Development of Administration Bookkeeping Framework

Introduction

In this report we will comprehend the administration bookkeeping which initiates as an estimation device with arranging techniques and fundamental announcing that makes the business a win. Understanding the administration bookkeeping framework incorporates the pay proclamation on the arch of minimal costing and assimilation costing, different apparatuses for arranging, budgetary control to quantify the execution examination of the organization, determining spending plans, reacting to monetary issues utilizing the best division which is administration bookkeeping through its procedures, plans and strategies for legitimate usage and execution. Zara is one of the medium-sized garments fabricating organization in the UK.

Calculate profit and loos o the income statement using marginal and absorption management accounting techniques .

Cost classification

Description

Production cost (£)

Direct cost

Direct materials

£40

direct wages

£30

Direct expenses

£10

Prime cost

………

Indirect costs or overheads

Administration

£15

Sales and marketing

£5

Contract price

£100

Marginal:

Calculation :

Total Absorption costing = Direct Cost+ Indirect Cost

Direct cost =direct materials + direct wages + direct expenses

Indirect cost =administration

Total absorption= 40+30+10+15+5= 100

Profit= contract price – absorption

Profit= 100-100=0

Contract price £100 and total absorption £100 that shows there is not any profit.

Marginal costing

Calculation:

Total marginal costing = direct cost

Direct cost =direct materials + direct wages + direct expenses

Direct cost =40+30+10

Marginal cost =80

Profit= 100-80=20

On total marginal cost profit is £20

1)    Financial planning – the purpose of financial planning is to help stakeholders make profit and meet customers need. The process includes estimating the capital needed in the business to be able to run and be compete .

2)    Financial statement analysis –is used to make business decision , investors and creditors . Use this analysis to check if the business is healthy enough to invest in to it. They do this by using analytical or financial tools to examine and compare financial statement.

There are 3 types of analysis: horizontal analysis , vertical analysis , and ratio analysis

Cost accounting analysis- is used to develop an understanding whether a company earn or loses money and based on this results , it helps to decide what or how the business will make or increase profit in future .This is been done by collecting  information about all the costs of the company and then evaluate the efficiency of cost usage . (Anon., 2018)

3)    Fund flow analysis – means analysing the balance sheet which shows the movement of funds within a company in a period of time ( wher the funds come from and what they are used for ). This analysis is used for proper management and to achieve organizational goals.  (farlex, 2002-2005)

Cash flow statement- are mostly used for financial reporting purposes . This analysis means an examination of all internal external cash flow within the company for a period of time . The analysis begins with a starting balance and after accounting all cash receipts and paid expenses during the period , it generates an ending balance . (Anon., 2018)

Standard cost technique – this technique is often used by manufacturers to identify the differences a variances between the actual costs and the costs that should have occurred for the goods that were produced. (Anon., 2004-2018)

Marginal cost –is determined by fixed and variable costs however it determinates profit only by taking in consideration variable costs . This is because fixed costs are being excluded as they remain uncharged for a period of time , no mater of the volume of production and sale . For variable costs when the volume off production and sales increases, the total variable coast rise similarly.

Absorption cost ( also known as full costing ) both fixed and variable cost are considered and absorbed by the total unit produced . This approach is used for reporting purposes , such as financial and tax reporting . (Anon., n.d.)

Historical cost –is used in accounting as a way to measure value .  The historical cost helps to differentiate an original cost from its replacement or current cost – the original cost of the asset is showed on the balance sheet (Anon., 2004-2018)

Rational analysis technique-is a technique used for planning , analysing , communicating and coordinating financial position to make decision .

Financial statement – is a financial document that shows the financial position of the company at the end of the accounting year.

Financial statement includes – income statement and balance sheet.

Income statement – this shows the income of profit of the company and is cover trading account and profit and loss.

Example: Good Clothing bays 20 dresses, purchased at £ 10/ dress and are sold at £30/ dress.

(20 x10) – (20×30) = 200 – 600 = -400 ( favourable)

Gross profit is – £400

Net sales : Nisa shop

Opening stock

10.000 +

Purchases

5.000 +

Carriages

1.000 =

Good available

16.000 –

Less closes stock

3.000 =

Cost of sales

13.000 –

Return inward

2.000 =

Net sales

11.000

Profit and Loos: is the account which shows the operated income and operated expenses for accounting people, and the profit can be net profit or net loos .

Example : Dental health centre

Income

12.000

Dental materials

2000

Dental equipment’s

1000

Salary

3000

Dispose rubbish

1000

Advertise

500

2000+1000+3000+1000+500= 7.500

12.000- 7.500= 4.500

Net profit = 4.500

Balance sheet: it is not an account is just a document which shows Asset and Liabilities.

Variance – is the difference between actual cost and standard cost, and they can be favourable and unfavourable variance.

Types of variance:

1)    Direct Material variance – is the difference between budgeted and actual material cost , the result value can be favourable or unfavourable .

Direct material variance is splits in controllable variance and uncontrollable variance

Exp: Calculating of Direct Material  Price Variance (DMVP)

DVMP= (AQ x AP) – (AQ x SP)

Fish and chips enterprise in the year ended 2016 the actual quality of materials is £1500 , actual price of £150 . Still in the same year the budget price of the material is £250. Find the direct material ?

DMVP= ( 1500 x 150) – (1500 x 250)

               225, 000 – 337,500 = – 112.5 ( favourable)

2 Direct Labour Role Variance- is the difference between the actual cost of the labour and the standard cost of the labour.

 DLRV= (AH x AR) – (AH x SR )

Exp: Tasena enterprise produce and sale spaghetti , the actual hors by unit of labour is £100 at actual rate of £10 when the standard rate is £5 . Find the direct labour .

DLRV= (100 x 10) – (100 x 5)

                  1000-500=500 ( unfavourable )

Profitability Ratios

Return on Capital Employed

Return on Capital Employed=PROFIT BEFORE TAX CAPITAL EMPLOYEDx100%
Capital Employed=Total Assets–Current Liabilities

   (2015)Capital Employed=50164.00-20206.00=29958.00

   (2016)Capital Employed=44214.00-19805.00=24409.00

 
2015Return on Capital Employed=2259.0029958.00x 100%=
7.54
2016Return on Capital Employed=(6376.00)24409x 100%=–26.12%

Profit on Margin Sales

Profit on Margin Sales=Operating ProfitSales x 100%
2015Profit on Margin Sales=2631.0063557.00 x100%=4.13%
2016Profit on Margin Sales=(5792.00)62284.00 x100%=–9.29%

Liquidity Ratios

Current Ratio

Current Ratio=Current AssetsCurrent Liabilities
2015Current Ratio=13085.0020206.00=0.64
2016Current Ratio=11819.0019805.00=0.59

Quick Ratio/Acid Test Ratio

Quick Ratio=Current Assets Less StockCurrent Liabilities
2015QuickRatio=13085.00–3576.0020206.00=0.47
2016QuickRatio=11819.00–2957.0019805.00=0.44

Efficiency Ratio (measured in Days or in Times)

Stock Turnover Period

Stock Turnover Period=Average StockCost Of Sales x 365 days
Average Stock=Opening Stock+Closing Stock2
2015Average Stock=60758.00+3576.002=32167.00
2015Stock Turnover Period=32167.0060926.00 x 365=192.70 days
2016Average Stock=67457.00+2957.002=35207.00
2016Stock Turnover Period=35207.0068076.00 x 365=188.76 days

Debtors Turnover Period

Debtors Turnover Period=Average DebtorsSales x 365 days
2015Debtors Turnover Period=2190.0063557.00  x 365=12.57 days
2016Debtors Turnover Period=2121.0062284.00  x 365=12.42 days

Creditors Turnover

Creditors Turnover=Average  CreditorsPurchase x 365 days
2015Creditors Turnover=18296.0060926.00 x 365=109.60 days
2016Creditors Turnover=17797.0068076.00 x 365=95.42 days

Fixed Asset Turnover

 

Fixed Assets Turnover

=   

Sales

Fixed Assets

(2015) Fixed Asset Turnover=

7,071.00
63,557.00

 

Budget control planning tool

Managers of Good Clothing Ltd use this tool to control costs, to maximise profits, to plan the future of the company and to meet its future goals. This is being done by setting a budget for the company and then use it to control the operations of the business. The budgetary planning control is very useful for Good Clothing Ltd in case of the risk of getting worse financial results than expected, as it helps the management to find up the responsibility. (Bragg, 2018)

There are two types of budget control planning tools:

1-      Financial budget

This budget control tool is used by Good Clothing Ltd as it indicates the sources of income that the business receives, but also what the business spends money on. Some incomes could be revenues from core businesses, sale of assets, loans, and sale of stock. Examples of what the business could spend money on would be costs of capital expenses, payment of salaries, repaying debts, and payment of shareholders. Some managing assets can affect the financial health of a company through the ups and downs of daily business. Examples of the managing assets could be: property, buildings, investments and major equipment. If a business would need more property or buildings as there might not be enough space for departments, then this would cost the business more money. Another managing asset that would affect a business financially could be if investors would cut down the investment into the business, as well as if major equipment would be required – both of these would bring financial loss to the business. (Shpak, 2018)

Advantages of financial budget control tool:

–          One advantage of this tool would be that it provides the information and guidance needed for the manager on future financial activities as it creates financial awareness by indicating the incomes and the expenses.

–          Another advantage would be that it also provides tools for checking the performance and what appropriate measures to take in case of any deviations.

–          It shows the assets and liability of the company. This helps to see whether the company spends more money on assets or made a profit out of them, but also what they are legally responsible for.

 

Disadvantages of financial budget control tool:

–          One disadvantage would be that it is not always possible to find the reason for certain deviations.

–          Another disadvantage would be that in order to implement the financial control tools (which must be implemented at the beginning of a process) in a business, it requires a lot of money.

–          Proper evaluation of the actual and standard performance cannot be done because of the rigidity of the standards as conditions may not still be the same as they were set at the time of fixing the standards.

 (Trisha, 2018)

2-      Operating Budget

This budget control is used by Good Clothing Ltd as it keeps track of the budget of ongoing operations, such as revenue and expenses in the business. This budget covers revenues and expenses that surrounds the daily business of our company. The operating budget is usually broken down into weekly or monthly period reports to help managers compare ongoing results to budget throughout the year and plan or adjust for alternatives in revenue. This budget control tool allows Good Clothing Ltd to see how their company spends its money and what areas of the business needs cash the most. This budget control tool helps Good Clothing Ltd because they would know what area would need to spend more money on in future from previous results. (Gaffney, 2018)

Advantages of operating budget:

–          This budget control tool helps by giving investors the knowledge of the operative costs of the business. This way investors would know what income the business receives and what they spend money on.

–          It keeps track of the entire running business. It shows both money that are received and spent by the business. Managers can notice if the business is on track or if there are any problems just by checking the operating budget.

–          The operating budget is used for financial responsibilities, because it prepares the business for monthly expenses as it gives the opportunity to the manager to put money aside in order to cover the expenses before they appear.

 (Morgan, 2017)

 

Disadvantages of operating budget:

–          If the operating budget is not updated regularly, then it can lead to financial shortfall. This is because financial information can change monthly because the business might exceed or fail to meet its revenue projections and if the operative budget does not change each time to reflect the new figures, then the operative budget contains inaccurate information.

–          If you devote all the operational budget to the needs of the new company or do not pay salaries, then this can have a negative effect on the company when it comes to paying taxes. This is because the goal of a company is to make profit, and by building an operational budget to function at a loss could have a federal tax agency shut down the business.

(Lister, 2018)

.

In this task I am going to compare Good Clothing Ltd with Zara, in order to see how they are using the management accounting systems to solve the financial and inefficiency problems of their business.

Zara is seen as one of the competitors for Good Clothing Ltd because it has a world-wide presence and is more dedicated on development of trendy but at a low-cost fashion – which satisfies the customers. However, Good Clothing Ltd is a local company that sells less trendy styles at an affordable price.

Businesses are much more evolved these days, because of the new resources that are being used to measure the performance of a business. Good Clothing Ltd and Zara are using management accounting systems, because this is a way to respond to the financial problems. Management accounting systems are really useful in small businesses, because it helps to find out where the problems are, how to overcome the problems and what profit there is. In addition, management accounting is also used to measure the performance of a business, check the profit and sales, as well as check if the aims and objectives of the business are being achieved.

Price Optimising System (POS)

Price Optimising System (POS) can be used by clothing shops, because it can decide the prices for different products at a time. It is best for clothing shops to use POS, because it can see how the demand fluctuates at different prices levels. This means that it can use the system for tailoring the price segments based on the stimulation of their customers’ responses to different prices. Good Clothing Ltd will use this type of management accounting system because it can help the organisation by determining the pricings of products for promotional, initial and discount pricing.  Zara uses this system too just for the same reason. To find out what customers prefer (Referring to what styles they like and the prices they are looking for), which helps them make profit. (Carboni Borrase, 2009)

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The advantages of POS would be that the price system encourages competition, which means that if a company is competitive they are more likely to be successful too. This would be because they would be more determined to be the top company and they would do their best in achieving that. In addition, this would also make the company produce better products for better prices which attracts customers. Another benefit of POS would be that it allows customers to decide whether they want to buy or not the items they are given for a certain price – which gives them the control over their economic lives.

The disadvantages of POS would be that it can increase the scale of unemployment because of automation. An example would be the free scan machines (the customer just goes scans their items, pays for them and they are free to go. Such machines and automatic procedures can affect the overall economy health of a company as it contributes to financial insolvency. Another disadvantage would be that even if there are items that have already a discount there are still people that cannot afford it – which means that people’s necessities can sometimes not be able to be affordable. (Anon., 2012)

Job Accounting

Based on the research I have done, I found out that there are many benefits of working as an accountant. Some of those benefits would be holiday allowance between 20-25 days per year, personal accident insurance, life insurance, pension, maternity leave and many others. However, most big firms are also offering discounts, annual travel insurance, health checks etc. All of these benefits are saving a lot of money for the employees. Therefore, these bonuses are motivating the employees to work hard and efficiently. (Anon., n.d.)

Zara would give employees most if not all the benefits mentioned above to their employees and this would be because they are a world-wide company, with a huge profit – which means they can afford it. (Zara, n.d.) However, Good Clothing Ltd cannot offering their employees all these benefits because they are just a start-up local company that sales standard clothes at a standard price – so they are struggling with the budget.

Inventory system

Managers use this system to manage inventory, which means that either the finished goods that are stored are going to be offered for sale by a business or the raw materials used to produce finished products by a business. (Grimsley, n.d.) Zara uses inventory system and I believe this is what helped their business increase in the first place. As a big company, there are lots of products that remain in the shop, so they must use the inventory system. They either try to sale the products that have remained again or they put discounts in, or they are used to create or finish other products. (Sajwan, 2010)

For Good Clothing Ltd this has not happened yet, because the company is still just a small business and is local. Also, because Good Clothing Ltd has standard prices, they have enough customers so that no products are left. Maybe in future, if Good Clothing Ltd expands – this would be a good system to use too. This would be because they would not have to worry regarding the products that will not sell, they could either put discounts on them or sell it to other businesses or help finish up other products.

 Conclusion

 

References

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