Performance Measurement In A Manufacturing Organization Accounting Essay


Presents, public presentation measurings of fabrication organisation play a significantly important function in helping strategic determination every bit good as development way devising. As a major component of public presentation measuring, the option of bing system has an of import influence on the prosperity of concern. When the usage of appropriate costing system can better production efficiency and guarantee the strategic determination in right way, the public-service corporation of incorrect bing system will take to destructive economic effect for concern. Since last century, the efficiency of traditional bing systems to cover with alterations in fabrication patterns have been primary concerned. As the result of industrial economic system age, the deduction of traditional bing systems is based on the production procedure affecting high proportion of direct cost such as machine and labour costs. ( Mishra and Vaysman, 2001 ) However, with the development of digital economic system, the function of support service has been enhanced, while the direct cost degree of entire production cost has been diminished in present concern environment. Compared with traditional methods, some advanced modern-day impression of bing techniques are introduced such as activity based costing and entire quality direction every bit good as just-in-time theory. ( Bhimani, 2006 ) Due to the important difference between traditional and modern-day techniques, it has attracted tonss of treatment refering the relevancy of traditional costing system to current concern environment. This essay aims to indentify the ground why the traditional costing systems compared with modern-day techniques become inappropriate for current concern environment by analysing two representative traditional cost-management tools: soaking up costing and standard costing.

The relevancy of soaking up costing system

Since the early of last century, the traditional costing systems have been introduced to fabrication patterns. It is a well-known fact that they normally involve volume-based cost driver which is suited for the production procedure during industrial age, and the information provided focal point merely on internal operation direction due to high aggregation cost. ( Johnson and Kaplan, 1987 ) However, with the coming of information and digital age, the relevancy of traditional cost direction tools have been attacked since last decennaries because of increasing demand of external competitory information. ( Wilson and Chua,1993 ) Furthermore, the exigency of new advanced modern-day cost direction techniques besides makes the hereafter of traditional bing systems in the quandary.

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As one of major conventional bing systems, soaking up bing method involves the public-service corporation of volume-based overhead soaking up bases such as labour hr and machine hr. In other words, all fabrication costs are allocated to merchandises while non-manufacturing costs are straight charged from net income and loss statement. Although bulk accounting important organic structures have approved the usage of soaking up costing, yet there is still a batch of unfavorable judgment around it. ( Baxter, 2005 )

Chiefly, soaking up bing method combines different cost drivers into unit cost instead than bespeaking the true cause of operating expense. ( Vercio, 2008 ) Therefore, it is hard to place where cost economy in operating expenses can be made for long term decrease of cost. Then, the unsighted decrease of operating expense costs is more likely to bring on a decreasing in the quality of merchandises in many instances, which destroys the client trueness finally. Furthermore, due to the advanced techniques involved in production procedure, the direct cost may merely be a fraction of entire cost with high-efficiency industry. ( Drury,2008 ) In other words, the traditional cost drivers such as labour hr or machine hr are non regarded as the major constituents of production operating expense in current concern environment. Therefore, the public-service corporation of soaking up costing will likely take to deceptive and inaccurate measuring of merchandise costs. Besides, it is possible to ensue in improper pricing and sale mix determinations owing to under or over appraisal of merchandise cost.

Due to above jobs about soaking up costing system, the possible solution is to use activities based costing ( ABC ) with the premise of cause and consequence relationship between activities and cost. Compared with traditional soaking up bing system, the major advantage of ABC is to foreground the true cost Centre of the operating expenses by utilizing the activity cost pools. ( Drury, 2008 ) Hence, some directors have began to wake up that the usage of ABC is more relevant to current alterations than soaking up bing in fabrication patterns since 1980s because it is helpful to extinguish the cross subsidisation job and better sale mix determination. ( Bj & A ; Atilde ; ¶rnenak and Olson, 1999 )

However, In fact, it is dearly-won and clip devouring to construct up an ABC system alternatively of the traditional one, because it usually involves complicated procedure and great sum of employee preparation, and the new system will be worthless if there is any mistake involved in overall procedure. Therefore, the traditional soaking up bing system is still prevailing in pattern because of several advantages to the concern. ( Mishra and Vaysman, 2001 ) On one manus, harmonizing to this step, fixed cost will be deferred and recorded merely in the period of incurring sale as an disbursal. Therefore, soaking up bing avoids fabricated losingss being reported and provides a logical net income computation. ( Drury, 2008 ) On the other manus, in order to be accordant with the step employed by fiscal market to measure general direction public presentation, senior direction may prefer internal net income coverage system to follow the external fiscal accounting soaking up bing systems. By this manner, it is to cut down the possible impact of the accounting information from external study on portion monetary value, and the managerial fillip linked to external rating study is besides to promote the usage of soaking up bing as internal coverage system every bit good. ( Drury, 2008 )

The relevancy of standard costing system

As to traditional criterion costing system, it involves to enter the production cost at standard per unit, so place the seting entries by comparing with the known existent cost. Therefore, standard costing is considered as an appropriate tool for production efficiency and cost control with the information provided from seting entries over a period of clip. However, dissidents insist it is non appropriate for modern-day concern environment with following unfavorable judgment.

Chiefly, this costing system merely focuses on the internal-oriented cost control, which may misdirect and corrupt direction determination devising as it neglects the importance of external market-oriented cost factors such as quality and flexibleness. ( Atkinson and Kaplan, 1998 )

Second, in order to prosecuting low cost, the majority purchasing and the provider alterations will be encouraged with traditional measuring of material monetary value discrepancy, as it pays small attending on quality and bringing which drama well important function in client satisfaction in current ferociously competitory economic environment. This step is besides considered to impede the successful use of Just-In-Time ( JIT ) and Entire Quality Management ( TQM ) which highlight the demand for long term strategic partnerships with a few stable providers to supply timely bringing of quality stuffs for the interest of minimising stock list cost. ( Drury, 2008 )

Besides, owing to the accent on labour and machine efficiency discrepancies based on standard costing, over-production may be encouraged and inordinate stock lists will go a load of concern. Differently, the impression of JIT may be helpful to get the better of the jobs with the purpose of extinguishing waste and heightening efficiency.

Furthermore, direction may be given to overly emphasize the volume based overhead allotment rates instead than the entire merchandise cost so that the overhead cost is inaccurately estimated and high cost activities are hidden. The nucleus job is that the true cost drivers are non identified like the state of affairs in soaking up costing. Hence, the deduction of Activity Based Management ( ABM ) is the sensible solution with edifice up the & A ; acirc ; ˆ?cause and consequence & A ; acirc ; ˆA? relationship between concern activity and cost. ( Atkinson and Kaplan, 1998 )

In add-on, the traditional manner merely blindly highlights the betterment of section efficiency instead than the overall efficiency of value concatenation with allowance for tolerable degrees of waste and quality fluctuations. As a consequence, this induces the loss of cost economy chances, non-value added and cost inefficient activities. Conversely, the construct of JIT and TQM emphasize the reengineering the whole procedure in order to better public presentation maximally.

Furthermore, current market environment alterations so quickly that there is great demand of existent clip information for guaranting proper control measuring taken. But, it is believed that periodic fiscal discrepancy studies can non supply sufficiently meaningful and timely information, and impede the control action in a JIT and the uninterrupted betterment agenda based on TQM & A ; acirc ; ˆ™s doctrine.

( Drury, 2008 )

However, although there are many unfavorable judgments mentioned above, standard costing system is still utile to modern concern with appropriate alterations. Alternatively of utilizing come-at-able public presentation, the public-service corporation of demanding is able to promote uninterrupted betterment. Furthermore, alternatively of being used to be control and public presentation rating, standard cost and discrepancy analysis besides can be regarded as useable tool for tracking cost of stock list and keeping a database for decision-making in order to better cost efficiency every bit good as to keep flexibleness to mutable market environment. Besides, standard costing can be employed in concurrence with mark bing for the interest of finding the cost spread.


In decision, due to the alterations in fabrication pattern and economic environment during last decennaries, the deduction of traditional bing systems has been in the quandary with the rise of new advanced direction accounting techniques. Although there are many unfavorable judgments environing the traditional costing system because of some theoretical restrictions, it is still relevant to the current concern pattern due to the advantages compared with modern-day techniques and continual betterment. The grounds from literatures besides suggest the employ of the traditional costing systems as important tools for public presentation direction is because they can avoids fabricated losingss being reported and present higher net income in accounting study than other modern-day direction accounting techniques. ( Mishra and Vaysman, 2001 ; Drury, 2008 ) Furthermore, In fact, it is dearly-won and clip devouring to construct up a new technique system such as ABC alternatively of the traditional one, because it usually involves complicated procedure and great sum of employee preparation, and the new system will be worthless if there is any mistake involved in overall procedure. As a consequence, some practicians prefer maintaining traditional direction accounting methods to taking adventure though there is obvious theoretical advantage of new methods. Therefore, although the traditional costing systems have been behind the times and inappropriate for present fabrication procedure in the facet of theoretical base, yet it still can non state that the traditional costing systems are irrelevant to current concern environment perfectly when the deduction of them still play an importance function in current existent concern universe.


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