Basically, management needs planning, cost determination, cost control and performance evaluation in order to improve the efficiency and effectiveness of operations. Planning through the use of budgets is a highly significant management functions. As a whole, the company must have a budget plan which will serve as a workable pattern to be followed. Budgeting is a means of coordinating activities with the cooperation of those who seek to achieve a common goal. For example, the plans for the manufacturing division must be tied in with the plans for the sales division. If large shipments are to be made to customers during particular months, the manufacturing division should have the products ready at that time.
In a manufacturing firm, the design of the product must be carefully planned to avoid costs wastage and ensure good quality output. Traditionally, a variance analysis was used to compare the actual costs against budgeted costs of the raw materials and labor used during a production period. But nowadays, an innovative technique like life cycle cost analysis can also be use. Life cycle costing recognizes that manager’s ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its lifecycle, since small changes to the product design may lead to significant savings in the cost of manufacturing the product.
Engineers who are familiar with the technical requirements of the product must estimate the quantities of materials needed for production and the labor or machine hours required for various operations. Prices and rates are applied to the physical measurements to obtain cost estimates. In order to manage effectively, management must have to estimate costs under different conditions and at different levels of volume. Also, this is essential in the preparation of the budgets and in the subsequent control of costs. Cost estimation is fundamental to the task of setting prices, bidding on contracts, and planning profits.
Control over materials begins with procurement. The purchasing department must seek a reliable supplier whose materials meet the quality standard in the desired quantity at the lowest price. After receiving a purchase requisition from individual departments, the purchasing department must place the order for the materials. When the materials are received, they must be counted, inspected, and turned over to the storekeeper. The storekeeper is the only person that must have an access to the physical materials, which are stored in an enclosed area to prevent theft or loss. An accounting record of the quantities of materials received and withdrawn must be maintained by a stores ledger clerk. Incoming items should be entered from receiving reports on the inventory cards, which constitute the inventory subsidiary ledger. The requisition forms for materials to be withdrawn for production support the entries for inventory withdrawals. The physical inventory kept by the storekeeper should be in substantial agreement with the book record revealed by independent counts. The separation of the duties acts as a check on both the storekeeper, who realizes that a book record of the inventory is being maintained, and the stores ledger clerk, who has no access to the physical inventory and thus no reason to falsify the record.
Invoices received for materials purchased are compared against purchase orders and receiving reports to determine whether or not the company was properly billed for materials ordered and received. Arithmetic computations on the invoices are checked, and the verified invoices are filed by the dates when payments must be made.
The greatest potential for increased productivity and significant reduction on production costs lies in the consideration of assembly requirements during the design stage of the product cycle. During assembly stage, costs must be closely monitored and controlled to ensure they are appropriate and reasonable for the activities performed. Costs must be identified with the person responsible for their incurrence. With responsibility localized, it is possible to rate individual supervisors on a costs basis by comparing the controllable costs of the unit with a budget prepared on the same basis.
As a whole, the company needs to have a system of responsibility accounting which relies heavily upon the distinction between controllable and non-controllable costs and is designed to fit the requirements of the persons within the firm. Managers are expected to prepare budgets of the costs that they control, and they are expected to operate within the limits of their budgets. Periodic costs reports prepared on this basis of cost responsibility are compared with the budgets and are used by each manager as a basis for self evaluation. Likewise, managers at higher levels may rate subordinate managers by using this information. The success of responsibility accounting depends in large part upon the sensitivity of top-level management and the accountants to the needs and preferences of the individuals within the organization.
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3. Moore, C. and Jaedicke, R. (1980). Managerial Accounting. (5th edition). Cincinatti, Ohio : South-Western Publishing Co.