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Table of Contents 1.Introduction: ....................................................................................................................................... 2
2.Outcomes of the Questions: ................................................................................................................. 2
2.1Role of Management Accountant: ...................................................................................................... 2
2.1.1.Planning : ........................................................................................................................................ 4
2.1.2. Directing: ....................................................................................................................................... 5
2.1.3. Controlling: .................................................................................................................................... 6
2.1.4. Decision Making: ........................................................................................................................... 6
2.2.Relevant and Irrelevant Costs and Revenues: ..................................................................................... 7
2.2.1.Relevant Costs and Revenues: ........................................................................................................ 7
2.2.1.1. Opportunity Cost: ....................................................................................................................... 7
2.2.1.2.Make or Buy Decision: ................................................................................................................. 8
2.2.2.Irrelevant Costs and Revenue: ........................................................................................................ 8
2.2.2.1.Fixed Costs:.................................................................................................................................. 9
2.2.2.1.1. Traceable Fixed Cost: ............................................................................................................... 9
2.2.2.1.2. Common Fixed Cost: ................................................................................................................ 9
2.2.2.2.Sunk Cost: .................................................................................................................................... 9
Continue or Drop out: ........................................................................................................................... 11
2.3. Activity-based Costing: ................................................................................................................... 11
2.3.1.Benefits of Activity-based Costing: ................................................................................................ 12
2.3.2.Problems of Activity-based Costing: .............................................................................................. 12
3.Conclusion: ......................................................................................................................................... 13
4.References: ........................................................................................................................................ 15
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1.INTRODUCTION:
Management accountant means the person acting as both management and accountant. Middle to
large every organization should have a management accountant to accomplish its management,
accounting and to combine the both. Jessup Ltd. is a fast growing and will move through middle
to large in operations. It has two divisions, providing advertising and public relation services. It
has only four advertising expert who are also performing as director. Being a fast growing
organization and having two service items, in the global competitive market it must need to have
a management accountant. The management accountant by performing his role must assure its
growth consistency by taking a strategic decision and considering relevant items. This
management accountant will make differentiation between relevant or irrelevant costs or
revenues in decision making. He will determine which project to accept, or which project to
reject, which service item will continue to provide or which service item will discontinue which
optimal product mix will be used everything by considering the relevant and irrelevant costs and
revenues and the allocated costs. He will also fix up a cost allocation method to determine the
accurate cost of service provided per unit and which will be convenient with the nature of the
organization.
2.OUTCOMES OF THE QUESTIONS:
2.1ROLE OF MANAGEMENT ACCOUNTANT: Managerial accounting mainly works with providing information to the people working inside an
organization and who direct and control these information and operations are the management
accountant (Garrison, Noreen & Brewer, 2006).
So the managerial accounting is identifying, measuring, accumulating, analyzing, preparing,
interpreting and communicating financial information which should be used by the management
accountant of Jessup to plan, evaluate and control the organization and to assure appropriate use
of accountability for its resources. He will also assist in the preparation of financial reports for
non-management groups, external parties, such as shareholders, creditors, regulatory agencies
and tax authorities which will provide both qualitative and quantitative information (Institute of
Management Accountant, 1981)
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Figure 1: Model of the Role of the Management accountants (Wells, 2000)
Figure (1) which represents the model of the role of the management accountants is developed
by (Wells, 2000), and we also observe here that the management accountant of Jessup in
strategic management should go beyond the strategic planning to pre-planning processes.
Management accountant of Jessup Ltd. should deploy and implement the strategic plan in
compliance its goal, measure and evaluate the outcomes. Completing the plan and
communicating it to all staff is deployment. Resourcing the plan, putting it into action, and
managing those actions are the implementation. Measurement and evaluation includes tracking
implementation actions, assessing how the organization in outcomes of those actions based on
the outcomes changing and updating the plan.
But, he is not only information provider but also a decision maker as well as very important part
in the management team. Management accountant provides information and helps in decision
making to the owner of the Jessup. In this ways management accountant must help Jessup to run
the organization effectively and efficiently.
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The roles of management accountants are as follows :
Figure (2): Roles of Management Accountant in Jessup
2.1.1.PLANNING : The determination of goals, the selection of some courses of actions and the determination of the
ways to implement those actions to achieve the goals of an organization are done by a
management accountant (Garrison et al, 2006, and Bamber et al 2008). So the management
accountant of Jessup will perform these above activities.
Their goal must be specific and future long term oriented. To attain the goal selected actions
should be performed being long term oriented. The main goal of an organization is the
maximization of profit except for the non-profit organizations. In setting and attaining the goal
the management accountant should also be long term oriented. To profit maximization, the best
way is to minimize cost, maximize revenues as well as generate sales. To generate sales he
should create an exciting and attractive environment following a customer intimacy strategy.
Planning
Directing
Controlling
Decision
Making
Feedback
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Along with profitability he should also be concerned about the cash flow. If there is less profit
but more cash flow that means more liquidity. The more liquidity the more expansion is possible
but up to a level which can also help an organization to attain its goals (Horngren, C., Dtar, S.
and Foster, G. 2006). Besides this, he should also consider the global competitive market and
competitive advantage. So, for the goal attainment he should be concerned about the expansion
and quality of their services and to make a reputation and demand of its to the customers and to
boost its sales, launch promotional activities. So, they will be able to increase the profitability
which will ensure the goal attainment through improving its quality and the method of the supply
of the service and improved marketing (Charles T. horngren et al, 2008).
2.1.2. DIRECTING: Strategic management accountants in Jessup Ltd. should monitor the company’s day-to-day
routine operations and observe whether the employees are performing their activities as needed
(Bamber et al, 2008), observe the implementation of the plans to achieve the organizations long
and short term goals and try to keep the smooth functioning of the organization. After making
plan, the management accountant is required to guide its stuff towards achieving the
organization’s goals. He should assign employees their responsibilities, arbitrate disputes, give
solutions to their problems and make many small to large decisions which will affect customers,
employees as well as the whole organization (Garrison et al, 2006). The goals of individuals may
not be in accordance with the goal of the organization. During that time the management
accountant of Jessup should motivate the managers and other employees and direct their efforts
maintaining employee’s interests towards achieving the organization’s goals. So, the major role
of the management accountant is putting the business into action. For example, when a composer
writes a beautiful score of music to bring a life on it, there require all members of the orchestra
and a conductor to bring the orchestra into synchronization and harmony with the direction of the
composer. So the management accountant should have all available necessary information, such
as whether inventory is available when needed, whether productive resources are scheduled
appropriately, whether to deliver output transportation system will be available and so on. He
must also be concerned about whether Jessup is complying with contracts and regulations needed
to comply.
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2.1.3. CONTROLLING: Strategic management accountant in Jessup Ltd. should evaluate the outcomes of its operations
comparing with the made plans and make adjustments or modification to keep the company
pressing towards its goals (Bamber et al, 2008). In addition to this to ensure the work efficiency
and effectiveness planning and directing should be controlled based on the selected performance
measures. The main aim of controlling is determining the problems and efficiency in directing
actions to determine the success of the planning actions. Plan should be appropriately modified
as circumstances change (Garrison et al, 2006). As Jessup is a fast growing company, budgeting
is a very essential tool to control the results. So he should establish a realistic goal and control
sthe performance and profitability for the business to achieve the goal.
Controlling is the process where management accountant uses feedback to evaluate the results
with the attainment of the objectives. Performance report gives feedback which is compared with
plans and by highlighting variances which is achieved from the deviations from the budgeted
plans. The strategic management accountant of the Jessup evaluates the effectiveness of its
advertising and public relation division’s operations by comparing the increase in revenue and
profits with the increase in promotional activities. Based on their evaluation of the outcomes
from the operations he will make corrections and revisions to their plans (Horngren et al, 2008).
2.1.4. DECISION MAKING: The selection among a set of alternative courses of actions to achieve specified objectives is
decision making (Horngren et al, 2008). Management accountant of Jessup Ltd. is involved in
goal setting, directing, controlling which also means that directly or indirectly is involved in
decision making. To create business value, he should ensure correct execution of these activities.
On the other hand, if he fails to execute planning, directing and controlling activities properly he
may turn to failure. The main theme related with decision making are-
I. Business value results from good decision making.
II. Through a spectrum of planning, directing, and controlling activities decision will be
taken and
III. Only on the reliance of decision making quality decision making will be possible.
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Management accountant estimates the organization’s competitive position in the competitive
market and assesses how their organization stacks up and takes decision against competition and
improvement.
2.2.RELEVANT AND IRRELEVANT COSTS AND REVENUES:
2.2.1.RELEVANT COSTS AND REVENUES: Different revenues and costs in future as between the alternatives are the relevant costs and
revenues (R. H. Parker, 1969). In a particular decision making these costs and revenues are
relevant. A relevant cost or revenue changes if an alternative cost or revenue is taken. These are
also known as Differential Cost or Differential Revenue.
Future costs or revenues may be relevant or not based on the situations, based on their types.
Future costs or revenue whether are going to be incurred or not depend on the made decision, are
relevant (Dennis Caplan). Generally are relevant which costs have impact on the choice of
alternatives are relevant such as the variable costs, opportunity costs.
For Example, there is a advertisement contract at £10000. The general cost of resource for future
usage can not be decided whether to incur or not at £3000, because these will be demolished
whether used or not. Service can be provided for the contract at a cost of £8000. So the total cost
for providing the advertising service is £11000. But here the above shown cost of £3000 is
irrelevant whether the contract is accepted or not the cost is fixed. So this contract will add to the
profit margin (10000-8000) £2000. So the management accountant of Jessup Ltd. should accept
the contract.
2.2.1.1. OPPORTUNITY COST: The cost of our lost opportunity is called opportunity cost. When one alternative is selected over
another then the lost profit is opportunity cost. Sometimes it includes the lost profit from the next
best alternative, and sometimes it includes the difference between the profit from alternative
taken and the profit from the next best alternative. Negative difference indicates that better action
is taken than the all alternative. But, positive difference indicates that better action is taken than
the next best alternative.
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For Example, assuming Jessup Ltd. has a good relationship with a regular customer XYZ Ltd.
Jessup Ltd. has to give advertisement service to XYZ Ltd. at revenue £8000. On the other hand,
a new customer ABC Ltd. wants to get advertisement service at cost £10000. But, Jessup Ltd.
will be able to accept only one contract in its capacity. So to maintain its old customer and
continue their old relationship Jessup will accept the contract of XYZ Ltd. and will reject the
contract of ABC Ltd. So the opportunity cost of maintaining the old customer and continue their
old relationship is (10000-8000) £2000.
2.2.1.2.MAKE OR BUY DECISION: Assuming that Jessup Ltd. provides public relation service from it’s own agency. The costs are-
Cost Items £
Variable costs 7000
Fixed Cost (Traceable) 2000
Fixed Cost (Common) 1000
Total Costs £10000
But if Jessup provides this service by negotiating with others the only cost will be £8500. Here
the relevant cost of this make or buy decision for Jessup is £9000. So, if the Jessup provides this
public relation service by others it can save £500.
2.2.2.IRRELEVANT COSTS AND REVENUE: The costs that have already been incurred are unavoidable, can not affect in decision making
regarding selecting alternatives. Besides this some other costs or revenues are similar among the
alternatives or next best alternatives are irrelevant in decision making (Horngren et al, 2008).
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2.2.2.1.FIXED COSTS: Costs which remain constant irrespective of the number of units produced up to a level of
activity are fixed costs. It does not change with the changes in the level of service provided. So
in case of decision making incurred fixed costs are irrelevant but future fixed costs can be
relevant. Fixed costs can be of two types-
2.2.2.1.1. TRACEABLE FIXED COST: Costs which can be identified to a particular item and are incurred only for that item are traceable
costs. If we drop out that product item the fixed cost will need not to be incurred. So, in this case
this is relevant. This cost is irrelevant to make decision whether to make or outsource if the cost
has already been incurred.
In Jessup Ltd. the incurred or future fixed costs of the individual division is the Traceable Fixed
Cost. But, the salary of the expertise for each division’s service oriented is the traceable fixed
cost.
2.2.2.1.2. COMMON FIXED COST: Common costs are common to all product items which also mean the cost of the overall
organization. These costs are charged divisions of Jessup. These costs should not be considered
by management accountant in decision making which can also be called irrelevant in decision
making.
If a strategic management accountant has been appointed the salary of that management
accountant will be common fixed cost for all divisions.
2.2.2.2.SUNK COST: Already incurred in the past are sunk costs. Which costs are already been incurred as sunk costs
should not be considered in decision making. Sunk costs can also be termed as non-refundable
costs (Dennis Caplan). So, non-refundable costs are irrelevant in the decision making.
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Assuming that Jessup Ltd. has an office space was on lease. The leased amount is totally paid in
advance for the office space is sunk cost. It has already been paid to the owner, so in decision
making it is irrelevant.
For Example-
Cost Items £ £
Revenue (public relation service) 10000 10000
Variable costs ( as the name of the organization) 1000 1000
Fixed cost (Traceable) 4000 -
Fixed cost (Common) 1000 -
Variable costs (providing service by other) - 7000
Variable costs (providing service by itself) 2500 -
Total Costs 8500 8000
Cost Items Relevant/Irrelevant
Revenue (public relation service) Irrelevant
Variable costs ( as the name of the organization) Irrelevant
Fixed cost (Traceable) Relevant
Variable costs (providing service by other) Relevant
Variable costs (providing service by other) Relevant
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Variable costs (providing service by itself) Relevant
CONTINUE OR DROP OUT: Suppose advertising division has net operating income £20000 but the net operating loss of
public relation division is £5000. So if the management accountant of Jessup Ltd. wants to drop
out public relation division in that views it may be seemed logical. But the unavoidable common
cost of the two divisions the salary of the management accountant is in total £25000 which is
allocated on the basis of proportion 3:2. So applied common cost to public relation division is
£10000. So if the management accountant of Jessup Ltd. drops out the division it will loss
contribution margin (10000-5000) £5000. So he should not drop the public relation division.
2.3. ACTIVITY-BASED COSTING: The allocation of costs to the product items or divisions based on the amount of resources
consumed by the product items is called activity-based costing (Eileen Rojas). Management
accountant of Jessup Ltd. can also allocate their costs to the two divisions based on the amount
of resources consumed by each division by applying this costing method. Jessup will allocate its
costs for two purposes-
I. To determine the costs of each service item to provide service.
II. To encourage cross-departmental monitoring.
Activity-based costing works with the following steps-
Step-1: Resources are consumed for activities identify these activities and assign costs to
them.
Step-2: Determine cost drivers that cause these costs.
Step-3: Divide total cost by total activity to calculate cost per driver.
Step-4: Assign costs to the service items by multiplying activity rate to the number of
activity consumed by each division of services.
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2.3.1.BENEFITS OF ACTIVITY-BASED COSTING: Activity-based costing allocates all the costs based on the consumption of resources to the
product or service division and determines the accurate costs of the each unit of product or
service items. The benefits of ABC system are given below-
I. Activity-based costing is a detailed measure for costing. The more detailed the cost
allocation system, the more accurately costs are allocated. So, if the management
accountant of Jessup Ltd. applies activity-based costing for cost allocation, he will be
able to compute the service costs of each service item accurately.
II. Accurate information for service provided is needed for Jessup to determine the accurate
cost of each unit service provided to determine the profitability.
III. Accurate cost information of each unit service provided is needed by the management
accountant of Jessup to determine an optimal product mix.
IV. ABC system provides more information by providing a requirement of more record-
keeping which maintains clarity to the external parties about Jessup’s activities.
V. Introducing ABC system requires teamwork which is cross-departmental teamwork. This
teamwork brings co-ordination between the works of the different divisions within the
organization.
VI. As given, Jessup is a fast growing organization, so Jessup will initiate some new
techniques which increase the proportional amount of indirect costs. In today’s changing
automated world indirect costs are more important. ABC costing also mainly focuses on
the indirect costs which allocates the huge amounts of costs to each product item for
which this is more important.
2.3.2.PROBLEMS OF ACTIVITY-BASED COSTING: As well as having some benefits Activity-based costing has some problems also. The problems
arise in ABC system are given below-
I. Activity-based costing is difficult, so time consuming and expensive to perform. Greater
amount of human resource is needed to get greater amount of quantitative information.
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The more human resource engaged the more expensive and complicated the costing
system.
II. ABC system is so much complicated to perform. If Jessup use this system there will need
to provide training to the employees to perform the system. Efficient employees are
needed to perform this task. Besides this, during working time employees have more
information to perform the task technically, but if anyone of them leaves the organization
they will take their skill as well as their expertise information with them which is
irrecoverable.
III. Jessup Ltd. has only two divisions which do not indicate simplicity in operation. In
simple operating system ABC system has no use, because costs can be easily traceable
for each service item.
IV. ABC system allocates all costs to all divisions. But the absolute allocation of all costs is
not possible. Such as the salary of management accountant can not be absolutely
allocated to each division.
V. ABC system sometimes misrepresents data. Some irrelevant costs in ABC system is
considered in decision making, but considering that costs ABC system is showing
product margin.
VI. ABC system does not conform with accounting standards and GAAP. So this report can
not provide information for external reporting.
3.CONCLUSION: Jessup Ltd. is a fast growing organization having only two divisions which indicates simple
operating process. Although it has simple operating process it needs a management accountant to
attain its goal. The responsibility of a management accountant performed when he will plan,
direct, control and make decision for Jessup as a management and an accountant. In every
decision he will consider whether the organizations objectives, goals, mission and vision will be
attained or not. They will also make differentiation between the cost and revenue items which are
relevant or irrelevant in decision making and makes decision on the basis of the cost items. In
decision making we should not consider all the cost and revenue items, as every cost and revenue
items are not relevant in the decision making. So the management accountant by differentiating
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these cost and revenue items makes goal oriented decision. By adopting appropriate method
management accountant will also allocate costs to each service item which will also help to
determine the absolute profitability by each service item and to make decision about the optimal
mixing proportion of each item.
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4.REFERENCES: I. Dennis Caplan (Management Accounting : Concepts and Techniques, Oragon State
University)
II. Drury, C. (2008) Management and cost accounting. 7th edn. London: Patric Bond.
III. Garrison R, Noreen E, & Brewer P. (2006),Managerial Accounting. Eleventh edition.
IV. Horngren, Ch, T., Datar, M, S, & Foster, G. (2003).Cost accounting: A managerial
emphasis. Prentice Hall Publishing. Eleventh edition.
V. Bamber, L., Broun, K., & Harrison, T, W. (2008).Managerial accounting, First
edition. Prentice Hall.
VI. Wells, L, D. (2000). Strategic Management for Senior Leaders: A Handbook for
Implementation.TQLO Publication.
VII. Warren, S. & Parker, L. (2009). Bean counters or bright young things? Towards the
visual study of identity construction among professional accountants. Qualitative
Research in Accounting & Management.
VIII. Siegel, G., and Sorensen, J.E. (1999). Counting More, Counting Less -
Transformations in the Management Accounting Profession. Institute of Management
Accountants.
IX. Eileen Rojas(2013), The Advantages and Disadvantages of activity costing,Demand
Media
X. Artill,P. and McLaney,E.(2012) Management Accounting for Decision Makers.7th
edn. Essex: Pearson Academy Ltd.
XI. Artill,P. and McLaney,E. (2009) Management Accounting for Decision Makers.6th
edn. Essex: Pearson Academy Ltd
XII. Drury,C. (2009) Management Accounting for Business. 4th
edn. London: Patrick
Bond.
XIII. Drury, C. (2008) Management and cost accounting. 7th edn. London: Patric Bond