SBS4246 / EME3203 / EMN4309 - Management Accounting

Assignment Number 02

Application of Management Accounting in

Engineering Organizations

Group members
22ug1 – 0019 – W.M.S.D,Wijerathna
22ug1 – 0527 – G.A.K.Dulshan
22ug1 – 0815 – W.M.I.U.S. Abeykoon
01. Five Management Accounting Techniques with Real-World Examples
Technique Brief Explanation Relevance to Engineering
Organizations
1. Activity-Based ABC assigns overhead costs Engineering firms have complex
Costing (ABC) more accurately based on operations with multiple activities
activities that drive costs, (design, testing, quality control).
rather than general cost ABC helps identify real cost
centers. drivers in product development or
project execution.
2. Target Costing Sets a target cost by Useful in product design and
subtracting a desired profit R&D stages, where engineers
margin from the competitive must design cost-effective
market price. products that meet customer
expectations and market price.
3. Lean Accounting Supports lean manufacturing Fits well with lean engineering
by focusing on value practices helps in tracking
streams, simplifying reports, efficiency improvements,
and eliminating waste in reducing inventory costs, and
accounting. promoting continuous
improvement.
4. Life-Cycle Costing Evaluates total cost of Essential for engineering projects
(LCC) ownership, including (infrastructure, machinery), where
acquisition, operation, long-term operational and
maintenance, and disposal maintenance costs significantly
costs. affect decision-making.
5. Environmental Identifies and allocates Engineering companies involved
Management environmental costs to in manufacturing, construction, or
Accounting (EMA) products, processes, or energy can use EMA to assess
projects. sustainability, comply with
regulations, and reduce
environmental impacts.
 02. Challenges or forms of resistance
1. Cultural Resistance to Change
• Explanation: Organizational culture typically ranks technical skill higher than
financial or accounting skill in engineering environments. Workers may find
management accounting irrelevant or useless.
• Examples:
o Engineers see accounting as "non-technical" and ignore cost data during product
design or process improvement.
o Project managers may distrust new systems that alter traditional budgeting or
performance metrics.
o Older employees may prefer legacy systems and are uncomfortable adopting
new cost-reporting tools.

2. Lack of Technical Knowledge / Skills Gap

• Explanation: Engineering professionals are typically trained in design, mechanics, or
systems, not in financial or managerial accounting principles. This constructs a
communication gap between finance and technical departments.
• Examples:
o Engineers misinterpret ABC reports, leading to incorrect cost-based design
decisions.
o Maintenance or production teams fail to record accurate data, which is needed
for life-cycle or environmental cost analysis.
o Managers struggle to use financial dashboards generated by lean accounting
tools due to unfamiliar terminology.

3. Poor Data Availability and Quality

• Explanation: Many engineering firms operate with outdated or isolated systems where
departments (design, production, finance) don’t share or standardize data.
• Examples:
o Production and quality data are kept manually or in spreadsheets, making it hard
to integrate with accounting software.
o Design teams don’t track time spent per task, so accurate cost allocation for
projects is difficult.
o Sensor or IoT data from equipment isn’t linked to cost centers, preventing real-
time tracking of operational costs.

4. High Implementation Costs

• Explanation: Advanced accounting systems (like ERP with ABC or EMA modules)
can be expensive to install, customize, and maintain, especially for small-to-medium-
sized enterprises.
• Examples:
o A manufacturing firm delays implementing LCC analysis because of the cost of
upgrading software and training staff.
o An engineering consultancy avoids lean accounting due to consulting fees and
system integration costs.
o A startup prioritizes design and prototyping budgets over investing in back-end
financial systems.
5. Structural Issues (Decentralization, Silos, or Project-Based Models)
• Explanation: Engineering organizations often work on multiple independent projects
or have a matrix organization. These factors make it challenging to standardize and
introduce accounting techniques in a centralized manner.
• Examples:
o In large infrastructure firms, each project has its cost-tracking format, making
consolidated analysis difficult.
o Teams may lack a shared performance metric, so applying lean accounting
across the value stream is challenging.
03. Suggest strategies to overcome the challenges/resistances
Challenge Strategy to Overcome
01 Cultural Resistance to Change Conduct awareness sessions and workshops to
demonstrate how management accounting supports
engineering decisions, and involve engineers in the
planning process.
02 Lack of Technical Knowledge Provide cross-functional training that explains
accounting tools in the context of engineering
operations and project management.
03 Data Availability and Quality Invest in integrated data systems (like ERP or MES);
assign data ownership to ensure responsibility across
departments.
04 High Implementation Costs Start with pilot projects in high-impact areas to
prove value before scaling; seek government or
industry grants for tech upgrades.
05 Fragmented Organizational Establish cross-departmental teams to coordinate
Structure efforts; create standardized templates and processes
tailored for engineering tasks.
04. Discussion with a Senior Official in an Engineering Organization
SUNBIRD renewable energy
(Renewable energy solutions provider – solar panel retail, installation, and servicing)
Details of Contact Person
• Full Name : Mr. A.T.K. Perera
• Position : Engineer
• Organization Name : SUNBIRD Renewable Energy
• Contact Information : [email protected]

Management Accounting Techniques for SUNBIRD renewable energy

SUNBIRD renewable energy, a prominent provider of solar energy solutions in Sri Lanka,
currently applies uniform overhead allocation across all solar panel products and services,
regardless of system size, customer type, or installation conditions. This traditional approach
has led to distorted cost information with particularly under-costing high-effort installations
and overpricing of less complex projects.

Activity-Based Costing (ABC): A Smarter Approach for Solar Solutions

To correct these inaccuracies, SolarTech Lanka is piloting Activity-Based Costing (ABC).
Unlike traditional approaches, ABC allocates overhead costs to specific activities and their
actual consumption of resources. This enables more precise pricing, better product profitability
analysis, and improved cost management.

Key Activity Centers and Cost Drivers

1. Site Assessment & Consultation (15% of Overhead)
• Cost Driver : Distance traveled (km) and number of site visits
• Rationale : Remote clients or larger installations often require multiple visits,
leading to higher travel and staff time costs.
• Example : A 150 km away large commercial industrial site requiring three visits
is more expensive than a local residential rooftop requiring a single visit.
2. System Design & Customization (25% of Overhead)
• Cost Driver : System capacity (kW)
• Rationale : Larger or customized solar systems need additional engineering hours
for load calculations, inverter design, and regulatory compliance.
• Example : A 25kW system with hybrid inverter setup demands more design effort
than a standard 3kW on-grid home system.
3. Installation & Setup (35% of Overhead)
• Cost Driver : Installation complexity index (roof type, height, electrical
configuration)
• Rationale : Complex roofs (e.g., tile, multi-level) or commercial installations
require more labor, equipment, and time.
• Example : Installation of a solar system on a pitched metal roof with reinforced
wiring and scaffolding takes more time and more money compared to a basic single-
story installation.
4. After-Sales Service & Monitoring (25% of Overhead)
• Cost Driver : Number of service hours per year
• Rationale : Customers who have service contracts or energy monitoring software
require regular system checking, inverter resets, and support.
• Example : A premium customer who has solar with battery integration receives
quarterly inspections, consuming more service costs than a basic customer.
Challenges and Resistance in Implementing ABC at SolarTech Lanka & Strategies to
Overcome Them
1. Resistance from Employees & Management
Challenges:
1. “It feels like finance is taking over our work.”
Engineers and field staff often feel that costing systems like ABC interfere with
technical autonomy and shift focus away from engineering quality.
2. “This just adds more paperwork.”
Employees may resist ABC if they believe it requires logging too much additional
information during their already busy daily routines.
3. “Now everything we do will have to be scrutinized.”
There may be a fear that ABC will highlight inefficiencies, leading to internal blame or
reductions in departmental budgets.
4. “This doesn’t reflect how we measure success.”
When cost tracking becomes a focus, staff whose KPIs revolve around speed, safety, or
client satisfaction may see ABC as irrelevant or misaligned.
5. “Not everyone here is comfortable with new systems.”
Employees unfamiliar with data entry tools, mobile apps, or ERP systems may be
hesitant to engage with new accounting processes.
Strategies to Overcome These Challenges:
• Start with a Limited Pilot – Begin with a single solar product line (e.g., rooftop
installations over 10kW) to minimize disruption and demonstrate measurable benefits.
• Cross-Department Training – Conduct ABC awareness sessions not just for finance
but also for sales, engineering, and operations to explain how the technique helps their
own decision-making and budgeting.
• Create a Non-Punitive Learning Culture – Emphasize that ABC is not designed to
blame departments but to identify process improvements and better align costs with
activities.
• Align ABC with Performance Metrics – Modify KPIs to include cost-efficiency
alongside existing performance goals (such as installation speed or client feedback).
• Provide Digital Support Tools – Equip staff with simple data entry applications and
provide training to ensure confidence in using digital tracking systems.

2. Data Collection & Accuracy Issues

Challenges:
• Manual Data Errors – Staff can inaccurately record travel distances, overlook certain
installation conditions, or skip updating job completion times.
• Disparate Systems – CRM, project management, and inventory software can remain
separate, rendering it challenging to integrate data for ABC analysis.
• Cost Driver Disagreements – There may be debate over what truly drives cost: is it
kW capacity or installation time? Is travel time or distance more important?
Strategies:
• Digital Tools – Use mobile-based job cards, GPS tracking, and barcode scanning to
automate site visits and inventory data.
• Software Integration – Link CRM, finance, and operations systems using APIs or
shared databases for better ABC data flow.
• Cross-Functional Cost Driver Selection – Include sales, engineering, and finance
teams in selecting and refining cost drivers to ensure fairness and relevance.
3. High Implementation Costs & Time
Challenges:
• Expensive System Upgrades – Implementing ABC may require additional ERP or
MRP modules, data analytics tools, or cloud services.
• Workflow Disruption – Introducing new steps (like data entry and activity coding)
could slow operations initially.
Strategies:
• Phased Rollout – Prioritize high-impact areas like design and installation before
expanding ABC to all departments.
• Use Existing Tools First – Modify existing Excel-based costing tools or lightweight
ERP features before committing to major software investments.
• Monitor & Share ROI – Track cost savings or pricing improvements from the pilot
and share with stakeholders to justify future spending.