ACCT322 Management Accounting | Operational Budget and Utility

Financial Accounting vs. Management Accounting

Financial accounting is of utmost important to the stakeholders and other parties who have an interest in the functioning of the company. Such parties include investors, employees, government, agencies, etc. Financial accounting helps in providing clear-cut information to the parties at large. The stakeholders refer to financial accounting because it aids in decision making process. It is done in accordance to the regulations framed by the disciplinary bodies and therefore, the preparation is not based on the whims of the managers. A standard format needs to be followed and a specific needs to be followed (annually). Therefore, it helps in shedding light on the working of the company and enables preparation of the financial statements. The standards are laid down by IFRS or GAAP. It is important to prepare financial accounting report as the related parties can know about the operation of the company (Albrecht et. al, 2011). Further, financial accounting resides on assumptions like going concern, consistency, historical cost, etc. It is different from management accounting in various ways like the basis of preparation, usefulness and the purpose.

On the other management, accounting plays a vital role in decision-making process. It enables the managers to take decisions that relate to the day to day activities. It is not associated with the performance of the past but makes a prediction into the future. It plays a major role in the preparation of the budget and other ancillary reports. It has no ambit and can be applicable to a particular environment or the organization at large. There is no predefined format and can be done as per the need of the manager. The main aim of management accounting is to help the managers in taking various internal decisions and aids the preparation of a budget that ultimately supports the financial statements. In short, it helps the organization to steer in the correct direction (Needles & Powers, 2011). Therefore, the activities of the management accounting are linked to the performance of the management and help in achievement of the result.

Going by the discussion, it can be said that financial accounting has a major reliance on management accounting as the entire functioning depends on it. The preparation of budgets and other planning is framed with the help of management accounting. This helps the concept of financial accounting. Hence, the area of management accounting is vast in the scenario as compared to financial accounting.

Importance of break-even analysis

Break-even analysis is one of the potent tools used in various industries so that the performance can be evaluated considering the costs. This is due to the fact that the analysis of the supply side plays a predominant role. When it comes to the implementation of the cost function, the break-even analysis plays a vital role. Three main factors are considered here that is the sales volume, cost, and profit. It helps in classification of the dynamic link that is present between total cost, as well as sales volume of the company. It is even tagged as cost volume profit analysis and enables to ascertain the operating condition that is present when the company break even (Charles, 2012). It is a point when the sales climb a point where sales equal to the expenses incurred in the attainment of the sales level. The breakeven point can be defined as that sales level where the total revenues are equivalent to the total cost and the net income becomes zero. This is even tagged as a point where there is no profit or no loss.

Break even chart are used by various companies to trace the break-even point and therefore, helps in the break-even analysis. Under the break-even chart, the costs such as fixed, variable and total cost are shown in a separate manner. Hence, the chart helps to project the profit level or loss at various different levels of operations (Robinson & last, 2009). In a simple description, the break-even chart is a graphical presentation of the costs at the different level of activity.

In the diagram, the line OA projects the fluctuations in the level of income at various point o production activity. OB denotes the total fixed costs that are present in the business. When the output enhances, variable costs is bound to happen that indicates the total costs also increases. At output level, cost ranks higher than income. At the point of intersection, P, costs are equivalent to income and therefore, the situation is neither profit nor loss. The overall analysis projects the breakeven point and eve classified the costs in a distinct manner that is the variable, fixed and the total cost (Don & Maryanne, 2006). If we shed light on the overall graph, a clear-cut conclusion can be drawn that the break – even chart helps in performing the break – even analysis in an effective manner. It is due to the fact as the overall costs are projected, the profit and loss are segregated and the income is differentiated with the costs. The break-even point in the chart denoted the point where the total revenue crosses the total expenses. In the above chart, the income line is above the cost and hence, a profit is achieved by the business (Hanninen, 2013).

When it comes to the break-even point it is important to trace at which point the revenue surpasses cost. A hypothetical example of a restaurant that deals in pizza is provided. Initially we need to differentiate between fixed and variable cost:

As per the total variable expense per pizza we get a clarity that the company must price the pizza at $5.47 ($0.40 + $0.05 + $0.02 + $4.00 + $1.00) or more so that the costs can be covered. However, if the pizza charges $10 for the finished goods then $4.53 is received on per pizza to add to the fixed costs and hence, the restaurants will earn profit.

Hence, the management can utilize the break-even chart to analyze the situation. Break-even chart is of great importance when it comes to break-even analysis as a pictorial representation is done and thereby the management is able to ensure a smooth conduct of the business.

Operational Budget and Utility

An operational budget is one that helps the management in terms of planning, as well as management of the activities that is concerned with the day to day operations. Moreover, the main aim is to eliminate and deficiency that comes in the way. One of the unique features lies in the fact that this budget can be forecasted with the income. The major goal lies in the prediction of the revenues (Hilton et. al, 2008). Hence, it can be commented that the operational budget aids the organization and helps in the decision-making process. The six important operational budget are described below:

Sales budget

It is considered as the major budget because various other budgets are linked to it. It helps in establishing a strong budget for the business. This budget consists of the units in total that need to be sold and the selling price.