Factors That Influence Adoption of Management Accounting Technique
Management accounting differs from financial accounting in that its focus is on providing information to internal users rather than the public or government agencies. This information is vital to functions such as forecasting, planning, cost control and performance evaluations. Multiple management accounting options make the specific needs of each business the most important determinant in choosing the right techniques.
Financial Reporting Rules
External financial reporting rules typically influence an initial choice of whether to adopt a variable- or absorption-costing technique. The difference is that with variable costing, overhead is not included as part of manufacturing costs, while in absorption costing, production costs do include manufacturing overhead. Although variable costing produces valuable information, income tax returns and external financial reports require work-in-process, finished-goods-inventory and the cost-of-goods-sold valuations to include overhead, making the absorption-costing technique a more logical choice.
Type of Business
Whether a business is service-based or involved in manufacturing influences the choice of adopting a job-order or process-absorption costing technique. An additional factor with manufacturing business is the type of goods produced. Job-order costing allocates overhead according to an average per-unit cost for each individual order or job. Construction companies, landscape designers and special-order manufacturers are most apt to adopt the job-order costing technique. Process costing, which allocates overhead at various stages of production, is a more common choice for manufacturing businesses that mass produce items requiring movement through several departments. Canneries, car manufacturers and bottling companies typically adopt process costing.
Customer Billing Procedures
Construction companies, landscape design firms and other custom-service businesses typically provide customers with an estimate before starting any job. Since the production manager won’t know actual costs until the job or project is complete, the quote includes time and materials estimates. The costing technique -- typically job-order costing -- is vital to calculating project costs and pricing and providing customers with accurate estimates. These also allow production or project managers to monitor and manage costs during production, and inform customers more quickly if or when cost overruns change an estimate.
Factors influencing management accounting techniques with inventory management include risk tolerance, locations of suppliers and warehousing capacity. The choice is between adopting a just-in-time or an economic-order-quantity technique. A just-in-time inventory management system seeks to control inventory costs by ordering only what a specific job requires, decreasing holding costs and the amount of money tied up in inventory. This technique works best when demand remains relatively constant and suppliers are in close proximity to the business. However, in retail businesses, this technique is often unsuitable. Here, adopting the economic order technique seeks to manage costs by placing larger orders less often, by setting specific reorder points and warehousing excess inventory. This allows for intangible costs, such as customer dissatisfaction, and provides for fluctuating demand.
Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.