BE113 Management Accounting Report: SCB Cost Reduction Strategies

This report analyzes management accounting strategies for Santa Cruz Bikes (SCB), a start-up mountain bike manufacturer. Part A explores potential challenges SCB faces in adopting Activity-Based Costing (ABC) and traditional costing methods, including issues like cost distortion and the complexities of implementation. It also examines cost-saving techniques, such as reducing labor and material costs, to increase profit margins. Part B delves into the benefits of ABC in preventing cost distortion and improving overhead control compared to traditional costing, emphasizing the importance of accurate cost allocation and waste reduction. The report recommends that SCB prioritizes reducing material costs through bulk purchasing and supplier negotiations. The study highlights how ABC provides more precise information for managerial decision-making and performance assessment in a competitive business environment. This report provides a comprehensive overview of management accounting principles and their application in a real-world business scenario, demonstrating the importance of strategic cost management for sustainable growth and profitability.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Part A:........................................................................................................................................2
Introduction:...............................................................................................................................2
Requirement (i): Potential challenges that SCB may face in adopting either of the two pricing
strategies:....................................................................................................................................2
Requirement (ii):........................................................................................................................3
Part B:.....................................................................................................................................5
Introduction:...............................................................................................................................5
Discussion:.................................................................................................................................5
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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Part A:
Introduction:
The present report is based on discussing the potential challenges involved in
adopting the appropriate pricing strategies for SCB which is a start-up company of
manufacturing mountain bikes (Collis and Hussey 2017). The report would also assess the
extent to which cost reduction can be possible in the potential areas.
Requirement (i): Potential challenges that SCB may face in adopting either of the two
pricing strategies:
The potential challenges that SCB can face by implementing the ABC costing are as
follows;
a. SCB might fail to differentiate between the “fixed and variable cost” and the entire
“absorption costs” especially the sunk cost. The ABC analysis should be
supplemented by added “cash flow”. The SCB should initially determine the
incremental effect of numerous alternatives (Kaplan and Atkinson 2015).
Nevertheless, the ABC system is regarded is viewed as “integral calculus” which
would slender the large number of possible alternatives while making decision to a
small number which can be later carefully scrutinised by SCB by using the alternative
analysis (Cooper 2017). The incremental investigation characteristically disregards
the costs that are sunk with regard to the resolution in hand. Therefore, for SCB, ABC
may emerge as cost that were sunk costs.
b. For SCB, the improved technology makes the ABC reasonable in the present day
business environment, however there is a tendency of complicating the system with
large number of activity based “cost pools and cost drivers” (Otley 2016). SCB may

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face the challenge by implementing the ABC if the resulting systems turn out to be
complicated where not one person can comprehend or proficiently maintains it.
c. Other issues that may be existent for SCB while implementing the ABC system such
as the absence of clear corporate purpose, inadequate assurance of senior
management, use of external consultants that does not understand the organization
and resistance to change (Datar and Rajan 2018).
On the other hand if SCB implements the traditional cost allocation system then it
may face the following challenges;
a. SCB when implementing the traditional costs system may lack the detailed
calculations which might distort the actual overhead expenditure (Lavia López and
Hiebl 2015). It simply skews the vital measures such as the profitability of the product
by assigning the costs arbitrarily rather than taking into the account each activity for a
specific product.
b. SCB may also face the challenge of reducing the waste because it does not shows
them with every indirect costs for each of the specific product or service (Cooper
2017). The traditional costing does not gives that ability since it views the overhead
costs in general.
c. For SCB implementing the “traditional costing system” does not factor in the
unanticipated expenditure (Collis and Hussey 2017). This means that it can cost SCB
more to produce the motorbike which it has projected to produce.
Conclusively it can be stated that instead of implementing the “traditional costing”
because the “Activity Based Costing” is very simple for the SCB business. It does not assess
the non-manufacturing costs which the activity based costs does.

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Requirement (ii):
For SCB the best way to increase the profit margin in manufacturing is to decrease the
manufacturing cost of its bikes rather than increasing the cost of product. Below stated are
numerous cost saving techniques that can be adopted to lower the cost of manufacturing
procedure.
Reducing the cost of labour:
The most significance expenditure is the labor cost can be an essential cost saving
measure (Redding and Turner 2015). There is a probable way of doing this. SCB can reduce
the hourly rate by hiring the unskilled labour.
Reducing the cost of materials:
For SCB material is viewed as the most significant part of production costs that is
involved in manufacturing. When majority of the manufacturing expenditure is because of
raw materials costs, it is reasonable to look for ways to lower the expenditure (Lee, Kim and
Welk 2014). As SCB is a start-up company it can look for ways to purchase its raw materials
at lower price. It is recommended that the company should purchase the raw materials in bulk
as this will help in taking discount from the supplier and comparing them with another. This
procurement procedure will help SCB in getting the raw materials at a highly competitive
price.
Conclusion:
On arriving at the conclusion it is recommended that SCB should lower its material
costs as this will help in reducing the expenditure involved in the raw material. The company
here is also recommended to purchase the raw materials in bulk and negotiating the same
with the multiple suppliers and comparing them with the other supplier, particularly the
purchase procedure. This will help in getting the most competitive price on the raw materials.

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Part B:
Introduction:
The management accounting system is better identified as the tool for assisting the
managers in making decision, formulating plans and operating controls. The “Activity-based
costing” (ABC) was formed and has been supported as the means of overpowering the
methodical distortions involved in “traditional costing” and bringing back the relevance in
the management accounting. The ABC is viewed as an “influential tool” for a business to
have the correct and actual cost for its product by evading the cost distortion which might
result in “sustainable development” and growth that is obligatory to be competitive in this
era of globalization and difficult business environment.
Discussion:
There are several organizations in manufacturing industry which has accepted new
method of costing. According to Datar and Rajan (2018) there are two purpose of “activity-
based costing”. The primary purpose is to prohibit cost distortion. “Cost distortion” mainly
happens when traditional costing combines all the indirect cost under a “single cost pool”.
“Cost distortion” is normally prevented by ABC by implementing multiple cost polls
(activities) and “cost drivers”. The second objective is to reduce the waste or non-value
added activities by offering a process view.
The ABC is motivated based on the belief of “traditional accounting information”
but useless for managers that are interested in assessing the effectiveness of resource
allocation decision in their organizations. The “traditional information” is directed towards
satisfying the auditors or other external parties that are interested in certain evidence of
financial responsibility. It is evident that “traditional costing system” uses a single, volume
based cost driver. This is viewed as the primary reason where the “traditional costing

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system” distorts the costs of product. In majority of the cases, the “traditional costing
system” allocates the costs of overhead to products based on their relative use of direct
labour. As a result of this, the traditional costing system generally reports inaccurate cost of
products. The problem lies in underlying practice of “traditional costing”. They obey to the
assumption that products results in costs. Every time when a product is produced it is
presumed that a cost has incurred. This assumption is valid for specific direct cost but it is not
useful for activities which is not performed directly on product units. Fundamentally, the
traditional costing system tries to assign cost directly to products instead of activities first and
later from activities to product units. This system only gives information on what is spent but
not on why it is spent.
While under ABC system it is completely different from the traditional costing
system. The “traditional costing system” presumes that produces results in costs while ABC
system have activities which is fundamental to cost objects. The “ABC costing system”
improves the control on overheads through a cost/cause relations which is activity and cost.
While using ABC, costs are allocated for each activity as the “independent cost object”.
These costs are later implemented on commodities when they undergo different activities.
The ABC system assigns the costs to objects on the basis of the activity which correctly
measures the consumption of activity. While using the ABC system managers makes an
attempt of assigning the costs of noteworthy activities to products which causes those costs to
occur. This leads to activity based costing giving adequate information to enable the
managers in knowing which activities results the use of resources.
On implementing the ABC system it would reduce the issue of “cost distortion” by
making a cost pool for every activity which can be isolated as “cost driver”. Under the ABC
system, the cost of overhead is assigned to hefty quantity of cost pools which constitutes a
highly significant activities involved in the process of production. It is also correct that ABC

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system uses the numerous indirect object due to several primary activity areas. The ABC
system allocates the cost of activity to “cost objects” on the basis of activity drivers which
accurately measures consumption of activity. While using the ABC system the focus point
remains on resources and activities which causes them. There should not be any division
among the product and period costs as defined under financial accounting. Even though
classification of activity is subjective, it is only considered as the tool that helps in improving
performance.
Conclusion:
The ABC costing has come up with modern concept in trade and commerce. It has
transformed the traditional costing view and management accounting. It measures cost
correctly then other volume based costing system. With more correct allocation of overhead
costs it results in fewer distortions and acts as performance assessment tool.

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References:
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Cooper, R., 2017. Target costing and value engineering. Routledge.
Datar, S.M. and Rajan, M., 2018. Horngren's Cost Accounting: A Managerial Emphasis.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lavia López, O., & Hiebl, M. R. (2015). Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research, 27(1), 81-119.
Lee, J.M., Kim, Y. and Welk, G.J., 2014. Validity of consumer-based physical activity
monitors. Medicine & Science in Sports & Exercise, 46(9), pp.1840-1848.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Redding, S.J. and Turner, M.A., 2015. Transportation costs and the spatial organization of
economic activity. In Handbook of regional and urban economics (Vol. 5, pp. 1339-1398).
Elsevier.