Extract of sample "Article review for managerial accounting"

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Article review for managerial accounting The article by Srikumar Rao d “Overhead Can
Kill You” basicallydescribes events that can make a company incur losses. It generally
discusses the decisions that a company can take in order to make profits by properly
allocating costs and labour. For a company that is facing bankruptcy, the management
can either increase the production of its best products or outsource it from another
company. The author also discusses how overheads can be the main factor of a
company’s downfall if they are not careful.
This is because some of the expenses can be reduced by use of direct labour instead of
using machines. The allocation of overhead does not only lead to faulty choices in a
business, but it assists managers to know which products to continue producing and
which it should stop producing. This has been further elaborated by the use of Activity
Based Accounting (ABC), which basically shows how to deal with cost allocation of
items sold to big and small customers. This way, the management is able to make
decisions in the best way to serve their customers.
For instance, in the TTI case, the company had to walk away from the old way of doing
things and make sure that each and every customer was satisfied. The large customers
as well as small customers were given an option of ensuring that they get many goods
but also get fair prices that will enable them to make revenues. This not only benefited
the customers, but it also helped the company grow and make substantial returns. ABC
is also used to assist in eliminating unnecessary activities as well as unprofitable
production line that cause extra overheads.
The cartoon shows one person enjoying a meal at the expense of the other three who
will also foot the bill as per the portion allocated. This is not fair since each person
should be charged the amount they consume, and that is what the companies should
adopt in order to have better profits and avoid extra expenses. The cost of an item is
determined by many factors. Therefore, the cost-volume-profit-relationship is an aspect
that is utilized in managing businesses. However, there are factors that need
consideration since one must understand how customers respond to the change of the
cost in terms of volume and how this factor affects the revenues on profits.
For instance, in the case of TTI, a private electronic distributor, they made revenues
worth $400 by distributing capacitors, resistors and other peripheries, but they realized
that in one financial year, they could make more than 80% but a 5% less amount in cost.
Therefore, they had to convince large manufacturers to buy components since it cost
almost the same amount of money for small orders, too. Many small orders made were
by people that knew the prices and thus could buy some component from them and the
other elsewhere.
When TTI discovered that, they established ABC software and persuaded five
customers to utilize it. This made them discover that by buying large volumes of all
components from TTI they would spend less. There was a $7 million revenue increment
from the five customers, which improved to $100 million from sixty customers. This
shows that buying things in bulk is better than buying individual components. The
customers experience low cost on items while the companies gain profitability
(Garrison, Noreen, and Brewer 83).
This shows that ABC is a valuable aspect of that is extremely imperative in decision
making. Variable Costing and Segment Reporting forms principal tools for
Management. This is because when making key decisions for the company, the
managers need to allocate costs in order to change workflows. The variable costs are
assigned goods sold as well as inventory. The cost consists of direct labour and
materials and variable manufacturing overhead. Variable costing only treat costs of
production varying with the output by separating variables and fixed costs.
The fixed manufacturing overhead as well as administrative costs plus fixed selling are
treated like period costs, which are further deducted from incurred revenue. These are
the factors that are reported in segments so as to avoid having mixed up data in the
final reports that is varying from the original correct value (Garrison, Noreen, and Brewer
249). Overheads, as learnt in Activity Based Accounting (ABC), basically deal with both
manufacturing and non-manufacturing costs assigned to a product.
This is because some of the manufacturing costs can be excluded from product costs,
thus basing overhead rates on activity at capacity. The overhead cost is usually more
than half the total amount of the product cost. In many cases this happens because of
missallocation of funds like in the example given of a restaurant when one has a
cheaper dessert than the other members in the group and pays much more money than
what one consumed regardless of the fact that others took expensive desserts. Direct
labour is utilized as an allocation base for overhead in assumption that overhead cost is
directly proportional to direct labour.
This is seen in the case of a company using 20% of the labour to produce a product.
This was more profitable than when using automated machinery. This is because some
of the machines were very expensive and also needed maintenance, thus costing more.
Additionally, when companies are using automated machines, they are not able to tell
when they are making losses or profits. In addition, the depreciation of the machine is
also an item inclusive as an overhead item (Garrison, Noreen, and Brewer 272).
Work Cited Garrison, Ray, Eric Noreen, and Peter Brewer. Managerial Accounting (14th
Edition), New York, NY: McGraw. 2011. Print. Rao, Srikumar S. “Overhead can kill you.”
Forbes. Fobes.com Inc., 2 Oct. 1997. Web. 25 March 2013.
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