Product Costing - John and Mary Farmers - Essay Example

Management Accounting is to gather and provide better accounting information to managers in any organizations, so that they can draw better business decisions and make their firm’s management and control functions more strong. Management accounting considers the relationship of the organization with its external business environment. It focuses attention on suppliers, customers and competitors. The information gathered in the course of management accounting may be qualitative or quantitative in nature, with some of it being non-financial in nature. John and Mary Farmer have, over the years focused on production management rather than financial management or accounting. But with the concept of management accounting system, John has decided to place in a better and sound managerial accounting system. The proposed solutions seem to be useful for John and Mary Farmers and other agricultural enterprises. Its basic aim is to gather better and vast information for managerial purposes and such information will be used in the long term as well. As, John and Mary Farmers are more keen in knowing the differences in the cost of production between farms and the profit difference between differing commodities produced over the years. To address this issue, the managerial accounting system will have its respected costs and profit centers. This method is more commonly known as “responsibility accounting”. Each service center is given its support cost centers. Those support cost centers are divided into activities and sites. These costs are further re-allocated to production cost centers. The marketing centers are concerned with the cost of marketing related with the products. Further on, profit centers are introduced, these profit centers account for both costs and revenue, the key performance measure of any profit center is therefore profit. This proposed costing system seems like a product costing system or an Activity Based Costing System. The benefit of having such systems is that each allocated center (either profit or cost) is responsible for its negative or positive variances. This system would prove beneficial for almost all agricultural businesses, with agricultural products having shorter life cycles and more complex production processes, this proposed system recognizes the complexity with its multiple cost drivers. Besides this, as the agricultural sector being a more competitive sector, this proposed system facilitates a better understanding of the driver of overhead costs. With all these positive feedbacks about the proposed solution and the management accounting techniques, there are a few setbacks as well: The cost concerned of implementing such technique may exceed its benefit; hence a Cost/Benefit analysis needs to be done. A single cost driver may not be able to explain the cost behavior of all items in the associated pool The traditional cost allocation technique was developed in an era when most firms usually produced narrow range of products and overhead costs were only a small fraction of total costs. Though the agricultural industry might be a very diversified industry i.e. there is a wide range of products to be offered to the market but John and Marry on the other hand do not seem interested in producing anything other than corn and soy beans, John is more than willing to stick with the same line of products, so if it continues this way, the proposed solution may seem unfavorable as it may require major commitment and besides that , the cost of implementing it might be higher than its benefits. Traditional costing systems, assume that all products consume all resources in proportion to their production volumes, they tend to allocate too great a proportion of overheads to high volume products and too small a proportion of overheads to low volume products. The proposed system in the case study attempts to resolve this issue, hence with this respect it may seem beneficial for John and Mary Farmers. With all these contrasting issues, the proposed solution just has a bit of an upper hand over the traditional cost allocation technique. The proposed solution besides all its drawbacks also helps in other issues such as: Providing better, accurate and reliable information. Establishes a long-run product cost. Provides data which can help in better decision making as to the different ways of delivering businesses. The article “Throw out and Variable Cost Thinking – Bringing in Activity based costing for Distribution decisions” discusses the differences in the Fixed/Variable Cost technique and the Activity Based Costing technique. This article outlines the issues with the Fixed/Variable Cost technique and the benefits of having activity based costing technique in the distribution industry. The question raised in the article is, “Why to nitpick issues of Fixed/Variable cost issue when such issues only constitute poor strategic costing decision”. The article proposes to have costs related to delivery activities rather than to volume e.g. rather than having Fixed/Variable costs that are categorized because of their impact on the production volume, it is better to have costs to be associated with the activities that they are doing for their customers such as after sales costs driven by returns, warranties, training or any other customer requirement. The article shows that in a distribution business it is better to have costs related to the delivery activities and thus it leads to a better strategic decision making. Further on the activity based costing approach of dealing with costs is looked upon in the article. ABC gives a better idea, it identifies the activities and the resource costs related to them. The activities described before are assigned to outside objects such as customers, products and processes. The costs identified in an activity are assigned to customers, products, etc, all this is based upon a cost driver. This approach assigns cost on the basis of their activities and the consumption of those activities irrespective of their fixed or variable nature. The article has proved the same thing that activity based costing is better than traditional costing techniques. it is better to use the activity based costing technique in John and Marry Farmer’s case as they too have a major transportation and delivering aspect in their service center and it would be better for them to use Activity Based Costing System rather than a Fixed/Variable costing technique. References; Kerschner, Morley I. Product Costing. Topics in health care financing, v. 13, no. 4. Frederick, Md: Aspen Publishers, 1987. Riahi-Belkaoui, Ahmed. Advanced Management Accounting. Westport, Conn: Quorum Books, 2000. Srinivasan, Padma. Activity Based Costing: Concepts and Cases. Hyderabad, India: Icfai University Press, 2008. Throw Out Fixed and Variable Cost Thinking—Bring In Activity-Based Costing for Distribution Decisions [1] By Roger K. Harvey, D.B.A, 2003 http://www.valueassociates.org/Web%20Articles/White1.htm Read More