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PM201 Management Accounting

Published : 27-Sep,2021  |  Views : 10

Question:

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Management Accountants are more involved in financial planning rather than historical accounting.

1. Analytically discuss how management accounting varies from financial accounting.                                                             
2. Analytically discuss the importance of break-even analysis with the help of a break-even chart.
 
3. Evaluate the importance of any six operational budgets for a limited company.    
 
4. Discuss analytically the importance of variance analysis as a cost controlling and decision making tool. 

Answer:

1. Analytically discuss how management accounting varies from financial accounting 

The financial accounting focuses on the financial reports which are provided to the finance executives, stockholders, lenders and other stakeholders. The financial accounting practices deal with the accounting principles which have to be applied while reporting the outcomes of the business’s previous operations in the financial reports.

The Managerial accounting focuses on giving the details inside the business so that the management can perform more efficiently (Olive, 2012). The management accounting covers subjects like break even points, operational budgets, capital budgets, decision making as per the cost analysis, ABC costing etc.

The financial accounts are utilized by one’s who do not belong to the business and are made for a pre-defined phase like the financial year. These reports have historic facts and analytical significance which can be used for making the financial decisions or investments within a business (Nixon and Burns, 2012). However, management Accounting is the division of accounting that mainly handles the private financial reports for the restricted utilization of top management in a firm. These reports are made by use of the logics and statistical ways so that monetary value can be attached to all the operations. The reports in management accounting involve

  • Merger and consolidation statements
  • Sales Forecasting reports
  • Feasibility analysis
  • Budget investigation and comparative study (Halí?, 2011)

The Financial Accounting focuses on the making of financial reports, together with the essential reporting needs of solvency, liquidity, profitability and solidity (Management accounting, 2015). The financial accounts of this character can be used by internal and external users for instance the shareholders, the banking organizations and the creditors. Management accounting is wider than only the making and reporting of financial information. Management accounting involves the investigation of non-monetary resources, counting production and sales performance information, and various practices for managing costs and different business resources.

2. Analytically discuss the importance of break-even analysis with the help of a break-even chart

Break-even analysis, a kind of the highly accepted business tools, is utilised by firms to find out the profitability level. It gives firms with targets to recover the costs and earn revenue (Vance, 2010)

It is a wide-ranging channel to assist in setting the objectives in form of units or profits.
Break-even examination is an organizational tool extensively utilised in various industries to assess the firm’s performance in terms of costs, because this is a supply-side study. It is a vital feature of a great business plan, as it assists the business in determination of the cost structures, and the number of units that have to be sold for recovering the cost or attain profits. It is generally considered as an element of a business plan to perceive the practicability of the business idea, and if it should be pursued or not. Even after setting up of the business, break-even analysis can be vastly useful in the pricing and advertising procedure, together with cost controls (Catanzaro, 2016).

The break-even point can be identified by calculation of the point where revenue got matches the total costs related to the manufacturing of the goods or services (Enyi, n.d.).

Break-even Point = Fixed Costs/ (Selling Price for each unit – Variable Costs)

The breakeven point can be assessed by plotting a graph which reflects the change in fixed costs, variable costs, total costs and total revenue with each level of productivity (Gambling, n.d.).

Utilizing the illustration of a business which manufactures the T-shirts, the costs can be assumed as below:

Fixed costs: £10,000.

Variable costs: £2.00 per T-shirt

                                               

The above graph shows fixed costs as well as total costs. The chart is created with the output (number of t-shirts) on the horizontal axis (x), plus costs and revenue on the vertical axis (y). In this chart, a horizontal fixed costs line is plotted (it is horizontal since fixed costs are fixed with the changes in the output too).

After this, the variable cost line is plotted as of this point, which will, effectively, become the total costs line. This is for the reason that the fixed cost plus the variable cost provide with the total cost.

To work out the variable cost, the variable cost per unit is multiplied with the number of units. In this instance, it can be assumed that there are 2,000 units and the variable cost for each item has been £2 therefore total cost = £4,000.

                                     

This graph reflects the business’ break-even point. After this the revenue line can also be plotted, for which sales price is multiplied to the number of units (output). Herein, the sales price is £6 and 2,000 units had to be produced and, the computation is:

Total revenue= 2,000 * £6 = £12,000

The point having the total revenue line intersects the total costs line, that point is known as the breakeven point (where the costs as well as revenue have same value). Anything under this level is created at a loss, and anything over it is manufactured at a profit.

Breakeven analysis is a valuable instrument for finding the minimum sales necessary to prevent losses. Though, it has its restrictions. It creates suppositions regarding different aspects - such as that all sale of every unit is made, that estimates are consistent and the external setting is steady. If fresh competitors get into the market or a monetary recession begins then it could take extended time to attain the breakeven point than foreseen.

3. Evaluate the importance of any six operational budgets for a limited company

An operating budget is a blend of acknowledged expenditures, likely potential costs, and predicted income during a year. Operating budgets are made prior to the accounting period; therefore these involve approximation of the expenditures and revenues. Operating budgets are usually made on the basis of future quarterly performance. There is huge challenge faced in creation of a suitable operating budget because it has to gather details of the past performance, and after that include the likelihood of further costs or market factors. A limited company might make a decision to make more than single operating budget. Taking an instance, it might be useful to plan a suitable budget for an unexpected fall in revenues, and a budget for more affirmative situation.

The 6 operational budgets for a limited company can be:

  1. Production Budget: This budget has an estimation of the different goods that a firm aims to produce throughout the budget phase and their amount. The quantity of commodities to be created relies on the sales budget (Fu and Hao, 2014). So as to build up the most favourable production budget, finest balance has be hit among sales, manufacturing and stock levels.
  2. Direct Labour and Manpower necessity Budget: It is made up of planned expenses for direct labour. This budget shows the rates for each hour and the amount of hours needed to fulfil the production needs. It has comprehensive details of every staff member within the firm. This budget can be applied for the human resource planning in short period (Teng, Lee and Chew, 2010). For making this budget, it is important to analyse and estimate the availability of workers by assessing the present proficiency’s level, modifications in the know-how, vacancies likely to come up from promotion, transfers, retirements and growth planning and retrenchment. This budgeting is helpful for the HR department in creating the recruitment and training plans.
  3. Sales Budget: This budget explains the proposed sales of a variety of goods, their average selling price, and the total realised sales (Hughes and Kirby, n.d.). This budget is put through the most indecision because the making of sales budget begins with the sales forecasting. Sales forecast is basically a guess, a forecast of clients demand, and a manifestation of market’s demand. Management responds to sales forecast by making decision regarding positioning of firm in the marketplace compared with its competitors. This choice is shown within the sales budget.
  4. Direct Materials purchases Budget: This budget reflects the likely usage of resources in manufacturing and the buying of the direct materials needed. The purpose is to acquire these materials at the correct time at the intended acquisition price.
  5. Overhead Budget: This budget reflects the likely cost of the entire manufacturing process apart from the costs for direct materials and direct labour. To an extent, the budgeted fixed overhead costs are not changed with the changes in the activities (Walters, 2008). The Budgeted variable overhead costs are as per a budgeted variable overhead rate * budgeted action.
  6. Selling and Distribution Expense Budget: Selling expenditures are sustained to build and motivate demand, getting orders and their execution. These expenditures may be direct or indirect in nature. The advertisement and publicity costs are parts of indirect selling costs. Distribution expenditures are those which link with the making the firm’s goods available to buyers in saleable form.

Operational budgeting has expansion of financial plans for the business, usually for a year. Whereas yearly budgets should not be subdivided into smaller phases, monthly or quarterly budgets are chiefly valuable to anticipate the cash requirements and for comparison of the real experience with plan. A wide-ranging master budget needs planning for every stage of the operation which is- sales, marketing, producing, obtaining and general paperwork. The budgeting procedure needs the steps such as:

calculating expected demand

deciding on production quantity

Quantity of raw material to be purchased

Deciding cash flows

profit planning

Risk planning for the daily operations of business etc.

4. Discuss analytically the importance of variance analysis as a cost controlling and decision making tool. 

Variance analysis is a significant element of a firm’s information structure. The variance analysis involves the role of Planning, Standardising and Benchmarking. With the intention of computing the variances, standards and budgetary goals need to be laid beforehand. The business can later compare its actual performance with these standards and budgetary goals. So, it supports progressive and a practical approach for laying down the performance benchmarks.

The variance analysis acts as a Controlling device:

Variance analysis encourages the theory of 'management by exception' by emphasizing on divergences from standards which have an impact on the financial performance of a business (Drummond and Vowler, 2012). If variance analysis is not carried out regularly then such exceptions might ‘be missed' and can lead to delaying of the management steps required in the circumstances.

Responsibility Accounting

Variance analysis encourages the assessment and control of performance at the point of responsibility centres (such as a division, branch, designation, etc). Such as, procurement branch would be accountable in case of a great raise in the buying expenditure of raw materials (i.e. poor material pricing variance) though the production department would be liable regarding a boost in the utilization of raw materials (i.e. poor material utilization variance) (Vance, 2011). As a result, the performance of every responsibility centre is calculated and assessed adjacent to budgetary standards, relating to only those segments which are under their direct control.

Variance analysis:

  • Material cost variances: It is the variation among the real cost of direct material utilized and standard costs of direct materials indicated for the yield attained (Hussey and Ong, 2012).This variance appears as of the variations among the quantities utilized and quantities of materials authorized for manufacturing and from variations among paid prices and pre-decided prices.
  • Labor variances: This kind of variation comes up when real labour costs are differing from the benchmarked labour costs. In investigation of labour costs, the labour rates and labour hours are stressed (M. Andawei, 2014).
  • Variable overhead variances: The examination of factory overhead variances is quite complicated in comparison to the variance analysis for direct materials and direct labour. There isn’t any standardisation of the provisions or techniques utilized for assessing the overhead variances.
  • Sales variances: It is the variation among the real value of sales attained in a specific phase and budgeted amount of sales. There are lots of sources which bring the variance in real sales and budgeted sales. A few of such sources are the variations in the selling price, varying sales volume and varying sales mix.

Variance analysis for Standard Costing acts as a tool of assessment which is used by the management for identification of "Variances" for evaluating the manufacturing performance.

References:

Catanzaro, T. (2016). Break Even Analysis. Journal of Global Economics, 4(2).

Drummond, G. and Vowler, S. (2012). Analysis of variance: variably complex. British Journal of Pharmacology, 166(3), pp.801-805.

Enyi, E. (n.d.). Applying Relative Solvency to Working Capital Management - The Break-Even Approach. SSRN Electronic Journal.

Fu, Z. and Hao, J. (2014). Breakout local search for the Steiner tree problem with revenue, budget and hop constraints. European Journal of Operational Research, 232(1), pp.209-220.

Gambling, T. (n.d.). A one-year accounting course. 1st ed.

Halí?, Z. (2011). Accounting System and Financial Performance Measurements. European Financial and Accounting Journal, 2011(3), pp.38-65.

Hughes, R. and Kirby, T. (n.d.). Prepare operational budgets. 1st ed.

Hussey, R. and Ong, A. (2012). Strategic cost analysis. 1st ed. [New York, N.Y.]: Business Expert Press.

  1. Andawei, M. (2014). Project cost monitoring and control: A case of cost/time variance and earned value analysis. IOSR Journal of Engineering, 4(2), pp.22-25.

Management accounting. (2015). 1st ed. London: BPP Learning Media Ltd.

Nixon, B. and Burns, J. (2012). Strategic management accounting. Management Accounting Research, 23(4), pp.225-228.

Olive, C. (2012). Accounting Management. 1st ed. Delhi: University Publications.

Teng, S., Lee, L. and Chew, E. (2010). Integration of indifference-zone with multi-objective computing budget allocation. European Journal of Operational Research, 203(2), pp.419-429.

Vance, D. (2010). Financial analysis & decision making. 1st ed. New York: McGraw-Hill.

Vance, D. (2011). Financial analysis & decision making. 1st ed. New York: McGraw-Hill.

Walters, B. (2008). FNSACCT403B prepare operational budgets. 1st ed. Frenchs Forest, N.S.W.: Pearson Education.

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