N40P Accounting and Finance : Methods of Management Accounting

Task - 1

A manager is that person who supervises the work done by a group of people allocated to him to work under his guidance and supervision to run that particular department or task of a business, organisation or be it any field efficiently, hassle free and profitability (Horngren, 2011). Management Accounting refers to a financial accounting technique wherein it helps the manager of the respective field with financially and non-financially information’s for  in order to have a detailed about study and analysis which can guide them in making appropriate decisions resulting in the benefit of the organization, and also helps in improving management performance (Maher, 2005).  Specific methods of management accounting are as follows:

Financial planning – financial planning is one of the best tool present with the manager that helps in profit maximization.  The objective can be best attained when there is a sound financial planning process into action. The manger utilises the data available through management accounting information as it provides a data-driven look at how to grow a particular business for example Budgeting figure, financial statement projections and balanced scorecards (Parrino et. al, 2012). 

Budgetary control - The decisions for which managers need management accounting are help in selecting between making or buying analysis this is one of the prime use of managerial accounting information to help in the decision making for manufacturing which means in guiding for making correct decisions that whether making or purchasing a product is more feasible and profitable to an organisation (Shah, 2013).

Cost accounting – It can help in knowing from where the company gets its funds and for what period of time. Managers can use the detailed report of accounting to ascertain the clients who are slow to discharge their obligations and to follow them accordingly. This will enable loss of income and the firm can showcase a strong operation. 

Task 2

Profitability Ratios

The profitability of the company is indicated by the gross profit and net profit ratio. From the computation, it can be observed that the net profit has increased marginally while gross profit declined. The increment in net profit can be attributed to more sales and control over the cost of goods sold. The gross profit remained in the range of 35-40%.

The liquidity ratio indicates the ability of the company in discharging its obligations. The current ratio indicates the current assets that are available to honor the obligations. The above computation indicates that the company has huge current assets and projects a formidable situation. The ratio best suited for any organization is 2:1. Here the company should invest the funds elsewhere because funds are lying idle (Porter & Norton, 2014). On the other hand, the acid test ratio is above 1:1 that shows the company has a huge surplus of liquid assets and can easily meet the obligations.

The working capital ratio indicates the excess of current assets over current liabilities and thee computation shows the company has adequate liquidity and hence has enough capital that will support the working (Porter & Norton, 2014).

The capital structure is determined by the debt equity ratio and equity ratio. The Debt equity ratio indicates the higher composition of debt that is more than 1. It will affect the operations as a higher chunk will go towards payment of interest. Moreover, it is highly risky as debt is more and difficult to raise further loans. The equity ratio of the company is weak and declined in the past three years indicating the assets are funded more by debt.

Task - 3

The indirect cost and expenses occurring to a business are known as overhead expenses. Overhead expenses accrue with little or no reference to the level of productivity of a facility or the total sales of the business Direct costs refers to such expenses which has a direct connection with the manufacturing process, production process or service sales. On the other hand overhead expenses is not affected whether the production or manufacturing is done or not as it is such necessary expenses which have to be borne  even under the circumstances where the production or manufacturing has come to a halt or stopped temporarily(Robinson, 2009). Example of such necessary expenses are rent, equipment or machinery depreciation, and wages employees who are an aid for the production process and even include such variable expenses such as electricity and factory supplies. The extra or add on  expenses under overhead costs includes cleaning, maintenance and sanitation helping personnel, the expenses involves in maintaining quality control and regular basis product inspection and keeping a check and reviewing technology which also incurs expenses such as updating of software and computer equipment (Subramanyam & wild, 2014). Therefore these costs which occur without any reference on everyday basis indirectly become very difficult to detect and calculate. Costing methods are used to calculate and incorporate overhead into total product or service costs. The modern Activity-based Costing and Traditional costing methods such as absorption costing are two different approaches and methods for calculating overhead costs to products (Shim & Siegel, 2009). Absorption costing and activity-based costing have different characteristic and differ in nature and way of method. Absorption costing refers assigning of costs to individual units, whereas activity-based costing at first priorities in focusing on overall company activities as a main or central cost and then determines indirect costs to units. The major benefit of implementing activity-based costing is that it facilitates the organizations to understand the real cost and profits involved in individual units produced or services rendered. This in turn boosts accuracy by mandatorily converting indirect costs to direct costs. It can be implemented almost at all costs of business and not restricted to only production-related overhead (Shim & Siegel, 2009). By implementing this costing method an organization can determine its marketing costs straight to the individual units it produce, resulting which it can portray a more clear picture than absorption costing and therefore the activity based accounting method has the opportunity in improving recovery as well as minimizing mistakes compared to traditional costing methods.

Task – 5

1. Calculation of flexed budget

1. Sales price variance

1. Calculation of

 

Success or failure of the company's budget.

Budgeting is not just an art, it is a science. The senior management's discretion is required to set targets and standards for a budget. The entire process of budgeting involves senior management and middle management to plan and effectively implement a road map of how finances will be allocated to the business (Vanderbeck, 2013). Here, the attitude of the management depends on a lot on the success. An unachievable budget can bring down the morale of everyone working on its implementation. A fair and achievable budget can be very motivating and a driving force, on the contrary, a bad budget can be very detrimental to employee's motivation. This side f the budgeting process is often ignored.

Task – 5

Answer: Budgeting refers to preparing of a in depth financial statement which determines in detail the financial results predictability over period of time. Budgeting might be made monthly, quarterly or yearly. It serves as financial forecasting for companies, organizations or to run any type of business and helps to provide information for strategic planning and control. In companies or organization when budgeting is planned the behavioral issues and aspects are often ignored without keeping in mind that human behavior can pose a strong impact on the performance of the budget. It is often observed that individual performances are boosted more on priority dumping down the rules of the budgetary control system (Robinson & Last, 2009). The employees want to solely concentrate on the objectives by the budgetary not considering whether it is desirable to the organization or not. It is observed that the prime behavior can be easily modified to obtain desired results by employees even at the cost of harm of the company or organization they are working for. Therefore it is important that the management team motivates their employees to achieve the desired results but without harming the organization and at fair grounds (Robinson & Last, 2009). It should be communicated properly that adherence of budget cannot alone measure all aspect of an employee’s performance.

Task – 6

 

MPB should consider the internal efficiencies and production efficiencies. The order lot, lag time and credit terms will be considered before taking a decision.

Task – 7

Task 8

 

 

 

 

 

Since the internal rate of return is highest in Beta, the company should first invest in it, and the balance funds should be invested in Charlie. Since the available funds are only 45000, Alpha will not be taken up.

Task 9

Epstein, M.J & Wisner, P.S., 2001, ‘Increasing Corporate Accountability: The External Disclosure of Balanced Scorecard Measures’, Balanced Scorecard Report vol.3, no. 4, pp.10-13. 

As per Epstein & Wisner balance scorecard is a potent tool for strategic planning and system of management. The business activities can be aligned in an effective manner through the utilization of the tool. More specifically, the journal stress upon the attempt of Balance scorecard to transform the hopes of a company into a realistic result. Balance scorecard provides an overall view of the organization and hence able to interlink all the departments thereby leading to an effective result.

Evans et. al, discussed the need for performance management in an organization and coined that the performance management is important for the success of the organization.  When it comes to the balanced scorecard, it is a strategic approach and a strong performance management system that helps the organization to transform its vision and strategy into an implementation that spreads across four perspectives that are the financial perspective, customer perspective, business perspective and learning perspective. The balanced scorecard influences the managers to shed light on the business keeping into consideration the above four perspectives.

The balanced scorecard is effective in nature and proven to be strong for all industries and organization of various sizes. The journal by Rompho projects the utilization of balance scorecard by various type of organization. Though SMEs failed to get out correctly however it depends upon the type f an organization. It is used by the teams of leader at the executive stage or at the level of the department. The main aspect of the effective scorecard is to have a leadership buy-in as it provides a strong projection towards its implementation.

Going by the discussion of Norreklit, the balanced scorecard is a strategic method that helps to serve the purpose. However, the assumption needs to be taken into consideration for proper implementation. The assumptions that need to be taken into consideration is the strategic control in the organization must provide meaningful information, the strategic pattern that is present in the organization needs to be bridged so that the scorecard can shed light on the link with the external stakeholders.organization on main things that is required to be created through performance, enables to link various programs of corporate like quality, customer services, re-engineering, etc. Further, it breaks the strategic measures into lower levels so that the unit managers, operators and employees can understand what is needed to attain an excellent overall performance.

Task 10

Cost plus Pricing approach is when a company calculates a selling price by first determining the total cost of a product or service, a business focuses while following cost plus pricing approach to cover the whole cost that will be involved in producing a product thereafter adds the profit margin which they want to earn and finally determine the selling price of the product. The cost-plus method utilizes the concept of cost to ascertain the price and target costing. The cost is determined through the price. In target costing, a business tries to maintain the product selling price by adopting the vice versa method that is it initially builds up the finalised price at which the organisation will sell the product, subtracts the profit margin according to the business venture they want and finally the price which come after adjusting the profit then the amount left is used to make the product within that budget. We can understand it better by taking a reference to a product like manufacturing sunglasses if the sunglass is manufactured using cost-plus pricing approach then if each sunglass to be produced requires $ 15 worth of raw materials, involving laborers worth wages at $15, and $10 in other type of necessary fixed costs such as rent and utilities. The sunglass finally produced is costing $40. The business organisation according to the desired profit it wants puts a mark up items 25 per cent over cost, and finally the selling price comes at $50. Assuming again the company makes sunglasses, and the company introduces a new line taking target pricing approach. The assessment and research done by the company and therefore it determines after a thorough market that the company will charge less than $60 for each sunglass. If the company desires a markup of 25 percent over cost, therefore the company needs to budget the production cost of each sunglass for $48 or less. Target costing recognizes that an organisation or company cannot totally control price of a particular product, the price is limited and has to be determined by what the market demand for the product is and the customers will pay. It therefore binds the businessmen to operate efficiently. The main benefit of the cost-plus method is the straight and simple approach and the ability to predict the cost. The other side of the coin that is the disadvantage is that the price is been set each time ignoring the fact that how that price set will affect demand of the product in the market (Drury, 2011).. The price set can be either too low budget or too high. A strict cost-plus policy may also affect the efficiency. Therefore if all costs get transferred straightway to the customer, the incentive may be present to curb down or make savings while doing the production process.

References

Drury, C 2011, Cost and management accounting, Andover, Hampshire, UK: South-Western Cengage Learning.

Epstein, M.J & Wisner, P.S., 2001, ‘Increasing Corporate Accountability: The External Disclosure of Balanced Scorecard Measures’, Balanced Scorecard Report vol.3, no. 4, pp.10-13. 

Evans, H., Ashworth, G., Gooch, J & Davies, R., 1996, ‘Who Needs Performance Management’, Management Accounting vol. 74, no. 11, pp. 20-25 

Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia.

Lanen, W. N., Anderson, S & Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press.

Maher, L 2005, Fundamentals of Cost Accounting, McGraw-Hill

Merchant, K. A 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no. 3, pp. 1-34.

Needles, B. E.&  Powers, Marian 2013, Principles of Financial Accounting. Financial

Needles, S. C 2011, Managerial Accounting,  Nason , USA: South Western Cengage Learning .

Norreklit, H 2000, ‘The balance on the balanced scorecard – a critical analysis of some of its assumptions’,  Management Accounting Research vo. 11, no. 1, pp.  65–88.  

Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley.

Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning

Robinson, M., & Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press

Rompho, N 2011,’ Why the Balanced Scorecard Fails in SMEs: A Case Study’, International Journal of Business and Management vol. 6, no. 11, pp. 39–46. 

Shah, P 2013, Financial Accounting, London: Oxford University Press.

Shim, J.K & Siegel, J.G 2009, Modern Cost Management and Analysis, Barron's Education Series

Subramanyam, K & Wild, J 2014, Financial Statement Analysis, McGraw Hill

Vanderbeck, E. J 2013,  Principles of Cost Accounting, Oxford university press