11 Pages
2825 Words
Introduction: Evaluating Costing Methods and Risk Management
Management accounting is defined as a stream of accounting which helps in evaluating and preparing the reports which is assistive in taking better decisions. The managerial accounting is purposely used for internal purpose and for effective decision making. Based on the financial statements the management accounting is implemented to take the proper decisions for development of the company. The present study is based on Roland Wheel manufacturing company. The company is located in Greenford and is manufacturing the peddled bicycles. The present study will outline the evaluation of the cost based on different costing methods. It will further outline the benefits and drawbacks of the various costing method used. Furthermore, the risk and risk management will be outline with the difference between systematic and systematic rest. In the end, the evaluation of the currency and reputational risk will be under taken.
Main Body
Preparing The Unit Cost Based On Different Methods
Absorption Costing
| Particulars / Products |
King |
Queen |
Duke |
Princess |
| Material cost |
20 |
80 |
20 |
80 |
| Labor cost |
1 |
3 |
1 |
3 |
| Short-run variable cost |
0.64 |
0.64 |
6.36 |
6.36 |
| Material handling cost |
1.59 |
1.59 |
15.91 |
15.91 |
| Expediting and Scheduling Costs |
1.88 |
1.88 |
18.80 |
18.80 |
| Set-up cost |
2.26 |
2.26 |
22.56 |
22.56 |
| Total |
27.36 |
89.36 |
84.64 |
146.64 |
The evaluation of the absorption costing method the unit cost is calculated based on per unit of production. The total cost is divided by per unit and with help of that per unit cost is calculated.
Activity based costing
| Particulars / Products |
King |
Queen |
Duke |
Princess |
| Material cost |
20 |
80 |
20 |
80 |
| Labor cost |
1 |
3 |
1 |
3 |
| Short-run variable cost |
0.64 |
0.64 |
6.36 |
6.36 |
| Material handling cost |
7.86 |
7.86 |
1.96 |
1.96 |
| Expediting and Scheduling Costs |
1.88 |
1.88 |
18.80 |
18.80 |
| Set-up cost |
1.1281 |
1.1281 |
11.364 |
11.364 |
| Total |
32.51 |
94.51 |
59.49 |
121.49 |
In against of this the activity based method is a type of costing method which includes undertaking the use of cost pool to calculate the cost. With help of the effective comparison of both the methods it is evident that in some case of the product, the absorption costing is better where as in some case the activity based costing is better.
Benefits And Drawbacks Of Costing Method Used Above
| Type of costing method |
Benefits |
Drawbacks |
| Absorption costing |
The major benefit of implementing the absorption costing into practice is that it helps in tracking the profitability of the business effectively. It is particularly because of the reason that this method of costing allows the company to achieve more targeted profit and achieve it effectively. Hence, it assists increasing the production and as a result of this the overall profitability is increased (Astuty et al, 2022).Another benefit of implementing the absorption costing into practice includes the fact that it covers all the product cost including variable and fixed effectively. Thus, it helps in more accurate evaluation of the total cost and ultimately the product is sold at the optimal price. |
In against of this the major drawback of using the absorption costing is that it is difficult in comparison and control the cost. It is particularly because of the reason that this costing method is dependent on the level of output. In case the output differentiates then the cost is also affected.In addition to this another drawback of using the absorption costing is that it is not much helpful in taking the managerial decisions. The reason underlying the fact is that it includes selection of suitable product mix and in case the product mix is not evaluated effectively then it will be resulting in mismanagement of the costing. Thus, as a result of this the overall cost of the product will not be appropriately planned (Gunarathne et al, 2021). |
| Activity Based costing |
The major benefit of implementing the use of activity based costing for the company is that it helps in accurate product costing. The reason underlying the fact is that all the direct cost is associated with the particular activity of the production only (Asiaei et al, 2022). Thus, it provides more accurate costing and effective decisions can be taken.In addition to this another benefit of using the ABC costing is that it helps in proper resource allocation. This is particularly necessary because when the appropriate resources will be allocated to each of the activities then automatically the overall costing will be improved.Another benefit of using the activity based costing is that it helps in better understanding of the manufacturing overhead. It is the most important benefit of using the ABC method. This is particularly because it helps in understanding the cost for the manufacturing overhead and it is effectively managed and controlled. |
In against of this the drawback of using the ABC costing is that it is very time consuming. The process of allocating cost to each and every activity of the business includes more time. Thus, as a result of this the whole process of costing is very time consuming.High cost is another drawback of using the activity based costing. The implementation of the activity based costing is very costly and particularly for a small scale business it is very difficult to effectively undertaking the costing process in less cost.Another major drawback of using the activity based costing is that it might not the capture the overhead cost (Djumanova and Bobomurodov 2021). It is particularly because the major focus of ABC is on the manufacturing overhead cost and it might be possible that it does not include the indirect cost. Thus, it can result in inappropriate overhead rating and as a result of this the accurate costing might not be implemented. |
Risk And Risk Management Along With Distinction Between Systematic And Unsystematic Risk
The risk is defined as the possibility of something wrong to be happening. It is a type of situation which is unpleasant and is not in hands of the person. Within the business sector there are many different kind of risk which can occur and can impact the overall working efficiency of the business. Hence, it is very necessary that all the risk is evaluated appropriately and the risk management plan is prepared (Alvarez et al, 2021). The risk management is defined as a process through which the person is in capacity to identify and analyse the different risk and try to control it. The businesses exist in the external environment and the working of the external environment cannot be controlled. Hence, it is mandatory for the companies that they effectively monitor the environment and their trends and accordingly take decisions to mitigate all the different risk. Hence it is necessary for Roland Wheel manufacturing that they must effectively manage the risk so that the overall performance of the company can be improved.
| Basis |
Systematic risk |
Unsystematic risk |
| Meaning |
The systematic risk is defined as the type of risk or the hazard that is associated with the market or changes in the market segment. |
On the other hand, unsystematic risk is the one which includes the association of the risk due to some particular security or the changes within the industry. |
| Nature of risk |
The nature of systematic risk is uncontrollable which implies that this risk is not in hands of the company. It is particularly because it is dependent over the market segment and the working of the market is not dependent on the company. |
The nature of unsystematic risk is controlled because these risks occur due to changes within the company's policies or the industry standards (Bresciani et al, 2023). Hence, the working of the company can be controlled and as a result of this the unsystematic risk is also controllable. |
| Types |
The different types of systematic risk include the interest risk, purchasing power risk, market risk and many other different kind of risk. |
Further, the different type of unsystematic risk includes the various business risks and the financial risk that the company is facing. |
| Factors |
The major factors which affect the systematic risk include the external factors or the macroeconomic factors that included changes in economic, social, legal aspects or the political aspects. |
The factor which promotes the unsystematic risk includes the changes coming within the internal environment of the company or the microeconomic factors. |
Currency And Reputational Risk With Regards To The Company
There are many different kind of risk which the businesses face while operating at the global level. Thus, it is very necessary for the companies to effectively monitor this risk and try to take mitigating action so that the risk can be removed (Varani?t?, Ži?kut? and Žandaravi?i?t?, 2022). The most common type of risk which the Roland Wheel manufacturing faces includes the currency risk and the reputational risk. In order to arrange the materials the company have to deal with China which is a country having a different currency.
Currency risk
The currency risk is defined as the exposure which the company faces when they work at the global level that is across different countries. This is defined as the unpredictable gain or loss which can occur to the business due to the change in the value of the currency. There are many different kind of the currency risk which the Roland Wheel manufacturing faces while getting materials from China. These different types of the risk as as follows-
Transaction
The transaction risk is defined as the risk which the company faces due to the financial transactions between the different companies present in different countries. Due to the change in the currency with China Roland will company faces the transaction risk through a great extent.
Translation
The translation is another risk which is faced by Roland wheel manufacturing and it includes risk faced by the businesses established in another country but they are conducted business in the foreign jurisdiction.
Economic
The economic risk is another type of risk which is faced by Roland Wheel Company under the currency risk. It includes the risk which occurs due to changes in the market value and the exchange rate ups and down.
Reputation risk
The reputation risk is defined as the risk which the business faces due to the working of the company and can impact the of the business (Wolf et al, 2020). It refers to as creating direct impact which the action of the company creates over the reputation of the brand value of the company.
Specific reputational risk
- Direct: The direct reputational rest is the one which impacts the performance or the market position of the company directly. It is particularly due to the actions of the business themselves.
- Indirect: The indirect reputational risk is the one which includes impact over the brand value of the complete due to the activities of some other companies.
Causes of reputational risk
- Illegal practice: While dealing with another country, it is essential to undertake legal practices otherwise this can lead to create negative impact on organization's image. Hence, this can lead to create negative impact on Ronald Wheel's goodwill.
Mitigation
The Strategies for mitigating the reputational risk includes the effective marketing. It is particularly necessary because when the effective marketing will be implemented them automatically the sales of the business will increase and the reputation will also enhance. In addition to this another method of improving the reputational risk includes the ethical working principles (Alabdullah and Ahmed, 2020). When the ethical working principles are complied then it automatically improves the repetition of the business.
Conclusion
In the end it is inferred that the use of management accounting is very necessary for the successful working of the business. The above study highlighted that the use of absorption and activity based costing is beneficial and at the same time also have some drawbacks. Furthermore it evaluated that there are different kind of risk which the businesses faces and it includes the systematic and unsystematic risk. Moreover, it was also analysed that there are also some currency and reputational risk which the business faces while operating at the global level.
References
Books And Journals
- Alabdullah, T.T.Y. and Ahmed, E.R., 2020. Audit committee impact on corporate profitability in Oman companies: an auditing and management accounting perspective. Riset Akuntansi dan Keuangan Indonesia, 5(2), pp.121-128.
- Alvarez, T., Sensini, L., Bello, C. and Vazquez, M., 2021. Management accounting practices and performance of SMEs in the Hotel industry: Evidence from an emerging economy. International Journal of Business and Social Science, 12(2), pp.24-35.
- Asiaei, K., Bontis, N., Alizadeh, R. and Yaghoubi, M., 2022. Green intellectual capital and environmental management accounting: Natural resource orchestration in favor of environmental performance. Business Strategy and the Environment, 31(1), pp.76-93.
- Astuty, W., Pratama, I., Basir, I. and Harahap, J.P.R., 2022. Does enterprise resource planning lead to the quality of the management accounting information system?. Polish Journal of Management Studies, 25(2), pp.93-107.
- Bresciani, S., Rehman, S.U., Giovando, G. and Alam, G.M., 2023. The role of environmental management accounting and environmental knowledge management practices influence on environmental performance: mediated-moderated model. Journal of Knowledge Management, 27(4), pp.896-918.
- Djumanova, A.B. and Bobomurodov, N., 2021. Features of the organization of management accounting and its impact on enterprises. ?????? ? ???????? ??????????? ?????, (9 (75)), pp.3-7.
- Gunarathne, A.N., Lee, K.H. and Hitigala Kaluarachchilage, P.K., 2021. Institutional pressures, environmental management strategy, and organizational performance: The role of environmental management accounting. Business Strategy and the Environment, 30(2), pp.825-839.
- Varani?t?, V., Ži?kut?, I. and Žandaravi?i?t?, A., 2022. The changing role of management accounting in product development: directions to digitalization, sustainability, and circularity. Sustainability, 14(8), p.4740.
- Wolf, T., Kuttner, M., Feldbauer-Durstmüller, B. and Mitter, C., 2020. What we know about management accountants' changing identities and roles–a systematic literature review. Journal of Accounting & Organizational Change, 16(3), pp.311-347.
