Accounting is the vast area of knowledge and implementation. If the knowledge of this is applied properly then it results in not only financial developments but it also helps to improve the work efficiency of the company. Budgeting is an accounting tool which helps the company’s to have an estimate of the cash flows. The experts in accounting use their valuable knowledge to make important decisions for the management and the companies. The vast area of accounting is distributed into various branches (Horngren, 2013). These branches of accounting are used as per the requirement and use.
The accounting in today’s era is not a manual work to do; this is so because accounting is not a mere act of making entries for the funds spend and received. The whole structure of accounting has moved to high levels. Bigger the operations of the company more complicated are the accounting for that business. So in order to make this whole process a lot easier the companies need to invest in proper accounting software. Accounting software not only makes an easier process of accounting, but it also assists the companies in other work. Software now days can perform functions such as forecast results, make reports, set thresholds, alert when thresholds are crossed, etc. Also, the accounting software’s secure the data, which is not easily accusable by anybody at anytime without the previous approval of the managers (William, 2010). Therefore, the companies should invest in accounting software as they provide great results.
Management accounting and financial accounting are two of the many branches of accounting. Management accounting provides information for the use of people within the organisation whereas financial accounting provides information which is of use to people outside the organisation. Management accounting is not mandatory in under law, it is done to assist the management to take decisions, but financial accounting is mandatory (Albrecht et. al, 2011). The report under management accounting gives the data related to a particular product, department or cost centre as required, but financial accounting gives an overall view of the working of the company. The results of the data of management accounting is mostly future oriented, but as that of financial accounting is based on historical data and depicts the performance of the company based on past data. Also in management accounting there is not legal requirement to get work reviewed by a professional, but it is so in case of financial accounting (Albrecht et. al, 2011).
Cost is the major driver of ay decision and especially in a production or manufacturing firm. But if all the data of cost is just laid on a table it will not result in any information to the movement. So in order to make the cost data meaningful the cost data is classified based on various attributes such as functions, behaviour, relevance and types (Robinson & Last, 2009). This classification is as hereunder.
The classification based on functions or activities in an organisation can be divided as under:
Production Costs: these are the costs which are directly related to the production process of the product. The costs which are incurred in a factory in connection with production of a good are referred to as production cost (Robinson & Last, 2009). These include material cost, labour cost, any other expenses incurred directly in connection with the produced product, etc.
Administrative costs: the other costs which are incurred outside factory in order to run the administration of the company is called administrative costs examples of these cost include rent expenses, employee benefit expenses, electricity expenses, etc. These expenses have no direct connection with the production process but if they are not incurred the production process will be affected (Robinson & Last, 2009).
Selling and distribution expenses: the expenses incurred on the manufactured products after they have been dispatched from factory for their sale or distribution of any kind constitutes this type of expenses. Examples of such expenses will include packaging charges, warehouse rent, etc.
Cost is relative in product. Based on the behaviour of the cost are classified as follows:
Fixed costs: these are the costs which do not change with the change in level of production. These expenses are fixed in nature. They change only in the long run when the company looks forward to change the scale of production. Expenses incurred for long term assets are such costs.
Variable Costs: these are variable in nature that is these costs change with change in level of production. Expenses which are directly incurred in connection with the product are such expenses, example include material expenses, labour cost, etc (Robinson & Last, 2009)
Mixed costs: mixed costs are the costs which constitute the feature of both fixed and variable costs. These expenses include batch costs, which are fixed up to certain level and after that they vary.
Classification of cost based on relevance cost can be divided into:
Relevant cost: relevant costs are the cost which are essential in the process do decision making. These are to be taken into consideration while making a decision
Irrelevant cost: these have no importance in the process of decision making (Robinson & Last, 2009).
On the basis of types of costs can be classified into as per traceability, nature, purpose for the decision making, etc. All the above costs are also included in the classification of costs on the basis of types. Therefore there are a lot of attributes on which costs can be classified.
Financial planning can be done when budget is prepared for the organization. In short there are many objectives for the preparation of budget. From planning to forecasting, budget plays a vital role in driving the organization forward. The main objectives of the budget are as follows:
The prime aim of the preparation of budget is to evaluate the financial status of the company for a particular point of time. A budget is a prime tool for planning and helps in stabilizing the business. The management can perceive budget as a tool that helps in decision making. It helps in determining what needs to be done next (Needles, 2011). Companies need to implement budget so that a strong structure can be established.
Preparation of budget helps in proper allocation of resources and hence, leads to use the resources in a prudent manner. It needs to be noted that a company have resources that are constraint and needs to invest in a manner that will helps to generate higher returns. For example, if inventory is lost or damaged then a strong budget will help in mitigating the loss through setting aside capital (Needles & Powers, 2013). This will not hamper the smooth functioning of the company.
There are various kinds of budget each having its own function and advantages. Budgets can be prepared to evaluate the operations and then to know whether the operations are in tune with the forecast and whether the resources are used in an effective manner (Horngren, 2011).The performances of the employees can be determined through the preparation of a budget. The variances can be used a signal to ascertain the performance of an employee.
Companies that have an uneven pattern of cash flows need to know the amount of cash available for the next term. This helps the business to ascertain the amount and thereby leads to better planning (Horngren, 2011).
In this report, Dicksmith Holding is selected for the purpose of study and from the annual report we can see that there are various operational budgets prepared like sales, manufacturing, selling expenses, etc. Firstly, the sale budget is prepared that is termed as the main budget and is linked to planning and control. Sales budget plays a pivotal role because other budget rests on it. Secondly, production budget is prepared that helps in knowing the total units that can be manufactured (Dicksmith, 2015). Thirdly, the material budget is prepared that helps in knowing the raw materials that is needed for the purpose of purchase. Labor budget is even prepared that ascertains the labor cost. Further, the manufacturing overhead helps in knowing the fixed, as well as variable overhead. Lastly, the selling expenses budget is prepared that helps in knowing the variable, as well as selling expenses. The general, as well as administrative expenses budget provide immense solidity while estimating the expenses that are operational in manner and are associated with administration.
Standard cost is one of the most important subtopics of costing. These are usually associated with the production of goods and expenses incurred in connection with them like material, labour and other expenses. Instead to allocating the actual expenses which are to be incurred in connection with these, an estimated value of these expenses are allocated. This means that the production process and stock of the manufacturer will be shown at the estimated values and not the actual (Lanen et. al, 2008). The manufactures will be paying the actual costs as a result of which differences will arise. These differences are known as variances.
There are immense benefits of using standard costing. Standard costing is a toll for variance analysis for the production firms. These firms need a yardstick in order to evaluate the performance in the first place. Standard costing serves as the yardstick for this evaluation. It also helps the firm to minimise wastage by giving them an estimate of resources which be required for the manufacture (Needles, 2011). Preparation of cost centres in the process of standard costing is one of the best ways of delegation of authority. This helps to create a positive and cost effective procedure at all levels of the organisation (Lanen et. al, 2008). It also helps to attract the management’s attention towards matters which are as efficient as they were planned to be. It provides an incentive scheme to workers. It helps to simplify the cost control procedures. It is all in all tools for budgeting, planning, inventory evaluation, etc.
Standard costing also has a few demerits along with the merits. The system of standard costing is sometimes proven to be time consuming, expensive and tedious. Only the cost and budget portion of the organisation is covered by standard costing, matters like customer satisfaction, lead time issues, etc fail are not paid attention to under standard costing. This system requires skilled persons to do the evaluations and estimations (Drury, 2011). This becomes a reason for which less developed firms are not comfortable in applying them.
Variances can be of two types, they can either be favourable or adverse. As discussed earlier variances are the differences between the standard costs and actual costs incurred by the companies. Favourable variances arises when the difference between standard cost and actual cost result in a positive answer. Adverse variances are the ones where difference is a negative answer (Shim & Siegel, 2009). For example, the company estimates that the labour for the next accounting period will be paid at the rate of $10 per hour for total of 1000 hours, the actual labour hours worked were 990 hours which were paid at the rate of $10.5. The total estimated costs that are the standard cost was supposed to be total of $10,000, but the company actually incurred an expense of $10,395. If we calculate the difference, it is negative $395 which is adverse variance (Drury, 2011). Similarly, if the firm had incurred a total expense of less than $10,000 then it would amount to positive variance.
To make the accounting process effective in a firm all the wheels of the organisation need to move in the same direction. We mean to say that all the aspects which are necessary should be covered. The company can implement the use of accounting software. It can use tools such as standard costing for variance analysis. It can also use management and financial accounting as per its requirement (Horngren, 2013). Accounting is a vast area and the information from accounting if uses efficiently then can provide great results to the company.
Albrecht, W., Stice, E. & Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.
Drury, C 2011, Cost and management accounting, Andover, Hampshire, UK: South-Western Cengage Learning.
Dicksmith 2015, Dicksmith profile 2015, viewed 23 July 2016, https://www.dicksmith.com.au/da/
Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W.: Pearson Australia Group.
Lanen, W. N., Anderson, S & Maher, and M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press.
Needles, B. E. & Powers, M 2013, Principles of Financial Accounting. Financial
Needles, S. C 2011, Managerial Accounting, Nason, USA: South Western Cengage Learning.
Robinson, M., & Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press
Shim, J.K & Siegel, J.G 2009, Modern Cost Management and Analysis, Barron’s Education Series
William, L 2010, Practical Financial Management, South-Western College.
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