Question

Conceptual Questions of Management Accounting

Q1 Discuss the role of management accountants within organisations.

Q2 Explain, when estimating overhead costs, why an organisation would choose to use managerial judgement instead of the high-low method.

Q3 Identify and discuss ONE (1) pricing strategy that a firm could use.

Q4 Explain the difference between the direct method and the reciprocal method for allocating support department costs.

Q5 Discuss the environmental, social and economic impacts associated with life cycle analysis for ONE (1) of the products made by Kilmarnock Enterprises.

Answer 1

1)

7 Roles of Management Accountant:

1. Stewardship Accounting:

Management accountant designs the frame-work of cost and financial accounts and prepares reports for routine financial and operational decision-making.

2. Long-term and Short-Term Planning:

Management accountant plays an important role in forecasting future business and economic events for making future plans i.e., long-term plans, strategic management accounting, formulating corporate strategy, market study etc.

3. Developing Management Information System (MIS):

The routine reports as well as reports for long-term decision-making are forwarded to managerial personnel at all levels to take corrective action at the right time.

The management accountant also uses these reports for taking important decisions.

4. Maintaining Optimum Capital Structure:

Management accountant has a major role to play in raising of funds and their application. He has to decide about maintaining a proper mix between debt and equity. Raising of funds through debt is cheaper because of tax benefits.

However, it is risky as because interest on debt has to be paid whether the firm earns adequate profits or not. Management accountant has, therefore, to maintain an optimum capital structure and give due consideration to various cost of capital theories, leverage and possibility of trading on equity.

5. Participating in Management Process:

The management accountant occupies a pivotal position in the organisation. He performs a staff function and also has line authority over the accountant and other employees in his office. He educates executives on the need for control information and on the ways of using it. He shifts relevant information from the irrelevant and reports the same in a clear form to the management and sometime to interested external parties.

6. Control:

The management accountant analyses accounts and prepares reports e.g., standard costs, budgets, variance analysis and interpretation, cash and fund flow analysis, management of liquidity, performance evaluation and responsibility ac­counting etc. for control.

7. Decision-Making:

Management accountant provides necessary information to management in taking short-term decision e.g., optimum product mix, make-or-buy, lease or buy, pricing of product, discontinuing a product etc. and long-term decisions e.g., capital budgeting, investment appraisal, project financing etc.

However, the job of management accountant is limited to provision of required information in a comprehensive as well as reliable form to the management for decision-making purposes. But the actual decision-making responsibility lies with the management. In other words, neither the management accountant nor the internal accounting reports can make the decisions for the management.

2)Explain, when estimating overhead costs, why an organisation would choose to use managerial judgement instead of the high-low method.

managerial

• Managerial accounting is the type of accounting that provides financial information to managers and decision-makers within a company.
• Managerial accounting often involves various financial metrics, including revenue, sales, operating expenses, and cost controls.
• Managerial accounting helps companies plan, forecast, and budget at an enterprise-wide level to ensure the company's long-term success.

high-low method.

• The high-low method is a simple way to segregate costs with minimal information.
• The simplicity of the approach assumes the variable and fixed costs as constant, which doesn't replicate reality.
• Other cost-estimating methods, such as least-squares regression, might provide better results, although this method requires more complex calculations.

3) Identify and discuss ONE (1) pricing strategy that a firm could use.

Pricing for market penetration

As a small business owner, you’re likely looking for ways to enter the market so that your product becomes more well-known. Penetration strategies aim to attract buyers by offering lower prices on goods and services than competitors.

For instance, imagine a competitor sells a product for $100. You decide to sell the product for $97, even if it means you’re going to take a loss on the sale. Penetration pricing strategies draw attention away from other businesses and can help increase brand awareness and loyalty, which can then lead to long-term contracts.

Penetration pricing can also be risky because it can result in an initial loss of income for the business. Over time, however, the increase in awareness can drive profits and help small businesses stand out from the crowd. In the long run, after penetrating a market, business owners can increase prices to better reflect the state of the product’s position within the market.

4) Explain the difference between the direct method and the reciprocal method for allocating support department costs.

Direct Method of Allocation

The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base. Services used by other service departments are ignored. This means the direct method does not recognize service performed by other service departments. For example, if Service Department A uses some of Service Department B’s services, these services would be ignored in the cost allocation process. Because these services are not allocated to other service departments, some accountants
believe the direct method is not accurate.

V/S

Reciprocal Method of Allocation

The final method, is the reciprocal method. Although it is the most accurate, it is also the most complicated. In the reciprocal method, the relationship between the service departments is recognized. This means service department costs are allocated to and from the other service departments.

5) Discuss the environmental, social and economic impacts associated with life cycle analysis for ONE (1) of the products made by Kilmarnock Enterprises.

Economic considerations

• Economics of engineering a component / system depends on three factors: o component design, o material usage, and o manufacturing costs.

• All these three factors are inter-related i.e., one or two might influence the choice of others.

• Manufacturing of a component starts from conception, design, material selection.

• Material life starts from extraction, forming into a component, service, and disposal.

• Inspection, packing, and transportation adds onto the increase the cost of a product.

Environmental considerations

• Manufacturing of a product does have impact on environment in many ways.

• This is because resources required to produce a product comes from different parts of the world. • Along with these, detrimental effects of industrialization also spread its wings to various parts of the world.

• A material used to produce a product goes through number of stages / phases.

• These include extraction of raw materials from natural resources through production, use during the service, and finally its disposal. It is some times known as cradle-tograve life cycle of a material.

Life cycle model

Raw material acquision =>Processess=>Transport=>Manufacture=>Use/Service=>Waste Management

Material life cycle

• Raw materials are first extracted from natural earthy resources through drilling, mining, etc.

• Later-on these are subjected to purification, refining to convert them into metals, ceramics, rubber, fuel, etc.

• These primary products are further processed to obtain engineered materials like metallic alloy, glass, plastics, semi-conductors, etc.

• Now the engineered materials are shaped, heat treated to make components which are assembled into products, devices that are ready for use by society.

• During the service, products become old, out fashioned, break down, or may not serve the purpose efficiently. So they are discarded. This competes the life cycle.

Social issues

• Raw materials and energy are prime components for manufacturing a product

. • However, they are limited in nature

. • Hence, materials and energy need to conserved

. • Material life cycle involves interactions and exchanges among materials, energy and the environment including the society

. • Social issues of material usage relates to weather distribution, and safe waste disposal

Recycling issues

• Metals and alloys tend to get corroded up to some extent i.e. bio-degradable. However, some of them are toxic. On the other hand, most metals and alloys are recyclable.

• Ceramics / glasses are, however, are hardly recycled. It is because their raw materials are inexpensive, and recycling process is time consuming and expensive.

• Plastics are mostly recycled, and just disposed through land-fills. Thermo-plastic polymers are easily recycled up on heating to higher temperatures. On the other hand, recycling of thermo-set plastics is much more difficult. Hence these are usually disposed. Thus, there is a trend to use alternative materials which are recyclable. Ex.: thermo-plastic elastomers in place of traditions rubber.

Life Cycle Analysis

• Industrial approach to assess the environmental performance of products is termed as life cycle analysis / assessment (LCA).

• The complex interaction between a product and the environment is dealt with in the Life Cycle Assessment (LCA) method. It is also known Ecobalance.

• One important reason for undertaking an LCA study is that there are growing concerns about a variety of environmental issues as expressed by public opinion, political bodies, and industry.

• LCA systematically describes and assesses all flows to and from nature, from a cradle to grave perspective

. • LCA is not only product-orientated; it is also quantitative and thus seemingly objective. Thus, it was no longer necessary to reply on simple rules of thumb.