Outline for answers
First responsibility of the Management accountants
Application of the first responsibility to help companies during economic crisis
Second responsibility of the Management accountants
Application of the second responsibility to help companies during economic crisis
Powers and Authorities of the Management Accountant
Use of the powers and authorities to help companies during economic crisis
Use of the traditional method of estimation
Advantages of traditional method of estimation
Criticism to the traditional method of estimation
Distortion of management view
Failure to capture reality
The activity based costing
Advantages over the traditional method of estimation
A clearer view of the reality
Includes contingency measures
Reasons for activity based costing’s infrequent use
Requires more work and effort to perform
Managementaccountants are given the responsibility to hold the key on financialrecords. Because of this, they are in the most strategic position tolead the company in minimizing and/or overcoming effects of economiccrisis. Among the ways in which the management accountants can helpin minimizing and/or overcoming the effects of the economic crisis isthrough the early prediction of the impact of recent nationaleconomic developments to the company by examining financial records.In examining the set of current financial records, managementaccountant may be able to draw a summary of patterns thatcharacterize the financial health of the company. This can enable themanagement accountant to make observations, predictions andrecommendations. If management accountants will do this series ofactivities regularly, early prevention of economic crises will beensured or if ever the economic calamity is wide and of anunpreventable nature, at least the effects of the crises will bemitigated (ProfessionalAccountants in Business Committee, 2009).
Asidefrom this, since management accountants have the responsibility ofmonitoring company expenditures, they can effectively help inminimizing the effects of economic crisis by actively issuing reportson total project expenditures as compared to the amount of projectbudget allocation in order to regularly and timely enable themanagement to adopt measures to adjust to the budget. In addition, ifthe management accountant’s signature will be required every timebefore an authority to disburse any amount of money will be issued,unnecessary costs can be eliminated. This can make all recordstransparent and every financial decision recorded and tracked.
Managementaccountants can also issue regularly long-term forecasts in order toalign all company projects and activities. Long-term forecasts enablethe company to predict their growth in the next couple of years.Without this, only unrelated, short term projects may be undertakenby the company and major, high earning long term projects will not befeasible nor logical for the company to adopt. This makes the companymore vulnerable to periodic economic troughs. Moreover, economiccrises do not usually strike as a sudden calamity. Instead, economiccrises gradually develop and become widespread only when not timelyaddressed. Long-term forecasts that focus on solving problemspermanently instead of temporarily is an effective tool to helpprevent the development of economic crises. In addition, when along-term forecast is available, it can help the management toappropriately decide on what courses of action to take when there isan impending threat of crisis.
Lastly,management accountants, through their partnership with the auditingdepartment, can mitigate and overcome the effects of economic crisisby being able to point put any anomalies or irregularities in thecompany’s processes. With this, the said anomalies andirregularities can be investigated and acted upon as soon as possiblebefore it becomes aggravated by external factors that would lead toserious repercussions to the company. Economic crises are arguablyman-made most of the time. This is because bad economic practices areusually the immediate cause of financial losses. As such, workpractices should be reviewed carefully in order to determine whethera company is already brewing an economic catastrophe within its verywalls(Robert Half International, 2014).
“Thetraditional method of cost estimation distorts management’s view ofbusiness through unrepresentative overhead allocation andinappropriate product costing. This is because the traditionalapproach usually absorbs overhead costs across products and orderssolely on the basis of one allocation base such as direct labour. Andas direct labour cost as a proportion of total manufacturing costcontinues to fall, this leads to more and more distortion andmisrepresentation of the impact of particular products on overheadcosts. Activity-base costing generally provides more accurate productcosts than traditional costing methods. However, it is unacceptablefor external financial reports”
Inthe statement above, the traditional method of cost estimation isused in order to come up with a single and specific cost estimatebased on a previous experience that can be used as a reference forthe current project. A single estimated allocation base summarizesall the projected expenses relevant to an expenditure item, thusmaking the estimate easier and simpler. As mentioned in thequotation, overhead costs are usually absorbed in this type of costestimation. The implication of this is that costs are treated asfrozen and tightly packaged items. Management personnel rely on thisestimate because it simplifies the issues and the items involved intheir expenditure plans. One cannot imagine a project’s expenditureplan containing ranges of amounts for every item identified as a keyindicator. The said scenario will create projection complicationsbecause the management will not be able to arrive at a sensibleprediction regarding the direction of the project. For example,direct labour uses the single estimated allocation base because itincorporates every possible expenditure aspect into one summarizedamount. The traditional method likewise enables a managementpersonnel to draw out specific sets of predictions based on dataprovided by this method which are easier to process because they comein a definite, linear amount. Direct labour is a project item thatexcludes any other possibility of negotiation expenses. As such,estimates are kept at a simple figure. Considering that labour is akey investment item in every project, direct labour cost estimatederived through a single estimated allocation base is a reasonableand practical management practice that enables a definite projectoverview (Mansor,2011).
Evenwith all the advantages associated with a single estimated allocationbase, it is still garnering criticisms. Generally, these criticismsare hinged on the inflexible nature of this method or approach. Inthe statement which is the subject of this discussion, thetraditional method of cost estimation “distorts management view ofbusiness through unrepresentative overhead allocation andinappropriate product costing.” This criticism provides that asingle estimated allocation base gives managers an inaccurate pictureof the product costing because it only misleads them into believingthat no other overhead costs would be affecting the project later on.With this, instead of having an effective prediction of costestimates and product characteristics, managers are led to interpretdata that are not usually exactly descriptive of the amountassociated with essential project components (Mansor,2011).
Inview of the criticisms mentioned in the previous discussion, activitybased costing offers a more sensible option that would enablemanagers to have an accurate picture of every project’s overviewand its path, especially the financial aspects of the project.Contrary to the lack of flexibility of the single estimatedallocation base, activity based allocation enables a manager to seethrough the entire cost aspects of each item that makes up a project.With this, overhead costs are treated separately. Contingency itemsare also given a space in the record ledgers which allows managers tohave a choice of whether to include them or not for a specificprediction. With this, managers are not confined in a single,inflexible set of data that will eventually result to an inflexibleprediction as well. The most attractive feature of the activity basedcosting is its ability to widen the managers’ discretion in comingup with financial forecasts which will then lead to more effectivecompany decisions. In addition, activity based costing can providemore accurate information on the specific costs of project itemsbecause a previous cost estimate that had worked for previousprojects might not necessarily be applicable for certainundertakings. If cost estimates will be based on particular anddistinct purposes, taking into consideration the unique attribute ofeach project, managers can have a safer planning phase because theinitial item cost setting activity can be considered reliable.However, despite the advantages associated with the method,currently, activity based costing is not yet an acceptable practicefor external financial reports (Innes& Mitchell, 1991).
Forexternal reporting purposes, activity based costing is not usedfrequently because this method implies a lengthier and morecomplicated record. If the activity based costing method will beemployed by every businesses, auditors and managing accountants willhave to face a bulky record that may contain overwhelming informationthat would appear to lengthy, which can thus cause discouragementbecause the task appears to be almost impossible to perform. Inaddition, most companies still prefer to use the traditional, singleallocation base method for purposes of external reporting because itwill result to less questions from external people who has limitedinformation on the details of projects. When reports are conveyed ina simple manner, with very distinct cost assignments for each itemthat calls for estimates, external auditors and other people outsidethe company who may be interested in the records can quickly come upwith financial estimates and conclusions from the informationprovided. Unlike managers, external auditors and other personsoutside the company who may be interested in the project recordscontaining information on financial estimates are only concerned witha limited aspect of record analysis (ProfessionalAccountants in Business Committee, 2009).Therefore, having a very detailed account will be more difficult andburdensome for them. Managers, on the other hand deal with a morerounded use of the information involving cost estimates because theyare primarily responsible for the implementation of main tasksinvolved in a project.
Innes,J. and Mitchell, F. (1991). Activity-basedCost Management: a case study of development and implementation.NY: CIMA.
Mansor,Z. (2011). Review on Traditional and Agile Cost Estimation SuccessFactor in Software Development Project. InternationalJournal on New Computer Architectures and Their Applications (IJNCAA)1(3): 942-952.
ProfessionalAccountants in Business Committee (2009). InternationalGood Practice Guidance: Evaluating and Improving Costing inOrganizations.New York: International Federation of Accountants.
RobertHalf International (2014). Bureau of Labor Statistics OccupationalOutlook Handbook. Retrieve from:<http://www.allbusinessschools.com/business-careers/article/role-of-the-management-accountant>.