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2.6. Directing

There are many good plans that are never realized. To realize a plan requires the initiation and


direction of numerous actions. Often, these actions must be well coordinated and timed. Resources must be ready, and authorizations need to be in place to enable persons to act according to the plan. By analogy, imagine that a composer has written a beautiful score of music - the "plan." For it to come to life requires all members of the orchestra, and a conductor who can bring the orchestra into synchronization and harmony. Likewise, the managerial accountant has a major role in putting business plans into action. Information systems must be developed to allow management to orchestrate the organization. Management must know that inventory is available when needed, productive resources (man and machine) are scheduled appropriately, transportation systems will be available to deliver output, and on and on. In addition, management must be ready to demonstrate compliance with contracts and regulations. These are complex tasks. They cannot occur without strong information resources. A major element of management accounting is to develop information systems to support the ongoing direction of the business effort.

Managerial accounting supports the "directing" function in many ways. Areas of support include costing, production management, and special analysis:

2.6.1. Costing


Cost accounting can be defined as the collection, assignment, and interpretation of cost. In subsequent chapters, you will learn about alternative costing methods. It is important to know what products and services cost to produce. The ideal approach to capturing costs is dependent on what is being produced.

Costing Methods - In some settings, costs may be captured by the "job costing method." For example, a custom home builder would likely capture costs for each house constructed. The actual labor and material that goes into each house would be tracked and assigned to that specific home (along with some matching amount of overhead), and the cost of each home can be expected to vary considerably.

Some companies produce homogenous products in continuous processes. For example, consider the costing issues faced by the companies that produce the lumber, paint, bricks or other such homogenous components used in building a home. How much does each piece of lumber, bucket of paint, or stack of bricks cost? These types of items are produced in continuous processes where costs are pooled together during production, and output is measured in aggregate quantities. It is difficult to see specific costs attaching to each unit. Yet, it is important to make a cost assignment. To deal with these types of situations, accountants might utilize "process costing methods."

Now, let's think about the architectural firms that design homes. Such organizations need to have a sense of their costs for purposes of billing clients, but the firm's activities are very complex. An architectural firm must engage in many activities that drive costs but do not produce revenues. For example, substantial effort is required to train staff, develop clients, bill and collect, maintain the office, print plans, visit job sites, consult on problems identified during construction, and so forth. The individual architects are probably involved in multiple tasks and projects throughout the day; therefore, it becomes difficult to say exactly how much it costs to develop a set of blueprints for a specific client! The firm might consider tracing costs and assigning them to activities (e.g., training client development, etc.). Then, an allocation model can be used to attribute activities to jobs, enabling a reasonable cost assignment. Such "activity-based costing" (ABC) systems can be used in many settings, but are particularly well suited to situations where overhead is high, and/or a variety of products and services are produced.

Costing Concepts - In addition to alternative methods of costing, a good manager will need to understand different theories or concepts about costing. In a general sense, the approaches can be described as "absorption" and "direct" costing concepts. Under the absorption concept, a product or service would be assigned its full cost, including amounts that are not easily identified with a particular item. Overhead items (sometimes called "burden") include facilities depreciation, utilities, maintenance, and many other similar shared costs. With absorption costing, this overhead is schematically allocated among all units of output. In other words, output absorbs the full cost of the productive process. Absorption costing is required for external reporting purposes under generally accepted accounting principles. But, some managers are aware that sole reliance on absorption costing numbers can lead to bad decisions.

As a result, internal cost accounting processes in some organizations focus on a direct costing approach. With direct costing, a unit of output will be assigned only its direct cost of production (e.g., direct materials, direct labor, and overhead that occurs with each unit produced). You will study the differences between absorption and direct costing, and consider how they influence the management decision process. It is one of the more useful business decision elements to understand - empowering you to make better decisions. Future chapters will build your understanding of these concepts. In review, to properly direct an organization requires a keen sense of the cost of products and services. Costing can occur under various methods and theories, and a manager must understand when and how these methods are best utilized to facilitate the decisions that must be made. Large portions of the following chapters will focus on these cost accounting issues.

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