HI5017 Managerial Accounting: Implementation of the Activity-Based Costing Model for a Farm: An Australian Case
Journal Article Critique Assignment (30 Marks)
You are required to read the journal article by Lu, C., Sridharan, V.G. & Tse, M.S.C., 2016. Implementation of the Activity-Based Costing Model for a Farm: An Australian Case. Journal of Applied Management Accounting Research, 14(2), pp.29-36.
Required: Critically evaluate the role of management accounting systems (MAS) and the provision of accounting information for the case company by answering the 4 questions below:
Questions:
- Identify any three (3) specific examples of the different types of management accounting methods and/or techniques from the case. (3 marks)
- Are MAS relevant to contemporary organisations? Discuss this with reference to:
- i) What evidence is there from the case company? Include examples in your answer. (5 marks)
- ii) Compare and contrast this finding with one other journal article you will need to find that has discussed about management accounting systems in another real-life company or companies. Did this second study have similar findings as the first chosen article, or mixed and/or different findings? Explain with examples. (5 marks)
- What conclusions do you make about the relevance of MAS in today’s competitive and (in most cases) uncertain business environment? (4 marks)
- Provide four (4) specific outcomes or lessons learned from each of the two articles’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e., provide 2 outcomes from each of the two studies]. (8 marks)
Abstract
The aim of the study is to understand and develop knowledge about the use of modern-day MAS and its implication upon the strategic decision-making processes in different business environments and situations. Critical evaluation of two journal articles is done to identify how management accounting systems practiced in contemporary companies by taking examples of real-life organizations. There has not been any study published until now, which definitely argues that management accounting systems are a must benefit for modern-day businesses. Many studies have been made to make an assessment of the usefulness of the MAS and its functionality in a modern – day environment. In our assignment we are going to make a similar analysis based upon two companies from two different industries and their relevant needs of accounting systems.
1- Identify any three (3) specific examples of the different types of management accounting methods and/or techniques from the case. (3 marks)
Management accounting means making use of management accounting techniques to support decision making, risk management, and execution of business activities at the strategic level of the organization. Management accounting is different from financial accounting as it does not have to follow set principles and standards (Ameen et al., 2018). Management may choose from a variety of techniques as per the need of strategy and industry the company works in. The three major management accounting techniques discussed in the case are Activity-based costing, Just in Time & Balance scorecard approach.
Activity-Based Costing:
This technique allows the overhead cost of the products very logically as compared to traditional approaches where simply costs were allocated based upon machine hours. In this costing method, different activities are identified in the organization and cost of each identified activity is allocated to products based upon their actual consumption (Baird et al., 2004). This more logical and gives higher accuracy in cost allocation in complex environments. The activities identified are actually cost drivers such as labor hours, machine hours, machine setups, number of inspections, etc. ABC costing technique allows the business to make an accurate cost of estimation as compared to traditional techniques where information may be distorted just because of inappropriate cost drivers (Maingi, 2013).
Balance Scorecard:
It is another performance metric of strategic management, mostly used in contemporary environments for the improvement of the internal functions of the organization. The four main areas that are being monitored in this technique are finance, customer, business process and learning & growth. In order to optimize its overall performance, an organization must give its best performance in each of the above-mentioned sector (Sikahala, 2015). Information is collected from all four sectors and noted on the balanced scorecard. Objective and goal of each primary function are set separately and monitored accordingly. This makes it easier for the management to identify areas of underperformance. It may be improved in order to achieve the goals of strategic management and business as a whole.
Total Quality Management:
The technique of total management, quality means it focuses upon the total quality of the business activities. It holds each and everybody involved in the process of production accountable for the results of their activities. TQM is a process which identifies, reduces, or eliminates the errors occurring in the process of manufacturing, supply chain management, improvement in the product or service offered and speeding up with the running processes (Arora, 2012). The continued improvement of the inputs of production, the quality of product or service is enhanced as much as it can be. This is a customer focused approach which joins all employees of the setup to come together and perform equally to produce an improved product or service.
PLAN, DO, CHECK & ACT are four main steps followed in the process of TQM technique. Planning involves identifying the issue or problem. Do means fixing the problem that hinders optimal production. Test the new results and compare it with the previous result of the checking process. Finally, the results of the cycle are documented and made public so that everybody involved in production can be made aware of the issue and its solution.
2- Are MAS relevant to contemporary organisations? Discuss this with reference to:
There are mainly two types of organizational structures. One is the traditional structure, and the other is contemporary. In a traditional structure, power flows from top-level to bottom level. The bottom layers are not involved in the decision-making process while in contemporary structure, each layer is involved in the decision-making processes (May Lilly, 2019). A traditional setup is mostly favored as site remains stable and under the autonomy of top management while in Contemporary structure autonomy is transferred to employees as well where they may play a part in the implementation of changes that might bring competitive advantage of the business. Hence, contemporary structures are becoming popular these days.
Contemporary organizations have a flexible environment and operating system; hence it appears that a flexible system suits it better such as Managerial Accounting system as compared to traditional methods of accounting and decision making. In a contemporary environment, employees have ownership of what task they perform, and they can mend the way they do their work as per the needs of the organization which in turns benefits the business by giving higher quality and greater productivity (Abrar, 2014).
Part i- What evidence is there from the case company? Include examples in your answer. (5 marks)
It is evident from the case that the management accounting system is more suited to contemporary organizations. The case identifies that in a globalized competition and greater access to advanced level of technologies, companies are being forced to make changes in the way they operate. These changes can only be accommodated by the management accounting system. In the case study, a multinational IT-based firm applied the management accounting system to its contemporary environment and achieved success by efficient and appropriate use of resources.
The management accounting system was beneficial for Company –A in the case as it was able to meet the requirements of stakeholders, customers, employees, and strategic managers, all at once. The tactical decision making in company-A was being made by the use of management accounting system technique.
Where at one end, the management accounting system supported the company in globalization and tactical decision making, it was also held inappropriate and less useful in the environment company –A operates. It was argued by the managers of the company that manages accounting system generates so many reports and a huge amount of data that resources and time are wasted because these outputs are not much needed by the company. Company-A could easily operate successfully without getting into the hassle of a complicated system.
Part ii- Compare and contrast this finding with one other journal article you will need to find that has discussed about management accounting systems in another real-life company or companies. Did this second study have similar findings as the first chosen article, or mixed and/or different findings? Explain with examples. (5 marks)
Our first study has shown that the management accounting system is not necessarily always beneficial for businesses as the cost of implementation may become greater than the benefits obtained from the system. Its usefulness depends upon the industry in which the company operates along with the complexity of activities the business is involved in. In case of Company-A, the complexity of work increased after implementation of management accounting techniques. It was said to be of little relevance to the business.
Another case study that has been chosen in order to obtain further findings of the assertion made by management of Company-A in the first case study. The second article belongs to the Journal of Applied Management Accounting Research by Clayton North, a summer issue in which management accounting system is intended to be used for the management of farms. Farm management and accounting are completely different from manufacturing concerns as farms have huge varieties of products and play a vital role in the global economy. In this case it has been identified that introduction of new IFRS has caused difficulty for the management to calculate its figures and wished to move towards management accounting techniques and leaving traditional techniques as the traditional ones are not working in the complexity of a farm management system. Due to advancement in technology, most farm management has started making use of machinery and software while leaving manual labor and manual working behind. The nature of the agricultural sector now makes it difficult to allocate overhead costs of production using traditional methods.
The farm management argues that their problem was only solved by diverting themselves to management accounting techniques for the sake of better costing leading to better decision making. Since the farmers have numerous harvest times, a variety of products obtained from harvesting in different seasons. They operate in a complex system for which more non-financial drivers need to be used in order to make better strategic decision making. Production, storage and then finally distribution of the perishable item form harvests need accurate and precise policies that would result in less wastage and higher profitability which can only be obtained by management accounting techniques of today’s world.
Due to high uncertain operating environment, farm management needs a quick change in policies and decision making as their production and profitability is dependent upon very uncertain factors such changing climatic conditions which may affect harvest times, storage issues and disturbed distributions. In order to tackle such issues, it is deemed that a management accounting system would be of great help.
Unlike the first case where company –A found it a waste of resources and time, the company, in this case, finds it very useful to operate under a management accounting system. Hence a fixed judgment cannot be made regarding traditional accounting systems and management accounting systems. It is totally dependent upon the nature of products, the nature of industry and the environmental situation based upon which appropriate accounting method is selected and relied upon for future decision-making process.
3- What conclusions do you make about the relevance of MAS in today’s competitive and (in most cases), uncertain business environment? (4 marks)
Management accounting system in today’s world is not just a system to manage financial numbers of the business, but also keep track of non-financial activities being carried out in the business which are of high importance in production and strategic goals and missions. Management accounting is differentiated from cost accounting records the costs incurred in business for the preparation of final accounts and decision making. Management accounting plays a wider role in the modern business environment by providing information that supports risk management, performance management and strategic management (Drury, 2013).
Management accounting is not bound to follow generally accepted accounting principles or any IFRs to support decision-making processes (Wall Street Mojo, 2019). Management accounting adds value to the businesses operating in today’s competitive environment by the following:
Provision of Information to the management that includes the cost of production, budgets, and cash flows. This process not only includes financial but also non-financial data to help management make strategic decisions.
Assisting in the direction by the analysis and comparison of budgeted and actual outputs and by identifying areas of success or failure.
The motivation of managers for the achievement of the goals of the business by making communication about plans and measuring how well a plan is being performed. In case of failures how the plans may be changed in order to meet the set objectives.
Performance Measurement includes not only financial but also the performance of subdivisions, departments, managers, etc.
Assessment of the competitive position of the business is done to obtain knowledge of how the customer sees the products or services of the organization and what goodwill business has gained in the market. In a competitive business environment, the firm needs to carry out innovations one after another to stay competitive in the market and obtain continuous improvements financially and non- financially both (Ieee Xplore, 2019).
In an uncertain business environment that prevails in the industry today, management accounting plays a vital role to keep the organization ahead of its competitors by keeping the strategic policies up to date as needed by the external conditions of the business (Hammad et al., 2013). Managerial accounting, I used across the organization by involving multiple layers of management and multiple departments to put their heads together and work equally to obtain success for the business. This management not only depends upon executives, but also personnel from functional areas like marketing, operation, production, etc.
Use of Management accounting system in the modern business environment gives a sustainable competitive advantage over other businesses in the same industry. Management accounting system keeps on changing as per changes in the current environment. This is important for the sake of cost reduction, improved productivity, high quality and above all satisfaction with customer needs. Nowadays business is also carried via E-commerce as most users prefer buying online. MAS play a significant role in the provision of cost-benefit analysis for such operations so that maximum benefit is obtained from new opportunities (Zhou et al., 2014).
4- Provide four (4) specific outcomes or lessons learned from each of the two articles’ research findings that will be useful for management accountants in Australian companies to learn from, and justify your answer [i.e. provide 2 outcomes from each of the two studies]. (8 marks)
Article 1 Outcomes
i-Ease of traditional methods to avoid resource wastage
The main outcome of case study 1 was that management is happy and making efficient decision making by using a management accounting system technique, however, on the other hand it is deemed to be a waste of resources and time. The management of company- A in case study 1 argued that unnecessary information is floated when MAS is used for the purpose of reporting. This not only wastes time, but also resources are wasted which could be used efficiently in other operations.
ii-Benefits of involving lower management in the decision-making process
It is clear from the case that autonomy is passed to lower-level personnel when following management accounting techniques. In complex and changing environmental conditions, the workers themselves can make a quick decision about something that they have detailed knowledge of. Later their ideas could be put together for approval from senior management. This not only Allows senior management to put their time and efforts in more strategic issue rather than looking after routine issue (Watts et al., 2014).
Article 2 Outcomes
i-Benefits of Activity-based costing as part of MAS in a setup that has not many legal obligations
The agricultural setups do not have many strict obligations from management bodies for the purpose of their accounting. Yet the case study reflects the need for an appropriate and detailed accounting system so complex working can be made easier. In traditional costing techniques only a limited set of cost basis is available which is inappropriate as a suitable way of allocation of cost of production. Hence the farm business in case study two found management accounting system very much beneficial for analyzing appropriate cost drivers that effect would result in appropriate cost allocation. This, in turn, would lead to better and accurate decisions making regarding production. Storage and distribution of farm harvest.
ii-The usefulness of MAS in smaller growing setups
The farm business identified in case study 2 was initially set up as a small grower of plants and flowers owned by a single family, which later grew into a bigger agricultural setup which demanded huge level of accounting and strategic decision-making policies. It is surprisingly identified how the management keenly wanted to implement a management accounting system to the agricultural setup as it thought that cost allocation is just being done upon mere estimates which proved to be inaccurate when the setup got bigger and higher productivity was obtained. This not only allowed them to obtain accurate cost of production relevant to each product, but also profitability levels of each segment were identified based upon which strategic decision making could be carried out. Segments with high profits may be expanded, and those with higher costs may be rebuilt or minimized in terms of production. Furthermore, the agricultural industry deals in perishable items which are prone to sudden environmental effects such as rain, flood, drought, etc. Hence management accounting system seems appropriate here as it helps in appropriate forecasting and budgeting based upon which sudden decision making can be carried out (Lu et al., 2016).
Conclusion
It has been examined in this study that the management accounting system is well regarded in contemporary businesses. It comes with great benefits, and a huge amount of reporting allows management to come up with the best decision-making policies it can. There is a huge list of management accounting systems available to organizations, so it is important that only relevant techniques are used in order to avoid resource and time wastage. It has been determined from both case studies that use of appropriate management systems not only depends upon the complex business environment but also type of production an organization is producing. The need for contemporary accounting systems compared to those traditional accounting systems depends on several factors that need critical evaluation before setting up the procedure. Instead of reverting back to old methods after failures in new techniques, it is suggested that the right decision making is done at the right time so that a rollback is not needed as happened with Company –A in case study 1. Lastly, globalization and E-commerce in today’s world have taken up a major portion of sales all around the world so management should keep in mind these factors before finalizing their approach.
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