Accounting Essays Management Accounting Techniques

account Essays Management be TechniquesCritically discuss the difference amid activity found follow and throughput chronicle.Changing external business environment has resulted in further developments in the tools and techniques used for worry account. Traditional management be techniques had certain limitations associated with them, for instance, ingress be methods bring in been found to be inappropriate in the modern font environment. Similarly, standard courting suitability with respect to its normal philosophy and tiny operations has come under severe criticism. It is believed that handed-down management account statement executing measures can produce the wrong type of response. As a response to the limitations of traditional accounting system techniques, activity based put together outes has gained significant repute.The sp be-time activity paper will evaluate the activity based be approach and attempt to highlight the constitutional differences between a ctivity based liveing and throughput accounting approach.In the case of activity based approaches, the focus is on the activities that the business carries out as opposed to how the activities have traditionally been coordinate into separate functions. use based costing was thereof developed because it was pull in that older methods like absorption costing, which used jab hours as the posterior for absorbing everywhereheads, did non provide useful in forgeation about the cost drivers, in other words it did non answer for the question what was make the overheads to be incurred in the first place.Generally, Activity Based Costing ( rudiment) is be as an accounting technique that allows an organization to determine the actual cost associated with separately product and service produced by the organization without regard to the nerveal structure. Amongst various benefits associated with the alphabet approach one of the major ones is that it helps to define the activities of the transcription in terms of value adding activities. In other words, as a result of rudiment it is easy to identify which activities add value to the organisation. appellation of non-value adding activities helps in identifying where time, effort and money atomic number 18 being wasted and supernumerary be being incurred.Advantages associated with activity-based approach are umteen. More generally it is state that activity based costing recognises the inherent complexities faced by many businesses in the present day, which results in the businesses having multiple cost drivers, many of them are transaction based rather than volume based.. These complexities arise due to businesses right away having a broader product range and the business environment in general is more than volatile and unpredictable. It is further argued that activity based analysis provides a more meaningful analysis of cost which provide a stop basis for pricing decisions, product mix decisions, des ign decisions and production decisions. alike activity based analysis is concerned with all overhead be, including the costs of the non-factory floor functions (product design, quality master, production provision, sales order planning and client service) and not just factory-floor overheads thus it takes cost accounting beyond the traditional factory floor boundaries. In addition activity based costing helps in identifying the causes of increases in costs and thus it further helps in cut back costs. ABC can be used in conducting customer netableness analysis.Despite the advantages associated with activity based costing a number of criticisms have been identified. Theorists have argued that the costs of obtaining and interpreting the new information may be time consuming activity, thus it has been suggested that activity based analysis moldiness lone(prenominal) be introduced when there are provisions in the organisation to manage information to use in planning and/or contro l decisions. Secondly, it has been criticised on the grounds that many overheads do not relate all to volume or to complexity and diversity. Severe criticisms were as well as raised with the underlie principle of ABC, which is that activity causes cost. Proponents of this viewpoint argue that decisions cause cost or the passage of time causes costs or that there may not be any one clear cause of cost.Throughput accounting is an substitute(a) to cost accounting based on Standard or Activity Based Costing (ABC) proposed by Eliyahu M. Goldratt. Throughput accounting claims to improve management decisions by using measurements that more closely reflect the effect of decisions on triad critical monetary multivariates. It has originated from the Theory of constraints.Throughput accounting is an approach to accounting, which is largely in sympathy with the Just-In-Time philosophy. In essence, Throughput Accounting assumes that a manager has a presumptuousness set of resources availa ble. These comprise of existing buildings, capital equipment and labour force. Using these resources, purchased solids and split must be processed to generate sales revenue. consequently, according to Goldratt and cox (1984), given the above scenario, the most appropriate financial objective to set for doing this is the maximisation of throughput, which is defined as, sales revenue less direct material cost.According to Noreen et. al (1995), there are three building blocks in Goldratts theory namely, throughput1, operate expenses2 and assets3 (Goldratt 1990). and Profit is measured by throughput minus operating(a) expenses and gainfulness by profits divided by assets. (Goldratt Cox 1992.).Managers are thus motivated to apply the theory of constraints (TOC) because it presents them with a new prop of focusing their energies on cost reduction rather than on profit enhancement. From this perspective TOC is considered simple. The official definition of throughput is revenue minu s total inconsistent costs. However, some companies exclude all the other expenses, such as the variable selling and shipping costs, considering direct material the most significant factor. Thus, a simplified version of throughput accounting is also used. The visible difference between conventional and throughput accounting is the handling of direct labour, which is considered as a frozen(p) cost. The variable cost nature of direct labour seems to be more a historical reminder than contemporary reality. In many companies, labour cost is, in practise, treated as a fixed cost. (Noreen et al. 1995.)Noreen et.al (1995) cited the type where Throughput Accounting has been successfully use also with ABC. Southwestern Ohio Steel has utilize a pricing good example based on ABC and Throughput Accounting. This model has been used to analyse and justify manufacturing cycle-time improvements. (Campbell 1995).Fritzsch (1997) argues that the essential difference between throughput accounting and ABC lies in the time horizon. ABC is recommended for strategic planning whilst, throughput accounting works better to meet short-term purposes. As the time horizons increase, the solutions produced by throughput accounting begin to look more and more like those produced by conventional cost accounting techniques. Applications of ABC in strategic planning appear to be well documented. It must be noted that ABC and Throughput Accounting are based on differing sets of assumptions that have an implicitly unalike time horizon thus claims of superiority of one approach over the other should be abandoned. It is however, possible to use twain approaches together to pass on appropriate results.Some researchers claim that Throughput Accounting approach requires less information and effort than ABC. It is further argued that Throughput Accounting is easier to implement and operate it sometimes provides inferior information to guide management decisions. A frequent question is whethe r ABC is worth the cost or whether the TOC approach will be competentAccording to Etienne du Plooy4, Throughput Accounting is differentiated from all other types of costing systems because only the costs that are truly variable and identifiable to products, are allocated to the products or services produced. These costs are called Totally Variable Costs (TVC). all(prenominal) other costs that are not clearly variable with the criterion of products or services produced are pooled into Operating Expenses (OE). These costs which must also be recovered are not allocated to products. As Throughput is the rate at which the system generates money, and is calculated by subtracting the TVC from the selling price of products, Throughput Accounting puts the performance measures required to maximise business opportunity in place and thus enables management to take immediate corrective action when necessary.It has been further argued by Noreen et.al (1995) by that the ABC approach yields the same activity for the unused force information that Throughput Accounting yields. As a result of tracing operating expenses to products and to unused capacity, an ABC income statement provides additional information concerning the per unit profitability of severally product that a Throughput Accounting income statement alone would not provide.Throughput Accounting has been considered as a perfect complement for many approaches such as the Theory Of Constraints and Total Quality Management (TQM). It is strongly believed that both labour and capital productivity are increased when Throughput Accounting is applied in organisations. It does not lead to inventory build-ups. It is considered more useful for management decision-making. It is closer to a cash flow concept of income and in its purest form it is based on the cash flows of transactions. It is applicable to any enterprise that has constraints. It is comparatively inexpensive yet extremely utile. It consistently provides the right information for effective decision-making. It brings the organisation closer to its goal.To explain the difference between activity based costing and throughput accounting an example has been provided ABC takes the information used in throughput accounting and adds monetary values. ABC differs from Throughput Accounting in that it traces resource costs to activities. After resource costs have been traced to activities, one divides the activity cost (required by ABC) by the activity capacity (required by Throughput Accounting and ABC) to amount at the activity-charging rate (required by ABC). Next, that activity-charging rate is multiplied by the standard of the activity costs driver demanded by each product from each activity (required by Throughput Accounting and ABC). Based on the budgeted number of units produced, each activitys budgeted production cost is compared to that activitys budgeted capacity costs to arrive at the costs of unused capacity for that activity (expre ssed in financial amounts by ABC and in non-financial amounts by TOC). 5ConclusionFrom the preceding paragraphs it can be concluded that Activity based costing and throughput accounting approaches can be used together to achieve the best possible results for the organisation. Despite the inherent differences in the two approaches, they are both essential management accounting techniques, which will help the managers to make sound decisions regarding the future growth of the organisation. Thus in conclusion it can be said ABC and throughput accounting are both required to achieve the long term embodied objectives and for management accountants to arrive at sound managerial decisions relating to profitability of the business.BIBLIOGRAPHY1 Eliyahu M. Goldratt and Jeff Cox, The Goal, second Revised Edition, North River Press, Croton-on-Hudson, N.Y. 2 Jay S. Holmen, ABC vs. TOC its a matter of time, Management Accounting (USA), Jan 1995 v76 n7 p37(4) 3 John B. MacArthur, From activity-ba sed costing to throughput accounting, Management Accounting (USA), April 1996 v77 n10 p30(5) 4 John H. Sheridan, Throughput with a ceiling T, Industry Week, March 4, 1991 5 Richard V. C., Eugene J. C., and Gerald E. C., Beware the New Accounting Myths, Management Accounting, declination 1989, pp.41-45. 6 robin redbreast Cooper, Regine Slagmulder, Integrating activity-based costing and the theory of constraints, Management Accounting (USA), Feb 1999 v80 i8 p20(2) 7 Robin Cooper, Robert Kaplan, Activity-Based Systems Measuring the Costs of Resource Usage, Accounting Horizons, September 1992, pp. 1-13.