The paper "Management Accounting of Scotty Accent Company " is a perfect example of a finance and accounting case study. The modern competitive market environment requires efficient managerial accounting for organizations in ensuring that production costs are correctly allocated to their respective products in optimizing product margins. Accounting for overheads represents an important and technical aspect of accounting for production cost in organizations from cost control and cost reduction point of view. This is more so considering that overhead costs represent the larger part of production costs compared to direct production costs.
Indirect material, labor and operating expenses pose a problem for managers incorrect identification and allocation to particular costs centers and products. For correct costing and pricing for products, companies have to strive towards the accurate measurement of cost items and allocating costs per unit for specific cost centers or products. Difficulty incorrect allocation of unit costs to specific products is further aggravated by the presence of more than one product for an organization. While direct costs can be allocated to specific products, overhead costs are a result of the general operation of the company and as such cannot be easily attributed to specific products’ unit costs through equal allocation (Haider and Shaukat, 2011: 3).
Scotty Accents Company sells two types of kitchen tap products, Brass and Chrome, and uses a full-costing traditional approach for its cost management. This approach is considered ineffective where more than one product is produced by a company since the products, though using similar production methods, have different production requirements and impact on the total overhead costs for the company, therefore cannot be allocated equal unit costs.
Scotty Accent Company uses an overhead allocation system that assigns the costs in terms of the number of hours used in the production of the two products. Using this method, the two products are allocated overheads using the same cost per hour rate. Under this system, overhead costs are taken as service renderers for the products with product costs being assigned in terms of the number of hours spent on the provision of specific services in the production of the products.
Haider, S., Ali, M. and Shaukat, M. (2011), “Strategic Management Accounting – A messiah for Management Accounting”, Australian Journal of Business and Management Research, Vol.1, No.4, 1-7, Sydney, Australia: Australian Institute of Chartered Accountants
John, J. W. and Barbara, C. (2007) “Cost Allocation and Activity-Based Costing Systems”, in Management Accounting, Information and Decisions. Boston, Massachusetts: Irwin/McGraw-Hill.