Management Accounting Change: Approaches and Perspectives - Essay Example

Running Head: Cost and Management Accounting Name Institution Course Professor Date Topic 1 Abstract Budgeting plays an important role in helping an organization’s activities. Budgets have systems which serve as the whole organization comprehensive financial plan. Organization’s budgets are made through a budgeting process which ranges from being a fairly informal process to elaborate detailed task. Managers are continually using budgets to plan, operate and control the activities in the organizations. Budgets used in planning and controlling organization activities are not always without challenges and problems. One such problem is the creation of incentives for unethical behaviour by the organizational members. Organizations can adopt various strategies that would help them in minimising the risk of their budgeting system leading to unethical behaviours. Budgeting plays an important role in the organization’s activities. Budgets have systems which serve as the whole organization comprehensive financial plan. Organization’s budgets are made through a budgeting process which ranges from being a fairly informal process to elaborate detailed task. Managers are continually using budgets to plan, operate and control the activities in the organizations. Budgets play a crucial in planning and controlling organization activities in a number of important ways. Budgets form the basis by which organization’s operations are undertaken. This is because budgets are the basic quantitative expressions of the organization plans that identify its objectives and actions that are needed in achieving them. Budgets are plans that deal with resources acquisition and use over a defined period of time (Jackson, Sawyers, & Jenkins, 2009). They are used in planning for acquisition and use of different materials which are then used in manufacturing and sale of the products. Budgets use in planning and controlling organization activities is not always without challenges and problems. One such problem is the creation of incentives for unethical behaviour by the organizational members. This essay discusses instances where incentives are created for unethical behaviour when budgets are use in planning and controlling organization’s activities. In addition, it also discusses strategies that can be adopted by organizations in minimising risk of their budgeting system leading to unethical behaviours. Budgets in the organization can be used in comparing the actual results with planned outcomes. They are also used in most cases in judging the managers actual performance. The managers’ ability to achieve or surpass the budgeted goals affects promotions, and salary and bonuses increases (Hansen, Mowen, & Guan, 2009). Budgets therefore can have significant behavioural effects since the manager’s career and financial status can be affected. In addition, when managers are compensated and evaluated according to the budget set targets achievement, they may have incentives and need to pad the organization budget, essentially making the targets easier to achieve. Conflicts invariably arise when budgets are used in the organization for purposes of planning and controlling. Control is the process involving setting of standards, actual performance feedback is received, and corrective actions are taken. Planning is crucial feature of good management practices and it requires organizational goals and objectives to be developed as well as budgets preparation. Budgets facilitate the operating activities which entails decision making on a daily basis by the managers. The attainment of the developed organizational goals and objectives are ensured by the function of controlling activities. Ethics is a theme that underlies the budgeting behavioural dimension. Unethical action may arise when budgets are more inclined to performance evaluation and both the manager’s promotions and pay rises (Hansen et al., 2009). Dysfunctional actions pertaining to budgets that an organization manager may select to use can possess an unethical aspect. A manager can deliberately overestimate costs and underestimates sales for purposes of making budget relatively easier to achieve is an example of an unethical behaviour. Managers are responsible in the avoidance of engaging themselves with such unethical behaviour. Organization on the other hand is responsible for creation of budgetary incentives that encourages no unethical behaviour (Hansen et al., 2009. Positive and negative behaviours can occur when budgets are used in planning and controlling organizational activities. Positive behaviour is realised when the individual manager’s goals are aligned with the organizational goals. In this case, the manager has the urge to achieve them. Negative behaviour manifests itself in different ways but organizational goals subversion is the overall effect. Subordinate managers’ reaction may be negative when the budget in the organization is improperly administered. Dysfunctional behaviour can thus occur which involves individual manager’s behaviour that basically conflicts the organizational goals. Budgets are not free from any inherent problems which are diverse in nature depending on which perspective it is viewed from. Budgets are at times viewed as rewarding negotiation and not performance; and budgets as conducive to unethical behaviour (Carreras, Mujtaba, & Cavico, 2011). Budgets are tools that help management in planning and controlling resources and thereby becoming any tool that can be misused. In particular, ethical issues in the budgeting process often arise when managers and employees are evaluated by the budget figures in comparison to their actual results (Heisinger, 2008). This evaluation of managers and employees based on budgets plans and controls creates incentives for organizational personnel to involve themselves in unethical behaviours. The choices that they make are all geared towards achievement of the budgeted estimates. In fact, budgets has been viewed as a method for a more rational, complete and objective mode of control and planning in the organization (Wickramasinghe & Alawattage, 2007). In this way, organizations functions, activities and processes are directed towards attainment of cost and profit objectives. Aggressive targets that are employed in budgets encourage unethical behaviour by driving people in the organization to meet the targets at almost any cost. In extreme circumstances, this can be achieved through creative accounting and unethical selling behaviours hence compromising the organization and manager’s reputation. The use of budgets in planning and control of activities can also create incentives for unethical behaviour through the allocation of resources into certain projects that do not provide any benefit to the business well-being and goals. The finance department personnel or those in charge of allocating resources to those projects may find it fit to use the organization resources in a manner that does not give any benefit to business but provides personal gain. This mostly happens when a person responsible for resource allocation in the budgets have a close acquaintance in the management team. Strategies of Minimising Risk of Budgeting System Budgeting is an important activity in the organization and most top level managers’ participate and coordinate the process. Budget committees are usually established by large corporations which may include chief financial officer, sales, purchasing and production vice presidents or managers. The work of these executives includes implementation of organization’s strategies achieved through coordination of the detailed budget preparation in the respective areas of responsibility. They then oversee together as a team the comprehensive master budget integration for the firm. Behavioural considerations and involvement in the budget preparation are the two important issues that top organization managers face in the budgeting process (Albrecht, 2007). The budgeting system that a corporation employs does not affect allocation of resources alone within the organization. Organization’s actor’s behaviour is also affected. Organizations can adopt various strategies that would help them in minimising the risk of the budgeting system leading to unethical behaviours. Several behavioural considerations of the personnel in the budgeting process is one such strategy that can be adopted by a firm. Several behavioural factors have been found to determine how successful organization budgeting process is going to be. First, top management must support the budgeting process (Albrecht, 2007). Lack of clear indication from the top managers that the budgeting system is imperative to the firm does not motivate the managers responsible for budgeting. Therefore, they will not devote the necessary time needed in formulation of an effective and efficient organizational budget. Unethical behaviour has the highest probability of occurring in the budgeting system in this case. Clear and strong support by the top executives minimises the risk of budgeting system leading to unethical behaviours. These managers are able to supervise the budgeting process and continually check that budgeting systems are effective. Budgets sets the targets that an organization strives to achieve both in short and long term perspectives. Budgeting systems main objectives is coordination and allocation of resources in the organization (Ghosh, 2005). It also includes the planning of operations. In order for managers and other organization’s employees to become more motivated in the achievement of budget goals, they must understand and participate in the designing of the budget itself. Budgeting system can be successful when managers feel that their opinions are given full consideration and are respected. Moreover, participation and communication process in the firm should be left open throughout the financial period. All parties involved in the budgeting systems should conduct discussions on the ideal budget adjustments when either internal or external circumstances changes. In this way, unethical behaviour in the budgeting system is greatly minimised as all the stakeholders are involved regularly in the process. Furthermore, all organizational personnel inputs are taken into considerations. They will thus feel as valuable members of the organization working as a team in attainment of the same objective. Ethics and compliance programs are also strategies that can be employed in an organization in minimising risk of unethical behaviour occurring in the budgeting system (Weiss, 2009). Organizations can use compliance programs in satisfaction of mandate that addresses ethical issues. Ethics and compliance programs can complement each other when they are properly structured. Compliance programs focuses on legal obedience and required performance details which are enforceable while ethics programs focuses on organizational values and it pursues virtues and delivery of ethical care. References Albrecht, W. S. (2007). Accounting, concepts & applications. Mason, Ohio: Thomson/South-Western. Carreras, A. J., Mujtaba, B. G., & Cavico, F. J. (2011). don’t blame the budget process: an exploration of efficiency, effectiveness, and ethics. Business and Management Review, 1(3). Ghosh, N. (2005). Management control systems. New Delhi: Prentice-Hall of India. Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: Accounting and control. Mason, Ohio: South-Western. Heisinger, K. (2008). Introduction to managerial accounting. Boston, Mass: Houghton Mifflin. Jackson, S., Sawyers, R., & Jenkins, J. G. (2009). Managerial accounting: A focus on ethical decision making. Mason, OH: South-Western. Weiss, J. W. (2009). Business ethics: A stakeholders and issues management approach. Mason, OH: South-Western Cengage Learning. Wickramasinghe, D., & Alawattage, C. (2007). Management accounting change: Approaches and perspectives. London: Routledge. Topic 2 Abstract In a contemporary manufacturing environment, customers are demanding more services and competition is becoming more intense hence it is important for management to control its overheads. They should also understand how these overheads are assigned to products which will ultimately be reported on the firm’s financial statements. Determining the exact cost of a product in a manufacturing environment is probably impossible. However, companies are striving to provide to its decision makers the most accurate cost estimates they can for better decisions to be made. The provision of the most accurate product cost estimates is achieved when the costs of the product are directly traceable to the produced product. Accuracy in application of overhead has become an important task as overhead costs are continually increasing hence making up large part of the total products costs. In a modern manufacturing environment, customers are demanding more services and competition is becoming more intense hence it is important for management to control its overheads. They should also understand how these overheads are assigned to products which will ultimately be reported on the firm’s financial statements. Determining the exact cost of a product in a manufacturing environment is probably impossible. However, companies are striving to provide to its decision makers the most accurate cost estimates they can for better decisions to be made. The provision of the most accurate product cost estimates is achieved when the costs of the product are directly traceable to the produced product or the service that has been provided. Direct labour and material costs are traceable easily to the service or product by using payroll time sheets and requisition forms. On the other hand, overhead costs are an indirect cost that generally is not directly or easily traceable to individual services or products. This essay discusses the difficulties that contemporary manufacturing environment faces in allocating overhead costs. In addition, strategies that can be adopted by firms in making their overhead costs allocations more accurate and reliable are also discussed. Overhead costs can be viewed as manufacturing overhead and non-manufacturing costs. Manufacturing or factory overhead costs consist of direct labour and materials costs while non-manufacturing costs consists of costs incurred outside the manufacturing plant which are typically administrative and selling costs (Jackson, Sawyers, & Jenkins, 2009). Direct materials can be traced directly to a particular product and they become integral part of final product. In costing of products in a manufacturing environment, direct materials cause some few problems. Engineering studies in most cases accurately measure the amount of direct materials that are used in making of the products. Moreover, the accounting systems of most firms have the ability to trace the costs and materials used in the manufacture of the products. However, questions arise and more often judgement is needed in classification of materials as either direct or indirect (Jackson et al., 2009). This judgment is made by human beings who are subjective in nature hence correctly classifying materials poses a big challenge. Managerial accountants are important in a manufacturing firm and they help in determination of the products costs that are being produced and subsequently sold by the firm. Cost information for a manufacturing business is equally important and it is used across the organization by managers. The costs of products influence many decisions of different managers in the company (Sharma, 2009). Finance managers make financing decisions, marketing managers are tasked with pricing decisions, and production managers have the responsibility of making manufacturing decisions. All these decisions are influenced by costs of the products which are difficult to trace and allocate in a manufacturing environment especially overhead costs. In computation of accurate units costs of a product, determination of proper overhead cost amount to assign each product or service is frequently the most difficult section (Weygandt, Kieso, & Kimmel, 2010). In the traditional manufacturing environment, direct labour was used as the activity base when the systems for allocating overhead cost were first developed. The total manufacturing cost at that time was largely made of direct labour. Thus, it was widely accepted that high correlation between overhead cost incurrence and direct labour existed (Needles, Powers, & Crosson, 2002). As a result, allocation of overhead using direct labour became popular. Even in the increasingly automated contemporary manufacturing environment, assignment of overhead costs to products by using direct labour is sometimes appropriate basis in two instances. First, when direct labour accounted for a significant portion of the total product cost. Secondly, when there is high correlation between overhead costs amount and direct labour (Weygandt et al., 2010). There is a need for new approaches in how overhead costs are allocated in the modern manufacturing environment as the traditional methods are difficult to use. Advances in the technological innovation, automation, global competition, and computerized systems have brought changes to the manufacturing environment in a drastic manner. Due to this, the amount of direct labour that many industries uses has greatly decreased. Furthermore, the total overhead costs that results from equipment and machinery, maintenance, repairs and utilities depreciation have significantly increased. It is inappropriate for companies to use predetermined overhead costs which are based on direct labour when no correlation exists between overhead and direct labour (Maher, Stickney, & Weil, 2012). This is a difficulty associated with overhead costs allocation in the present manufacturing environment. Significant product cost distortions are experienced by companies that use overhead rates that are based on direct labour even in situations where no correlation exists. Modern manufacturing processes are using large automated machines which have replaced people that were used in the traditional manufacturing firms. Overhead costs have increased to more than 60 per cent and direct labour costs have decreases to 5 per cent of the total production costs in an environment with heavy automation (Jackson et al., 2009). Machinery and equipment in the contemporary manufacturing environment are typically used in making multiple products. This makes it difficult to trace a machine cost directly to a company’s specific product. Manufacturing costs are attached to the products as it goes through the firms manufacturing process hence are normally called product costs. Overhead costs are attached to the product and remain with it until that time when it is sold. Overhead costs are expensed on the firm’s income statement when a manufactured product is sold. It is expensed as cost of goods sold. Restructuring of the manufacturing cost patterns is the consequence of automation in the modern manufacturing environment. Under the contemporary manufacturing environment, overhead is a significant element of cost (Hall, 2001). Use of standard costing leads to costs of products to be distorted causing some products in a firm to appear more costly and others appear less costly than they are in reality. Therefore, poor decisions regarding profitability, pricing and valuation may result. In the traditional manufacturing environment, overhead costs was allocated on basis of only one factor such as such as direct labours hours. In essence this means that only one driver of the industry overhead exists such as direct labour hours or any other indicator was used. In real modern manufacturing environment, there are many factory overhead drivers which include special storage, machine setups, special handling and machine inspection (Hansen, Mowen, & Guan, 2009). The diversity in products and customer demands presents a bigger problem to the firms in allocation of costs of all these various activities by using one activity only such as machine hours’ production. The resulting allocations using only one activity are misleading since cost of most diverse activities in reality has no correlation whatsoever with the machine hours’ production number. Strategies of making overheads more reliable and accurate High-tech computers in some manufacturing firms control robots that paint, weld and perform other functions that were previously done by human labour. Robots are very expensive and they are treated as part of overhead cost. Accuracy in application of overhead has become an important task as overhead costs are continually increasing hence making up large part of the total products costs (Sharma, 2009). In such situations, firms need to consider using a method of overhead cost allocation that captures all the costs accurately using multiple bases. Activity-based accounting and value stream accounting are two methods that firms can adopt. Activity-based costing is a method that allocates overhead costs based on the activities that lead to the costs of overheads (Jackson et al., 2009). The activities are assigned costs on the basis of their resource use and cost objects are assigned costs based on the use of their activities. In activity-based method, one assumption is that activities cause costs and products create demand for activities (Hall, 2001). Activity-based costing is more accurate and reliable in contemporary manufacturing environment as it allocates overhead to various multiple activity bases and assigns activity bases to products through use of cost drivers. This method is advantageous to the firm as it accurately tracks costs of processes and activities (Rossing & Rohde, 2010). Activity-based costing is complex and many firms have abandoned it in favour of value stream accounting which is much simpler accounting model. Companies are implementing lean initiatives through adoption of lean practices and principles which traditional costing methods may conflict them. This is important especially in manufacturing environment where costs must be drastically reduced for realisation of meaningful profits. Value stream accounting can help achieve this because it identifies costs by value stream instead of activity or department (Hall, 2001). Value stream cuts across the entire department and functional lines and it include costs that are related to product design, engineering, materials purchase and distribution; and marketing and selling expenses. References Hall, J. A. (2001).  Accounting information systems (3rd ed.). Cincinnati, Ohio: South-Western College Pub. Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: Accounting and control (6th ed.). Mason, Ohio: South-Western. Jackson, S., Sawyers, R., & Jenkins, J. G. (2009). Managerial accounting: A focus on ethical decision making (5th ed.). Mason, OH: South-Western. Maher, M., Stickney, C. P., & Weil, R. L. (2012). Managerial accounting: An introduction to concepts, methods and uses (11th ed.). Mason, OH: South-Western Cengage Learning. Needles, B. E., Powers, M., & Crosson, S. V. (2002). Financial & managerial accounting. Boston: Houghton Mifflin. Rossing, C. P., & Rohde, C. (2010). Overhead cost allocation changes in a transfer pricing tax compliant multinational enterprise. Management Accounting Research, 21(3), 199-216. Sharma, B. S. (2009). Accounting management: Information for decisions. New Delhi, India: Global India Publications. Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: Tools for business decision making (5th ed.). Hoboken, NJ: Wiley. Read More