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It is a method of selling a product from a subsidiary to another within the company. It also involves a price which a division charges from other division in context with the selling of goods and services to that division.
Factors affecting-
1) Goal Congruence- Transfer price should not be such which only looks for a department goal. But it should also look forward to the company’s goal. It should promote the company’s goal as a whole.
2) Evaluation of Performance- Buying and selling should be such that which doesn’t affect the income of the organization. Buyer should not involve in high purchasing cost and seller should not involve in losing income after selling the product.
3) Autonomy- The transfer price should preserve autonomy. The managers of the buying and selling divisions should have the freedom to operate their divisions as separate entities.
4) The capacity of the selling division to meet the demand of the buying division should be considered. If there is excess capacity, the cost of producing the goods to be transferred is relevant. If there is no excess capacity, opportunity costs should be included in determining the transfer price.
Management Accountant should behave ethically and they should perform their duties under the guidelines. They should not perform such tasks which would affect their as well as the company’s image. The Institute of Management Accountants (IMA) has developed four standards of ethical professional conduct.
They are:
1) Competence- Accountant should maintain the appropriate level of professional advice with learning and developing skills. He should perform tasks and duties in accordance with the law governing. He should also supply information to the management and should recommend which is accurate, clear and reliable.
2) Confidentiality- Accountant should keep all the information up to himself until there is no authority order. He should inform all relevant parties regarding the appropriate use of confidential information and monitor subordinates’ activities to ensure compliance. He should not use that information for illegal use.
3) Integrity- He should be in regular touch with business authorities that will allow him to maintain interest. He should refrain himself from engaging in any conduct that would prejudice carrying out duties ethically. He should not engage in activities which are of illegal nature.
4) Credibility- Accountant is expected to communicate the information fairly. He should disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. He should also disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.
Grenzplankostenrechnung (GPK) is a German costing methodology, developed after World War II by H.G. Plaut. It was designed to correct errors made by the allocation of fixed cost to the product. Their vision was to provide clear and reliable cost information to managers to help in making better decisions. The term Grenzplankostenrechnung, often referred to as GPK, has been translated as either Marginal Planned Cost Accounting or Flexible Analytic Cost Planning and Accounting.
Foundational Principles of GPK
1) The view of resources and capacity.
2) A quantity based model.
3) The nature of costs: initial and changing.Objectives
1) Supporting management decision making.
2) How to price product and services
3) How to plan and control operations.Advantages
1) Comprehensive Approach.
2) Different approach regarding cost drivers.
3) Detailed approach to cost control.
4) Willing to make e estimates.
5) Better use of different costs for different purpose.Disadvantages
1) System support and expertise required in cost management.
2) Too much information is not healthy sometimes.
3) Cost of implementing is high.
4) Small companies do not require such complex system.Cost of goods sold, also known as COGS are the direct costs. These costs are attributable to the production of the goods of the company. Ultimately it is the cost of the product manufactured and sold by the company or the product purchased and resold by the company. As these are the expenses of the company, thus it reduces the profit of the business.
What is included in COGS?
- Cost of raw materials
- Cost of items purchased for resale
- Cost of parts used to construct a product.
- Shipping costs
- Costs of containers
- Freight in
Formula of COGS
COST OF GOODS SOLD=Beginning Inventory+Purchases-Closing Inventory
Example
Max is a clothing and apparel retailer with four different locations. Max specializes in sportswear and other outdoor gear and requires a good supply of inventory to sell during the summer seasons. Max is finishing his year-end accounting and calculated the following inventory numbers:
Beginning inventory: $10,000
New purchases: $45,000
Ending inventory: $3,500COST OF GOODS SOLD= 10000+45000-3500
COGS = $51,500ABC Method
CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs.
It is a method of assigning indirect costs to the products and services which involves finding cost of each activity. It is a more refined approach to assign cost to product.Steps of assigning costs-
- Identify Activities Involved.
- Classification of each activity according to cost hierarchy.
- Identification and Accumulation of total cost of each activity.
- Identification of most appropriate cost driver.
- Calculation of total units of the cost driver relevant to each activity.
- Calculation of the activity rate i.e. the cost of each activity per unit of its relevant cost driver.
- Application of the cost of each activity to products based on its activity usage by the product.
It refers to the allocation of the manufacturing overhead to the product that is manufactured. The traditional method (also known as the conventional method) assigns or allocates the factory’s indirect costs to the items manufactured on the basis of volumes such as the number of units produced, the direct labor hours, or the production machine hours.
Advantages of Traditional Costing
1) Easy to Apply- This method is easy to apply as it is easy for managers to trace the cost which is directly related to the product. It’s trickier to assign overhead costs to different products.
2) Ability to Distort- For companies which produce a larger quantity of few products, traditional costing could provide a good idea of the costs of manufacturing a product.Disadvantages
1) It proportionate all overhead to the volume of production. Many overhead costs are, however, not proportionate to volume.
2) The reason is that the splitting of cost gives inaccurate costs of products if business grows.
3) Some companies are manufacturing and selling more than single product. In such a case, these companies are forced to take decision on pricing, product mix, advertisement, sales promotion campaign, process technology etc. based on the approximate cost information.
There is a number of differences between financial accounting and management accounting which falls into these areas: –
a) Financial Accounting reports on the result of an entire business whereas management accounting focuses on the specific areas as well. For example- Management accounting focuses on profit by-products, consumer’s behavior and so on.
b) Financial Accounting tells the organization about the profit that has been earned by the organization in last financial year but management accounting points out the problem that was faced in the last financial year and derive solutions to make sure that it will not be repeated again in next year.
c) Statements which are prepared by the financial accounting system will be useful for the internal as well as external users. For example- the Balance Sheet is also used by the investor. Whereas statements prepared by the management accounting will be used internally. For example- Standard costing done by the system will be useful for the management as they can see whether they are in line or not.
d) Financial Statements are prepared on the basis of the guidelines and principles whereas there is no need for the management accounting system to follow any principle to prepare statements.
e) Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.
f) Financial Accounting System looks back i.e. past year to prepare the financial statements. For example, the Balance Sheet is the outcome of the performance of the company in the last financial year. Whereas Management accounting may involve in making a budget for the company which is future-oriented.
g) Financial Accounting System present financial statements at the end of the financial year. Whereas Management accounting system presents the statement throughout the year to the management.
h) Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, evaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.
1) Statements of different companies can be compared with each other as principles followed by them will be the same.
2) Statements of a company can be compared with the statement of previous years which will enable the company to know the growth and earnings of the company.
3) Investor’s trust in the financial statement will be affected more by GAAP. If a company follows GAAP and prepared statements on the basis of this, the investor will be more prone to invest in the company rather than investing in the company which is not following GAAP.
Generally Accepted Accounting Principles is a collection that consists of rules and regulations which affect the financial reporting of the company. The financial statement is prepared and presented on the basis of the guidelines externally. These guidelines vary from country to country. The main purpose of following these guidelines is to have transparency and consistency with other organizations.
Financial Accountants must make sure that they prepare the financial statement in compliances with the principles. The Financial Accounting Standards Board (FASB) stipulates GAAP overall and the Governmental Accounting Standards Board (GASB) stipulates GAAP for state and local government. GAAP covers such things as revenue recognition, balance sheet item classification and outstanding share measurements. If statements are not according to the principles then the investor must be cautious as the financial statements can be wrong.
1) Manually Maintained Data. Management Accountants interpret the data which are manually maintained by the financial accountants. Reliability of the data can be questioned as the biasedness can be there from the side of the accountant. An accountant can also make the error of principle which will affect the statement of accounts.
2) Recommendation. There are many alternatives to a problem and the effectiveness of these alternatives is not sure. So, management accountant can only recommend the alternative and cannot say about the effectiveness.
3) Less Participation. Employees can be less competitive. They may resist certain policies adopted by the management accounting system. So, it will become a failure for the company.
1) Aim. Management accounting with the data available determines the goals and vision of the organization for a short run or long run. And it also helps the company in finding out the route through which they can reach to that ultimate goal.
2) Planning. Planning is one of the important things that a producer must do to ensure higher earning. A producer producing 1000 units when the demand is just 100 and a producer producing 1000 units when the demand is 900. Both the producer may employ the same resources but the earning of both the producer will be different. Thus it is very important for the manager to analyze the past on the basis of the data and prepare for the future.
3) Better Price. A cost control device in management accounting helps the management in reducing the prices of the product which will beneficial for the consumers. When the quality of the product is pre-determined, the manufactured product’s quality will also be good.
4) Measurement. Company’s result cannot be determined without measuring the performance of the company with the predetermined performance. Like in standard costing, standards are determined first and then the actual cost is compared. It helps out in finding deviation. If the actual cost is more than the budgeted cost, performance is found out to be less and vice versa.
5) Increases efficiency of the business. Management accounting increases the efficiency of the business concern. The targets of different departments of the enterprise are determined in advance and the achievement of these goals is taken as a tool for measuring their effectiveness.
