Management Accounting Traditional Costing and Merits

Question: Describe about the Management Accounting for Traditional Costing and Merits. Answer: Introduction: The assignment has two basic requirements demerits of traditional costing and merits of activity based costing in manufacturing companies. The requirements are derived from the research on Australian industry, which is still using the traditional costing. The traditional costing is criticised for its inability to provide rich direction to the decision-makers in business. The study would explain the two dimensional application of ABC costing method and application of it in generating activity-based management in manufacturing firms. Additionally, the paper has contributed towards describing cost measurement in activity-based management in purpose of decision-making. 1. Problems of traditional costing in manufacturing companies Traditional costing system is an out dated method of costing in manufacturing facility. It uses the volume based costing method. Thereby, the non-manufacturing overhead is not allocated throughout all the activities of manufacturing (DRURY, 2013). It is a type of costing method whereas the overhead is measured on basis of direct labour associated with the job. It does not accumulate indirect costs such as administrative cost while evaluating the unit product cost. Apart from measuring cost of goods sold, traditional costing method does not help much to make decision in manufacturing process. The traditional costing method denies to accept the usage of modern machineries at the time of measuring the cost of unit product. The direct labour cost is not only the cost associated with the manufacturing of a product, but also there some other cost drivers of production (Kaplan and Atkinson, 2015). The main disadvantage is non-inclusion of non-manufacturing cost in a products cost, which may lead the management to make poor decision. Modern manufacturing uses the modern machineries compatible with automation, which may increase the indirect labour cost for producing a product. 2. Description of two dimensions of the activity based costing Activity based costing is viewed from two angles cost and process view. This is known as two dimensions of this costing method. The cost view is a dimension of activity based costing where the cost flows from resources via every activity. The number of known activities may deduce the consumption of resources in each activity. Cost view is applicable in manufacturing of the product at the first stage. In the second stage, it may measure the cost of resources in services too for any certain product (Shields, 1995). The resource depletion in the activities of the manufacturing and services can be presented by a vertical flow of cost objectives of the activities (Della Porta Keating, 2016). The process view is the horizontal flow of activities. The cost view helps in determining the activities and cost objectives (Durndez et al. 2016). In vertical flow, the products (cost objectives) drive the activities whereas activities drive the resources. The cost view can be seen in the following diagram where the direction of the flow of cost is also labelled. It helps to determine the cost of activities to understand the usage of the resources in those activities. The process view is in the horizontal flow of the following figure. It gathers the information on specific work of the activities. Further, it helps to understand the significance of one activity to other activities. Therefore, the process view helps the management to proceed with an activity based management system. It also helps in measuring each activity to enhance the efficiency of each activity (Briciu Capusneanu, 2013). The process view also helps in evaluating the performance of each activity. It helps the operation as well as human resource managers to assess the performance of each unit in operation. According to Joseph and Vetrivel (2013), performance is measured in three different metrics quality, efficiency of the operation and time consumed by the operation. The process view helps in investigating the value-added as well as non-value-added activities in business to eliminate it from the operation. Thus, activity based management helps the management to reduce the opera ting cost by eliminating the non-value-added activities from the entire operation. Figure 1: Two dimensions of ABC (Innes, Mitchell Sinclair, 2000) The costs are assigned to each activity by the usage of resources - as if Moulding of metal is an operation, which has several activities in it job mould, core making, material movement and inspection of materials. Finishing of metal has also many activities underneath it heat treatment furnace operation, oxy cut casting, grind castings, blast furnace operation and initiating the heat treatment furnace. Thereby, the cost is evaluated for each of them individually by measuring the expenses on resources for each of the activity. Further, cost of activity is driven by product costs. Therefore, each activity is assigned individually for measuring the activity cost of each product (Shields, 1995). Activity based costing is thus applied in the manufacturing from the first dimension by driving the resources as well the activities. In moulding industry, the resources are heat treatment machine, electricity, labours, oxygen cylinder, water and some others. Here the main root causes of drivi ng agent of costs are electricity, labour costs and heat treatment furnace. It helps the managers to evaluate the cost of every step of every activity in a pile of activities of production. The small changes in every manufacturing activity might improve the cost of resources as well as the cost efficiency of the operation. The activity-based management helps the managers in identifying the irrelevant actions in it and thus they may control the overall expenses by disseminating those irrelevant activities (Della Porta Keating, 2016). The assignment has explained the demerits of traditional costing as well as the applications of ABC costing in manufacturing companies. The modern manufacturing companies use the two dimensional costing of ABC method to reduce the irrelevant cost in operation. Additionally, the assignment has explained the advantage of activity based costing in current manufacturing companies. The above explanations may conclude that two dimensions of activity-based costing helps the managers to eliminate the irrelevant costs as well as activities in operation. In this way, it reduces the overall cost of the operation and makes the operation cost effective as a whole. References Briciu, S., Capusneanu, S. (2013). Pros and cons for the implementation of target costing method in Romanian economic entities. Accounting and Management Information Systems, 12(3), 455. Della Porta, D., Keating, M. (2016). Activity 28 Costing a Research Project. 100 Activities for Teaching Research Methods. Drury, C. M. (2013). Management and cost accounting. Springer. Durndez, A., Ruz-Palomo, D., Garca-Prez-de-Lema, D., Diguez-Soto, J. (2016). Management control systems and performance in small and medium family firms. Innes, J., Mitchell, F., Sinclair, D. (2000). Activity-based costing in the UKs largest companies: a comparison of 1994 and 1999 survey results. Management Accounting Research, 11(3), 349-362. Joseph, J., Vetrivel, M. A. (2013). Impact of target costing and activity based costing on improving the profitability of spinning mills in coimbatore-empirical study on spinning mills. Journal of Contemporary Research in Management, 7(2). Kaplan, R. S., Atkinson, A. A. (2015). Advanced management accounting. PHI Learning. Shields, M.D., 1995. An empirical analysis of firms' implementation experiences with activity-based costing. Journal of management accounting research, 7, p.148.