Assessment Essay: Costing Products And Services - Q&A.

Task

The art of observation and inserting the observation fear into the observed individuals could be termed as panopticism. Jeremy Bentham has established this theory and the following diagram would help in explaining the concept:

 

As per the above diagram, the construction of the above place is simple because an observation tower is present in the centre and the cells are used for lodging the prisoners. This has helped the in-charge of the prison to maintain a thorough observation on the prisoners. In addition, the prisoners are observed to suffer from fear due to such location. This is because they are kept under strict vigilance from the tower leading to behavioural effects on them.

Since fund management is crucial in all firms, the importance of management accounting has grown rapidly. Due to this, panopticism has made its way, since an illusion is created often that all things are kept under vigilance and they are transferred via workflow (Adler, 2018). The perception is that some unknown individuals investigate the financial transactions passed in the departments. Due to this, the strict department of a firm is the accounting department. Thus, panopticism is highly valuable in those organisations, especially in departments concerning business funds.

With the help of management accounting, the management of an organisation could undertake significant decisions for maintaining appropriate control of the business operations. The three major functions of management accounting are enumerated briefly as follows:

Compliance:

With the help of compliance, the reporting needs could be met along with the external regulations. Hence, it is necessary for the accountants to realise expenses and revenues appropriately, while the assets and liabilities are to be valued in accordance as well. The management accountants develop operating systems associated with cost accounting, in which the inventories are valued by distributing costs to products (Eldenburg, Krishnan & Krishnan, 2017).

Control:

Control helps in signifying the entire process of planning and control. Planning could be carried out appropriately with the help of management accountants by developing budgets for summarising the operational plans. In addition, they review the design and operation of systems.

Competitive support:

It implies the provision of financial services to the management in order to enhance the overall business competitiveness. With the help of financial services, there is increase in value of the firm by aiding line and process managers in undertaking decisions for engaging the management accountants directly in the process of decision-making.

Question 1: Panopticism and its relevance to management accounting

Van Helen is a rock band in US and there are four members in the band. There is a contract of Van Helen with the concert promoters that the bowl of M&M is to be provided backstage; however, the brown candy would be removed upon the show forfeiture within the entire band compensation (Henri, Boiral & Roy, 2016). This is the sole band to undertake adequate production into tertiary and third-level markets. They had managed to pull up with nine trucks having gears and the standard was a maximum of three trucks. In addition, technical errors could be observed as well.

The contrast riser read like a version related to the Chinese Yellow Pages because of the presence of equipment and individuals needed to maintain the overall functions. Thus, the overall production level could be checked in line and there is not presence of any profession where the checklists would be highly advantageous.

Manufacturing statement (Normal view):

 

Manufacturing statement (Formula view):

 

Income statement (Normal view):

 

Income statement (Formula view):

 

Part a:

Under the perpetual inventory system, the organisations are required to count items periodically in inventory and valuation is made to maintain record of the cost of goods sold. The managers would be highly benefitted, since the levels of inventory could be kept under strict vigilance for preparing the interim financial statements (Klychova, Faskhutdinova & Sadrieva, 2014).

Part b:

Since there is no association between production purpose and overtime payment, it needs to be treated as overhead expense rather than direct labour.

Material control account and journal entry (Normal view):

 

Material control account and journal entry (Formula view):

 

T-account for accrued payroll and journal entries (Normal view):

 

T-account for accrued payroll and journal entries (Formula view):

 

 

 

Weekly journal entries (Normal view):

 

Weekly journal entries (Formula view):

 

Ledger accounts (Normal view):

 

Ledger accounts (Formula view):

 

For assessing the requirements of the concerned employer, it is crucial to obtain an overview of the variation between the systems of traditional costing and activity-based costing. Firstly, there should be a clear understanding regarding the costing concept. For instance, the production manager of a car manufacturing subsidiary is responsible to look after the production line and accordingly, stuffs are fixed with the cars produced. In case, the manager is responsible to carry out 50 activities every day, it would be helpful for the manager to understand such activities producing losses and profits. Thus, costing is important, since the cost pertaining to each activity is settled out for the respective sets of activities.

Question 2: Functions of management accounting

Traditional costing system:

This system is used primarily due to its simplicity. In this method, average cost method is considered and the cost of each activity is included in the same (Kokubu & Kitada, 2015). Thus, the costs of overhead are those expenditures, which are associated with the manufacturing of a particular product. The overhead costs take into account the cost of labour in case of operators handling forklifts, individual cost to maintain machines and cleaner cost related to the floor of the factory. These costs could not be taken into account in the form of raw material cost, which are not utilised in the production process of a specific product. However, these costs could be engaged directly in the manufacturing process.

Various drawbacks are inherent in the traditional costing system. The overhead cost pertaining to each activity is distributed to each activity irrespective of whether the activities have included overheads or not. Hence, the only advantage of this system is that the implementation process is easy, which is beneficial to undertake management-related decisions. However, the system could lead to incorrect results.

Activity-based costing (ABC) system:

This is a contemporary costing method where the overheads are allocated with precise and rightful values. For instance, if the cost of labour associated with the production line is $15 per activity and the cost of labour is $25, the allocation would be made at the right value. However, in the traditional costing system, the mid-value of the two stated costs would be considered and $20 would be distributed as cost of overhead (Lin, 2017).

The important benefit of this method is the accuracy and most of the managers prefer this method in order to obtain a clear understanding of the activities leading to profits and losses. However, there is complexity in this system and implementation is complicated in majority of the organisations (Otley, 2016). Few issues could be identified while the system is implemented and this could be in the form of selection of cost drivers, allocating common costs and changing cost driver rates. Finally, the companies engaged in utilising market-based pricing might not find it effective to implement the ABC system.

Hence, the costing system, which would be implemented, relies on the nature of business operations of the organisation and the willingness of the organisation for investing in the system (Weygandt, Kimmel & Kieso, 2015). 

Cost of the service department:

S1= S20,000

S2= $25,000

After obtaining the share from distribution of service departments:

S1= $20,000 + 15% of S2

S2= $25,000 + 20% of S1

By placing the value of S2 in S1 equation,

S1 = $20,000 + {15% ($25,000 + 20% S1)}

S1 = $20,000 + $3,750 + 0.03S1

S1 - 0.03S1 = $23,750

0.97S1 = $23,750

S1 = S23,750/0.97

S1 = $24,485

By placing the value of S1 in S2 equation,

$2 = $25,000 + (20% x $24,485)

S2 = $25,000 + $4,897

S2 = $29,897

References:

Adler, R. W. (2018). Strategic Performance Management: Accounting for Organizational Control. Routledge.

Eldenburg, L. G., Krishnan, H. A., & Krishnan, R. (2017). Management Accounting and Control in the Hospital Industry: A Review. Journal of Governmental & Nonprofit Accounting, 6(1), 52-91.

Henri, J. F., Boiral, O., & Roy, M. J. (2016). Strategic cost management and performance: The case of environmental costs. The British Accounting Review, 48(2), 269-282.

Klychova, G. S., Faskhutdinova, ?. S., & Sadrieva, E. R. (2014). Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), 79.

Kokubu, K., & Kitada, H. (2015). Material flow cost accounting and existing management perspectives. Journal of Cleaner Production, 108, 1279-1288.

Lin, Z. (2017). PART II: Management accounting. In The Routledge Handbook of Accounting in Asia (pp. 105-108). Routledge.

Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.