Management Accounting | Direct costs, indirect cost and management allocation of actual
production costs is a continuing discipline in management accounting
On his book of Invisible hand, Chandler has at all times aspired to accomplish a cross-disciplinary address to a level that might well be exceptional among Historians of the United States. He has entered effectively into prolific interdisciplinary discussions with scholars all the way through the social sciences.
Many industrial consultants in the United States and abroad have drawn from his publication and varying disciplines globally. Among them are organizational theorists, business administration specialists, economists, sociologists and multinational enterprises who have pinched productively on Chandler’s ideas (Lisa, 2009).
Coordination involves the systematic combination of various processes to achieve optimal results of pre-planned outcomes. It involves three main processes:
Performing situational analysis, competitor analysis and self-evaluation. Both micro-environmental and macro—environmental aspects must be considered. Concurrent with the above process, clear and specific objectives must be set. Vision statement, overall objectives both short-term and long—term are crafted (Magdy, 2006).
With regard to situational analysis, the above processes give rise to a strategic plan. The plan provides details of how coordination is to be achieved. Coordination involves managing dependencies among activities. Chandler suggests that to understand the business coordination concept, a simple intuition must come into mind that, if there is no interdependence, there is nothing to coordinate.
It is comprehensible that players carrying out interdependent actions may have inconsistent interests and that might be called opinionated processes. These are ways of managing them in order to ensure best results are realized. According to Chandler, coordination occurs in many kinds of systems, biological, human, computational among others. The question on how community run enslavement's among their actions are middle to parts of organization theory, sociology, management science, social psychology, linguistics, law and anthropology. Coordinating these dependencies gives rise to direct and indirect costs (Lisa, 2006).
Indirect Costs are the ones that have been sustained for universal or joint objectives and cannot be enthusiastically recognized with the exact final cost objective. They can also be defined as costs that cannot be directly quantified and may need further analysis to quantify them. They are incurred for various or interlinked activities and are not easily categorized into specific activity. They are categorized into fixed and variable costs. Direct costs are attributed to specific activities and are quantifiable without necessitating further analysis. Chandlers’ describes direct cost as costs incurred for organization activities, projects, programmes in fulfillment of its mandate.
Variable Indirect cost is one of the categories of indirect cost. Utilizing common system of cost control in calculation of cost recovery rates aids management in coordinating activities at the production department. Through bench marking, appropriate cost recovery rates are predetermined and harmonized. A varying percentage of these costs is established through monitoring of activities and calculating their estimated indirect costs versus their actual costs. For instance, operational support services are covered both at administration and production levels and more so, among various departments at the same levels (Magdy, 2009). They constitute the overall costs of managing a company and not just the direct costs of material incurred in manufacturing a product. To be able to coordinate these costs more accurately, management should first clearly define these costs because they are ever-changing and are likely to be affected by shifts in the economy such as electricity bills, and gas.
This article suggests that hygiene should be evaluated as direct cost. This is because the process through which it is carried out is measurable in both time and monetary value. In monetary value, the numbers of workers involved in ensuring hygiene of specific products are known by number and their compensation whether in hours or days. Through this, cost incurred is therefore directly attributed to specific product in quantitative terms rather than in percentage. Categorizing hygiene as direct cost will change the cost structure of commodities. This depends on how long products take to clean, type of machines needed to ensure their hygiene, relevant staffs needed, and storage facilities necessary for various products.
In measuring hygiene team performance, focus should be on quality of output and then strain back to time taken per inspection activity. This is because the desired quality will determine time taken on inspection activity. To achieve the desired quality level of zero unhygienic incidents, time factor is taken into consideration.
Reward to production managers for reducing hygiene activity costs must be hand in hand with reward of workers at the shop level. For production managers to achieve their desired level of hygiene, the policies and time frames set by them must be executed by shop floor workers. Formulated strategies and well documented steps are nothing if workers do not implement them. In rewarding the managers, management should take into consideration the reduced costs, and their proposed rewards to ensure that cost-benefit equation is maintained.
To make effective management while achieving best coordination, management need to set up short term and long term quality levels to achieve and share it with all departments involved. This is because objectives shared equals objectives halfway achieved. When every stakeholder is involved and has a clear picture of desired level of performance, they will set their individual work goals in line with top management goals and find a common focal point of meeting within the defined company scope.
The top level management needs to understand the idea of cost reduction in management accounting not only in monetary terms but also on employee satisfaction levels. Satisfied employees are more likely to lead the organization in achieving the desired cost reduction. Elements of Overheads costs in management accounting must be considered in totality, and in more actual or realistic terms rather than theoretical explanation in books.
Requesting for additional payments from suppliers after product sales should be discouraged as this will in the long run affect an organization’s relationship with its partners. Management should use their experience and expertise to foresee future management accounting trends and pass the knowledge to managers through the organization hierarchy. This will help achieve desirable quality output and reduce indirect costs associated with dealing with suppliers.
Direct costs, indirect cost and management allocation of actual production costs is a continuing discipline in management accounting. Administrative coordination as argued by many theories is an essential pillar for development. Majority of theories after Chandlers’ work are based on understanding and interpreting his proposals, findings and applying them in real life situation. This article suggests that, Chandler is the Father of contemporary administration coordination theories.
References
Magdy Abdel-Kader Robert Luther, (2006),"Management accounting practices in the British food and drinks industry", British Food Journal, Vol. 108 Issue 5 pp. 336 – 357
Chartered Institute of Management Accountants (CIMA) (2009) From Gate to Plate. http://www.cimaglobal.com/Thought-leadership/Research-topics/Management-and-financial-accounting/From-gate-to-plate-strategic-management-accounting-in-the-UK-agricultural-industry/ (accessed 2014-10-07)
Jack, Lisa (2009) Benchmarking in food and farming: creating sustainable change. In: Gower. ISBN 9780566088353
Jack, Lisa, Ramon-Jeronimo, J. and Florez-Lopez, R. (2012) Performance measurement and risk management: in intermediary food supply chain businesses. Working Paper. Chartered Institute of Management Accountants, London.
Essex Sustainability Institute
http://www.essex.ac.uk/esi/research/default.aspx
New Economics Foundation:
http://www.neweconomics.org/issues/entry/environment
Farming Today BBC Radio 4
http://www.bbc.co.uk/programmes/b006qj8q
News Articles:
Ready meals
http://www.bbc.co.uk/news/magazine-21443166
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/5741860/Private-label-food-manufacturers-fight-it-out-as-crisis-bites-ready-meals-industry.html
The horse meat scandal and contamination
http://www.theguardian.com/uk/horsemeat-scandal
http://www.theguardian.com/commentisfree/2014/sep/07/eating-food-fraud-review-horsemeat-scandal
http://www.reuters.com/article/2014/07/25/us-china-food-hongkong-idUSKBN0FU00J20140725
http://www.theguardian.com/world/2014/jul/23/-sp-revealed-dirty-secret-uk-poultry-industry-chicken-campylobacter
On his book of Invisible hand, Chandler has at all times aspired to accomplish a cross-disciplinary address to a level that might well be exceptional among Historians of the United States. He has entered effectively into prolific interdisciplinary discussions with scholars all the way through the social sciences.
Many industrial consultants in the United States and abroad have drawn from his publication and varying disciplines globally. Among them are organizational theorists, business administration specialists, economists, sociologists and multinational enterprises who have pinched productively on Chandler’s ideas (Lisa, 2009).
Coordination involves the systematic combination of various processes to achieve optimal results of pre-planned outcomes. It involves three main processes:
Performing situational analysis, competitor analysis and self-evaluation. Both micro-environmental and macro—environmental aspects must be considered. Concurrent with the above process, clear and specific objectives must be set. Vision statement, overall objectives both short-term and long—term are crafted (Magdy, 2006).
With regard to situational analysis, the above processes give rise to a strategic plan. The plan provides details of how coordination is to be achieved. Coordination involves managing dependencies among activities. Chandler suggests that to understand the business coordination concept, a simple intuition must come into mind that, if there is no interdependence, there is nothing to coordinate.
It is comprehensible that players carrying out interdependent actions may have inconsistent interests and that might be called opinionated processes. These are ways of managing them in order to ensure best results are realized. According to Chandler, coordination occurs in many kinds of systems, biological, human, computational among others. The question on how community run enslavement's among their actions are middle to parts of organization theory, sociology, management science, social psychology, linguistics, law and anthropology. Coordinating these dependencies gives rise to direct and indirect costs (Lisa, 2006).
Indirect Costs are the ones that have been sustained for universal or joint objectives and cannot be enthusiastically recognized with the exact final cost objective. They can also be defined as costs that cannot be directly quantified and may need further analysis to quantify them. They are incurred for various or interlinked activities and are not easily categorized into specific activity. They are categorized into fixed and variable costs. Direct costs are attributed to specific activities and are quantifiable without necessitating further analysis. Chandlers’ describes direct cost as costs incurred for organization activities, projects, programmes in fulfillment of its mandate.
Variable Indirect cost is one of the categories of indirect cost. Utilizing common system of cost control in calculation of cost recovery rates aids management in coordinating activities at the production department. Through bench marking, appropriate cost recovery rates are predetermined and harmonized. A varying percentage of these costs is established through monitoring of activities and calculating their estimated indirect costs versus their actual costs. For instance, operational support services are covered both at administration and production levels and more so, among various departments at the same levels (Magdy, 2009). They constitute the overall costs of managing a company and not just the direct costs of material incurred in manufacturing a product. To be able to coordinate these costs more accurately, management should first clearly define these costs because they are ever-changing and are likely to be affected by shifts in the economy such as electricity bills, and gas.
This article suggests that hygiene should be evaluated as direct cost. This is because the process through which it is carried out is measurable in both time and monetary value. In monetary value, the numbers of workers involved in ensuring hygiene of specific products are known by number and their compensation whether in hours or days. Through this, cost incurred is therefore directly attributed to specific product in quantitative terms rather than in percentage. Categorizing hygiene as direct cost will change the cost structure of commodities. This depends on how long products take to clean, type of machines needed to ensure their hygiene, relevant staffs needed, and storage facilities necessary for various products.
In measuring hygiene team performance, focus should be on quality of output and then strain back to time taken per inspection activity. This is because the desired quality will determine time taken on inspection activity. To achieve the desired quality level of zero unhygienic incidents, time factor is taken into consideration.
Reward to production managers for reducing hygiene activity costs must be hand in hand with reward of workers at the shop level. For production managers to achieve their desired level of hygiene, the policies and time frames set by them must be executed by shop floor workers. Formulated strategies and well documented steps are nothing if workers do not implement them. In rewarding the managers, management should take into consideration the reduced costs, and their proposed rewards to ensure that cost-benefit equation is maintained.
To make effective management while achieving best coordination, management need to set up short term and long term quality levels to achieve and share it with all departments involved. This is because objectives shared equals objectives halfway achieved. When every stakeholder is involved and has a clear picture of desired level of performance, they will set their individual work goals in line with top management goals and find a common focal point of meeting within the defined company scope.
The top level management needs to understand the idea of cost reduction in management accounting not only in monetary terms but also on employee satisfaction levels. Satisfied employees are more likely to lead the organization in achieving the desired cost reduction. Elements of Overheads costs in management accounting must be considered in totality, and in more actual or realistic terms rather than theoretical explanation in books.
Requesting for additional payments from suppliers after product sales should be discouraged as this will in the long run affect an organization’s relationship with its partners. Management should use their experience and expertise to foresee future management accounting trends and pass the knowledge to managers through the organization hierarchy. This will help achieve desirable quality output and reduce indirect costs associated with dealing with suppliers.
Direct costs, indirect cost and management allocation of actual production costs is a continuing discipline in management accounting. Administrative coordination as argued by many theories is an essential pillar for development. Majority of theories after Chandlers’ work are based on understanding and interpreting his proposals, findings and applying them in real life situation. This article suggests that, Chandler is the Father of contemporary administration coordination theories.
References
Magdy Abdel-Kader Robert Luther, (2006),"Management accounting practices in the British food and drinks industry", British Food Journal, Vol. 108 Issue 5 pp. 336 – 357
Chartered Institute of Management Accountants (CIMA) (2009) From Gate to Plate. http://www.cimaglobal.com/Thought-leadership/Research-topics/Management-and-financial-accounting/From-gate-to-plate-strategic-management-accounting-in-the-UK-agricultural-industry/ (accessed 2014-10-07)
Jack, Lisa (2009) Benchmarking in food and farming: creating sustainable change. In: Gower. ISBN 9780566088353
Jack, Lisa, Ramon-Jeronimo, J. and Florez-Lopez, R. (2012) Performance measurement and risk management: in intermediary food supply chain businesses. Working Paper. Chartered Institute of Management Accountants, London.
Essex Sustainability Institute
http://www.essex.ac.uk/esi/research/default.aspx
New Economics Foundation:
http://www.neweconomics.org/issues/entry/environment
Farming Today BBC Radio 4
http://www.bbc.co.uk/programmes/b006qj8q
News Articles:
Ready meals
http://www.bbc.co.uk/news/magazine-21443166
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/5741860/Private-label-food-manufacturers-fight-it-out-as-crisis-bites-ready-meals-industry.html
The horse meat scandal and contamination
http://www.theguardian.com/uk/horsemeat-scandal
http://www.theguardian.com/commentisfree/2014/sep/07/eating-food-fraud-review-horsemeat-scandal
http://www.reuters.com/article/2014/07/25/us-china-food-hongkong-idUSKBN0FU00J20140725
http://www.theguardian.com/world/2014/jul/23/-sp-revealed-dirty-secret-uk-poultry-industry-chicken-campylobacter
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