The insignificant inventory levels would make the difference between the''units completed'' and the '' amount of work done in the current period'', the elements used to calculate equivalent units in process costing procedures, very small.
When JIT is implemented, a job-shop system changes to a process system: Almost zero time between operations; and simplification of the entire process. Accountants are then dealing with process costing, rather than job-shop costing.
As JIT and total quality control concepts are successfully practiced and the spoilage and defect rates are substantially reduced, the need for a separate tracing and accounting for the costs of spoilage in process costing may become no longer essential. Instead of the concepts of normal and abnormal spoilage, all spoilage might be considered abnormal and controllable. The system would no longer tolerate normal spoilage.
Changing cost structure:
The existing cost and managerial accounting systems were designed several decades ago to closely monitor direct labour costs for mass production of a few standardized items, since direct labour cost was a significant portion of total product cost. Manufacturing overhead costs, under those systems, are allocated primarily based on direct labour costs. Since the 1920s automation has decreased direct labour content in the production dramatically, to only about one-fifth of overhead in most firms. Management accountants must adapt to the changing cost structure.
At some companies direct labour is no longer accounted for as a separate product cost. With only 3-5% of product cost attributed to the direct labour component, accountants and managers see little benefit in standard cost and variance analyses of direct labour. Direct labour is now included in manufacturing overhead at those companies. This adjustment to the changing nature of operations will reduce a significant amount of cost and effort spent on distinguishing between the two cost categories.
Variable costing vs. absorption costing:
The changes in the environment have made variable costing less important. This is because the percentage of variable costs in the total manufacturing costs has decreased, and grouping fixed overhead item together to be changed to the period does not help the company find ways to control rising fixed overhead costs. Labour cost in an automated manufacturing system tends to become mostly fixed. In the new environment, absorption costing becomes the only meaningful costing method.
New Element to be Considered in Management Accounting:
Traditional capital budgeting analyses consider only operating cost saving, labour cost in particular, in the estimate of future cash inflows. There are many other benefits to consider, in additional to the evaluation of investment in new technologies. The following benefits into the analysis:
. Inventory saving: Work -in-progress and finished-goods inventory levels are reduced substantially due to the increased flexibility, more stable product flow, better quality, and improved production scheduling. When the new process becomes operational, there will be large cash saving as a result.
2. Less floor space: As computer controlled machines replace conventional machines and the need for the storage space for inventory is reduced, a significant amount of floor space will be released because less computer controlled machines will be necessary.
3. Better quality: The new technology improves the company's ability to conform to product specifications, reducing defect and increasing uniformity in products.
4. Increase flexibility: The same equipment will handle both current high volume models and discontinued models; machines can serve as backups for each other; and they can easily accommodate product changes.
5. Shorter lead time: The new technology allows the company to respond to customer demand more quickly.
6. Gaining experience with the technology: This will enable managers and employment to be in a better position to deal with any future technological advances which may drastically alter the market situation.
Main Changes is Activity Based Costing (ABC):
Traditionally cost accountants had arbitrarily added a broad percentage onto the direct costs to allow for the indirect costs. In a business organization, Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. This is a necessary tool for doing value chain analysis.
"A method of measuring the cost and performance of activities and cost objects. Assigns cost to activities based on their use of resources and assigns cost to cost objects based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities."
Process description of the first phase of the ABC-process:
The first phase of the ABC-process of the day-surgery unit started in 2003 and ended in spring 2004. When this first phase started, there were no plans for a second phase. It was considered as a one-off project. At this point one of the major objectives was to study the process the patient went through and whether there were any dispensable activities in that process. Additionally the interest was merely in costs. What were the actual costs of different operations? (Mättö, 2004)
The process began with activity analysis. The chain of activities was clarified with interviews. The employees were asked about the process and the time each activity took. It was quite clear from the beginning that time would be the main driver, and the interviews confirmed this hypothesis. The outcome of the activity analysis was a very streamlined process that had no dispensable activities. The interviews also confirmed the fact that the recovery room and the receiving and sending home patients were the bottlenecks of the day-surgery unit. (Mättö, 2004)
Objective Tools Outcomes
Figure: The first phase of the ABC-process in the day-surgery unit
Process description of the second phase of the ABC-process:
The second phase of the process was naturally an extension of the first phase. The need for the second phase arose from the need for more accurate cost information. When the objectives for the second phase were discussed, also the managerial use of the ABC-model was pointed out. Most of the basic work for building the model was done in the first phase and the second phase focused mainly on the process view of the ABC. This meant mostly new ways of using the model and also adjustments to the model.
The adjustments to the appearance of the model were made so that it would be easier to update it in the future, and the model would not be for one time use only but would be a permanent tool in the unit. Also the reporting was improved. This included the graphics showing instantly the costs of each activity and operation and how the costs are made up. The model now also enables simulation, which shows easily how changes in time, personnel or costs influence the costs of activities and operations. This enables managerial use of the model and helps improving the employees' cost awareness. The simulation possibility was also used to find out the profitability of the
enlargement of the day-surgery unit. In this calculation many simplifications were made, but the model was considered to be a helpful tool in the evaluation. The objectives, outcomes and tools used in the second phase are presented in following figure.
Objective Tools Outcomes
Figure: The second phase of the ABC-process in the day-surgery unit
Traditional costing today:
Despite the fact that it is over 75 years old, most companies still use standard cost systems both to value inventory for financial statement purposes and for many other management purposes as well. While it has some advantages for financial statement purposes (simplicity, consistency, well understood by auditors), it is, at best, meaningless and, at worst, misleading as a tool to assist in making effective management decisions.
Why is this true? It's because the business case for which it is being used today is not the business case for which it was designed. Standard cost accounting was designed for a company that had: 1) homogeneous products, 2) large direct costs compared to indirect costs, 3) limited ability to collect data and 4) low "below the line" costs. Today's company typically has 1) a wide variety and complexity of products and services, 2) high overhead costs compared to direct labour, 3) an overabundance of data and 4) substantial non product costs that can dramatically affect true product, distribution channel and customer profitability.
The typical manufacturing company is still arbitrarily attaching overhead to products using Direct Labour as the driver. They are often allocating the largest cost (overhead) based on the smallest (direct labour). Because of product variety and product line complexity, one homogeneous overhead rate is no longer an appropriate average. Finally, today, we have high tech, high speed data collection and reporting tools. With the proper system, gathering and manipulation of data in multiple complex ways is no longer an issue.
Finally, there are many costs that are "below the line" in a traditional cost system and are not differentiated by product. These include sales, marketing, advertising and administrative functions. In many manufacturing and non manufacturing companies, these costs represent a substantial part of the total value chain cost. The management cost system should address these issues as well.
New Management Accounting techniques have been developed such as activity-based costing (ABC) and strategic management accounting. However, such so-called 'modern' techniques are not being used as widely as their advocates might have expected. For example, various surveys indicate that ABC is only used by between 20% and 30% of companies (e.g., Innes and Mitchell, 1995). Whereas traditional management accounting techniques continue to be used widely.
However, rather than change being necessarily in the type of management accounting techniques adopted, it seems to be more about the manner through which management accounting, including many traditional techniques, is being used. Whilst it is difficult to disagree with the findings of surveys that, at a superficial level, traditional management accounting techniques continue to be used, these surveys fail to identify changes in the way that traditional accounting techniques are now used in practice.
The Changing Nature of Management Accounting, there have been considerable advances in information technology in recent years. One of the most important, apart from the speed and capacity of modern systems, has been the development of data-base technologies which provide the ability to store vast amounts of information in easily accessible ways.
Activity-Based Costing Process of a day -surgery unit- from Cost Accounting to comprehensive Management.
Katja antikainenl; Tarja Roivanen; Mairva Hyvarinen.
Management Accounting Practices and Discourses Change: The role and use of Management Accounting Systems.
Rui Vieira; Keith Hoskin;
Financial and Management Accounting: The Changing Nature of Management Accounting.
John Burns; Robert Scapens.
Managerial Accounting Changes
John Y. Lee
Management Accounting- European Perspectives