Genesis Manufacturing currently uses a traditional cost management system as the basis for its accounting structure. Cost accounting's fundamental aim is to assist managers in making a wide range of decisions. Historical information is used to predict the expenses for the coming year, and predictions based on expected changes in unit prices are used to show a budgeted material cost. Budgets are implemented based on that information, evaluated as the year progresses, and recalculated for the upcoming year. At Genesis, nonmanufacturing costs are allocated to the various product lines based on sales volume (as a percentage of total sales). Direct costs are distributed across product lines using standard cost data. Manufacturing variances are distributed using a system based on standard hours earned versus actual hours.
We are proposing a departure from this cost-based accounting method to an activity-based accounting system.
Activity-based accounting recognize various decision centers throughout an organization and take into account the organization itself and its processes. These decision centers may be called cost centers or profit centers, but the emphasis is on the degree of latitude that individual managers of these centers have with regard to the decisions that are made regarding their operation. It is considerably more latitude than our managers currently have.
Under activity-based accounting, Genesis would move from allocating costs across the company as a whole to profit and cost centers. Each manager of these centers would be responsible for controlling the costs and revenues that the center generates. Our computer system would make this implementation feasible from a technological standpoint, but the technology is by far the easiest aspect of changing our accounting focus.
The current hierarchical organization of the company would not need to be significantly changed. However, the responsibility and accou...