EMERGING TRENDS IN MANAGEMENT ACCOUNTING

Traditional allocation method

Activity-based allocation method

Cost s Product s

Cost s
First stage

Activities

Product s
Second stage

Strategic cost management has become an essential area now days. While formulating the strategy for the accomplishment of organizational overall objectives, different cost drivers should be clearly identified. Identification of key cost drivers help companies to focus on key activities that will constitute almost 90% of the total costs. In view of this, the importance of strategic cost management should not be underestimated. This implies that organization should be installing appropriate framework of strategic cost management to reduce its costs in key areas on which the success of organization is heavily dependent.

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Total Cost Management

Issues addressed by TCM

Does your existing system provide reliable information to answer the following ?

Which are your profitable customer segments? What are your product costs and their profitability? Do your cost go up despite cost cutting efforts? Can you reduce your price and yet increase customer value? If not, turn to TCM.

Environmental Management Accounting

EMA aims in establishing a culture of pollution prevention and waste minimization within industries. The success of government and corporate programs to promote EMA depends on developing EMA systems that are cost-effective for industry.

The costs for industry of environmental protection, including pollution reduction, waste management, monitoring, regulatory reporting, legal fees and insurance, have increased rapidly in the past 20 years with increasingly stringent environmental regulations. A rule of thumb of environmental management is that 20 per cent of production activities are responsible for 80 per cent of environmental costs. When environmental costs are allocated to overhead accounts shared by all product lines, products with low environmental costs subsidize those with high costs. This results in incorrect product pricing which reduces profitability.

The most important task is to make sure that all relevant, significant costs are considered when making business decisions. It is also important to note that organization should not spend a lot of time defining exactly which costs are environmental or which costs are not, or what percentage of something is environmental or not.

Responsibility Centers
A subunit in an organization whose manager is held accountable for specified financial results.

Responsibility Centers
has control over the incurrence of costs.

Cost Center Segment

Revenue Center
Segment is responsible for the revenue of a unit.

The Paint Department in an automobile plant.

The Reservations Department of an airline.

Responsibility Centers
Profit Center
Segment has control over both costs and revenues.

Investment Center
Segment has control over profits and invested capital.

Company-owned restaurant in a fast-food chain.

A division of a large corporation.

Evaluation Tool
Cost Center
Profit Center

Cost standards
Contribution income statement

Rate of return on invested Investment Measuring Management funds or Center Performance residual income

Traditional responsibility-accounting systems tend to focus on the financial performance measures of cost, revenue, and profit for subunits of the organization.

Activity-based costing systems associate costs with the activities that drive those costs. In activity-based Activity-Based Responsibility not responsibility accounting attention is directed Accounting only to costs incurred but also to the activity creating the cost.

THANK YOU.