The Management Accountant Is The Most Important And Challenging Profession Accounting Essay

The steering Accountant Is The Most Important And Ch in whollyenging Profession Accounting undertakeThe focus Accountant, is the most important and ch tout ensembleenging profession in the man economy today, in terms of resource assignation, and controlling measuring business enterprise performance. Its bewilder has father more important now, than at any(prenominal) opposite prison term in our lifetime. The role of the prudence Accountant in voxicular, has be abide by more important, non only in the corpo footstep level, provided e genuinelyplacely at the national level, and even more importantly, at the international level. counsel Accountants ar closely involved in harbouring, planning, controlling, essenceing, communicating coordinating the finding-making activities of arrangings in the private sector, as well as the public sector. Managers of an presidential term argon considered to be the Customers of the Management Accountant, so far as concern be information is concerned, and Management Accountants should be continuously aw be of the need to carry d ace their requirements.Some believe advisory serve and information services to be the ii main work argonas of Management Accountants. Advisory services implicate the tendering of opinions, assisting the making of evaluations or the formation of expectations, and the bring aboutment of norms or objectives. Information services include the provision of historical information, and future-oriented information. It has too been identified that Compliance, Control and hawkish support, be the three itemors which influence attention write up system work.Over time, the comparative emphasis on these three factors has changed. Previously, a great deal of centering accounting work was driven by the need for Compliance and Control. and now, the emphasis on Compliance and Control is declining, while the emphasis on Competitive support is increasing. The greater need for Compet itive support has move due to plusd competition, greater customer focus, globalization, and the importance of quality. At the homogeneous time, shapings nonplus responded to the changing competitive environment with flatter(prenominal) organizational structures, which are more flexible, responsive customer-focuse.The increased emphasis on Competitive support now requires management accountants to have strong Analytical and Communication skills. Furthermore, they must now actively support the line motion managers, and be instantly involved in the end processes. They must in any case consider long-term as well as unforesightful-term planning horizons. They must develop management accounting systems capable of providing information which supports both strategic operable ratiocinations. Importantly, management accountants must become this instant involved in the formulation, and the performance of organizational strategies.It has been established that the role of th e management accountant in an organization is to support the information needs of management. The type, size, structure and form of confessership of the organization entrust influence the management role, and thus, determine the complexity of the management accountants role. much(prenominal) differences in size do not change the basic role of the management accountant, nor the basic work which he or she does. However, the size of the organization whitethorn change the degree of formality or sophistication with which the ferment is carried out, or the level of resources devoted to management accounting. But, the management accounting situation remains essenti every(prenominal)y the same. pertinent Cost and Ir pertinent Cost for Decision-makingrelevancy is one of the key characteristics of good management accounting information. This means that management accounting information produced for for to each one one manager must relate to the lasts which he/she entrust have to m ake.Relevant terms are the be that follow this requirement of good management accounting information. The Chartered Institute of Management Accounting defines pertinent terms asThe apostrophize appropriate to a item management lastThis definition could be restated as the count by which be increase and benefits decrease as a direct take of a specific management ending. Relevant benefits are the amounts by which be decrease and benefits increase as a direct result of a specific management conclusion.Before the management of an enterprise female genitalia make an informed termination on any matter, they need to co-ordinated all of the germane(predicate) cost which apply to the specific last at hand in their decision making process. To include any non- applicable be or to exclude any relevant be get out result in management basing their decision on misleading information and last to poor decisions surviveence taken.Relevant cost and benefits only deal with the duodecimal aspects of decisions. The qualitative aspects of decisions are of equal importance to the quantitative and no decision should be made in practice without blanket(a) consideration being given to both aspects.Identifying relevant and irrelevant beThe recognition of relevant and non-relevant costs in various decision-making situations is based primarily on viridity sense and the knowledge of the decision maker of the orbit in which the decision is being made. Armed with these two tools you should be able to sift through all the information that is for sale in respect of any decision and extract those costs (and benefits) which are appropriate to the decision at hand.In identifying relevant costs for various decisions, it may find that approximately costs not included in the normal accounting records of an enterprise are relevant and some costs included in such records are non-relevant. It is important that there is a substantial difference between record accounting costs and relevant costs for decision making, and while the latter may be record in the former this is not invariably the case. Accounting records are used to record the incidence of positive costs and revenues as they arise. Decisions, on the other hand, are based only on the relevant costs and benefits appropriate to each decision while the decision is being made. This point is peculiarly appropriate when you come to examine luck costs and sunk costs that are dealt with below.In practice, you may also find that the information presented in respect of a decision does not include all the relevant costs appropriate to the decision but the identification of this omission is precise difficult un slight you are familiar with the area in which the decision is being made.ExerciseThe more common types of costs which you allow meet when evaluating diffe select decisions are additive, non- additive and spare dexterity costs. argon these likely to be relevant or non-relevant?Suggested SolutionIncremental costs An incremental cost can be defined as a cost which is specifically incurred by following a course of activeness and which is avoidable if such action is not taken. Incremental costs are, by definition, relevant costs because they are straightaway affected by the decision (i.e. they will be incurred if the decision goes ahead and they will not be incurred if the decision is scrapped). For example, if an enterprise is deciding whether or not to accept a excess wander for its intersection point, the extra variable costs (i.e. number of units in limited order x variable cost per unit) which would be incurred in alter the order are an incremental cost because they would not be incurred if the special order were to be rejected.Non-incremental costs These are costs which will not be affected by the decision at hand. Non-incremental costs are non-relevant costs because they are not related to the decision at hand (i.e. non-incremental costs stay the same no matter what decision is taken). An example of non-incremental costs would be immobile costs which by their very nature should not be affected by decisions (at least in the short term). If, however, a decision gives rise to a specific increase in fixed costs because the increase in fixed costs would be an incremental and, hence, relevant cost. For example, in a decision on whether to extend the factory floor area of an enterprise, the extra rent to be incurred would be a relevant cost for that decision.Spare expertness costs Because of the recent advancements in manufacturing technology most enterprises have greatly increased their efficiency and as a result are very much operating at below full capacity. Operating with spare capacity can have a significant impact on the relevant costs for any short-term production decision the management of such an enterprise might have to make.If spare capacity exists in an enterprise, some costs which are generally considered incremental may in fact be non-incremental and thus, non-relevant, in the short term. For example, if an enterprise is operating at less(prenominal) than full capacity then its work force is probably underutilized. If it is the indemnity of the enterprise to maintain the level of its work force in the short term, until activity increases, then the crunch cost of this work force would be a non-relevant cost for a decision on whether to accept or reject a once-off special order. The labour cost is non-relevant because the wages will have to be paid whether the order is accepted or not. If the special order involved and element of overtime then the cost of such overtime would of course be a relevant cost (as it is an incremental cost) for the decision.Two further types of costs that have to be considered are hazard costs and sunk costs.Opportunity costs An opportunity cost is a level of simoleons or benefit foregone by the pastime of a particular course of action. In other words, it is the hono r of an picking, which cannot be taken as a result of following a antithetic option. For example, if an enterprise has a quantity of raw satisfying in stress which cost $7 per kg and it plans to use this material in the filling of a special order then you would normally incorporate $7 per kg as part of your cost calculations for filling the order. If, however, this quantity of material could be resold without further processing for $8 per kg, then the opportunity cost of using this material in the special order is $8 per kg by filling the order you forego the $8 per kg which was available for a straight sale of the material. Opportunity costs are, therefore, the real stinting costs of taking one course of action as debate to another.In the above decision-making situation it is the opportunity cost which is the relevant cost and, hence, the cost which should be incorporated into your cost-versus-benefit analytic thinking. It is because the loss of the $8 per kg is directly rela ted to the filling of the order and the opportunity cost is greater than the check cost. Opportunity costs are relevant costs for a decision only when they exceed the costs of the same item in the option to the decision under consideration.You may find the idea of opportunity costs difficult to grasp at first because they are notional costs, which may never be included in the books and records of an enterprise. They are, however, relevant in trustworthy decision-making situation and you must bear in mind the fact that they exist when assessing any such situations.Sunk costs a sunk cost is a cost that has already been incurred and cannot be altered by any future decision. If sunk costs are not affected by a decision then they must be non-relevant costs for decision-making purposes. prevalent examples of sunk costs are market research costs and study using up incurred by enterprises in getting a product or service ready for sale. The final decision on whether to launch the produc t or service would regard these costs as sunk (i.e. irrecoverable) and thus, not incorporate them into the launch decision.Sunk costs are the opposite to opportunity costs in that they are not incorporated in the decision making process even though they have already been recorded in the books and records of the enterprise.Exercise(a) An enterprise is considering replacing its professional legal advisers with its own bracinglyly trained personnel. The relevant personnel are currently apply in the secretarial section of the enterprise and will receive no comprise increase when taking up their new responsibilities. They will also be required to continue to perform their old duties. The current one-twelvemonth salary bill of these employees amounts to $100,000. Is the $100,000 a relevant cost in the decision on whether to replace the professional advisers?(b) An enterprise is considering the upgrading of its computer system. The upgrading would result in the annual maintenance sq uinch fee supercharged by the suppliers rising from $30,000 to $40,000.Is the maintenance fee a relevant cost to the upgrading decision? in short explain your reasoning.(c) The relevant cost of X in the filling of the special order is nil. The cost of the 200 kg of X in transmit is a sunk cost and thus non-relevant. This is so due to the fact that no amount of the purchase price appears to be recoverable through either a straight sale of the material or by incorporating X in the manufacture of a product (other than the special order) which could then be sold by the enterprise.Evaluating decisions involving relevant and non-relevant costsIt is observed that two task is to be performing before making final decisionEvaluate the options in the decision on a monetary pedestal using cost versus benefit analysis.Take account of the qualitative factors associated with each option in the decision.The performance of the first task is dealt with in this section. operation of the second ta sk is influenced by experience and common sense.Nearly all decisions will ever make will involve some relevant and non-relevant costs. As stated earlier the hardest part of the evaluation process will be the identification of the relevant costs for the decision at hand. This identification is often required from a plethora of information that you will have to carefully sift through to ensure the completeness of your evaluation.Once the relevant costs are identified for each option you simply perform a cost versus benefit analysis for each option and select the one that results in the greatest gain or least cost to the enterprise.Dont entomb that, in practice, qualitative factors can result in a diametrical option being selected than that suggested by the quantitative evaluation.ExerciseThe local office staff of a small town maintains a orbit and arts means for the use of a local repertory company, other visiting radicals and exhibitions. Management decisions are taken by a comm ittee which meets regularly to refresh the accounts and plan the use of the facilities.The field of operation employs a full-time staff and a number of artists at costs of $4,800 and $17,600 per month respectively. They mount a new production every month for 20 performances. Other monthly cost of the dramaturgy is as follows$Costumes2,800 tantrum1,650Heat and light5,150Apportionment of brass costs of local authority8,000Casual staff1,760Refreshments1,180On average the theatre is fractional full for the performances of the repertory company. The capacity and seat prices in the theatre are200 pose at $6 each500 seats at $4 each300 seats at $3 eachIn addition, the theatre sells refreshments during the performances for $3,880 per month. Programme gross sales cover their costs but advertising in the political program generates $3,360.The management committee has received proposals from a popular touring group to take over the theatre for one month (25 performances). The group is prepared to pay half of their ticket income for the booking. They expect to fill the theatre for 10 nights and achieve two-thirds full on the remaining 15 nights. The prices charged are 50 cents less than those normally applied in the theatre.The local authority will pay for heat and light costs and will still honour the contracts of all artists and pay full-time employees who will sell refreshments and programmes, etc. The committee does not expect any change in the level of refreshments or programme sales if they agree to this booking.Note The committee includes allocated costs when making profit calculations. They assume occupancy applies equally across all seat prices.On financial grounds should the management committee agree to the approach from the touring group?Suggested SolutionTo make a decision on the use of the theatre for one month the committee would calculate the relevant cost or benefit of accepting the tour groups qualifying as opposed to handle as is (i.e. with the repertory company).Relevant benefitsCosts saved with touring group$ Costumes2,800 Scenery1,650 Casual staff1,760Relevant benefits6,210Relevant costsDecrease in revenue with touring group taxation with repertory company200 x $61,200500 x $42,000300 x $39004,100$4,100 x x 2041,000Revenue with touring company200 x $5.51,100500 x $3.51,750300 x $2.57503,600($3,600 x 10) + ($3,600 x 15 x 2/3)= 72,000Half kept by touring company leaving,36,000Relevant costs (41,000 36,000)5,000 clear up relevant benefit (6,210 5,000)1,210Therefore, the committee should accept the touring companys offer as it results in a net benefit to the theatre of $1,210 for that month.Non-relevant costs were full time salaries, heat and light, apportionment of administration costs and refreshments. Re non-relevant benefits were refreshment sales and advertising revenue. All of the above were non-relevant because they were unaffected by the decision (i.e. they were the same whether the repertory or the touring c ompany occupied the theatre for the month).The qualitative factors that might apply to this decision includeThe desirability of go a range of activities in the theatre and thus to cater for a wider audience fulfils an important social role.The opinions of the artists who are employed by the theatre should be consulted. They may welcome some months for rehearsal or face-to-face development. But if this were regular, the more talented people who were in demand may seek opportunities elsewhere.A different number of performances may have implications for predicted cost levels and the accuracy of the theatre occupancy predictions should be confirmed.ExerciseLombard Ltd. has been offered a contract for which there is available production capacity. The contract is for 20,000 items, manufactured by an involved assembly operation, to be produced and delivered in the side by side(p) financial year at a price of $80 each.The specification is as followsAssembly labour 4 hours office X 4 unit sComponent Y 3 unitsThere would also be the need to hire equipment which would increase next years fixed crashs by $200,000.The assembly is a highly virtuoso(prenominal) operation and the work force is currently under-utilized. It is company policy to support this work force on full pay in arithmetic mean of high demand, in a few years time, for a new product currently being developed. In the meantime, all non-productive time (about 150,000 hours per annum) is charged to fixed production command overhead at a current rate of pay of $5 per hour.Component X is used in a number of other sub-assemblies produced by the company. It is readily available. A small investment firm is held and replenished regularly. Component Y was a special purchase in presentiment of an order which did not materialize. It is, therefore, surplus to requirements and the 100,000 units which are in stock may have to be sold at a loss. An estimate of choice grade for components X and Y provided by the mat erial planning department areXY$ per unit$ per unitBook value410Replacement cost511Net realizable value38Overhead costs are applied on a labour hour basis. multivariate overhead is $2 per hour worked. Provisionally, fixed overheads, before the contract was envisaged, were budgeted next year at $3,560,000 for productive direct labour hours of 1,040,000. There is sufficient time available to revise the budgeted overhead rate.Analyze the information in order to advise Lombard Ltd. on the desirability of the contract and briefly explain your reasoning.Suggested replyAdvice on the contract will be based on the relevant costs or incremental costs incurred for the contract using the values provided in the question.$ per unitLabour 4 hours x 00Component X 4 units x $520Component Y 3 units x $824Variable overhead 4 x $28Relevant cost per unit52Total relevant cost = ($52 x 20,000) + $200,000 = $1,240,000Revenue = $80 x 20,000 = $1,600,000A surplus of revenue over costs of $360,000 is reveal ed so the contract would appear to be attractive.The recommendation is based on the following reasoning Labour will be paid in any event as non-productive time so the incremental cost is zero. Component X will be replenished at the current replacement cost. Component Y is costed at its opportunity cost, that is, what could be obtained if sold at its disposable or realizable value. It is already in stock and has no alternative use. Variable overhead is incurred in relation to the direct labour hours worked. The only incremental fixed overhead is $200,000. The remainder is common and unavoidable in all situations.Advantages and disadvantages of Activity Base CostingAdvantages of an Activity Based Costing placementThe first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping units employed by the management and the channel and kinfolk which streamline the flow of the product from the producer to the end user.This system conk out assists in the process of come acrossing the concept of overhead costs i.e. the allocation of common business resources as they are used by specific product lines and their relation to specific cost driver.The system is easy to understand and interpret is it is accessible, useable and practically implement able across all norms of business set-ups.This process uses unitary cost, or marginal cost as the computation base in contrast to the traditional cost accounting methods which employ total cost.The system works exceptionally well will quality improvement and up gradation programs e.g. Six SigmaThis system is particularly helpful in identifying and ear-marking some of the matters business activities which are a hindrance or stress on the business i.e. wasteful or non value adding services.The system also works exceptionally with performance management systems which are employed by most human resource departments in contemporary busin esses.This process allows companies to implement costing strategies across another diagonal of the firm as business processes, supply chains and value addition carry are ably and optimally analyzed in this process.This system mimics the actual business process as the appropriation of common pool resources takes place in the same way as common resources are used in the business.This system aids in the process of benchmarking which is an integral part of the quality control system.Disadvantages of an Activity Based Costing System entropy collection process for this system is very time consuming.The capital expenditure on the activity based system and its subsequent running costs can be a road balk for firms.The system is very transparent which some managers would not approve of as they would like to keep some things out of the view of the owners of the company.Technical LimitationsThe major technical point of accumulation that will be faced is testing the hypothesis in the real wor ld. Testing the hypothesis whether ABC is a more appropriate accounting solution is certainly possible on paper but its sexually attractive effects in the real world cannot be properly gauged unless it is directly implemented by companies operating in the world today and the analysis is conducted in a kinetic time apparatus. This is a major stumbling block for most organizations who are remain transfixed to their current accounting mechanism and dont want to change over to this new system, which despite its obvious benefits, seems to come a great switching or even multi-homing cost.