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Article review for managerial accounting

The article by Srikumar Rao titled “Overhead Can Kill You” basically describes

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
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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
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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).

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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. <http://www.forbes.com/forbes/1997/0210/5903097a.html>