Introduction to Management Accounting
In today’s competitive and rapidly changing environment, it is essential for the organizations to decide effective course of action. In order to effectively plan business course of action, the varied range of management accounting information is required. The financial information tends to support effective decision making within the organization. It is through access to wide range of financial information that the business unit is able to decide effective course of action. The report into consideration develops deep understanding of manner in which management accounting information helps in business decision making process. Moreover, the manner in which management accounting techniques helps in supporting strategic management decisions. Moreover, it throws light on manner in which budgeting and forecasting techniques is considered to be effective decision making tool. It also helps in understanding ways through which management accounting techniques can be used in the current competitive era of business.
Be Able To Analyze Cost Information Within The Business Of Buccaneers Ltd.
Direct cost: The cost that results due to production process is termed as direct cost. Direct labor and direct materials are the main part of direct costs. Expenses related to manufacturing activities are called direct costs (Anderson, 2011).
Indirect cost: The cost that is incurred due to administrative and other expenses within the organization is termed as indirect costs. Costs related to depreciation and insurance come under this section. These are the supportive expenditures of the company.
Factory overhead: It is the part of manufacturing costs. It includes expenditures such as electricity, rent etc.
Non manufacturing costs: These types of costs are the expenditures which are not related to the production. It includes administrative expenses, selling and distribution expense (Anderson, 2006).
Cost by element: Element of cost are material, labor and expenses. Hence cost of the company can be classified on the basis of element of expenditures.
Cost by function: The cost incurred by every function of the business such as production, administration, finance, selling, distribution etc, are known as cost by function.
Cost by nature: In this kind of cost, management can divide cost into three parts such as material, labor and other expenses.
Cost by behavior: In this part cost can be classified into fixed cost, variable cost and mixed costs. Buccaneers Ltd is using cost classification by behavior in its business. They are included fixed, variable and mixed costs in business operations.
Multiple costing: The methodology emphasizes on application of minimum of two approaches for calculation of costs for the organization. The methodology is suitable for calculation of costs in automobile sector, telecom industry and so on.
Activity based costing: The activity based costing emphasizes on allocation of costs within the business based on activities for optimum allocation of resources. It is useful for the production industries (Arai, Kitada and Oura, 2013).
Batch costing: In this method, the whole process of production is divided into batches. The expenditures are also distributed on the basis of batches. It is useful for big companies.
Job costing: In this technique cost of the production is calculated as per the expenditure incurred by a specific work or job.
Contract costing: The costing methodology is applicable in businesses that are conducting operations on the basis of contracts such as construction of dams and buildings. Expenditures are calculated on the basis of every contract.
Process costing: Many companies go through different processes to produce the particular goods. Such companies use process costing. Costs are calculated on the basis of the every process (Banks, 2008). In the present case study, Buccaneers Ltd is using process costing because company has ranges of process of production such as forming, machining, finishing etc.
Evaluation of Projects
On the evaluation of case presented herewith, it is seen that Buccaneers plc evaluates the processes of production that includes forming, machining and finishing. They can use process costing method for cost calculation. The raw material is converted into finished goods by entering into different process of production. It can be therefore said that the process costing is one of the best options for the organization because it is the easiest technique and matches with the production style of the company. The company is using process costing technique for its business and operations (Birnberg and Sisaye, 2010). Besides, some tools of costing that can be adopted by the organization are described underneath in detail.
Standard costing: The costing methodology emphasizes on comparison of actual expenditure incurred to that of budgeted expenditure. This in turn helps in estimating variances that can be minimized by taking appropriate measures. It is the most famous classical tool of costing.
Marginal costing: In this method, marginal cost of products is computed by estimating a difference between fixed and variable expenditure incurred on part of the organization. It is therefore considered to be one of the easiest techniques for costing.
Uniform costing: The costing methodology emphasizes on adoption of similar costing techniques and principles by which expenditures can be controlled and regulated in a continuous manner (Budgetary control. 2011).
Buccaneers Ltd. can apply job costing method so as to estimate cost for every department. The below table 3 represents total cost estimated for different departments of the business. It is seen that the highest cost is incurred within forming department. It can be therefore said that the huge amount of money is invested in this department. Direct labor and material costs result in difference between forming department cost and other departments. On the other hand, maintenance cost of the machining department is higher than others. It can be therefore concluded that the cheapest of all the departments is finishing department (Burns, Hopper and Yazdifar, 2004). Company is implementing absorption costing so as to allocate cost appropriate on the basis of labor hour. Henceforth, the organization is suggested to monitor the cost associated with forming department. This in turn results in reducing the total cost of production.
Be Able To Propose Method To Reduce Costs And Enhance Value Within The Business
Cost report of Buccaneers ltd shows the money incurred on each element of cost such as production cost, material cost, labor cost etc. By using effective method they can reduce their production cost. The report is prepared by using all the financial information of the business. Information or data should be accurate and correct. It should be collected in an effective manner. After proper collection of data, it should be organized, summarized and arranged according to the use of this information. After compiling of all the data, reports of cost should be developed. There are many problems which may arise during the report formulation (Hopwood, 2007). Issues related to inadequacy, irrelevancy, nu-authenticity and shortage must be avoided by the managers. Moreover, the organization should make appropriate estimation of facts and figures since these decide achievement of goals and objectives of the organization. Managers must find out the all errors of report perfectly.
Generally, there are two types of indicators of performance of the business which are as follows:
Financial statements: There are basically tree types of financial statements which show the financial position and performance of the enterprise such as income statement, balance sheet and cash flow statement. These statements help in evaluating financial performance and position of the business unit. It can be said that the profitability, liquidity and efficiency position of the organization is judged through the analysis of statements. These statements will assist in identifying the growth opportunities that exist for the organization (Kastantin, 2005).
Ratio analysis: It is the scientific way of finding out the exact efficiency, effectiveness, profitability, liquidity etc. of the associates. They can compare their performance with existing years as well as with the other enterprise to find out new development, growth and expansion opportunities for the company.
Non financial indicators: Efficiency of the labor, satisfaction level of consumer etc are included in non financial performance indicators, and these can be found out with the help of effective use of research tools and techniques. Company can conduct market research in order to find out valuable and significant data regarding consumers, employees etc.
Cost incurred, value offered and quality delivered of the product are considered to be interrelated elements. The approach of value enhancement emphasizes on rising level of profits and reducing cost of production. However, the approach ensures maintenance of adequate level of quality (Kate-Riin Kont, 2012). They can use many cost controlling techniques and value enhancement methods so as to develop business activities. Moreover, the list of expenditures which have high value can be prepared. This in turn helps in finding out efficient ways to reduce the expenditure. The organization should pay wages as per the nature and quality of work completed by distinct set of employees. The business unit can employ stock and cash controlling techniques such as just-in-time, economic order quantity and so on. These techniques help in reducing cost of holding, insurance and damages. They also can set the priority of different set of expenditures according to the respective prices. Moreover, the top management is responsible to control the high level of expenditure. The organization can adopt the latest technology so as to produce quality products at reasonable price. Moreover, the implementation of novel and fast machinery and equipment can make the production process faster (Kinney and Raiborn, 2012).
- Cost can be reduce with by using just in time, EOQ etc method of inventory control. It is also helpful in improving value of products and services.
- Effective and efficient use of human resource is helpful in improving quality or value and reducing expenditures such as wastage etc.
- Effective cash management and working capital management is also helpful in improving efficiency of the business and finally it is helpful in value enhancement and cost management.
Be Able To Prepare Forecasts And Budgets For a Business
The process of budgeting initiates with the stage of formulation whereby the future forecast for income and expenses are made. The forecasting is done on the basis of past performance of the organization. Once the forecasting is done and budget is prepared; the actual performance is compared to that of budgeted values. This in turn helps in identifying variances which are removed through adoption of appropriate measures. It can be said that the budgeting process helps in quantifying the future performance of the organization. The key purposes of budgeting process are as follows.
- Optimum utilization of financial resources
- Implementation of strict control mechanism within the organization
- Motivating individuals.
- Forecasting income and expenditure.
- A tool of decision making.
- Monitoring business performance.
Budgeting will help to manage limited resources effectively. It provides an appropriate way of allocation of economic resources in an effective manner. The basic purpose of budgeting is decision making and planning (Lillis, 2008). The main aim behind the process is to efficiently plan financial operations of the organization. Moreover, the adequate level of co-ordination is established in allocation of resources and cost of production. It will help to predict the outcomes of an adjustment before action.
Following are the key methods of budgeting which can be used in the case study.
Incremental budgeting: It is classical and one of very simple methods of budgeting. Moreover, the budget as per incremental budgeting is prepared by continuously increasing financial figures of past years at constant or increasing rate. It will be prepared on consistent basis. The main limitation of this kind of budgets is considered to be its approach to ignore the impact of changes within organization. Moreover, limited amount of efforts are involved in development due to lack of innovation. It can be therefore said that the approach is not considered to be valuable in present dynamic environment (Obura and Bukenya, 2008).
Zero based budgeting: It overcomes the disadvantage of incremental budgeting. This approach says that the managers should start their budgeting with zero bases. They should consider the changes and make a new budget every year by starting with zero level. It is the modern method through which they can allocate resources efficiently. This type of budgeting may be used by the big companies because it requires trained and expert employees.
Top down budgeting: It provides importance on the priority of work done. It says that they should estimate the expenditure of raised level tasks introductory and use this approximation to constrain the calculation for subordinate level. This way takes very fewer time frames than others and appraises upper level loyalty (Standard Costs and Variance Analysis. 2007). This is the method utilized by the company in the present case. Hence, it can be said that it is the best way of controlling and managing variance as it includes less involvement of low level workers of the entity.
Bottom up budgeting: In this technique, budgets are formed by incorporating the input of subordinate level administration. The counsel and procedure are developed by strategic level but budgets are prepared by the individual departments. It is also a good method which can provide full information of activities easily. The company can use this kind of budgets with experienced employees.
Antonio Ltd. can set up their budget with the help of the following procedure.
- Preparation of budget: The process outset with the preparation stage where they estimate the income and expenses within the company (Thomas, 2009). It is the first step of the budgeting.
- Budget implementation: After formulation of various budgets, it's should be implemented in the work environment for decision making and planning.
- Monitoring and evaluation: It is the most important stage of this process. They must monitor their budget’s performance from time to time for modification. The results of budget are evaluated in this step.
- Assessment and computation of variances: After finding out the result of the budget, they will find out the variances by analyzing the budgeted amount and actual performance.
- Modification for better results: Managers can modify the budgets by calculating the variances for better results in near future (Wildavsky, 2006).
Be Able To Monitor Performance
Variances may be characterized as the deviation between the planned and the existent outcomes of the business. This in turn raised positive variance and higher negative variances show the weak budgeting coming of the institution. Positive discrepancy of cost shows that activities are enforced in the aforesaid manner as they are expected. They are performing very well and the methods of controlling of cost are working in the organization. Positive discrepancy of sales, revenue, profit etc. shows that activities are not implemented effectively (Arai, Kitada and Oura, 2013). Minimum variance shows the effectiveness and efficiency of the business as well as their management team.
As per the accumulation, it can be inferred that there are unfavorable discrepancy for the company in the month of May due to wrong estimation of expenses and incomes for this month. They suffer from the job of proper application of suitable budgeting method which can give them valuable results (Budgetary control. 2011). As per the analysis, it can be said that the work force of the enterprise is not supportive and is not able to achieve the sales target of the business effectively. They should hire efficient employees to achieve the long term objective of the company.
Discrepancy in income is also a huge content. The grounds behind it are that expenditure of labor hours and intermediary are not projected effectively. All the swings show that pricing and costing strategies of the firm are not suited according to the nature of the products and business. They must adopt appropriate pricing schemes for their product. They should accept time series analysis techniques for forecasting because it consider time value of money and can examine the several trends of market. It can also respond to the outlook of the customers in an proper manner (Standard Costs and Variance Analysis. 2007).
The above study is related to application of management accounting in the business environment. In above report it can be reason out that there are various sorts of causes which can fluctuate the result of budgeting. Company should use suitable method for budget preparation to reduce variances. They can control their cost by using cost control models for example just in time, profitable order quantity etc. to cut down the general cost of manufacture. Information collected for budgeting and costing should be accurate and correct to achieve the objective of analysis.
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