“The past 15 years have seen a series of new developments within Management Accounting to meet the ever changing needs of the organisation in the light of rapidly changing technologies”. The following will focus on new techniques and developments used in Management Accounting over the last 15 years, by looking at their origins and apparent necessity leading to their introduction within industry. Each development will be assessed individually providing its background, initiation, impact on the business environment and numerical examples of them in action, where appropriate. The developments will be Activity Based Costing (ABC), Throughput accounting (TA) and Just in Time (JIT). Activity Based Costing
ABC is a developed costing system which focuses on the activities within the business and assigns cost objects to each activity. An activity is any form of work or task which can be related to the product. In costing, direct costs are already attributable to a job linked to the product i.e. materials and labour, what ABC does is appropriate indirect costs to events or tasks as an effort to lower the risks of conventional overhead recovery systems. By doing this it allows managers to estimate the cost of individual products and services, which lets them remove unprofitable products and reduce the costs of overpriced ones. The concepts of ABC emerged in the manufacturing sector of the US during the 70’s and 80’s after coming from Japan where it was widely used in manufacturing, from then it was formalised and became a popular decision making tool for managers of that time as absorbing costs via labour was leading to poor decision making at the time. ABC was first coined by Kaplan and Bruns (1987) who focused on its application in the manufacturing sector (where it had been used to best effect), noting that the increase in technology that decade, had to lead to a massive hike in productivity and in turn, reducing direct labour and material costs and increasing indirect costs, bringing ABC to fruition. Once the 90’s came around, ABC started to fade away due to alternative techniques and methods, also developed by Kaplan, such as the balanced scorecard tool and economic value added. However, today ABC is still widely used in many sectors i.e. the service and banking sector but many theorists debate its efficacy. The reasons behind ABC’s large success after its initiation is due largely to it’s accurate cost measurement, as solely recovering direct costs when in reality, the indirect costs play a greater part in the production process means that tasks and jobs were priced much more accordingly. This meant that individual activities could be focused on specifically by managers and cost’s could be reduced where possible, the same point also meant that cost bases where much more flexible; as business activities change, so do the costs, this allowed managers to identify how these changes affected individual activities. The ability to lower costs effectively was an invaluable tool, as the 80’s was a huge economic boom and competition was fierce, what ABC also did was directly relate the product cost to the activity (or activities) needed to produce it. The reason ABC started to fade away slightly after the 1990’s was simply due to its expense. ABC is very costly to apply, it would require the maintenance of a dedicated database and staff needed to handle data into it as well as operate the system to get any practical function from it. That only applies to one or a small group of activities, many businesses have many activities to monitor, and suddenly ABC needs an entire team just to get results. The following are the steps taken to assign indirect costs to activities:
Firstly the businesses activities need to be identified, as they will be your cost base, depending on the sector and the business, these will vary in scope.
After that, costs can begin to be grouped together as cost pools, this stage can differ, depending on staff...
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