Approaches To Accounting For Overheads In Manufacturing Firms Accounting Essay

Category: Accounting

The competition between the companies has increasing nowadays which leads each firms to give more attention to overheads cost accounting and management control system. The importance of overheads and management control information is to supply the expansion of huge transaction, production, and distribution enterprise has been practice in U.S. Corporation and has been well outlined by Thomason Johanson. Overheads refer to ongoing expenses of operating a business. Overheads normally used to group expenses that are essential to carried purposing of the business. In this essay, we will start off with a dissection of the importance of accounting for overheads to organization and a clear description of the main features of the possible approaches to accounting for overheads. Then we will show a comparison of the likely operating environments for manufacturing firm as Nokia and services company as Carphone Warehouse. After that, we will give a concentration on the strength and weakness of each approach for each organization. In addition, we will based on this analysis and identify the potential uses for such accounting information by manager in both organizations.

It is common that Income minus Overheads equals profit. So if the business reduces the overheads there will be an increase in profit without increasing in income. There are some overheads that companies cannot control it like Taxes, rates, rent, employment cost, and several other costs. That is one of important reasons why the firm should classify the full cost of overheads and therefore wherever possible, create saving. In addition, controlling overheads reach the company its financial objective by spending money carefully and even pay bills on time to keep away from fee penalty. Also, managing the overheads will develop the credit rating as the company will no longer be defaulting on loan payments. Moreover, companies should focus on leadership management who has the ability to manage the overheads by applied the best method of reducing cost and generate profit. Another important point of calculating overheads costing to organization is to choose the appropriate time to expand. It is obvious that if the company want to expand or joint venture or franchising; it has to accumulate accurately each pound where they have spent and wherever possible save this pound. In order to analyse the possible approach to accounting for overheads; we should mention the Traditional Cost Account (TCA) and Activity Based Cost (ABC). Traditional costing is a costing method that does not separated cost by role or allocation by each element of the manufacture procedure. It takes a full cost and split it by each element of the procedure. So essentially each part element of the manufacture process is dispersed an equal forecasted cost. Traditional cost account were established and improved between 1870 to 1920. TCA is becoming hopeless and obsolete nowadays in the competitive global of business. It operated perfect until the business environment altered. A long time ago, most of manufacturing companies started accepting change in their works, which were not consistent of traditional costing system. Using standard cost which is the one creature supporter by traditional costing system was proposed for a firm that had: similar goods, huge direct costs compared to indirect cost, incomplete capability to gather data and below the line costs. Alternatively, today’s firm naturally have a broad diversity and difficulty of goods and services, elevated overheads costs compared to direct labour and sustainable product costs that influence product cost. Because of product diversity and product line difficulty, applying one similar overheads rate which is becoming exploited under traditional costing system, is no longer a suitable average. The new business environment is now differentiating by efficient technology, high speed, gathering information and reporting system. According to these changes, the traditional costing system is not a sufficient implement for today business role because it cannot authorize managers with accurate data needed to control the firm’s operation productively and profitably. After the firm’s have faced problem with traditional costing system, they were searching for new method to accounting for overheads until they have found the Activity Based Costing. (Upchurch, A, 2002).

Activity Based Costing is a cost accounting technique improved and initiated by Robert Kaplan and H. Thomas Johnson, which outlines overheads cost straight away to cost substance. It varies from traditional cost because it shows cost straight away when possible and all related manufacturing cost is considered. ABC allocates overheads costs to goods on the origin of supplies consumed by each activity is included in the design and production. ABC is an accounting method that permits an organization to achieve the real cost related with each product and service produced by the organization without observe to the organizational structure. ABC allows manager to show whether the resources are becoming used effectually and which action adds value to the good or service. ABC system can help manager classifying the value added action which they could develop to convene consumer wants and increasing the product quality and efficiency. Accountants have a large regulation to supply exact numbers for business for them to create a better sound decision. One of the most challenging assignments is to give good reason for why ABC is essential now when it was neglected in long time ago. The technique business was operated in the past is varies from the way business is now behavioural. That is the reasons why business companies start re-organizing on how they should function their work (Robert, S. 2007).

Now we will talk about a comparison of operating environment for manufacturing and Services Company and we will use Nokia as an example of a firm from the manufacturing sector and Carphone Warehouse as an organization from service sector. Nokia Company is concentrate on a unit stage action is performed each time a unit is formed. Also, product maintaining activity permits goods to be produced. While Carephone Warehouse Companies focus on which goods are profitable, which product should be highlighted, trends in product profitability over the time and product costs as a origin for setting price. Services firms have had troubles coming up with straight cost accounting system because they have been replicating them after system found in manufacturing companies. The trouble with this are that manufacturing firms situate importance on valuing inventory, which service company do not offer, and apply standard cost accumulate for direct labour and materials. ABC can be implemented is services sector much better than manufacturing sector. It has become rising essential for firms whose market is becoming more competitive. Since ABC is actually about cost management, applying it permits services firm to decline and manage their costs in order to create right pricing and other decisions, and to raise their profitability. It is commonly to carry on becoming more widespread in the service sector in the future.

After we have talking about the operation in manufacturing sector and services sector