Management Accounting Management Structure and Functions

Question: Discuss about the Management Accounting for Management Structure and Functions. Answer: 1. The cost structure is referred to as the all type of cost a business incurs to operate. It also states the proportion of fixed and variable costs that a business has in its total costs (DRURY 2013). If the business follows, a cost based pricing strategy then the cost structure is useful in calculating price. The cost structure is an important management accounting concept that helps management to identify areas to improve its cost structure and function (De Zoysa et al. 2014). In the given case, Brown Bakery Company is in the manufacturing of baked foods for over 25 years. The company initially had three product lines bread, meat pie and sausage rolls and over the 25 years it has added various other low volume products like gluten free bread, vegetarian quiches and fruit tarts. The production procedure applied by the company has also changed over the years. The company at its initial stage primarily relied on labor and simple machineries. The operation of the company has also shifted from labor-intensive techniques to machine intensive techniques. The production process of low volume products are complex so it required the company to set up extra machineries. Further, the company has introduced computer controlled mixings oven thereby replacing direct labor earlier required (Chak and Fung 2015). The change in the production process and products has caused the cost structure of the company to change. The company initially had high labor costs now it has high depreciation costs. The high depreciation costs are due to heavy reliance the company places on machinery for production (Garcia 2015). The direct labor costs are variable costs and depend on the level of production. The depreciation on the other hand is typically considered as fixed costs. Therefore, it can be seen that change in production process has shifted the costs structure of the company earlier the company had more component of variable costs now it has more component of fixed costs. In order to increase production or reduce the down time of the company it is essential to have annual repair and maintenance of the machineries (Fullerton et al. 2013). The company usually makes an annual maintenance contract with the vendor company in such case the maintenance costs becomes the fixed costs. In case of labor intensiv e production technique increase of production would require overtime the company would therefore had to incur bonus expenses which is a variable costs (Uyar and Kuzey 2016). Therefore, from the above discussion it can be concluded that over 25 years the cost structure of the company has changed. The proportion of fixed costs has increased and variable costs has decreased in the total cost structure of the company. 2. The costing system is useful for the company to determine the costs of the product. One of the most common types of costing system used by the manufacturing companies is traditional or conventional costing system. In this system the manufacturing overhead of the company are allocated based on units produced. In the traditional system, it is assumed that volume is the driver of the manufacturing overhead (Kotas 2014). This system of allocating overhead costs has become out dated because of the use of machineries and computers in the production process and the traditional system uses direct labor hours to calculate costs. Further, the system fails to recognize the importance of other cost drivers for allocating costs (Chenhall and Moers 2015). In case of Brown bakery, the meat pie and vegetarian quiche are low volume products as the units produced is low so the manufacturing overhead allocated on the traditional costing system is also low. The production of the low volume products requires setup of extra machinery and material handling (Dobie 2013). This increases the manufacturing overhead but as they are produced in low volumes, the manufacturing overhead cost allocated to them is less. On analysis of the cost system, the conclusions that can be drawn for each item are given below: In case of meat pie the existing cost system understates the cost. In case of vegetarian quiche the existing costs system understates its costs. 3. The Activity Based Costing is an improvement over traditional costing system and it provides the user with more accurate cost of production. The difference between activity based costing and traditional costing system is in the process of allocating overhead costs. In the activity based costing system every activity associated with the production of an item are identified and costs are allocated to this activities. The costs of the particular activities are then assigned to the individual products that requires that activity to find the total cost of the product. In the traditional costing system, the overheads are allocated on the basis of volume like units manufactured, direct labor hour etc. Therefore, a product with low volume that has high overhead will not reflect the correct costs in this system (Hopper and Bui 2016). The Browns bakery is currently following traditional costing system for allocating overhead costs. It is frequently observed that indirect costs and common costs that require to be allocated in many cases are not affected by volume. If by following the traditional costing system, this costs are allocated based on volume then the overhead is bound to be understated or overstated. The main problem that can be identified with the traditional costing system is that the basis of allocating costs followed in this system is different from the root cause of the costs. The activity based costing can help to eliminate the problem of traditional costing because in this method the costs that are not relevant to the product are eliminated. The costs are allocated to products that require the activity thereby reducing the possibility of overstatement and understatement of overhead in a particular product (Nixon and Burns 2012). 4. The factors that should be considered by Knight at the time of deciding whether to use an Activity based Costing system are: The time that will be required to implement the activity based costing system; The cost involved in implementation of the activity based costing system; The composition of the team that is responsible for design and implementation of the system; The risk involved in implementing the system should be considered; The complexity of the operation and the system should be considered; The objective and purpose of the system should also be considered before deciding whether to use the activity based costing system (Prasad 2015). 5 Statement showing computation of total cost of each department Particulars Product Development Sales Dispatch Mixing Batters Filing Pies and Quiches Baking Packing warehousing Administration Corporate Management Total Wages $ 30,000.00 $ 60,000.00 $ 90,000.00 $ 120,000.00 $ 90,000.00 $ 120,000.00 $ 60,000.00 $ 30,000.00 $ 600,000.00 Building Costs $ 6,400.00 $ 16,000.00 $ 16,000.00 $ 32,000.00 $ 16,000.00 $ 32,000.00 $ 32,000.00 $ 9,600.00 $ 160,000.00 Depreciation $ - $ - $ 20,000.00 $ 60,000.00 $ 100,000.00 $ 10,000.00 $ 10,000.00 $ - $ 200,000.00 Consumables $ 2,000.00 $ 3,000.00 $ 10,000.00 $ 20,000.00 $ 20,000.00 $ 30,000.00 $ 10,000.00 $ 5,000.00 $ 100,000.00 Energy $ - $ - $ 32,000.00 $ 32,000.00 $ 640,000.00 $ 96,000.00 $ - $ - $ 800,000.00 Other $ 2,000.00 $ 4,000.00 $ 6,000.00 $ 8,000.00 $ 6,000.00 $ 8,000.00 $ 4,000.00 $ 2,000.00 $ 40,000.00 Total Cost of department $ 40,400.00 $ 83,000.00 $ 174,000.00 $ 272,000.00 $ 872,000.00 $ 296,000.00 $ 116,000.00 $ 46,600.00 $ 1,900,000.00 Cost driver consumption pattern Cost Cost Drivers Total Quantity of Cost drivers Total Cost Wages Number of employee 100 600000 Building Costs Floor Space 5000 160000 Depreciation Machine Hours 10000 200000 Consumables Orders placed by centre 500 100000 Energy Kilowatt hours used 250000 800000 Other Number of employee 100 40000 6 In the activity based costing system, every overhead costs fixed and variable are allocated to a cost categories. These cost categories to which the costs are allocated are called as activity cost pool. In case of Brown Baker J. Knight has identified various costs categories like wages, building costs, depreciation, consumables, energy and others. In the Activity based costing system costs are allocated on the basis of cost drivers. In order to determine appropriate cost drivers it is important to classify the cost in accordance with various categories. In the analysis, J. Knight used number of employee to allocate the cost of wages among various departments. She also used floor space to distribute building costs among department so the use of building cost in her cost category is justified (Dekker 2016). The next category depreciation is allocated on the basis of machine hours so the classification is justified. The consumables are classified on the basis of number of orders so this classification is also justified. Then the cost is classified into another category of energy that is classified on the basis of Kilo watt hour this is also justified. All the other costs of the company are allocated to various departments based on number of employees. On the basis of the above analysis it can be said that costs are classified in various categories by J. Knight so that she could ascertain appropriate cost drivers to allocate costs among various department in a more accurate manner. 7. The total costs of the business can be classified in various categories and these are known as cost categories. The costs that the business incurs can be identified using the past financial performance and by studying the operation of the business (Ward 2012). In the case of Browns bakery, the management accountant J. Knight has identified various costs categories. She identifies this cost categories through analysis of the performance and the cost structure of the company. The examples of costs that are likely to be included in the cost categories are labor costs and this are included in the wages, expenses related to computerized mixing is included in the depreciation. 8. In the case of Browns bakery, J. Knight the management accountant of the company used the number of employees as the cost drivers for allocating costs of wages. The wages costs should be allocated on the basis of direct labor hour than the number of employee. The direct labor hour indicates the hour that has been put in for achieving the production. Therefore, if the wages is allocated among various department on the basis of the number of labor hours that have been used by them then it would reflect the appropriate picture (Ward 2012). 9. In case of business, that uses machinery in its operations should allocate costs based on machine hour rate. The depreciation can be allocated on the basis of units produced. In that case the number of units will be considered but the time required for producing the output will be ignored. In the case of machine hour rate system the depreciation will be allocated to the departments based on their actual usage of machinery (Dekker 2016). Therefore, it can be concluded that Machine hour is the most appropriate method of allocating depreciation. References Chak, S.C. and Fung, H., 2015. Exploring the effectiveness of blended learning in cost and management accounting: An empirical study. InNew Media, Knowledge Practices and Multiliteracies(pp. 189-203). Springer Singapore. Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control.Accounting, Organizations and Society,47, pp.1-13. De Zoysa, A., Bhati, S. and De Zoysa, M., 2014. A survey of cost and management accounting practices in Sri Lanka. Dekker, H.C., 2016. 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