The development of Strategic Management Accounting will help to improve the horizon and will focus on different aspects as it will consider the both the internal financial information along with external information which will thereby help to improve the relevance of decision making and ensure that internal and external factors are considered in decision making. Strategic Management Accounting is quite different from techniques and provides information pertaining to competitors, use of accounting in strategic decision making, cutting down the cost through strategic decision and similar other reason will ensure that it provides additional advantage to the organization (Smith, 2005). Some of the prime differences which has been noticed in comparison to traditional management accounting decisions are as The manner in which SMA differs from the traditional methods will help to improve the decision making process as it will look into different factors and based on it decisions will be made. This will thereby help to improve the overall relevance of the management accounting decisions and will have a positive impact. Manner in which Strategic Management Accounting will help Strategic Management Accounting will be beneficial for Charles Darwin University in a number of ways as it will help to maximize the result in the following manner Attribute Costing: Using SMA will ensure that the product cost is estimated through the process of attribute costing where the mechanism will look to estimate cost based on product features, purchase agreement and after sale service. This will thereby ensure that the method of costing will gain efficiency and will help to arrive at the correct cost. This is something which the traditional method is lacking and will thereby help to improve the relevance of the entire decision Competitor Cost Assessment: SMA will help to take advantage of the trend analysis which the system provides and will thereby enable to get an idea about the competitors cost pricing method. This will thereby help Charles Darwin University to understand their cost parameters as well and will facilitate a comparison through which cost can be controlled in the future. This will thereby help to develop products correctly and will provide a mechanism through which correct price is estimated. Competitor Appraisal: SAM will assist to understand the appraisal of the competitor based on their financial statement. Charles Darwin University through this will be able to compare the financial statement and develop a process of benchmarking which provides an opportunity through which the efficiency is gained and the entire process through which the business is functioning will be improved The Balance Score Card: SMA allows the development of balance score card which will help Charles Darwin University to measure the financial and non financial measures which will help to provide important strategic management decisions. This will help to develop a linkage between vision, mission, and strategy of the business which will focus on perspective of the customers, business process, growth, and financial position (Alkaraan and Northcott, 2006). Decisions based on the outcome of the balance score card will be better and will help to transform the complete manner in which the business is conducted Strategic Costing: SMA provides an opportunity where the user can use strategic costing which will measure cost by breaking it down into smaller parts and will provide an option of matching with those of the competitors. Charles Darwin University will be able to benefit from it as the expenses made in the field of marketing can be identified and based on it their strategy can be developed Value Chain Costing: SMA has been developed from the Value Chain Analysis and thereby helps to understand the manner in which value is created by linking the different activities in the product or service related industry. This thereby helps to improve the relevance of the decisions as they are backed by information which helps to add value and will prove beneficial to Charles Darwin University in decision making Activity Based Costing: SMA also proposes to use the activity based costing method which will help to apportion the overhead costs correctly to the different cost centers and will thereby ensure better cost estimation. This strategy will help the organization to develop a strategy through which cost estimation becomes correct and Charles Darwin University is able to better decisions based on it. This will help to improve the overall efficiency and multiply the use of SMA in decision making Concerns Using Strategic Management Accounting SMA will help Charles Darwin University is several ways but doubts have also being raised and can create concerns for the management. This has been raised on the grounds that decisions which are taken by managers based on accounting require rationalization to justify the same. This becomes a difficult proposition as the basing decisions based on it might not provide the results which are desired (Hopwood, 2007). The other concern seen with the usage of SMA is that the techniques which SMA proposes to use are already found to be used in different organizations and the manner in which those techniques have been effective is still a doubt that needs to be answered. Further, the use of SMA requires the use of balance score card and value chain analysis which might not be a perfect fit for Charles Darwin University as the different benefits which are being aimed at might not be provided. Despite the different concerns raised in the usage of SMA it has been highlighted that SMA develops the traditional method of management accounting and provides the use of different tools and techniques which will have a positive impact on the overall development of organization. Since, the method uses different applications and provides results through different linkages through the use of balance score card, value chain, activity based costing, strategic costing and similar other test the results will be better (Åhlström and Karlsson, 2006). This will also help to improve the chances of developing the entire process through which Charles Darwin University works and is an area which could facilitate the development of the entire working mechanism Recommendations Charles Darwin University should use SMA as it develops the traditional method of management accounting and provides the use of different tools and techniques which will have a positive impact on the overall development of organization. Since, the method uses different applications and provides results through different linkages through the use of balance score card, value chain, activity based costing, strategic costing and similar other test the results will be better. This will also help to improve the chances of developing the entire process through which Charles Darwin University works and is an area which could facilitate the development of the entire working mechanism. This will thereby help to provide the required focus and help Charles Darwin University will be able to deliver better results and improve the process of decision making. Charles Darwin University further has to ensure that the new installation of SMA will help to provide maximum productivity and will thereby help to increase the level of decision and ensure that overall effectiveness is achieved Conclusion The research brings to an important decision that Charles Darwin University should look to go ahead and install SMA as it will help to improve efficiency and bring about the required changes through which overall efficiency is achieved. This will hep to deliver the required framework through which efficiency improves and the performance of Charles Darwin University improves. This will help Charles Darwin University to deal with competition and develop strategies which will help them to gain a competitive edge and perform better in comparison to the competitors. Thus, the overall efficiency of Charles Darwin University will maximize and will create a structure through which decisions are taken in the most productive manner. References Åhlström, P. and Karlsson, C. 2006. Change processes towards lean production. International Journal of Operations & Production Management. 16 (11), 42-56 Alkaraan F. and Northcott D. 2006. Strategic capital investment decision-making: A role for emergent analysis tools? A study of practice in large UK manufacturing companies, The British Accounting Review, 38, 149–173 Burgstahler, D., Horngren, C. T., Schatzberg, J., Stratton, W. O. and Sundem, G. L. 2007. Introduction to management accounting, 14th ed., Pearson/Prentice Hall, Upper Saddle River, NJ Baines, A. and Langfield-Smith, K. 2003. Antecedents to management accounting change: a structural equation approach. Accounting Organizations and Society, 28 (7-8), 675-98 Chapman, C. S. 2005, Controlling Strategy: management, accounting, and performance measurement, Oxford University Press, Oxford Hopwood, A, G. 2007. Handbook of management accounting research, Oxford University Press, Oxford Smith, M. 2005. Performance measurement and management: a strategic approach to management accounting, SAGE, London. Read More