Cmse11101 Advanced Management Accounting: Management Assessment Answers

JJ Ltd is a small-medium sized enterprise that manufactures a variety of electronic control systems for household white goods. Management decision making process of the company relies heavily on the information about stock valuation. 

You have recently joined the Business Accounts Team of the company as an intern, and your manager has asked you to produce a report on the following:

i. Explain the difference between planning, control, and decision making in management.

Your answer should be in the context of Business Accounting, and include an example of each of these three aspects of management. 

 ii. Critically discuss the four inventory valuation methods (Throughput, Direct or Variable, Full Absorption, and Activity Based) and their impact on the total value of the inventory. 

1. Difference of planning, control and decision making in management

The management process refers to process that each and every manager carries out and this process involves planning, controlling and decision making.

• Planning: The process of planning requires detailed formulation of all the required activities in order to achieve the defined goals. So it can be said that planning process requires defined set of goals and type of method to be used to make plan and budgets to accomplish the goals. Planning process is complex process as it summons all the activities that need to be carried out by the employees to achieve the target goals (Curry, Flett and Hollingsworth, 2006).
• Controlling: The controlling process refers to the managerial activity that requires managers to monitor the implementation of the plans and to make the corrective actions to ensure that plans are implemented and executed perfectly. It is the duty of manager is to look after that plans are successfully implemented and it works as it was expected from them.
• Decision Making: Decision making is the costing method used by the managers to choose the best method among the alternatives. This manager function requires various details to choose the best alternative and such details are gathered from the collaborated function of planning and controlling (Curry, Flett and Hollingsworth, 2006).

2: Inventory Valuation Methods

Inventory is regarded as the goods that are ready to be sold to customers and it is shown in the assets side of balance sheet. In order to make inventory ready for sale it requires many expenses to be incurred such as direct material, direct labour and overheads. There are multiple methods to determine the value of inventory for calculating the amount to be capitalized in the balance sheet. There are mainly four methods of inventory valuation, and they are throughput method, full absorption method, direct or variable method and activity based costing method. All these methods are explained in detail below:

• Throughput Method: There are many companies that have direct material as only the variable cost and all the other cost such as labour and overheads fixed cost. Throughput cost uses completely different approach in the management accounting as in this method only direct material expenses are treated as the variable cost and rest all other costs are treated as the fixed cost. Therefore, it can be said that profits of the company can only be increased by making efforts for reducing the fixed overheads. Here, fixed overheads consist of direct labour cost and overhead cost. The throughput costing method revolves around the bottlenecks or scare resources that direct the focus of the companies to improve the performance of the scared resources so that overall profits can be improved. The throughput costing method is based on the theory of constraint (TOC) and applying this theory in this method it can be said that organization can produce as fast as the organization slowest department will allow doing it. This slowest department is commonly referred as the bottleneck. As per the throughput costing method all the cost except the direct material cost is treated as the period cost. This is the reason why this method is also known as super variable costing method (Brigham and Michael, 2013).
• Direct or Variable Costing Methods: This method is frequently by the companies to value their inventory and to find the amount of inventory to be recorded in the balance sheet. The variable cost method is directly related to the production. Under variable costing method, that change on the base of production has to be included in the cost of inventory. The some of the important cost that changes as the production are direct material cost, direct labor cost, and variable manufacturing overhead cost. All the other cost such as fixed overhead cost and other fixed cost are not included in the inventory cost as this method. This means only the direct or variable costs are considered in this method. It can also be said that inventory cost is greater in this method as compared to throughput costing method. The inventory cost under this method is highly variable and changes in proportion to the production units of the inventory (Porter and Norton, 2014).
• Full Absorption Costing: Under this costing method the inventory cost includes all those costs that are associated with the production process. In this method inventory cost is apportioned to individual products this why this method is recommended by the accounting standards in order to value the inventory. Some of the major components of the production cost that is included while valuing the inventory cost are direct material, direct labor, variable manufacturing overhead and fixed manufacturing overhead. So, it can be said that full absorption costing method accumulated only those costs that is linked with the goods and services. Generally this method of cost allocation is known as full costing as this method provide the complete picture of the financial situation. So all the production cost is absorbed under this method that is incurred for the manufacturing process (Bragg, 2010).
• Activity based costing method: Activity based costing method is most popular costing method that is used by to allocate the overhead cost to the products using the cost driver used in each activity. Under this costing method, all the activities that are performed by the organization are firstly identified and cost drivers that regulate that particular activity is used as the base to calculate the recovery rate for allocating all the overhead cost to the products. So it can be said that activity based costing assigns all the overheads in more meaningful manner as compared to traditional costing or absorption costing method. This method uses activities as the base to proportion the cost which is the real cause to occurrence of the overheads. As this method takes all the direct costs and overhead costs occurred in the organization for calculating the inventory cost, the amount of inventory to be capitalized is the highest among all the methods of inventory valuation (Puncel, 2007).

References

Bragg, S. 2010. Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles 2011. John Wiley & Sons.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Curry, A, Flett, P. and Hollingsworth, I. 2006. Managing Information and Systems: The Business Perspective. Taylor & Francis.

Porter, G. and Norton. C. 2014. Financial Accounting: The Impact on Decision Makers. Cengage Learning.

Puncel, L. 2007. Audit Procedures. CCH.