Management accounting Essay Example | Topics and Well Written Essays - 2500 words

Management accounting - Essay Example 20-25, 2003). The type, number, or volume of the products does not directly drive these costs. Several costs even within a factory are questionable for the same reason. Moreover, substantial material vendors and customer also impel quite a few costs. â€Å"In fact there is no single correct (product) cost figure† (Walker, 22, 1999). Costs centers hold records of the financial transactions of the organizations, which they use to calculate their product costs. Several methods for this exist where different organizations may employ unique methods. The simplest of the aforementioned methods for product costing, employs only direct costs. Earlier, labor costs received greater importance. Companies carried out everything manually. The number of employees involved dictated the output volume. Then came the time when machines began to substitute labour in production. This progress posed a problem to the prevailing costing method because most of the machine costs are depreciation costs and are not comparable to direct labor costs (Fritzsch, pp. 83-89, 1997). Organizations and experts highlighted several more weaknesses of the traditional accounting system because it was not compatible with the development of the new business methods. To overcome the weaknesses of the simple product costing method, accounting experts introduced standard costing. Standard costing method uses Bill of Material (BOM) and the capacity demand of the product to calculate the product cost. To calculate direct costs, the accountant considers raw material costs and labor costs, as incurred per unit of production. Whereas, to calculate indirect costs, they use the product of multiplier factors (predetermined rates) and the direct costs (Broadbent et al., pp. 31-37, 2003). Although standard costing is an easy and appropriate way for actual cost follow-up, it may lead to inappropriate decisions when used erroneously in future planning. The basic issue with standard product costing is that it do es not provide sufficient information to facilitate the user to control the overheads and other indirect costs related to the product. For instance, accounting experts express the production overheads multiplier as an additional percentage of the product direct cost. Recursive calculations from past accounting figures drive this value and it usually allows a rising trend for overheads when managers use it as a standard for a new product (Shank & Fisher, 77, 1999). Having seen the drawbacks of simple and standard costing systems, experts in the field have been attempting to formulate generic costing methods since decades. For example, traditional costing methods include only the manufacturing costs in the total unit cost of each product. However, the new concepts in cost management require the accountants to cross the usual limits of product costing methods by applying all organizational costs in a more applicable and informative way and attaching them to cost objects such as a proce ss, product, customer etc (Broadbent et al., pp. 41-48, 2003). The design of such advance cost management system (ACMS) requires companies to integrate the new concepts practically in the business processes and operating systems (Schnoebelen, 52, 1993a).  Ã¢â‚¬ËœActivity-based costing’ is one of such advance cost management systems. Activity based costing technique is a way of assigning