Application of managerial economics

"During the past decade many organization in both the manufacturing and services sectors have faced dramatic changes in their business environment." These changes are having significant influence on management accounting system. Globalization is the main reason for the keen competition. The successful companies not only compete against domestic competitors, but also the companies over the world. World Trade Organization (WTO) provide more business opportunities, however, at the same time, it brings more global competitors into the domestic market. For example, after China entered into WTO, she opened her domestic market for the western in various industries, such as car manufacturing, manufacturing food and farm product and so on.

Due to the economic development, customers in China have more choices on goods and services, the higher quality of goods and services are demanded. In order to compete in such competitive business environment, companies become more "customer-driven and make customer satisfaction an overriding priority." The above situation not only faced by China, but all over the world. These changes are playing a significant influence on management accounting system. This is the reason why the traditional costing and budgeting approach as relevant management techniques for the use in planning and control has diminished in recent decades. Most companies therefore focusing on total quality management to meet the customers' satisfaction (TQM). TQM are helping many companies change and improve their performance. By customer oriented process of continuous improvement the product and services of consistent high quality in timely fashion. The management accounting needs to be modified to meet the current planning & budgeting needed on the ground that the world wide business environment facing keen competition caused by globalization and changes from time to time.

Effective cost control would greatly attribute to the gross profit of companies and only cost is in companies' control. An appropriate costing method is very important. "Traditional absorption costing was development when most organizations produced only a narrow range of product and when overhead costs were only a very small fraction of total costs, direct labour and direct material cost accounting for the largest proportion of the costs. Errors made in attributing overheads to products were not too significant."

An alternative way for costing is Activity Based Costing (ABC). Traditional costing is structure-oriented whereas ABC is process-oriented. Hence, we see that the traditional usage of fixed and variable costs is totally meaningless. In ABC, all costs are included. "In fact, ABC is possibly even more relevant to services industrial because, the absence of a direct materials element, a services business's total costs are likely to be particularly heavily affected by overheads. There certainly is evidence that ABC has been adopted by some business which sell services rather than goods."

Nowadays, overheads are likely to be far important within the cost structure of an organization and direct labour may account for as little as 5% of a product's cost. For example, in the bank there has been an increase in non-volume related support activities such as computing, from processing and ...