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BUS 630 Week 6 Final Paper

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BUS 630 Week 6 Final Paper
Focus of the Final Paper Due to varying business characteristics, the managerial accounting
techniques applied in each business may differ. For example, a business in the start-up phase
may rely heavily upon budgeting and capital investment techniques; whereas, a business in the
mature/maintaining phase may rely heavily upon cost management and quality control.
Ultimately, the techniques used by management should assist the business in achieving its short-
term and long-term goals through effective decision-making.
For your Final Paper, you will analyze the role of managerial accounting in two parts. Part I will
provide a general overview of managerial accounting. Part II will provide examples of how
managerial accounting theories and principles are applied in the business world. You may find it
helpful to reflect upon your own professional experiences for examples.
Part I (Three to four double-spaced pages) Present the following:
Definition of managerial accounting Role of managerial accounting and the management
accountant in a business or organization Ethical issues/concerns for the management
accountant General description of at least three managerial accounting techniques available and
their application within a business or organization Part II (Four to six double-spaced pages)
Select at least three of the five topics identified below:
Cost Management Techniques Costing Methods Capital Investment Decision Techniques
Budgeting Quality Control For each topic selected present real world examples of the application
of managerial accounting techniques within a business or organization. Examples may be
gathered from your own professional experiences or from case studies obtained from credible
sources (excluding textbook examples explored in previous weeks). Presentation of each
example should include how a managerial accounting technique was applied in the business or
organization’s decision-making model. Be sure to support your example with calculations when
applicable.
Introduction
The concept of Activity-based cost management was born from the belief
that traditional costing systems have inherent limitations that do not
accurately assign indirect and overhead costs in all situations. Managers
that are familiar with their organization’s operations know that different
products and services consume these costs in varying proportion, but
traditional costing systems tend to spread these costs evenly over all

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products and services offered. Assignment of overhead costs based on
direct labor hours or square footage occupied by facility do not always
serve as accurate means of allocation. Costing accuracy enables
decision-making that is less likely to result in poor performance, and
provide organizations with competitive advantages. Activity-based cost
management is a means to solve this problem.
In its early years, Activity-based cost management (ABC/M) gained
popularity rapidly in the management consulting community. It was
oversold as the “magic pill” to solve almost every problem within an
organization, and the expectations of management were raised too high.
As a result, many early implementations of ABC/M were viewed as
failures. Some of these perceived failures were resultant from design
misunderstandings and others from an inability to interpret the data
produced. Management didn’t understand that ABC/M is meant to act as
an enabler to for better decision-making, and can enhance popular
performance improvement programs such as Total Quality Management.
Activity-based cost management has been faced with numerous
difficulties as being accepted as a worthwhile change. Poor
implementations created organizational shock, and adoption throughout
did not occur overnight. Users had tendencies to misuse the system as a
policing program to place blame or embarrass departments. Some were
shocked when they learned their departments which they believed to be
highly profitable were in some cases unprofitable. Others learned their
previous traditional costing system already provided accurate costing
information. Problems like these can serve as serious impediments to
ABC/M proving its true worth to a company.
There are two broad elements of managerial accounting. They are cost
measurement and cost uses. Cost measurement draws its data from
financial and operational data collected by the organization. Once
organizational costs have been measured they must be assigned. Costs
can be assigned to production or assigned to the period in which they
occur. For managerial purposes, cost assignment revolves mostly
around operational costs. Once assigned, these costs have uses in
controlling expenses, assessment and evaluation of operations, and
they play a role in predictive planning. Activity-based cost management
plays its role during the assignment phase of cost measurement, and
exercises its power by manipulating cost uses.

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A common problem with most ABC/M systems is known as “the leveling
problem.” The leveling problem refers to the level of detail provided by
the system. During the design phase of an ABC/M system, it is difficult to
know the amount of detail the system should provide to users, and most
accountants will tend to err on the side of increased detail. Once the
system has been implemented, the intense detail overwhelms its users.
They do not understand how to interpret it, and it does not provide
enough summarization to aid in decision-making. It is important to keep
in mind when designing an ABC/M system that there is a point of
diminishing returns. In most situations, it is better to be approximately
correct than to be precisely accurate in cost assignment. ABC/M
systems must be right-sized for each application. Diversity of costs
objects, correlations of drivers to costs, and accuracy of driver quantities
are just a few of the factors involved with determining the amount of
detail an ABC/M system should produce.
Activity Based Management: Beyond Manufacturing
However, in today’s competitive business culture, a company has to do
more than just stream line their company’s manufacturing operations. A
company has to account for all of the activities involved in acquiring and
selling its merchandise. When dealing with customers and suppliers,
there are extra, hidden costs associated with the products. According to
Cokins, companies must distinguish the incremental costs associated
with customers who demand more services when buying a product from
other customers who want the same product at the standard service. To
determine these “costs-to-serve,” companies should employ Activity
Based Management (ABM). By assigning activity drivers to each of the
customer activities, a company can learn which customers they are
actually losing money on. One of the results of Cokins' research was that
too many employees feel that all customers are equal and that the
volume of purchases a customer provides helps cover up overhead
costs, even if the company loses money on the sale. Profit contributions
from customers are not the only issues however, understanding the
actual costs of the products they buy is just as important. This is a
similar philosophy in our text books. By helping manage the supply
chain, multiple companies can get together and deliver better customer
value to the product at a lower cost. This strategy is also supported by
our text book, except the textbook seems to skim the surface of this
theory.

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I was struggling with this subject, and this helped me a ton!

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