Accounting
BAO2204: Management Accounting.
Assignment 1.
Article: Ferrara, W.L, 1995, Cost/Management Accounting- The 21st century, Management Accounting (US), December, pp.30-36.
The purpose of this report is to review the changes that Management accounting has undergone throughout the 20th century and how these changes will have an effect on Management Accounting in the 21st century, according to Ferrara. The article by Ferrara provides a comprehensive view as to how Management Accounting has been beneficial for organizations, which is divided into four separate areas and how it will continue to be as Management Accounting approaches the 21st century. These changes are all outlined below:
The first paradigm that Ferrara outlines is Paradigm A, which consists of the turn of the 20th century until the 1940’s. This was the era of the Industrial revolution plus, and was a representation of the image of an early day industrial engineering type. As a result, the costs that were involved were direct materials, direct labor, manufacturing overhead, as well as marketing and administrative costs. All of these costs were joined together in order to form a total cost per unit of output. Therefore, in many ways, the total cost per unit excluded marketing and administrative costs, which were included as a factor of desired profit. This enabled the sum of the total cost and desired profit to generate a target selling price per unit.
The second paradigm focused on the period from the 1940’s until the 1980’s, which was the era of cost-volume profit analysis as well as direct costing, and in which it was introduced through the distinction between fixed and variable costs. Therefore, variable costs per unit were determined by engineering standards and analytic techniques, which meant that the volume of activity primarily related to fixed costs. This has also led to many variable costs becoming fixed as time has gone by. The variable costs per unit for direct materials and direct labor were easily determined by the engineering specifications for materials and labor requirements. The derivation of variable costs per unit through engineering standards and analytic techniques only left the fixed costs to be considered when determining the volume of activity to be divided by the derivation of per- unit costs. The issue of dividing the volume of activity had become a larger issue as the relative amount of variable costs had diminished and the relative amount of fixed costs had increased.
The third paradigm focused on the period of the late 1980’s through to the early 1990’s. This was the era when activity- based costing was introduced. Under activity- based costing (abc), there were 3 elements of variable manufacturing costs:
i. Costs that varied with product units;
ii. Costs that varied with product complexity, such as the number of batches; and
iii. Costs that varied with product diversity, such as the number of products. Activity- based costing (abc) [next page]