Accounting Discussion #6 (part B/C)

Respond to 3 peers' discussion posts. Each response should be a minimum of 150-250 words. (choose 3 from the discussion posts below)

Discussion #1: Balanced Scorecard

Leaders must look at all aspects of the organization and find balance to assure the organization is meeting the needs of all stakeholders. Often planning and analysis focus on the financial aspects of the organization and see the financial performance as the most important and the sole priority of management. However, more and more companies are seeing the organization as being impacted by many forces and not just the financial performance. While budgeting and ratios are vital, there are other aspects and conditions which should be considered in planning. Companies now employ a balanced scorecard approach to organizational planning and management. A balanced scorecard is a performance measurement approach that uses both the financial and non-financial performance to evaluate the organization’s success and to see the company from a broader perspective (Weygandt, Kimmel, & Kieso, 2010).

The balanced scorecard was developed as an alternative to traditional business and accounting analysis as it provides a more in-depth way for managers to plan for the future. The balanced scorecard sees the organization as integrated operations where each aspect of the organization impacts others. Therefore looking at one aspect of the organization may ignore factors of importance (Weygandt, Kimmel, & Kieso, 2010). Accounting too often looks onlyat the past financial performance of the business and can therefore causes issues with future planning because it accounts only for the numbers. While financial data is important for understanding certain aspects, it tells a very narrow story and ignores the real factors of success. The balance scorecard uses both financial and non-financial data and therefore can help to locate issues within the organization that can be used to improve the company through more focused initiatives (ICMBA, 2007). The balance scorecard does look at financial performance and accounts for these aspects but also includes many areas typically not included in accounting or financial analysis. Since accounting is based upon numbers and making goals and predictions based upon numbers, it can ignore other factors that often are even more important than numbers.  The balanced scorecard approach finds that intangible assets must be considered and that integrating tangible and non-tangible assets, organizations can optimize planning (Drury, 2008).

Balanced scorecard takes a completely different approach to planning by understanding that financial planning is only one part of realistic planning for the future. Yes all organizations must budget and understand aspects of their financial condition, yet this can only help improve the current conditions. If other aspects are out of line, such as people or processes, financial planning will fail to achieve results. Balanced scorecard evaluation looks at the financials like other approaches, but also pays attention to internal business processes, customers/stakeholders, and organizational capacity. The approach understands that all of these flow from and are essential to the vision and strategy and that without balance in all areas the company cannot achieve its goals (Balanced Scorecard institute, 2014). Each of the areas are measured, evaluated and scored separately. This allows the leaders to understand how each area is performing and allows management to focus on areas where changes are required. By reviewing all aspects of the organization, and not focusing just on the numbers and financial information, managers can create initiatives that will help the company to reach the stated goals and mission of the organization. Managers are responsible for many areas and therefore it makes sense to help to focus on the company as a whole and then formulate strategy based on this idea. When the company is looked at through a narrow lens, the strategy will not reflect the real needs (ICMBA, 2007).

References

Balanced Scorecard institute. (2014). Balanced Scorecard Basics . Retrieved from Strategy Management Group: http://balancedscorecard.org/Resources/About-the-Balanced-Scorecard

Drury, C. (2008). Management and Cost Accounting. London: South-Western Cenage Learning.

ICMBA. (2007). The Balanced Scorecard. Retrieved from Net MBA: http://www.netmba.com/accounting/mgmt/balanced-scorecard/

Weygandt, J., Kimmel, P., & Kieso, D. (2010). Managerial Accounting: Tools for Business Decision Making (5th). Hoboken, NJ: John Wiley and Sons.

Discussion #2: Material and Labor Variances

Our textbook defines labor rate variance as, “the difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours during the period (Noreen, Brewer & Garrison, 2014).” Then we examine material price variance and this is defined as, “ the difference between the actual unit price paid for an item and the standard price, multiplied by the quantity purchased (Noreen, Brewer & Garrison, 2014).” Now there is another term we can touch on as well called material quantity variance, which is basically the difference between materials used for production and the standard that is usually allowed for this output. Then this answer is multiplied by the standard price per unit of material.

I got an example online to explain these new concepts a little better from (accountingformanagement.org)           

The Acer company manufactures and sells small ear buds that are used in I phones. The ear buds are sold in bulk to I phone manufacturing companies where complete I phones are produced. The direct material of Acer company is a thin copper coil. One meter of the copper coil is the standard requirement to manufacture one ear bud.

The standard cost to manufacture one ear bud is as follows:

Direct materials: 1meters × $1.50 per meters	$1.50
Direct labor	$1.00
Manufacturing overhead	$0.50
	—–
Total	$3.00
	—–

During the month of June, Acer purchased 5,000 meters of copper coil @ $1.70 per meter and produced 2,500 ear buds using 3,000 meters of copper coil.

The materials price variance for the month of June can be calculated using the following formula/equation:

= (5,000 × $1.70) – (5,000 × $1.50)

= $8,500 – $7,500

= 1,000 Unfavorable

Acer has an unfavorable materials price variance for June because the actual price paid ($8,500) is more than the standard price allowed ($7,500) for 5,000 meters of copper coil.

This variance can also be computed by using the factored form of above formula:

AQ × (AP – SP)

5,000 meters × ($1.70 – $1.50)

5,000 meters × $0.20

Therefore with $1000 being unfavorable.

Now we have established this formula we can examine the various reasons of direct materials price variance are listed as either favorable or unfavorable price variance can happen due to some of the following reasons: order size, quality, urgent needs, transportation, rise in price, inefficient standard setting and lastly, inefficient or unreliable suppliers.

Reference:

Noreen, E.W., & Brewer, P.C. & Garrison, R, H. (2014). Managerial Accounting

for Managers. New York, NY: McGraw- Hill Companies.

Direct materials price variance. Retrieved October 9, 2014, from

http://www.accountingformanagement.org/direct-materials-price-variance/

Direct materials. Retrieved from http://accounting-simplified.com/management/variance-analysis/material/price.html

 

Discussion #3: Management by exception vs. Crisis management

 

Anyone trained in management knows the importance of the management functions: planning, staffing, directing, controlling… but when an organization does not perform one or more of the functions well then a crisis can result (Summers, 2002). Our textbook explains that Management by exception is a management system in which standards are set for various activities, with actual results compared to these standards… deviations from standards are exceptions and the managers who are working with this system should manage these deviations. However, what is confusing is how it is deferent from Crisis management.

            Crisis management often comes as a result of poor planning (Edmund. 1994). In our day-to-day lives we operate as both managements by exception and by crises management mode. Consider the example when a medical student preparing for the Licensing examination. He/she prepare a plan, buy the books, buy the question banks and set the standards. After some time he/she goes for evaluation tests, if the standards are not met then he/she does management by exception where he/she talk to the classmates, teachers, counselors, and evaluate why he/she is not meeting the standards. However, what if while he/she is studying for the test he/she gets sick, or the loan company started to ask for money, then this student gets into Crisis mode management and plan accordingly. The same thing is business operation. Managers who are practicing management by exception examine financial and operational budgets, set the standards and if those standards are not met then he/she investigate why they are not met and fix them – therefore, it is highly organized practice. However, Crisis managers only operate during “crisis” – therefore, they operate in highly disorganized situations.

            In today’s world of internationally-operated, fast-paced, time-scarce, space-scarce, computer- based, internet-centered, social media-controlled business world it seems as if those two modes merge. A surveillance system or programmed watchdog that automatically screens out routine problems and alerts us only to situations requiring immediate attention is indeed appealing (Asa. 2005). However, several elements are common to a crisis managements, first being an element of surprise, second being a short decision capacity both of which are requirements for the crisis management, therefore, if one pays close attention the crisis management and management by exception are differ dramatically.

 

 

Edmund C. Mitchell. (1994). The Benefits of Management by Exception. Marine Crops Gazette. 62-63. Retrieved fromhttp://search.proquest.com.proxy.davenport.edu/docview/206353919?pq-origsite=summon

 

Asa Sharp. (Feb. 2005). Exceptional management. Maintenance managemtn. Fleet Owner. 100.2 Retrieved from  http://search.proquest.com.proxy.davenport.edu/docview/220727237?pq-origsite=summon

 

Summers Jim. (2002). Management by crisis. Healthcare Financial Management. 56.9. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/196366351?pq-origsite=summon

 

Discussion #4: Standard Costs and Variance Analysis

     In the course of running a business, it is paramount that one important practice to maximize profits, is to cut cost as much as reasonably possible. By predetermining set costs and observing for variations from the "norm" one is able to exert control as a manager. In the real  world there will always be variations. For standard costs and variation analysis to be practical only those variations from the budget or plan that are significant enough to warrant the attention of the manager should be brought up. The manager then responds by investigating and rectifying the anomaly. This is known as Management by Exception (Noreen, Brewer & Garrison, 2013).

     The first thing to do is to set a standard cost that will form the basis of any observable variation. A standard cost card is used for this purpose, depending on the kind of business the card's items may include direct labor, materials or machine hours more commonly. In general it aims to compare the planned or budgeted costs to the actual costs incurred (Noreen & Co, 2013).

     The variation could be a function of the price or the quantity of the item(s) of interest, these both add up to make up the spending variance except in situations where the items purchased are different from the amount used.

     In initiating standard costs and variance analysis, it is essential that all standards have been set and running for a substancial aamount of time before going ahead to do a variance analysis (Milan & Perry, 2013).

 Standard costing and variance analysis is a great managerial tool that helps to determine when there are changes or variations from the set or standard cost. Taking it a little further. There is still a need to weigh the probability of the variation, the cost of investigating the variation, and the cost of making any necessary variations. The control system should be set up in a way that the cost control systeem does not become a costful venture thus upseting the intended previous potential gain. It may be wise sometimes to "let sleeping dogs lie" (Sen, 1998)

References

Milani, K., & Perri, A. (2013). Managing meal costs: Variance generation, analysis, and interpretation. Management

     Accounting Quarterly, 14(4), 1-11. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/1465

     555688?accountid=40195

Noreen, E., Brewer, P., & Garrison, R. (2013). Managerial Accounting for Managers 3rd Edition. New York: McGraw-Hill

     Irwin. 11, 462 - 470

Sen, P. K. (1998). Another look at cost variance investigation. Issues in Accounting Education, 13(1), 127-137. Retrieved

     from http://search.proquest.com.proxy.davenport.edu/docview/210899835?accountid=40195

Discussion #5: Standard Costs

            Within the accounting world and managerial accounting in particular, it is important to have an overall standard set up for costs.  By creating the standards, they can have a way to benchmark and have a basis of comparison to similar industries. If a company doesn’t stay competitive with the market they risk the chance of being put out of business.

            There are two types of standards used within industries that have food, service, manufacturing, and not for profits.  They have quantity standards as well as price standards. With a quantity standard they determine how much they are required to input for a service.  An example of a quantity standard might be with a car mechanic who repairs breaks; they know that this job will take the mechanic two hours to complete. An example of a price standard might be a veterinarian office that has an office visit for animals.  By having something to compare to others or different businesses is beneficial to both consumers as well as the business as w whole. Being able to have a set standard makes it easier for decisions to be made (Noreen, 2013). 

            There are other advantages to having set standards and sometimes employees do not even know that they are already doing it (Standard costing, 2014).   

1. Budgeting – when you have a standardized costs, it can help with the planning and organization of the financial data.

2. Inventory costing – whenever there is an inventory count they are able to use that standard costs to put a dollar amounts to that costs.

3. Overhead application – having a standard overhead application rate, gives you the ability help by giving one rate to use for overhead items and then is adjusted accordingly to keep costs current.

4. Price formation – often used with companies that do custom work. Once they can create a more standardized pricing they can be more consistent with customer’s quotes or estimates. 

However with advantages there are also disadvantages involved.  When there are situations that standardized costing doesn’t apply can lead to poor decision making, so setting up these standards are decisions not to be made lightly.  There are also variances involved with standard costing both rate and volume variances.  A rate or price variance would be the price difference between a price paid and the expected price; whereas a volume variance would be the amount sold and the budgeted amounts (Standard costing, 2014). 

            One important fact about standardized pricing is that this is something that is looked at more on a period basis to compare where the company is sitting at.  These standard pricing can be used on the direct materials, direct labor, as well as the overhead costs. Providing analysis on these costs in the planned and actual is a great way in make sure a profit is earned by the company (Jan, 2014). 

 

 

References

Jan, O. (2014, October 10). Standard Costing and Variance Analysis. Retrieved October 10, 2014, from http://accountingexplained.com/managerial/standard-costing/

Noreen, E. (2013). Managerial accounting for managers. Place of publication not identified: Irwin Mcgraw-Hill.

Standard Costing - AccountingTools. (2014, October 10). Retrieved October 10, 2014, from http://www.accountingtools.com/standard-costing

Discussion #6: Advantages to Standard Cost Systems

 

Standard costing is an integral part of most corporate structures (Averkamp, 2014).  One major advantage of using this approach within an organization is that managers are then able to have a lot of the costing issues on a type of auto pilot mode.  This allows managers to be freed up for other business concerns.  As well, when the costs are not within the standards, managers can be alerted to this issue.  The manager will know that there could be a potential problem.  Again, this whole approach to handling costs keeps the managers focused on other things from day to day but giving attention to costing when they might be an issue.

 

Standards that are set fairly can be a huge help to more than just the immediate company.  When standards are fair, they can help with the overall economy as a whole.  Standards are one way to set bench marks.  Bench marks are crucial within the industry to judge how companies are functioning.  For example, consider a company that runs a shoe making factory.  This factory averages 100 shoes per day with 10 employees.  Is this high performance?  Is this a successful company?  One important way to establish this is to compare this facility to other ones.  Importantly, this shoe factory should be compared to other shoe making factories.  It would not be bench marking, or as meaningful, if another type of factory or company were used.

 

One huge advantage of standardizing costing that cannot be under estimated is that this practice greatly simplifies the process of accounting itself.  The book keeping end of things is made into a much more easily and conveniently done process.  The actual costs for various tasks are not required.  Rather, the standard costs are used.  For example, if a shoe making factory set a standard cost of twenty five dollars per pair of shoes, then this amount is entered into the records versus having to calculate for direct materials or any other amounts. 

 

One final advantage to standard cost systems is that they fit well with the “responsibility accounting” (Noreen, Brewer & Garrison, 2014).  Standard cost systems help to set what costs should be and which parties are responsible for them.  This is an important point to make as well because various companies might be tempted to “blame” a supplier, for example, when inflation or other economic hardships occur.  With this system, there is responsibility.

 

References

 

Averkamp, H. (2014). Standard costing. Accounting Coach. Retrieved from:

http://www.accountingcoach.com/standard-costing/explanation

 

Farid, S. (2014). Advantages and disadvantages of standard costing and variance analysis.

Management Accounting. Retrieved from: http://www.accounting4management.com/advantages_disadvantages_standard_costing.htm

 

Noreen, E. W, Brewer, P., & Garrison, R. (2014). Managerial Accounting for Managers (3rd

Ed.). New York, NY: McGraw-Hill Irwin.