Indicate the main purposes of management accounting and its relevance to the management of organisations.
Evaluate the main cost structures of organisations and methods of their calculation.
Determine appropriate methods of calculating break-even, profitability and capital input costs.
Management accounting is of significant help to the management because it aids in decision making process and helps financial accounting. Determining the cost structure for the management is vital because a business needs to know about the expected profitability and costs. Therefore, budget leads to proper control on the management and the function. To prepare this report, Dicksmith Holding Ltd has been selected which is a good company in consumer electronics. The report will revolve around financial accounting, importance of budget and variances.
As per the trend and the budget we can expect that the company will move to significant height in the year 2015. We are expecting the figures to touch $37,905 thousand as against $19,826 thousand in 2014 and this is due to strong policies framed by the management. The preparation of budget along with spotting of variances can lead to this figure. Moreover, investing in software will lead to strong opportunity like stock movement, tracing of sales, etc. Hence, a strong figure can be expected in the year 2015 as comapred to 2014.
Management and financial accounting are the two pillars that help in structuring the organization and to steer it forward. However, with the advent of technology, the manual system no longer exists. The work is being done by the latest softwares. In our case we are selecting Dicksmith holdings Ltd that is a leader in the field of consumer electronics. In this case it needs to have strong grasp over the management and the financial aspect. Investing in softwares will help the company to get automatic updates concerning the inventory and will aid in decision-making process (Albrecht et. al, 2011). Moreover, this will tend to have a strong grasp over the budgetary process, financial statement preparation and the conduct of the business.
Management accounting helps the management that is present internally. It helps to connect the various departments and ensures that the activities are aligned. It aids in preparation of budgets and various other financial statements. In short it helps the management in taking decisions. Employees, managers, etc depends upon management accounting to get adequate information (Drury, 2011). On the other hand, financial accounting mainly revolves with the information that is beneficial to the parties that are present externally. Government, regulatory authorities, creditors depends on the information provided by financial accounting
The main role of management accounting is to plan and forecast and this is done by preparing the budget. Moreover, it is not rigid; it can be used as per the requirements. On the contrary financial accounting is prepared as per the format and aids in the process of decision-making. It is mandatory for the organization to prepare it (Drury, 2011)
Hence, management accounting can be said to be the essential tool that helps financial accounting. Management accounting is not compulsory but provides strong assistance to financial accounting.
When it comes to financial planning preparation of budget is essential and vital. Without a budget it is difficult to operate because estimation is needed for the proper functioning. A budget helps to strengthen the organization and leads to proper functioning. It helps in forecasting and even enables in knowing the performance in comparison to the previous year result (Robinson & Last, 2009). The main objective of budget is to provide solidity to the company in terms of guidance and proceedings. It enables the company to chalk out a plan regarding what needs to be done. Hence, preparing budget leads to planning. A budget helps in structuring the management and helps in evaluating the performance that is based on the expectations 9 Needles & Powers, 2013).
Secondly, it helps in forecasting the cash flow. It enables the company to grow at a rapid pace. Through budget, a company can estimate the funds that remain in the hands of the company and even predict crisis if any. Moreover, preparing budget helps in better allocation of resources. It helps the company to decide where the funds should be allocated and which activities will generate the maximum returns (Needles & Powers, 2013). By a valid consideration and application of various other methods budget can provide significant results. Moreover, it helps in measuring performance and the variances if any can be used to rectify the process.
The prime aim of creating an operational budget is to ascertain the functioning of the business and estimation can be done with the figures that are estimated. It helps the management to command over the current period expenses. Operational budget is of utmost helps because it enables saving and provides ample benefits (Robinson & Last, 2009). Therefore, it helps in reduction of the financial problem. It helps the management and structures the business. Secondly, the forecasting of the expenses can be done with ease and flexibility. When the performance of the past is assessed, comparison can be done with the figures of the current period so that alignment of the business can be done. The chief aim of the operational budget is to enhance savings, investing, as well as strong planning. In short, it helps the business to perform in an effective manner and reduce the debt. Hence, it helps to avoid the jerks that are temporary in nature.
In our example we have selected Dicksmith Holding Ltd where different operational budgets are prepared and are linked to sales, manufacturing, selling expenses, etc. Sales budget can be termed as the initial stage of the budget that pertains to business and budgetary control starts from here. Sales budget assumes special importance because many budgets depend on it (Dicksmith, 2015). Secondly, the production budget provides the total units that can be manufactured. It needs to be noted that the production rests on three main factors that is the units needed to be sold, need of the stocks and other units. Thirdly, the material budget that is direct in nature helps in ascertainment of raw materials that is required for purchasing purpose. If ascertainment of the units purchase is done then it can be multiplied with the cost per unit to know the budgeted amount. Then the preparation of the labor budget that is direct is done so that it highlights the labor hour and the cost of labor to know the entire labor cost. The manufacturing overhead budget is prepared to ascertain the expected variable and fixed overhead. Lastly, the selling expenses budget provides the way for variable and selling expenses (Lanen et al, 2008). The general and administrative expenses budget leads to strong estimation of the expenses that is operational in nature and linked to administration.
Direct Cost- These costs are important because it can be accurately traced to a cost object with minimum effort. This cost object can be a department, product, project etc. For example, in the production of concrete, the cost of sand, gravel, cement etc are direct costs.
Indirect Cost- These costs cannot be traced to a cost object but these benefit multiple cost objects. It can either be fixed or variable but mostly it is fixed as it does not change significantly. For example, the cost of depreciation, power and supervisor’s salary in a concrete plant are indirect cost.
Fixed Cost- These costs incur no matter what level of production or sales is generated. It is important because high fixed costs can prove to be an entry barrier for competitors and on the other hand, it can also create economies of scale. For example, depreciation, rent, salaries etc.
Variable Cost- These costs varies with the production output. It is necessary to understand these costs because high variable costs indicate that a business can operate at a relatively low level of revenue. For example, commission to salesman only when they sell products or services, credit card fees etc.
Mixed Cost- This cost is basically an admixture of both fixed and variable costs. It is important to know the mix of both these because one can predict how costs can alter with varied level of activity. For example, the total cost of a building owned by a company is mixed cost where the depreciation associated with the building is fixed while the utility expense is variable.
Production Cost- Any costs whether direct or indirect that are attributable to the production of goods and services are called production costs. Companies can get a clear picture about how much cost will incur to produce an item or service by classifying these costs. Example, cost associated with a product, utility expense, etc (Horngren, 2011).
Administration Cost- Costs required to administer the business are the administration costs. It is required to ascertain the structure of fixed cost. Example: staff wages, office supplies, rent, etc (Horngren, 2011).
Selling Cost- Costs incurred in selling products or services are the selling costs. It must be classified because it can rival the size of production budgets. Example: advertising and salary of sales staff, etc (Horngren, 2011).
Distribution Cost- Costs incurred from the production stage till the customer point are distribution costs. Example: warehouse costs and transport cost etc.
Research and Development Cost- These Costs are incurred for developing or improving products. Example: designing of products, patent etc.
Relevant Cost- These costs are associated with a particular management decision and will change as a result of this decision in future. It is helpful in eliminating extraneous data from a decision-making process. Examples: Costs incurred to keep or sell a unit, etc (Horngren, 2013)
Irrelevant Cost- These costs does not alter as a result of a management decision but it can be relevant to other management decisions, hence must be classified. Examples: Sunk Costs, fixed overheads, non-cash items, etc (Horngren, 2011).
Standard costing is used by companies to measure performance and determine costs but speculation on it being the most efficient measurement tool has always been there. Standard costing takes into consideration factors like quantity, price and quality of the material and it is based on present and projected future conditions. Standard costing permits the recording of inventory and cost of goods sold (COGS) at standard cost in order to prevent time-consuming in valuation of inventories (Horngren, 2013). Since, these accounts are recorded at their standard cost, corrective action becomes impossible and there does not remain any yardstick that can measure the performance. Therefore, in order to use standard costing in variance analysis, the variance and costs must be inter-related which means that the standard costs must be compared with the actual costs. In simpler words, variance analysis can be computed by the differences between standard cost and actual cost (Horngren, 2011). By deducting the actual costs with the standard costs, the inefficiency in estimates can be ascertained and investigations can be done by the management to determine the cause. Variances of direct labor, direct material and overhead costs can also be obtained and by comparing these variances or actual costs with standard costs, innovative ways can be known on how to control costs more effectively. Hence, it can be assumed that both standard costing and variance analysis make a very good performance measurement tool (Horngren, 2011).
In variance analysis, the variances are assessed as favorable and adverse so that it becomes easy for the authorities to ascertain its financial impact. A favorable variance arises when the actual or net income of the company is better than the standard or estimated income (Shim & Siegel, 2009). It can also arise when the actual costs of the company are less than the projected or standard cost. It can be interpreted that when the actual revenue of the company rises as a result of decrease in costs or increase in income, then a favorable variance is created. For example: The actual revenue of $100000 of a company versus a budget or standard revenue of $90000 gives a favorable variance (revenue) of $10000. Similarly, the actual costs of $150000 of a company versus a budget of $175000 give a favorable variance of $25000 (Vanderbeck, 2013).
Similarly, when the revenue of the company are lower than what is expected or the expenses are higher than what is expected, then it gives rise to an unfavorable variance. In relation to standard costing, it means that when the actual costs are higher than standard costs, an unfavorable variance is created. These variances are very significant for the management because after identifying these variances, they can take relevant steps in order to determine the cause of such variance (William, 2010). For instance, the actual revenue of $500000 of a company versus a budget of $550000 gives an unfavorable variance (revenue) of $50000. Similarly, the actual costs of $250000 of a company versus the standard cost of $200000 gives an unfavorable variance (expense) of $50000.
Conclusion
The discussion and the report clearly signify that the preparation of budget is important for the organization and helps in smooth running of the organization. Furthermore, the financial accounting, as well as management accounting must go hand in hand that helps to steer the organization in the correct direction (Needles, 2011). This enables knowing the variances and leads to proper strategy. Moreover, the annual report of Dicksmith Holding clearly shows that budgeting and holds the key for success of the organization.
References
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 12 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, Marian 2013, Principles of Financial Accounting. Financial
Needles, S. C 2011, Managerial Accounting, Nason, USA: South Western Cengage Learning.
Vanderbeck, E. J 2013, Principles of Cost Accounting, Oxford university press
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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