Economics and Management Notes > Oxford University Economics and Management Notes > Accounting Notes

New Directions In Management Accounting Notes

This is a sample of our (approximately) 35 page long New Directions In Management Accounting notes, which we sell as part of the Accounting Notes collection, a 1st Class package written at Oxford University in 2011 that contains (approximately) 347 pages of notes across 12 different documents.

Learn more about our Accounting Notes

The original file is a 'Word (Docx)' whilst this sample is a 'PDF' representation of said file. This means that the formatting here may have errors. The original document you'll receive on purchase should have more polished formatting.

New Directions In Management Accounting Revision

The following is a plain text extract of the PDF sample above, taken from our Accounting Notes. This text version has had its formatting removed so pay attention to its contents alone rather than its presentation. The version you download will have its original formatting intact and so will be much prettier to look at.


One study found that US firms that introduced JIT gained over the following 5 years (on average) a 70% reduction in inventory, a 50% reduction in labour costs and an 80% reduction in space requirements.

Traditional focus was on cost containment rather than cost reduction (on maintaining the status quo)

Activity Based Costing (Economist June 2009) o 'a method of assigning costs to products or services based on the resources that they consume.' o Problem with traditional costing - 'two activities that absorb the same direct costs can use very different amounts of overhead.'
 'hence a company that makes more and more customised products can soon find itself making large losses.'
 'as new technologies make it easier for firms to customise products, the importance of allocating indirect costs accurately increases.' o Introducing activity based costing - 'by no means as easy as ABC.'
 Although 'the development of business accounting software programs has made the introduction of ABC more feasible.' o Chrysler claims that ABC programme introduced in the early 1990s saved hundreds of millions of dollars
 ABC showed that the true cost of certain parts that Chrysler made was 30 times what had originally been estimated (so ended up outsourcing many of these parts)

Dunn 2000 o A cost driver is 'an activity or factor which generates cost.' o A cost pool is the 'pooling of overhead cost which relates to a specific activity.' o A cost driver rate is the product of dividing the cost pool for the activity by the cost driver volume e.g. could be the total of the cost pool for inspection divided by the number of inspections planned.

Scarlett 2003 o 'Benchmarking is the process of improving performance by continuously identifying, understanding and adapting outstanding practices and processes found inside and outside the organisation, and implementing the results' (The American Productivity and Quality Centre, 1997) o 'our performance can best be measured and managed by comparing it with that of an appropriate entity which is already achieving world class performance.' o Choice of benchmark:
 Needn't operate within the same sector
 Can be from another organisation
 Or a different segment in the same organisation o 'to be meaningful, a benchmark should relate to a key performance indicator.' o 'by discovering the practices that are responsible for high performance, understanding how they work and adapting them to your operation.' o E.g. Motorola was trying to improve the process of delivering its mobile phones to customers, it benchmarked with both Domino's Pizza and Federal Express. o 'Benchmarking relies on competitive data that isn't readily available...moreover, it allows a comparison at only one point and does not provide a way to improve performance continually.' (Puckett, BCG)

7 steps of ABC: o Identify the activities

o o o o

o o o


o o o o o o

o o o o o

Estimate the total indirect costs of each activity Identify the allocation base for each activity's indirect costs -primary cost driver Estimate the total quantity of each allocation base Compute the cost allocation rate for each activity i.e. estimated total indirect costs of activity divided by estimated total quantity of cost allocation base Obtain the actual quantity of each allocation base Allocate the activity costs to the cost object = cost allocation rate x actual quantity ABC - benefits and drawbacks Benefits
 Accurate
 Better and comprehensive understanding of overheads and what causes them to occur
 Makes costly and non-value adding activities more visible
 Supports other management techniques such as CI, BSC and performance improvement Drawbacks
 Can be difficult and time consuming
 Costly to implement, run and manage
 Some overheads are difficult to assign to products and customers Rutherford 2001 'only one third of those companies considering the use of ABC in 1994 had actually adopted the system by 2000.' 'in many situations there will be costs (essentially those relating to non-separable resources) that ABC doesn't handle much better than traditional costing.' 'given that traditional systems work well in some situations and ABC doesn't always give the right answer, managers are right to be cautious.' 'companies that feel they must make an 'all or nothing' decision, to move to ABC or stay where they are, may miss opportunities to refine their current systems.' 'feeling pressured to adopt the latest fad rather than calmly asking what steps should be taken, based on first principles.' 'companies that have installed the latest systems, at great cost, are, perhaps, more likely to rely uncritically on the numbers emerging from them.' Morgan 2005 'emergence in the 1990s of low cost airlines' 'competition can significantly affect the structure of an industry' 'on-going success will depend upon a continuing ability to attract customers and maintain operational efficiency.' 'BSC might be used to maintain the low cost carriers' competitive edge.' Business model adopted by low cost carriers:
 Route network development

The BSC must be selected to provide high load factors i.e. % of available seats sold

Should be new routes or those served by high cost carriers, and have appeal to leisure and private travellers

'secondary airports in the UK provide convenience to travellers, and important cost savings for the company.'

'avoid direct competition from other low cost carriers.'
 Brand development and marketing effectiveness

2 major factors that have allowed both Ryanair and easy Jet to capitalise on product strengths to become leading UK brand names: o Fares are initially low and rise as departure dates approach

****************************End Of Sample*****************************

Buy the full version of these notes or essay plans and more in our Accounting Notes.