Chapter 20 Contemporary issues in management accounting

Group discussion question notes

20.1
1. It is true that ABC has caused much excitement among management accountants, especially those working in academia. However, it is difficult to see why this is the case. Basically, the technique is just a more accurate and more detailed way of absorbing overheads into product costs. 2. It is probably less true that it is just a fad and a fashion because any technique that enables a closer relationship to be established between levels of activity and their consequent costs must surely be welcomed.

20.2
1. Backflush costing is a modern management accounting technique that complements a just-in-time production system (JIT) whereby products are only manufactured when an order has been placed for them. Backflush costing simplifies the book-keeping procedures as entries are only made in the books of account when either the finished units are produced or when the raw materials are purchased and the finished units are produced. Another method is to record them only when the raw material units are purchased and when the finished goods are sold. Hence irrespective of which method is adopted, backflush costing does not require work-in-progress accounts to be kept. 2. This method of book-keeping might appear to be only of relevance to management accountants but it also has consequences for non-accounting managers. As fewer records are kept of productive activity the amount of information available will be limited and this could lead to a loss of managerial control. This could lead to inefficiencies and a consequent loss of business, and this could affect all personnel employed by the entity. 3. Backflush costing may only be appropriate and may only work successfully if the JIT procedures are working smoothly. If they are, then normally it will have little day-to-day relevance for most managers.

20.3
1. Possibly, but not entirely. 2. Ultimately, it is up to the Chairman and his board to determine policy. The Board should not introduce SMA simply because the accountants argue for it. It should be argued on its merits in respect of that particular company. 3. It really is a derogation of duty if the Chairman meekly acquiesces to anything put to him by his accountants. Accountants may appear to be somewhat awesome figures, and they might have some statutory backing for their views (especially if it is a financial accounting matter). Nonetheless, ultimately, it is up to managers to manage, and they should not allow themselves to be unduly influenced by the arguments put forward by their accountants.

Accounting for Non-Accounting Students, 5th edition, Lecturers Guide. Pearson Education Limited 2001

93

Practice questions
20.4
1. Activity based costing (ABC) is a refinement of the more traditional method of absorbing overhead costs. Overhead costs are classified into similar groups of activities or cost pools. The main activity that drives each cost pool is identified and the cost per activity (e.g. the cost per material requisition) is then calculated. 2. The proponents claim that ABC enables a fairer share of overheads to be charged to products, thereby enabling more realistic product costs to be determined. If selling prices are then based on cost, it is likely that they will be more representative of the cost incurred and that they offer a more competitive price in the market place. 3. Hence ABC is probably more useful to managers when it comes to decision-making than the more traditional method of absorbing overheads because it may result in the determination of more accurate product costs.

20.5
1. In theory, a just-in-time production system (JIT) is one where products are only manufactured when a customer places an order for them. This procedure means that, again in theory, materials will only be ordered from a supplier when they are required for an order that has already been placed. 2. Thus materials are only purchased for specific orders and it is then possible to identity the specific cost of such materials. Consequently, no material pricing problems arise because the cost of materials associated with the particular order is always known. It is only when materials are ordered for stock that a material pricing problem arises and an estimate may have to be made. 3. In practice, however, it is not always possible to place a specific material order with a supplier precisely when required and it is inevitable that some material orders will find their way into the stores. In such circumstances a material pricing problem will still arise.

20.6
1. Backflush costing involves making a record in the books of account only when (a) raw materials have been purchased and the finished goods are completed; or (b) when raw materials are purchased and the finished goods are sold; or (c) when the finished goods are sold. Hence it is a simplified form of cost book-keeping that fits in with a just-in-time production system. 2. Life cycle costing involves collecting detailed data about the cost of products from their initial development to their eventual abandonment. 3. Strategic management accounting involves collecting detailed data about the entitys competitors product costs and sales revenue, and profits and losses. 4. Target costing is a cost control mechanism whereby the selling price of a product is determined, the desired profit margin established and a vigorous attack is then made on costs to ensure that the gap between the unit selling price and the unit cost is as great as possible. 5. Throughput accounting concentrates on measuring sales revenue against direct material costs in order to encourage the maximum amount of direct material turnover. The idea behind this technique is that the more direct materials are turned over, the greater the throughput (or activity) of the entity and hence the greater the profit. 6. All of these techniques have a place in a modern manufacturing environment and they are not necessarily exclusive. Backflush costing has possibly less of a direct effect on non-accounting managers than do the other techniques. Life cycle costing and strategic management accounting are highly relevant to all managers in decision-making. Throughput accounting helps to identify bottlenecks in an entitys operations and hence it has day-to-day implications. However, perhaps target costing has the most impact on all personnel within the entity because it requires a most rigorous approach in the search for cost savings throughout the entire entity. 94

Accounting for Non-Accounting Students, 5th edition, Lecturers Guide. Pearson Education Limited 2001