Question

Questions
1. What are the 3 problems that might arise from the application of ABC costing?
2. Describe and explain the evolution of a management control system, including how
budgets became a major feature of that system.
3. What is an accounting tool and why is budgeting described as an accounting tool?

4. Define kaizen budgeting and its importance for cost management. How would you
incorporate kaizen budgeting in your organization? Give example.

Answer 1

1. What are the 3 problems that might arise from the application of ABC costing? Answer: Absorption-costing, or full costing, has for years been the most common method of allocating manufacturing overhead. This approach takes the full amount of manufacturing overhead and spreads it equally across the production volume of all products. It does not consider that certain products may be responsible for more or fewer costs from specific activities. Activity-based costing, also known as ABC, deals with this problem.

Problems  that might arise from the application of ABC costing : 1. Implementing an ABC system is a major project that requires substantial resources. Once implemented an activity based costing system is costly to maintain. Data concerning numerous activity measures must be collected , checked and entered into the system.

2. ABC produces numbers such as product margins, that are odds with the numbers produced by traditional costing systems. But managers are accustomed to using traditional costing systems to run theirs operations and traditional costing systems are often used in performance evaluation.

3. Activity based costing data can be easily misinterpreted and must be used with care when used in making decisions. Costs assigned to products, customers and other cost objects are only potentially relevant. Before making any significant decision using activity based costing data, managers must identify which costs are really relevant for the decisions at hand.

4. Reports generated by this systems do not conform to generally accepted accounting principles (GAAP). Consequently, an organization involved in activity based costing should have two cost systems - one for internal use and one for preparing external reports.

Q.2 Describe and explain the evolution of a management control system, including how budgets became a major feature of that system.
Answer:- A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole in light of the organizational strategies pursued.

Causes of management control problems - The causes can be classified into three main categories:

1. Lack of direction - Employees do not know what the organization wants from them.

2. Motivational problems - Individual and organizational objectives do not naturally coincide: individuals are self-interested. Employee fraud and theft are the most extreme examples of motivational problems.

3. Personal limitations - They may be caused by a lack of requisite intelligence, training, experience, stamina, or knowledge for the task at hand. Some jobs are not designed properly.

These five types of management control systems are :- (i) cultural controls

(ii) planning controls

(iii) cybernetic controls

(iv) reward and compensation controls

(v) administrative controls.

Budgets became a major feature of that system:

In the control process, budget, which is a plan of action, is used to control by comparing actual operations and performances as they happen with the planned (budgeted) operations.

Q.3 What is an accounting tool and why is budgeting described as an accounting tool?

Answer :- A management accounting tool is a framework, model, technique or process that enables management accountants to: improve performance; facilitate decision-making; support strategic goals and objectives; and otherwise add value.

Types of Managerial Accounting :- 1.Product Costing and Valuation. 2.Cash Flow Analysis. 3. Inventory Turnover Analysis. 4. Constraint Analysis. 5. Financial Leverage Metrics. 6. Accounts Receivable (AR) Management.

# Budgeting, Trend Analysis, and Forecasting -

Budgeting described as an accounting tool - A budget helps you forecast how much of your assets you use and how much revenue (sales) the asset generate. If you use your assets (resources) wisely, you increase your profit. Assets such as trucks depreciate. They're worth a little less every day as you use them up.

A budget is used to forecast the financial results and financial position of an entity for a future period. It is used for planning and performance measurement purposes, which can involve spending for fixed assets, rolling out new products, training employees, setting up bonus plans, controlling operations, and so forth.

At the most minimal level, a budget contains an estimated income statement for future periods. A more complex budget contains a sales forecast, the cost of goods sold and expenditures needed to support the projected sales, estimates of working capital requirements, fixed asset purchases, a cash flow forecast, and an estimate of financing needs. This should be constructed in a top-down format, so a master budget contains a summary of the entire budget document, while separate documents containing supporting budgets roll up into the master budget and provide additional detail to users.

Many budgets are prepared on electronic spreadsheets, though larger businesses prefer to use budget-specific software that is more structured and so is less liable to contain computational errors.

Q.4. Define kaizen budgeting and its importance for cost management. How would you
incorporate kaizen budgeting in your organization? Give example.

Answer : Kaizen budgeting is defined as a budgeting technique focusing on continuous improvement from a service or product perspective. Kaizen budgeting requires management to set goals based on future plans for process and operational improvements, rather than creating budgets based on the existing cost structure.

1. Budget – This is an estimate of expenditure and income expected to be incurred or earned over a given period of time.

2. Timeframes – A specified period within which an action must take place.

3. ABC method – A system of arranging costs according to their importance.

4. Target-costing – A system of determining a product or service life-cycle cost..

For example, GM might keep track of the direct hours it takes to bolt on a fender or paint a hood. Management compares these hours to the expected and budgeted hours. If the actual hours it took to perform the process is more than the budgeted hours, management will look into each step of bolting on fenders and painting hoods to figure out a way to cut the production time.

Each process is examined for ways to cut costs. Over time, GM develops a more efficient and cost effective way to produce cars.

The kaizen budgeting philosophy can also be used to create better products rather than being used primarily to cut costs. Managers develop a budget and must meet product standards within the set budget. This forces them to create new ways of manufacturing or develop new product ideas.