Discuss About The Management Cost Accounting Thomson Learning?
Flexible budget is the form of budget that shows figures for every line item from actual figures as indicated on the organization statements as well as variance between figures. Basically, flexible budget is usually the estimate of what costs and revenues should have been, provided the actual activities for the period. Therefore, whenever it is used in performance evaluation of an organization, the actual expenses are usually compared to what costs should have been for actual activities within the period instead of static planning budget (Horngren 2009). Flexible budget is the form of budget that is permitted to adjust based on variations in assumptions used in creating a budget during the management’s planning process.
The main objective of flexible budget is assessing performance of profit centre in that it permits performance report to be created in a meaningful manner. This performance evaluation helps in comparing actual expenses or costs incurred in production of the products with those expenses or costs that ought to have been incurred, provided the actual activities (Drury 2001). Thus, the main objective of flexible budget is to help in obtaining expenses that ought to have been incurred in a project given the actual activities. In addition, flexible budget is a performance evaluation approach aimed at permitting correct comparison in between actual and budgeted performance. Thus, another objective of flexible budget is to allow for comparison between actual and budgeted performance. For example, comparison is usually distorted in case the actual production in a company is 10,000 units which the static budget projects 9,000 units. By reviewing original budget to around 10,000 units, it makes a detailed comparison in between the actual and budgeted costs, for numerous line values shows value relative to similar output. Furthermore, flexible budget is used since it takes into considerations of how variations in activities influence costs (Horngren 2009). For instance, flexible budget is used in creating budgets whenever one is assessing performance of a profit organization since the approach recognizes that budget could be adjusted in order to indicate what costs or expenses should be for actual activities.
Cash budget comprises of itemization of anticipated sources and utilization of cash in future period. It is used in ascertaining whether an organization’s operations would give adequate amount of cash in order to meet projected cash needs. In case, this is not the case, the management has to find extra financing sources (Drury 2001). In essence, cash budget is usually itemized in two main segments; that is uses of cash as well as sources of cash.
Inputs of cash budgets are basically obtained from numerous other budgets; these include the sales budget, production as well as purchase budgets. Therefore, the three main budgets, which are prepared prior to the preparation of the cash budget are the sales, purchases and production budgets. Sales budget is usually the first budget prepared since all the other budgets and particularly cash budget rely on its information. It comprises of sales in units and selling price per units. Production budget on the other hand is prepared in order to enlighten the management on the total amount of units that needs to be produced. It comprises of the finished goods units that are to be sold, desired finished goods at the year end and beginning finished goods on hand.
Cash cycle and operating cycles are usually measures of how efficient an organization is in managing its cash. When an organization invests in inventories, its cash is usually tied up till the items are sold. Thus, whatever cash is tied is not readily available for any other use. It is thus in an organization’s will to maintain as short cash cycle and operating cycles as possible since by doing so it can be in a position to maximize liquidity and minimize costs of storing these inventories (Nordmeyer 2017).
The main different between the two concepts is that operating cycle represent amount of time taken by an organization to acquire inventories, sell and receive cash from the consumers in exchange for these inventories. Contrary, cash cycle is the amount of time takes by an organization to covert its resources to cash. It computes amount of time where every dollar is dedicated to numerous sales and production procedures earlier before its conversion to cash in terms of paid invoices or account receivable. Therefore, understanding all the components of cash as well as operating cycle would assist organization’s management in managing or controlling their working capital proficiently in that it helps one to understand what is to be done to minimize costs involved and in maximizing liquidity which are crucial in working capital management (eFinance Management 2017). In essence, understanding the concepts of cash and operating cycles would assist in easily computing current assets, current liabilities which are crucial in computing current, quick and working capital ratios of an organization. Therefore, the main ratios and data used in analysing efficiency of managing working capital are quick, current as well as working capital ratios. The current ratio helps in measuring the capacity of an organization to settle its short-term debt obligations while quick ratios help in measuring the capacity of an organization to pay off its debts using its most liquid assets. On the other hand, working capital ratio helps in measuring an organization’s efficiency and liquidity and to ensure that an organization is capable of continuing its key operations and it has adequate cash flow that enable it satisfy both its upcoming operations and it maturing short-term debt. These ratios are computed by use of both current liabilities and its current liabilities.
Accounting is the platform for reporting the financial information of an organization. It entails measuring, communicating and identifying economic information to allow informed decision and judgment by users of this information. Despite, these considerations, I totally disagree with this statement that says accounting aspect is not as significant in government entities as it is in the private organizations as the government firms do not care at all about generating profits. This is based on the fact that, in government entities accounting information is as much required as in private entities where information is to be provided to potential and present shareholders, vendors, creditors and financial accounting analysts for their different needs. Furthermore, in government entities accounting information is required to allow for accountability of the government entities to the public for the task delegated to them same as the private entities where information is required by shareholders.
Costing system is usually designed to screen amount of cost incurred by an organization. In essence, costing system is an accounting system that is established to monitor an organization’s costs giving the management information on performance and operations. It contains a set of processes, forms, reports and controls designed to sum up and report to the management about the profitability, costs and revenues (Hilton, Maher & Selto 2003). The main information supplied by the costing systems is utilized for a number of reasons including making decision as to where to reduce costs in an event of an organization downturn, creating tactical and strategic plans for the future operations, fine-tuning operations in order to generate high returns as well as in matching the actual costs incurred alongside with the budgeted cost levels to enhance better control. Therefore, the purpose of any costing system is to help the management in analysis of profitability of different operations or departments.
It also assists in the analysis of the cost behaviour of numerous items of expenditure in an organization. This would assist in future cost projection with reasonable accuracies. Further, costing system is crucial since it assist in locating differences between the expected results and actual results. These differences are traced to individuals cost centres with effective costing system. Further, costing systems are important since they assist in planning operations as well as in gaining insights into possible effect of managerial decisions on profits and cost levels. Costing systems also provide consistent base where performance of an organization could be measured and provide a relevant technique whereby overheads and labour could be consistently charged and recovered into stock.
In this case, manufacturing overhead allocation rate = total manufacturing overhead costs/total machine hours
This is equal to = 598,080/7,000= 85.44
In this scenario, administrative overhead allocation rate = total administrative overhead costs divided by total direct labour hours = 695,520/14,000= 49.68
Direct Material costs $19,000
Direct labor costs (537,600/14,000*750) 28,800
Manufacturing overheads (is equal to 85.44*400 hours) $34,176
Administrative overheads (is equal to 49.68*750) 37,260
Mark-up = 40%*119,236 =$47,694.4
Thus, total price = 119,236-47,694.4 = $71,541.6
Management of expenses is crucial for an organization success and overhead costs have a pivotal or crucial role in realizing favourable income margins (Drury 2001). Therefore, overhead costs allocation is very important when deciding on prices. This is based on the notion that allocation of overhead costs provides relevant information in establishing base on costs of the products. Basically, it is not enough to include the direct labour and direct material in setting prices of a given job; thus, overhead costs have to be considered as well. Further, allocation of overhead costs is also crucial since it promote efficient utilization of the resources (Patil & Bhangale, 2014). The three approaches that might be taken in allocating overhead expenses include the volume-based approach, departmental approach and activity-based approach. These approaches experiences some issues while allocating overhead expenses which include allocation expenses could exceed the external purchase expenses.
Predetermined overhead allocation rates is used in applying manufacturing overhead to the job orders or products and is calculated at the start of every period by subdividing estimated manufacturing overhead costs by allocation base (Drury 2013). Predetermined overhead rate is said to set manufacturing overhead costs of the work in progress. Basically, predetermined overhead rate is mainly founded on the basis of projected total overhead expenses to the projected total activities. Organizations consider using predetermined overhead allocation rate instead of actual overhead allocation rate since predetermined overhead rate gives a percentage to monitoring on weekly, monthly or on quarterly basis, with amount of the expenditure and the base being proportionate and relative to one another at a given period. Further, unlike actual overhead rate, the predetermined overhead rate streamlines the year-end overheads reconciliation (Hilton, Maher & Selto 2003).
Another reason why organizations use predetermined overhead allocation rate instead of the actual overhead rate is provision of timely information for planning, control and decision making. This is based on the fact that predetermined overhead rate is usually computed earlier and in time thus can allow for easier planning, control of the operations or for decision making rather than actual overhead rate which is computed once the costs incurred and all the activities are recorded. Furthermore, organizations make use of the predetermined overhead rates instead of the actual overhead rate in allocation of production jobs since it is easy to apply and evade any fluctuations in the job costs which are caused by variations in the overhead costs or production volume all through the year contrary to actual overhead rate (Drury 2013).
References
Drury, C 2001, Management and Cost Accounting, Thomson Learning. ISBN 1-86152-536-2.
Drury, CM 2013, Management and cost accounting. Springer.
eFinance Management 2017; Operating Cycle and Cash Operating Cycle; Viewed at 19th September 2017 from; https://efinancemanagement.com/working-capital-financing/operating-cycle-and-cash-operating-cycle
Hilton, RW, Maher, M & Selto, FH 2003, Cost management: strategies for business decisions. McGraw-Hill/Irwin.
Horngren, CT 2009, Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Nordmeyer, B 2017, The Difference Between Operating & Cash Conversion Cycles; Viewed at 19th September 2017 from; https://smallbusiness.chron.com/difference-between-operating-cash-conversion-cycles-24738.htm
Patil, SS & Bhangale, P 2014, Overhead Cost in Construction Industry.
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