Strategic Management Accounting Report: Modern Manufacturing Analysis

This essay delves into the realm of strategic management accounting, examining its significance in the modern manufacturing environment. It begins by outlining the characteristics of this environment, emphasizing the importance of quality and efficient production. The essay then explores the usefulness of Activity-Based Costing (ABC) in allocating costs accurately, especially for companies with customized products or services, while also acknowledging the challenges of its implementation. Furthermore, it discusses the Theory of Constraints (TOC) and its application through throughput accounting, highlighting its role in improving profitability by identifying and managing constraints within the production process. The essay also analyzes the importance of target costing in product design and development. The report emphasizes the application of these concepts to increase profitability within manufacturing companies.

Essay
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INTRODUCTION
Strategic management accounting is an extension of traditional management accounting
which focus on external environment of business. This aspect is related to a combination
between strategic position of a firm and management accounting principles (Burns, Hopper and
Yazdifar, 2004). The present report deals with explaining characteristics of the modern
manufacturing environment and the usefulness of Activity Based costing in production units and
importance of Target costing in product design and development. This report further discuses
about theories of constraints and accounting application and defines how these may assist
modern manufacturing companies to increase their profitability.
TASK A
Characteristics of the modern manufacturing environment and the usefulness of Activity Based
costing within the environment
Manufacturing is the process of producing goods for sale through using labour and
machinery as well as other useful resources. The manufacturing term involves range of human
activities from handicraft to high tech technology however, it is commonly applied to industrial
production. Within industrial production, raw materials are transformed or converted into
finished goods to a very large scale. Furthermore, some manufacturing goods are used to product
some more complex good i.e. aircraft, household products and auto-mobiles. Manufacturing is
the most common activity that take place in all types of economic systems (Maelah and Ibrahim,
2015). In the modern manufacturing environment, quality of products is the most focused area of
manufactures. To the view point of economic reformers, in the free market economy, the
manufacturing activity is directed toward the mass production of goods so at to products can be
soled to the consumers at profitable prices. On the other hand, in collectivist economy,
manufacturing activity is more focused for state to production and supply of goods to a centrally
planned economy. Nonetheless, in a mixed market economy, manufacturing activities are
conducted while flogging the norms and regulations of government. In other words, the
manufacturing activities are conducted under government regulations.
In the present era, manufacturing consider all intermediate processes which are needed
for the production and integration of a goods and related components. For a manufacturing unit,
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cost of production matters a lot, hence, it becomes crucial to understand the actual cost
associated with the production process. A major characteristic of a modern manufacturing
environment is that production of products is done while assessing proper demand from market
and the quality aspect that are required (Kate-Riin, 2012). It has been witnessed that the
manufacturing units require information which is relevant, accurate and readily available. Proper
information is requiered to formulate and operationalise functional strategies as well as to
support decision making related to product mix and production costs. Within the modern
manufacturing environment manufacturers have dissatisfied with conventional costing systems
along with this, a specific concern about the suitability of conventional costing systems have
been raised.
Activity-based costing is a renowned way to allocate costs to the manufacturing activities
which is based on the amount of resources that a produced product and services consumes. From
a in-depth secondary investigation, it has been found that use of ABC (Activity-based costing) is
crucial to the businesses which are involved in providing customized products or services.
Within a customized manufacturing environment ABC allocation is helpful in assessing the
actual indirect costs so as to identify the true cost of a single product. However, it has been
witnessed that implementation of Activity-based costing method can be a challenging task for
manufacturing organization (Vanderbeck, 2012). The data indicates that ABC method has been
emerged as an alternative of conventional costing systems. Kaplan and Cooper, Professors of
Harvard Business School have developed Activity-based costing model to list out the cost of
each activity that contributes to the production of specific product or service. Nonetheless, in
terms of treatment of non-volume related overhead cost, is different in ABC method from
conventional costing methods. The benefits acquired from the use of activity based costing for a
manufacturing organization have a long list. With the use of ABC method, a production unit can
have more accurate product line costing in which non-volume related overheads are significant
considered while large scale product line is manufactured. This method is flexible enough to
assess the cost while considering the objective of cost, instead of product processes and
managerial responsibility. Furthermore, reliable indication of long-run variable product cost is to
be identified by the manufacturing unit which is crucial to take viable strategic level decisions.
This methods provide meaningful financial and non-financial measures that are based on cost
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management and performance assessment. The cost estimations can be improved while
understanding cost behaviour as this method provides a logical, acceptable and comprehensive
basis to condyct costing work. Within a production unit, ABC system helps in identifying
accurate costs and provides guidelines to the management to analyse customer base and their
requirements to provide better services (Zawawi and Hoque, 2010). The system is useful to
enable production units for having a relevant product line and making effective business
decisions. The expansion of ABC system to cover manufacturing area is helpful in allocating
indirect costs that could be based on product’s cost driver or the significant factors that creates
the cost. The cost of production is to be allocated to each product which has been produced
within an manufacturing environment. The use of Activity based costing enable company to have
an image which business process is performing well and which is required to be improved.
Activity based costing is used to assess the non-valued added activities so that effective
allocation of resources to be done to the profitable activities. Thus, it will be true to say that ABC
method is useful in adding value to the continuous improvement of business processes within
manufacturing units. The method defined in above, accounts for assessing the overhead costs
that is going on. However, the use of this method is complex but is found accurate. The main
function of this method is that the mentioned method is used the overheads incorporated that are
based on the budgeted overheads for recent period. With the use of such method, wasteful
products and unnecessary costs are to be identified so that the resources can be used in more
productive manner. While making use of the Activity based cost method the excessive or
incorrect prices can be fixed. At the end, it is to be bring into notice that product and service
quality can be improved while making use ABC's data related to production and cost issues.
TASK B
Theories of constraints and throughput accounting
Theory of constraints is a system management philosophy developed by Eliyahu M.
Goldratt in early 1980s. Fundamental approach of TOC states that constraints establish the limits
of performance for any organization. This theory is applied on the key factor (i.e. constraint) in
the way to achieve aims and objectives in an effective manner (Kont, 2013). Further,
organization starts to work in proper manner till the time that constraint is no longer considered
to be limiting factor. This approach is applicable for manufacturing companies in which there are
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multiple activities that are linked to one another. In these activities, one of the activities act as
constraint which is considered to the weakest link of the chain. Throughput accounting can be
defined as management accounting approach which provides information for decision support in
order to make increment in profitability.
Five focusing steps
In accordance with the core concept of TOC, in all manufacturing companies there is
single constraint. Further, total procedures can be improved only if there is improvement in that
constraint. With the applicability of following focusing steps constraint factor is improved in
order to make increase in overall profitability:
In accordance with the TOC approach, initially current constraint is identified in
manufacturing process of the company. It is the single part of the process that impose limitation
on the rate at which goal will be achieved by the business entity. In the second step of exploit,
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Illustrati
on 1: Five focusing steps of Theory of Constraints
(Source: Sakurai, 2009)

quick improvements to the throughput of the constraint by making use of available resources. In
this process, next step is subordination and synchronization to the constraint. In this step, all the
activities of manufacturing process is reviewed in order to assure that they all are in proper
alignment with the requirements of constraint. Next step i.e. elevate is conducted if there is still
existence of constraint (Theory of Constraints, 2013). In this step, further steps are considered
which can be taken for the elimination of constraint from the manufacturing process. Generally
above described actions are repeated in this action until the point at which constraint has been
broken. For this aspect, in some case situations capital investment is made for the improvement.
This process is vicious circle it is because resources are limited in comparison to the wants. Due
to this aspect, one constraint is removed then focus is transferred on the another constraint.
Throughput accounting
It is an alternative accounting methodology which is used for the elimination of harmful
distortions occurred due to applicability of traditional accounting practices. Distortions are those
factors which promotes contradictory behavior of attainment of long term profit. For example, in
traditional accounting inventory is considered to be asset which will provide case in the future.
However, this aspect is not true in manufacturing companies inventory items are truly not
needed. Further, accumulation of asset only makes inflation in asset (Dugdale, Jones and Green,
2006). Due to this aspect, TOC consider inventory as liability that had tied the cash and it can be
used for the other purposes.
Throughput accounting is focused on increasing throughput instead of cost cutting
expenditures. It is because, cost cutting expenses are limited to zero while increase of throughput
has not such limitations. Core measures used in this approach are throughput, investment and
operating expenses. Throughput can be considered as rate at which customer sales is generated
after deduction of actual variable cost. In this aspect, in variable cost only sales commissions,
raw material and freight are considered (Jones, and Dugdale, 2005). Further, labour is not
considered as true variable cost until and unless it is paid on the basis of per piece. Investment
can be defined as money as per the physical things such as machinery, real estate and product
inventory. At last operating expense is money spent other than the variable cost. By considering
this measure manufacturing company aims to maximize return on investment, net profit,
investment turns and productivity.
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Importance of this approach for modern manufacturing companies in order to increase their
profitability
Manufacturing companies have objective to enhance their profitability for short term and
long term period. In this aspect TOC provides five focused steps (methodology for identification
and elimination of constraints), thinking processes (to determine suitable tools for the analysis
and resolving problems) and throughput accounting (method for the measuring of performance to
make better decision). With this approach, organizations are able to make optimum utilization of
available resources (Bhimani and Bromwich, 2009). In addition to this, it makes improvement in
the operational activities by which issue of constraints is resolved.
Applicability of TOC also makes improvement in production capacity of business. It is
because; it optimizes the constraints and enable management for the manufacturing of higher
units. With the increase in production units, volume of sales will be increased by which cost
benefit can be attained by the business (Theory of Constraints, 2013). Throughput accounting
assists manufacturing companies in making reduction in inventory and lead time. With the
benefit, organization has to pay low storage cost and transportation cost. In addition to this,
reduction in lead time assist in increment in the speed of production as issue of stock out will be
resolved.
TASK C
Analyse of usefulness of target costing in product design and development
Target costing is a famous cost management tool that is significantly used for reducing
the overall cost of a product in the entire product life cycle phase of product. The use of this
method is seen during the product life cycle. This is regarded as a modern advances in
management accounting, that is used in conventional costing. Target costing is going to be recipe
for cost management in upcoming decades because, it includes all three elements of Strategic
cost management such as quality, cost as well as time. Target costing applies to manage the cost
as prior to its occurrence (TARGET COSTING, 2015). It allows business to set the target cost of
a product or service as per the market demand, customer demand and desired profit. This method
is an improvement over conventional methods that attempts to control the cost of product as
prior to production of in designing stage. In the pastime, it has been witnessed that the target
costing is particularly focused towards reducing the cost, in product planning and designing
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process. This is the most important methods of conventional costing during the planning and
design stage of the product life cycle since the majority of product cost is determined at such
stage. In the place of traditional product costing methods, target costing is the most appropriate
methods that allocates total cost to the development stag However, it helps in reducing costs at
the stage of production process. To the view point of Kont (2013) it has been witnessed that
target costing is famous among Japanese manufacturing firms such as Toyota, Nissan, Toshiba
and Daihatsu. In the present market place the diverse need of people related to innovative
products have shortened life cycles of products (Kont, 2013). The shorter duration of product life
cycle lead to identify specific cost at each phase i.e. development, planning and designing, etc. In
various investigation, it has been found that 80% of the costs of a product is seen for the design
stage. Target costing provides an opportunity to reduce costs during design as it occurs in
product development cycle. The costing method is applied when product is seen in the concept
stage and ends with starting of manufacturing process. Within the manufacturing unit, target unit
is applied in the beginning of the product’s life cycle and it based on the fact that the cost of
product became fixed at the time when product goes through with the production process. Target
costing makes use of costing information and focuses to determine the best price up front while
avoiding wastage of time on re-engineering or redesigning of the product (Implementing Target
Costing, 2015). To the view point of management accounting aspects, the prevalence of
assembly-oriented products as well as short product life cycle is the most important method that
has contributed to the wide acceptability of target costing during the product designing phase. In
the present competitive scenario, many of organizations have turned towards target costing
because they consider it a method of improving price and quality products. This method adds
value the product designing process by making it appropriate as per the needs and wants of
customers. It creates benefits for the company in terms of gaining improved profits and
increasing customer satisfaction (Griffith, Stephenson and Watson, 2014). Furthermore, the
usefulness of target costing is seen adding value to the production process by the means of
avoiding non-value added activities. This is also helpful in decreasing cost that is to be passed on
to the consumers. Target costing also helps companies in the process of ascertaining more
realistic prices and supports in attaining competition edge among firms by the means of lowering
costs and improving quality (Drury, 2008). Product design and development is the most crucial
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take of manufacturing organization that is done as prior to come up with manufacturing process.
It has been witnessed that most of the companies tend to build product and to provide it at the
best prices to the customers. This method allows company of design a product as per the
wordings and requirements of customers so that it will become easier to make it appropriate as
per the needs of people. The target costing process is the most significant process that allows
company to spelled out the cost of production during designing and development stages.
CONCLUSION
In accordance with the present study, it can be concluded that in present environment
manufacturing organizations are required to make modification in accounting practices in order
to achieve their aims and objectives in effective manner. With the applicability of modern
practices of accounting organization will be able to make better decisions for their business. In
addition to this, they will be able to enhance their productivity and profitability. By the use of
activity based costing, organization can allocate cost in justified manner to make better decisions
for product portfolios. Applicability of TOC and throughput accounting assists in eliminating
constraints for the increment of profitability. In last, target costing assist companies in designing
of product as per the wordings and requirements of customers so that it will become easier to
make it appropriate as per the needs of people.
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