Panopticism and its relevance to Management Accounting

1. How may it be relevant to management accounting? Give examples

2. Explain how the Van Halen rock band used checklists as a control device

3. If a perpetual inventory system is used for recording movements of raw materials there is no need to conduct a physical stocktake.” Do you agree? Why?

4. Should overtime payments be treated as direct labour, or as overhead? Explain.

5. Prepare a business report comparing the traditional costing system with ABC and evaluate arguments for and against ABC.

Panopticism could be defined as the art of observing and placing the fear of observation into the observed people. Jeremy Bentham was the founder of this theory. It could be explained with the help of the following diagram:

The construction of the above location is simple due to the presence of an observation tower in the middle and the prisoners are lodged into the cells surrounding the same. As a result, the prison in-charge could keep a central observation on all the prisoners. This has resulted in fear in the minds of the prisoners. They now that they are observed from the tower; however, they do not the way and timing of observation. As a result, there is behavioural effect on the prisoners.

Management accounting is necessary for all organisations, since it deals with the method of managing their funds. As a result, Panopticism comes into play, as the finance departments could form an illusion that all stuffs are observed and they are passed through a workflow (Cooper, 2017). The individuals generally believe that few unknown people scrutinise financial transactions in the finance department. As a result, the accounting departments are considered as the strictest department in an organisation. Hence, panopticism needs to be used in companies, particularly in departments concerning their funds.

Management accounting enables the management in undertaking quality decisions to control the business activities appropriately. The three main functions of management accounting are described as follows:

It denotes the need of satisfying reporting requirements and external regulations. Hence, the accountants are needed to provide for effective realisation of expenses and revenues along with valuing assets and liabilities. The management accountants are involved in creating and operating systems of cost accounting that value inventories by allocating costs to products (Fatseas & Williams, 2013).

It signifies the overall process of control and planning. The management accountants aid in planning by preparing budgets to summarise the operational plans along with oversight on the operation and design of systems.

Functions of Management Accounting

This denotes the provision of financial services to the management team for improving the competitiveness of an organisation (Klychova et al., 2015). Such financial services provide value to the firm by assisting process and line managers in decision-making for involving the management accountants directly in the decision process.

Van Helen is identified as US had rock band comprising of vocalist David Lee Roth, guitarist Eddie Van Helen, bassist Michael Anthony and drummer Alex Van Halen. The checklists are adjudged as portion of this arena rock universe. The contracts of Van Helen with the concert promoters include a clause that M&M’s bowl needs to be provided backstage; however, with the removal of the brown candy upon forfeiture of the show within the overall band compensation (Kokubu & Kitada, 2015). Once Van Helen actually cancelled a Colorado show at the time Roth established few brown M&M’s in his dressing room.

According to the explanation of Roth, it was the only band to take considerable productions into third-level and tertiary markets. They had pulled up with nine 18-wheeler trucks having gear, in which the standard was a maximum of three trucks. There was presence of technical errors as well. The contract riser read such as a version of the Chinese Yellow Pages due to the availability of equipment and human beings for maintaining their functions (Labro & Hemmer, 2017). Thus, the entire production could be line-checked and there would be absence of any profession, in which the checklists would be highly useful.

The perpetual inventory system needs the organisations to count the items periodically in inventory and they are valued for keeping a record of cost of sales. This is beneficial for the managers, as inventory levels could be kept under control for developing interim financial statements (Otley, 2016).                                                 

Due to the absence of any relation between overtime payment and production purpose, it should not be treated in the form of direct labour; instead, it should be treated as overhead expenditure.

In order to evaluate the need of the employer, it is necessary to understand the difference between traditional costing and activity-based costing. Initially, a clear understanding needs to be formed about the concept of costing. For example, a production manager of a car manufacturing unit is accountable for the production line manufacturing engines and then fixations are made with the cars manufactured. If the manager is accountable for 50 activities that are carried out daily, the manager would tend to obtain an insight of those activities fetching profits and those activities resulting in loss. In this case, costing is significant, as the cost related to each activity is sorted down for the respective activity sets.

Van Halen and the use of Checklists for Control

It is the method that is used widely mainly because of its simplicity. In this technique, average cost method is taken and the cost related to the activity is added with it (Taleb, Gibson & Hovey, 2015). In this context, it could be stated that overhead costs are those expenses, which are related to the production of a certain product. Overhead costs include the labour cost for the operator managing forklifts, individual cost for maintaining machines and the cleaner cost of the factory floor. These costs are not raw materials, which are not used in the manufacturing process of a certain product. However, there is indirect involvement of these costs in the production process.

There are certain issues associated with the traditional costing system. The cost of overhead is allocated to all the activities regardless of whether these activities have consumed the overheads or not. Thus, the sole benefit of this system is that it could be implemented simply and easily. In addition, it could be highly effective in undertaking management decisions; however, it might lead to inaccurate results.

This is a modern costing method, in which all the overheads are assigned with exact and accurate values. For instance, if the labour cost related to the line of production is $20 per activity and the labour cost in the line of peers is $30, it would be allocated at the exact amount. However, it is noteworthy to mention that in the traditional costing system, an average of the above-mentioned two costs would be taken into account and $25 would be assigned in the form of overhead costs (Uyar & Kuzey, 2016). The significant advantage of this system is its accuracy and majority of the managers tend to use this method for obtaining a clear overview of the profitable and unprofitable activities. However, this system is highly complex and implementation is difficult in many organisations (Wouters, et al., 2017). Some issues could be even observed in implementing this system like the selection of drivers of cost, assigning common costs and varying rates of cost drivers. Finally, the organisations involved in using market-based pricing might not find the ABC system favourable.

Therefore, the costing system that would be implemented depends on the nature of the business and the amount that the organisation is willing to invest in the same.

References:

Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.

Cooper, R. (2017). Supply chain development for the lean enterprise: interorganizational cost management. Routledge.

Fatseas, VA., & Williams, J.F. (2013). Cost accounting. McGraw-Hill Education.

Klychova, G. S., Zakirova, A. R., Zakirov, Z. R., & Valieva, G. R. (2015). Management aspects of production cost accounting in horse breeding. Asian Social Science, 11(11), 308.

Kokubu, K., & Kitada, H. (2015). Material flow cost accounting and existing management perspectives. Journal of Cleaner Production, 108, 1279-1288.

Labro, E., & Hemmer, T. (2017). Management Accounting and Operations Management. In The Routledge Companion to Production and Operations Management (pp. 345-359). Routledge.

Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.

Taleb, M. A., Gibson, B., & Hovey, M. (2015). Fifty years of Sustainability Accounting: does accounting for income in business sustainability really exist?. International Journal of Accounting and Financial Reporting, 5(1), 36-47.

Uyar, A., & Kuzey, C. (2016). Does management accounting mediate the relationship between cost system design and performance?. Advances in Accounting, 35, 170-176.

Wouters, M., Selto, F. H., Hilton, R. W., & Maher, M. W. (2017). T Course: Management Accounting 1 [T-WIWI-102800]. Module Handbook Industrial Engineering and Management (B. Sc.).