Unit Amounts Of Other Variable Costs example essay topic

BAO 2204: Management Accounting. Assignment 1. Article: Ferrara, W. L, 1995, Cost / Management Accounting- The 21st century, Management Accounting (US), December, pp. 30-36. The purpose of this report is to review the changes that Management accounting has undergone throughout the 20th century and how these changes will have an effect on Management Accounting in the 21st century, according to Ferrara. The article by Ferrara provides a comprehensive view as to how Management Accounting has been beneficial for organizations, which is divided into four separate areas and how it will continue to be as Management Accounting approaches the 21st century.

These changes are all outlined below: The first paradigm that Ferrara outlines is Paradigm A, which consists of the turn of the 20th century until the 1940's. This was the era of the Industrial revolution plus, and was a representation of the image of an early day industrial engineering type. As a result, the costs that were involved were direct materials, direct labor, manufacturing overhead, as well as marketing and administrative costs. All of these costs were joined together in order to form a total cost per unit of output. Therefore, in many ways, the total cost per unit excluded marketing and administrative costs, which were included as a factor of desired profit. This enabled the sum of the total cost and desired profit to generate a target selling price per unit.

The second paradigm focused on the period from the 1940's until the 1980's, which was the era of cost-volume profit analysis as well as direct costing, and in which it was introduced through the distinction between fixed and variable costs. Therefore, variable costs per unit were determined by engineering standards and analytic techniques, which meant that the volume of activity primarily related to fixed costs. This has also led to many variable costs becoming fixed as time has gone by. The variable costs per unit for direct materials and direct labor were easily determined by the engineering specifications for materials and labor requirements.

The derivation of variable costs per unit through engineering standards and analytic techniques only left the fixed costs to be considered when determining the volume of activity to be divided by the derivation of per- unit costs. The issue of dividing the volume of activity had become a larger issue as the relative amount of variable costs had diminished and the relative amount of fixed costs had increased. The third paradigm focused on the period of the late 1980's through to the early 1990's. This was the era when activity- based costing was introduced. Under activity- based costing (abc), there were 3 elements of variable manufacturing costs: i. Costs that varied with product units; ii.

Costs that varied with product complexity, such as the number of batches; and. Costs that varied with product diversity, such as the number of products. Activity- based costing (abc) was argued as being nothing more than an updated, revised, and most likely a more accurate version of the absorption costing concept. This caused the new face of management accounting to focus on the implication of basing decisions on their estimated effects of marginal balances and contribution margins instead of 'full cost' calculations. The fourth paradigm was based on the period of the 1990's and beyond. This was the era of market driven standard (allowable or target) costs as opposed to engineering driven standard costs.

This means that the allowable or target cost per unit is a market- driven standard cost that must be met, if the desired profits are to be achieved. Furthermore, Paradigm D creates a series of provocative new issues, such as: - all that counts, is that the total cost per unit must not be greater than the allowable or target costs, should the desired profits be achieved. This gives Ferrara reason to suggest that the distinction between fixed and variable costs is either considerably less relevant or totally irrelevant. The second issue is: - if it is believed to be a part of continuous improvement, then the allowable or target cost per unit must be reduced as time goes by. Ferrara concludes this paradigm by outlining that continuous improvement even creates the possibility of more positive relationships with suppliers and customers, in order to reduce costs and increase quality as well as performance.

According to Ferrara, the relationship between costs and selling price has undergone considerable change throughout the 20th century. He proceeds to highlight that a desired profit as well as the sum of the total cost and desired profit, which generated a target selling price per unit was added to the calculation of the total cost per unit. The main result was to primarily achieve the target selling price per unit, which was the sort of price that would generate the desired profitability, if projected unit- costs could be achieved. Therefore, variable costs per unit for direct materials and direct labor were easily determined by engineering specifications for materials and labor requirements. This enabled per unit amounts of other variable costs to be calculated.

The focus on the development of a total cost in order to assist in determining a selling price had diminished. Instead, a selling price which was believed that the market would allow to help determine the cost in which the market was going to allow, would be used. This concept was often referred to as 'price-led costing' instead of cost-led pricing. As a result, the target cost per- unit was a market- driven standard cost that was always required to be met if desired profits were to be reached. Finally, Ferrara outlines his thoughts on the 21st century paradigm in which he believes that management accounting is entering into a whole new era. Therefore, there is a necessity for continuous improvement in management accounting through the changing times.

The use of activity- based costing (abc), would be greatly assisted by combining paradigms C and D in the determination of product promotion and pricing strategies. This combination would add more depth in the role of activity- based costing (abc), when it comes to forcing the use of alternative cost structures. As a result, the shifts from Paradigms C and D, which focus on per-units, could be achieved by the multiplication of the expected actual and actual volumes for each product, through the per- unit amounts at every respective volume production level. It would then be easy to develop contribution margins in the product line income statements.

Ferrara concludes that activity- based costing (abc) will continue to play a large role in management accounting, and along with combining paradigms B and D, it will have a huge influence as management accounting proceeds to the 21st century.