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Summary of inventory management
Theories relating to inventory management
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Table of Contents
1.0 EXECUTIVE SUMMARY 1
2.0 INTRODUCTION 2
3.0 PERFORMANCE MEASURES 3
3.1 Performance measures for Cost Centre Management 3
3.2 Performance measures for Profit Centre Management 3
3.3 Performance measures for Investment Centre Management 4
4.0 CONCLUSION 5
5.0 COSTING SYSTEMS 6
5.1 Marginal/ Variable Costing 6
5.2 Full or Absorption costing 7
5.3 Activity Based Costing 8
6.0 REFERENCES 10
1.0 EXECUTIVE SUMMARY
As Financial Director for a large multinational company operating its business in 20 countries around the world the task of assessing different ways to measure the performance of individual manager who each has responsibly for one part of the portfolio was assigned. To do this an audit was carried out at several different centres that played a major role in how the company was run and managed on a daily basis. I looked at the different methods used of evaluating the individual managers who were responsible for different parts of the portfolio and how their decisions affected the success of the organisation in order to maximise profitability.
To maximise profitability it was very important to consider in such a diverse environment the best way to organize and plan their activity and resources. After evaluation of all the different methods of measuring performance using the three approaches it was clearly seen that in such environment no one way is suitable for measuring performance and a combination of approaches would be best suited according to the operational and environmental setting of the organisation.
The departments were also given the responsiblity for costing products and services in order to make better decisions. In this case we consider different costing systems and looked at act...
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Reece, R.S & Cool, W.R ,Measuring investment centre performance . Available From :<(http://hbr.org/1978/05/measuring-investment-center-performance/ar/1>.[20th December, 2013)
Ottley, D., 2001. Accounting performance measurement: a review of its purpose and practice. Available at: [ 22nd December 2013].
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Cost allocation and activity based costing systems. Available at :< http://www.pearsoned.ca/highered/divisions/virtual_tours/horngren/man_acc/Ch05ManAcc.pdf > [ 20th December 2013]
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
Management accounting in organisation is very important for decision-making and to make the business more efficient and therefore increasing its profits. Is the process of preparing accounts that can help managers to make day-to-day and short-term decisions, by providing them with accurate and timely key financial and statistical information...
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
There are many ways to analyze the performance of a company, some more popular than others. According to the Barney text the accounting method is the most popular way of measuring a firm's performance (Barney, 2002). Some of the reasons for the popularity could include the fact that accounting measures of performance are publicly available on many firms and they communicate a great deal of information about a firm's operations. Other methods of performance analysis include firm survival and the multiple stakeholder approach.
Tapinos, E., Dyson, R.G. & Meadows, M. (2005). The impact of performance measurement in strategic planning. International Journal of Productivity and Performance Management, 54(5/6), 370-384.
One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).
Activity Based Costing (ABC) refers to an accounting method that enables businesses to gather information about their operating costs and assign them to specific activities such as planning, engineering or manufacturing. Therefore, ABC enables businesses decide which products, services and resources to employ in order to increase profitability and cut down unnecessary wastage. Unlike the traditional costing methods, ABC emerged in the 1980’s as a way to more accurately measure all business costs while at the same time associating them to the goods and services produced.
As per Harvard Mentor Review, measuring performance of companies is important for the following reasons:
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
The Balanced Scorecard has emerged in recent years as a performance measurement system in various organizations. This paper will discuss the origin and concept of the balanced scorecard and how it was first implemented. We will then review the criticisms on the balanced scorecard methodology as well as analyse the strengths and weaknesses of this performance measurement tool.
Business firms may seem to be similar, relying on guide of organizational models. However, in practice, all business is unique, functioning as a distinct arrangement of organizational models, designs and practices. Adoptation of any plan is all to support ‘’inimitable’’ business strategy. Performance measurement is critical in assessing organization overall performance and results are used for strategic planning to develop range of strategies (Tapinos & Dyson, 2005) for achievement of sustainable business success. Without this information and understanding, organizational strategies will not be in configuration with or effective in the business environment. Performance measurement is a multifaceted management tool that centres on how a business generates value. Performance measurement systems are used to reinforce the behaviours required for business success as well as for achieving organizational direction.
The purpose of this essay is to determine whether measuring employee performance is all pros and no cons. Performance appraisal is considered as an important management tool in many countries (Milliman, Nason, Zhu & Ciery, 2002). According to Kazan and Gumus (2013), “Kaplan and Norton (2001) define the performance assessment as "a planned tool which is integrating the success of individual at a given task, his attitude and behaviors at work, his moral conditions and characteristics, and assessing employee's contributions to the success of the organization".” In other words, employee’s weak and strong points, trainings needed, future predictions can be recognized by performance appraisal (Milliman et al., 2002). There are a lot of different performance measurement systems. Lam and Schaubroeck (1999) stated that there are traditional performance appraisal and a more current one called TQM (Total Quality Management). From traditional perspective, appraisal is measuring individual results rather than the overall system. It is assumed that individual is capable and responsible to influence the way things are done in a company. On the other hand, TQM stressed the importance of system rather than individuals.
Others feel that ABC would be more widespread in industry if it were marketed better by the cost accounting profession itself [1]. As the dust has settled, ABC has turned out to be less a revolutionary technique than a useful refinement to proven systems. The costs of products and services must be accurate, or management can be misled. Decisions... ...
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.