Managerial Accounting, Essay Example

The primary factor to organizing, planning, and coordinating in global marketing is to develop a flexible framework that permits the business to respond to pertinent changes in the market that they are trying to operate in. This information is needed in helping companies compete in the market that influenced with changes to the methods of production and advanced technology. (Cunnigham, Nikolai, Bazley, Slaughter, and Simmons 15) In order to remain in being competitive the owners must be aware of the product costs, so that they will be able to trade at a profit rather than a loss. It is used in valuing the costs of stocks and determining selling price during the accounting quarters, and more importantly product costs help the organization plan for the future, control the operations that are current, and evaluating their performance in the past. Allocating costs for the organization is also significant in outlining the indirect and direct costs. The methods in helping organization do this through activity-based cost allocation, and cost rate calculations. Each method is used in helping to allocate the indirect costs for the specific costs, expenses, and wages for an organization. While there are many disadvantages and advantages for using these methods, there are still beneficial in trying to help manage the issues for Ausbloom. The importance of production costs for an organization is rooted in the managerial accounting needed to allocate the correct costs and expenses that are necessary in maintain and organization as well as the production. According to research on product costs, “Product costs that were used directly in decision-making were more important than those that were used as attention directing information and they were more important in product mix, output level and product discontinuation decisions in continuous production processes manufacturing.” (Cowton, Drury, Brierley 249) Product costs are directly related to the income and the amount of goods that are sold in an organization. For companies that are in the manufacturing and production industries, identifying and managing production costs will help in sustaining healthy income and gross profit. Product costs are specifically used in determining the costs of each unit of production or service that is delivered by the organization. In order for an organization to remain profitable they must efficiently and effectively track energy inputs, tooling, labor, raw materials, and sum these into the product costs.  Organizations such as Ausbloom are able to do this by classifying production costs to indirect and direct costs.

According to Banker and Hughes (1994), methods for allocating costs, such as activity-based allocation are used in assigning cost of support activities to units of production. (Banker and Hughes 480)  It is considered the more accurate method in allocating indirect costs as it helps managers classify and record the activities of the organization. Other methods used in allocating indirect costs includes cost-rate allocation, a traditional method that is used in indirect cost allocation. “Indirect cost is that cost that is required for the execution of orders but cannot be directly attributed to it.” (Manea and Barbu 213) Cost rate allocation is used in managerial accounting in helping to divide the indirect cost by an object’s costs. Although it is the traditional method that is used, it is not the most effective or efficient in managerial accounting. What would work best for this organization is activity-based cost allocation which provides a more accurate methods of indirect cost allocating. Managers will need to outline and write down the business activities of the flower organization that each department performs. In categorizing the indirect and direct costs, in which they will be reviewed at the end of each month. While cost rate allocation is a good way in managing indirect and direct costs, as well as helping to calculate overhead costs, and figure out the each contribution to the organization’s profits, there are disadvantages. These disadvantages includes time consumption, you can easily charge off indirect overhead without allocating the costs of departmental expenses. It requires effective managerial accounting in order to ensure no mistakes that are made. “Activity based costing, which can be used to avoid a lot of inaccuracy which exists in compiling classical costing and those, which were introduced as reserves in the allocation of direct and overhead costs to the output.” (Kucera, Skorecova, Szovics 359) In accordance with the case study, when the absorption costs are used, the indirect costs that need to be allocated to the products are the overhead costs of the organization.

Looking over the case study of Ausbloom PTY LTD, there are one of the major exporters of native flowers in Australia. The major parts that need to be improved includes, an information system that makes a better organization of purchases and operations. The way in which the organization handles indirect costs are through absorption costing. Full absorption cost includes fixed indirect production costs, variable indirect production costs, direct labor, and direct material.  “Absorption costing is the most common way of dealing with overheads by assigning an appropriate share of the entity’s total overheads.” (Ming, Chung 1) In using absorption costing, identifying direct costs are easy, however indirect costs take another strategy. For the Ausbloom organization, they must use the method described above in order to allocate the indirect costs from direct costs and manufacturing costs.  For the Ausbloom company the indirect costs consists of product depreciation, in the inventory in which is handling fresh products such as flowers, have to be delivered in bloom in a matter of time, or they will be unsellable. Dr. Ferry or other managers in different operations must handle the complex operation of vertical coordination, that mixes well with the vested marketing, production, and exchange of value and interfaces added. Indirect cost directly relate to the needed system that records and coordinates the collection, storage, manipulation, and retrieval of the different packing sheds. Activity based accounting can be used in assigning costs to the tasks, project, services, and products that consume the organization’s resources. Marketing and planning which is a part of absorption costs consists of establishing firm agreements with Europe, the United States, and Japan in order to sell more product. The cost drivers for the organization includes, a system that records the units produced, hours used in production, the miles driven, and the labor hours used by each workers. Dr. Ferry must coordinate the times or the strategy needed in packing sheds for each company. Costs that include coordinating time deliveries of the blooms against the blanket orders to increase the export revenues. These cost drivers are important in allocating the costs to the products.

Product costs are essential in managerial accounting. There are important in all the manufacturing costs for identifying the cost object, indirect costs, direct costs, and overhead costs. In order for costs to be allocated in order to assign to the cost object, they must use the activity based costing method in which assigns costs for the activities that are used throughout the organization. Ausbloom method for absorption costing helps in assigning the cost used in manufacturing a product. Their cost drivers include the hours labored, the miles to fly out the products, and other indirect costs that are used in keeping the organization profitable. These cost drivers are used in helping to allocate these indirect costs to the products for Ausbloom. Effective and efficient managerial accounting creates a better workflow that coordinates, organizes, and evaluates the different operations for better streamline success.

Works Cited

Banker, Rajiv D., Hughes, John S. “Product Costing and Pricing.” The Accounting Review. Vol. 69, No 3. July 1994. Web. 26 October 2014. http://astro.temple.edu/~banker/Accounting/16%20Product%20Costing%20and%20Pricing.pdf

Cowton, Christopher J., Drury, Colin and Brierley, John A. “A note on the importance of product costs in decision-making.” Advances in management accounting. Elsevier, pp. 249-265. 2006. Web. 26 October 2014. http://eprints.hud.ac.uk/2760/

Cunningham, Billie, M. Nikolai, Loren, A., Baxley, John D., Kavanagh, Marie, Slaughter, Geoff, Simmons, Sharelle. Accounting Information for Business Decisions. Cengage Learning Australia PTY Limited. 2012. Book.

Kucera, M., Skorecova, E., Szovics. “Managerial Accounting As A Source of Information For Product Cost Management in Managerial Information Systems.” Agric. Econ. Czech, 49, pg. 357-360. 2003. Web. 25 October 2014. http://www.agriculturejournals.cz/publicFiles/59450.pdf

Ming, Li Tak, Chung, Kwai. “Cost Accumulation Using Absorption Costing” AAT Examination Paper 3 Management Accounting. N.d. Web. 26 October 2014. http://www.hkiaat.org/images/uploads/articles/AAT_Paper_3_Cost_accumulation_using_absorption_costing.pdf

Manea, Delia, Barbu, Mircea. “Beneifts of Indirect Costs Allocation With Cost Drivers.” Review of General Management Vol 15. 2012. Web. 26 October 2014. http://www.managementgeneral.ro/pdf/1_2012_19.pdf