Introducing Management Accounting

7/29/2019 Introducing Management Accounting

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Malwina MroczkowskaBTEC National Diploma in

Business StudiesUnit 7, Introducing Management Accounting

Assignment 4

Malwina Mroczkowska 1


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How accounting and statistical information would have been used to create the budgets?

A budget is a plan for the future based on the figures that we know and the estimations. It is useful because with thiswe can forecast the position of the business, set targetsand monitor performance toward those targets. Businesscould analyse the achievement to make decisions and takeappropriate actions for improvement. Budgets should bemanaged over set timescales that are realistic and, ideally,

fit in with business funding arrangements allowing finance staff to complete their tasks in time for grant claims, for instance. Budget helps managers to measurewhether they are achieving what they set out to achieve. If

they are under or over budget they can take steps tocorrect position. The information should be reliable,otherwise business would comes up with false findingsand the real situation of the business would still not beknow.



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How accounting and statistical information would have been used to create the budgets?

Budget helps managers allocate resources at start of a period like:In which areas is business going to invest How much will be spent on marketing & promotional activities thisyear How many employees does the business need what will they be paid? Provide a way of allocating responsibility among employeesManagers are given their own budgets and are responsible for controlling how the budget is spent or achieved.

There are many different types of budgets that businesses use:SalesPurchases of materials

Debtors and creditorsCashOverheadsCapital ExpenditureMaster budgets (forecast)



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State the purpose of each budget and explain them.There are many different budgets businesses uses to look at the performance and to forecast the

future which are explained below:

Sales budget( other name sales forecast)

Shows the expected sales for the budget period; typically, it is expressed in both pounds and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the salesbudget is sloppily done then the rest of the budgeting process is largely a waste of time. In other words, it is a break-down of how many products business aims to sell and how much revenue it will get from those sales

Purchases of materials

This type of budget would only be prepared by manufacturing businesses. This budget will use the figures proposed on the Production budget to determine the amount of raw materials needed tocompensate for manufacturing the required number of units. At this time, it may be useful to researchyour suppliers to determine that the quality of the material supplied reflects what you are currently

paying: it does not always involve looking for the cheapest supplier.

Debtors and creditors

This budget is useful for businesses because by the end of the month it is possible to check whether expected figures are the same as ours actual. It is crucial that debtors are managed effectively, so that the money will comes in quickly and that business will not will not finished with bad debts. Debtorsbudget include: opening balance, sales, subtotal of the previous two, receipts, bad debt and our closing balance.

Capital Expenditures budget

Plan prepared for individual capital expenditure projects. The time span of this budget depends uponthe project. Capital expenditures to be budgeted include replacement, acquisition, or construction of

plants and major equipment

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State the purpose of each budget and explain them.

Marketing budget Describes how business intends to achieve budgeted sales (e.g. how much advertising, sales

promotion)

Production budget Volume of production (units) and production costs to achieve it Used to help schedule work, order raw materials and manage capacity

Cash budget:The cash budget is the link between all the individual budgets and the master budget. For thosesmall businesses that can budget through a single document, this is what they will use. It formsan overview of how money will be moved to and from the business bank account. This cashbudget will then form the proposed cash flow forecast for the budgeted period.

Cash flow budget

Ties all other budgets together Helps understand what money is coming in (sales) and what money is going out (production

and departmental

Overheads budget

It is a schedule of all expected manufacturing costs except for direct material and direct labor.Factory overhead items include indirect material, indirect labor, factory rent, and factory insurance. Factory overhead may be variable, fixed, or a combination of both.



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Describe how these budgets would affect the cash budget and why its important to usethis for target-setting.

All of the budgets that are explained in the previous slidesmake a cash budget. This is used to determine how muchmoney the firm is likely to have every month. Smaller businesses would use the cash budget because it include theopening balance, which is the money that the business has

at this moment, income which is taken from the debtorsbudget and any cash sales, together with the creditors sales

from the capital expenditure sales. This would show themwhat they will use and what they can expect in the future.Expenditures would come from all other budgets. Those

budgets would affect the overall cash budget because if they will be incorrect the whole budget will be wrong and misleading. It is important for target-setting because thebusiness could compare previous findings and results, and set new target for the business.



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Describe how the budgets drown up so far can be used to drawn up departmental andmaster budget.

The master budget is a summary of company's plansthat sets specific targets for sales, production,distribution and financing activities. It generally culminates in a cash budget, a budgeted incomecomprehensive complete statement, and a budgeted balance sheet. In short, this budget represents a

expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. Onebudget may be necessary before the other can beinitiated. More one budget estimate effects other budget estimates because the figures of one budget isusually used in the preparation of other budget. This isthe reason why these budgets are called interdependent budgets. Once the budgets are drawnup they will act as targets for the future can becompared with the actual figures to see how well thebusiness is doing and where it is facing.

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Suggest why budgets need to be revised from time to time and why thought should begiven to the relationship between costs and incomes at different activity level.

Main reason why budgets needs to be checking and redoing regularly is,that if they will occur a massive change in the short period of time thiswill mean that business should look at this closely and find out why doesit change is occurring. Looking at the debtors budget we can seewhether our bad debts are getting higher or not, the business might toconsider to take an appropriate actions to improve. Another action that the business may consider while looking at the budgets is to changeactivity levels. Business may consider expanding or declining the fixed assets that are available like:

Its pricing strategies Break-even point Purchasing policies Marketing expenditures

Production or labour strategies Overheads Cash situation

This would give to the business an opportunity to improve and tocompare figures with previous years.



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Standard costing- definition

Standard costing involves using the predetermined costs to compare them with theactual to find the difference or variance.Variance can be adverse (actual result is worsethen standard or predicted) or favourable(actual result is better than standard or

predicted). Standard costing is for improving

costs / cost control, simplify stock valuation and improving costing and pricing of products.

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Standard costing- usageStandard cost for Mr. Jones

Overheads amount used price standard cost

Materials 0.5 meter 12 per meter 6.00

Labour 1 hour 4 labour hour 4.00

Variableoverheads 1 hour 0.40 per hour 0.40

Total 10.40

Sellingprice 15.00

This means that thevariance is favourable because selling price is15 and to make a

pair of shoes is costs

10,40.

Short term target setting can be monitored by the standard costing becausewe can look at the changes in the materials as well as looking at the time it takes to produce a product to provide the service. Then we can compare it withour previous one to see if it changed or not. We can also look at the prices and then conclude if we would like to change our supplier or change wages of our employers or not.



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Sales and purchases variances

Variance analysis is used to monitor what is actually happening in the business suchas costs, revenues and budgets in relation to our considerations. For example, a firmhave worked out a cash-flow forecast and estimated quarterly revenues of 10million. If the actual revenue shows a figure below that 10 million then this isreferred to as negative variance and may trigger the need to take some curative

action or to do investigations into what may be happening to have caused thenegative variance.

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Purchases varianceJanuary February March April May June

budgetpurchases 625 657 844 523 525 856

Actualpurchases 492 462 564 393 400 607 variance 133F 195F 280F 130F 125F 249F

Sales variance (Revenue)

January February March April May Juneactual 1150 1219 1394 953 794 1353 budget 1250 1314 1688 1046 1050 1712 variance 100 A 95 A 294 A 93 A 256 A 359 A



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Sales and purchases variances

Variance in sales ()

January February March April May June

budget sales 18,750 19,710 25,320 15,690 15,750 25,680

actual sales 18,400 19,500 23,700 16,200 14,300 25,700

variance 350F 210F 1,620 F - 510 A 1,450 F - 20 A

Variance in purchases () January February March April May June

budgetpurchases 7500 7884 10128 6276 6300 10272

Actualpurchases 5900 6000 7900 5500 6000 9100

variance 1600F 1884F 2228F 776F 300F 1172F



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Sales and purchases variances are useful becausethey can be used to monitor performances of thebusiness and to conclude why these changes haveoccur. The business could compare his target sales

with actual and see whether it is doing better or worst then it was predicted. Sales and purchasescan change because of increase or decrease indemand, costs and prices like seasonal products. It also can be useful by the business to see if they aredoing any better or worst over a time because they can compare those figures with one from previousyears or competitors if they have an access to sucha data.

How sales and purchases variances can be used to monitor performance.



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The summary of operations that shows the overall variances for the year can assist with decision-making in many different ways, for example we can use those data to analyse our

performances. We could look at the summary of operations to find the variance in between our actual and predicted budget and by this we are able to drawn up a summary. If the salesare higher than expected we are saying that the variance is

favourable , while if our figures would be lower we would say that the variance is adverse . The manager of the business

would look at the reasons for variances and find out how it would affect other figures in our organisation. This would helpus with many important decisions, like changing the price,quantities of goods or service sold, marketing strategies,wages, and our expenses or combination of all of them.

How a summary of operations that shows the overall variances for the year can assistwith decision-making and informed actions



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Advantages Disadvantages

Variance analysis is intrinsically connected with planned and actual results and effects of thedifference between those two on the performance of the entity or company.This variance analysis can lead to the identification of certain types of task that frequently overrun their budget whilst other tasks may be seen to regularly come in under their budget. Occurrences such asthese require further investigation in order to identify

potential efficiency gains.Standard costing provides the best basis for estimating future cost and contribute to the

planning/budgeting function. It also assist in thecomparison of the actual with the planned toevaluate managerial performance. By focusing on the

variance whether adverse and favourable, it enablethe management to identify and take action tocorrect or improve present and future planning and control. The setting of standards will require thelooking at the methods and operations which will lead to improvement in efficiency by eliminatinginefficiencies and provides a basis for estimating

prices, costs and the effect of prices fluctuation oncosts.

The major problem with a variance analysisapproach to project monitoring is the amount of timeit takes to establish actual costs. On the majority of large projects, supported by a typical accountsdepartment, there will be a time lag of around 6weeks before spend information can be accurately reported. The monitoring cycle can be so long that it renders the application of control impossible.Typically, by the time a problem has been identified through variance analysis it is too late to takecorrective actionMain disadvantage of standard costing is that it cannot be used in those organisations where non-standard products are produced. If the production isundertaken according to the customer specifications,

then each job will involve different amount of expenditures. The process of setting standard is adifficult task, as it requires technical skills. The timeand motion study is required to be undertaken for this

purpose. These studies require a lot of time and money. For instance, if the industry changed thetechnology then the system will not be suitable. Inthat case, we will have to change or revise thestandards. A frequent revision of standards will become costly.

Strengths and weaknesses of the budgetary techniques

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Production data is an important piece of information that thebusiness can use to asses the future and to compare it with the

previous years. From the production data we can see if our business is expanding or not, we can also see in which monthsour production is higher and in which is it lower, and this may

affect our future target .Sales, costs and profits in previous accounting periods is useful because the business can compare figures from the past and

predict the future. It can also improve performance by monitoring regularly those figures. We can see in which way business is going and we can also compare our sales to indicatewhat would be the best price for product. We could compare our

profits with the previous one and make changes which areneeded to improve the performance. It is also easier to find and

problems and decreasing and improve them.

Analyse different types of information and explain importance of them.



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Change over time- business can compare changes by monitoring frequently any variances that occur in the business and find out why they happen. Changes over time can be due to changing the price, suppliers etc. We can also compare thevariance in between our budgeted and actual figures and by monitoring them

frequently.

Moving averages and seasonal variations- by analysing the seasonal variances,

the business would simply see in which months the sales is higher and in which isit lower and then make steps to improve the sales in more quiet seasons e.g.Invest more in the advertisements. By looking at the moving averages and comparing them the business can set targets because it is easier to see changesin the sales and trends that occur and when they occur. One major advantage of moving average is to eliminate fluctuation in one single year when identifying

the trend of data.Price indices and trends detected in previous accounting periods are other

pieces of information, which are important for the business to monitor.Monitoring trends can be useful because by them, a business see if there are any variations or fluctuations. Trends can also help with determining future moves of the business or changes like expanding. Monitoring price indices can help to

asses the price of goods, which the business is selling or whether is would bebetter to increase or decrease the price.

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Original break-even table from assignment 2

Units Fixed Costs () Variable Costs () Total Costs () Sales Revenue () Profit or Loss0 11,500 - 11,500 - - 11,500

250 11,500 3,000 14,500 3,750 - 10,750

500 11,500 6,000 17,500 7,500 - 10,000

750 11,500 9,000 20,500 11,250 - 9,250

1000 11,500 12,000 23,500 15,000 - 8,5001250 11,500 15,000 26,500 18,750 - 7,7501500 11,500 18,000 29,500 22,500 - 7,0001750 11,500 21,000 32,500 26,250 - 6,2502000 11,500 24,000 35,500 30,000 - 5,5002250 11,500 27,000 38,500 33,750 - 4,7502500 11,500 30,000 41,500 37,500 - 4,000

3834 11,500 46,008 57,508 57,510 24500 11,500 54,000 65,500 67,500 2,000

4950 11,500 59,400 70,900 74,250 3,3505500 11,500 66,000 77,500 82,500 5,0006123 11,500 73,476 84,976 91,845 6,8697668 11,500 92,016 103,516 115,020 11,504



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Increase of variable costs by 11%.

Quantity Fixed Costs () Variable Costs () Total Costs () Sales Revenue () Profit or Loss0 11,500 - 11,500 - - 11,500

250 11,500 3,330 14,830 3,750 - 11,080

500 11,500 6,660 18,160 7,500 - 10,660

750 11,500 9,990 21,490 11,250 - 10,240

1000 11,500 13,320 24,820 15,000 - 9,820

1250 11,500 16,650 28,150 18,750 - 9,4001500 11,500 19,980 31,480 22,500 - 8,980

1750 11,500 23,310 34,810 26,250 - 8,560

2000 11,500 26,640 38,140 30,000 - 8,140

2250 11,500 29,970 41,470 33,750 - 7,720

2500 11,500 33,300 44,800 37,500 - 7,300

3834 11,500 51,069 62,569 57,510 - 5,0594500 11,500 59,940 71,440 67,500 - 3,940

4950 11,500 65,934 77,434 74,250 - 3,184

5500 11,500 73,260 84,760 82,500 - 2,260

6123 11,500 81,558 93,058 91,845 - 1,213

7668 11,500 102,138 113,638 115,020 1,382



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Increase of selling price by 20%

Quantity Fixed Costs () Variable Costs () Total Costs () Sales Revenue () Profit or Loss0 11,500 - 11,500 - - 11,500

250 11,500 3,000 14,500 4,500 - 10,000

500 11,500 6,000 17,500 9,000 - 8,500

750 11,500 9,000 20,500 13,500 - 7,000

1000 11,500 12,000 23,500 18,000 - 5,500

1250 11,500 15,000 26,500 22,500 - 4,000

1500 11,500 18,000 29,500 27,000 - 2,5001750 11,500 21,000 32,500 31,500 - 1,000

2000 11,500 24,000 35,500 36,000 500

2250 11,500 27,000 38,500 40,500 2,0002500 11,500 30,000 41,500 45,000 3,5003834 11,500 46,008 57,508 69,012 11,5044500 11,500 54,000 65,500 81,000 15,500

4950 11,500 59,400 70,900 89,100 18,200

5500 11,500 66,000 77,500 99,000 21,500

6123 11,500 73,476 84,976 110,214 25,238

7668 11,500 92,016 103,516 138,024 34,508Malwina Mroczkowska 20


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In assignment 2 I have created the tables, which showed how changes of the costs and selling price would affect on the profit of the business. If we would like to look at the changes of variable costs, we see that if they would

increased by 11% the business would make less profit because the costs would be higher and the businesswould have to sell more to make profit. If Mr. Joneswould like to increase the selling price of his products by 20% this would means that to make profit businesscould sell less, however it could be dangerous becauseincrease of price would affect that some of customersmight not afford news price it and the business would loss some customers and money at the same time.

Analysing the cause of changing selling price and costs, and how it affects of profit.



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There is also a huge impact of increase or decrease in costs on the selling price where thecost-plus method is used. Costs plus method iscalculated by adding the total variable costs and

fixed costs and then dividing by the total number of units to be produced. This will determine thetrue unit cost It is calculated as:(average variable cost + % allocation of fixed

costs)*(1+ markup %).If the costs would increase the selling price would increase as well, while if the costs would decreasethe selling price would drop.

The impact of increase/decrease in costs on the selling price where the costs-plus pricing method isused.

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As we can see the original break-even point for Mr. Jones business was 3843.

If Mr. the variable costs would increase by 11%, thebreak even point of the business would be higher. The

reason for this is that if the costs of sales will go up, profit would drop, so business would need to sell moreto make a profit and to meet the new break-even point.

Increase of the selling price by 20% would have a

positive effect on the break-even point on the Mr. Jonesbusiness. The original break-even point would be higher then new break even point, which could be lower, so thebusiness could sell less and still make a profit.

The effect on the break-even point that is affected by changes of the costs or sales.



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If some activities would increase the costs of sales of the business, this would affect on the level of thebudget activities. As we previously mention, increaseof the costs could affect the break-even point and a

profit of the business itself. Business would have to

produce more trainers, which they could sell later and by this they may become more solvent.The selling price will affect on the level of trainerswhich are produced if the business needs to make a

profit. Higher selling price means that organisation

may sell less in the higher price, so business could produce less trainers and still make the profit if the price will be not too high, but at the same time if theincrease would means more money that comes intothe business.

How budget activities need to change to maintain profits when such changes occur.



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Malwina Mroczkowska

Summary of operations for Mr. Jones business.

25

Mr. Jones summary of operations

Budget:8060

Actual Sales:6863

Gain orReduction in

Profit

Actual Costsand

Revenues

Variance

Sales 120,900 102,943 17,957 A 117,800 14857 FMaterials 48,360 41,178 7,182 F 40,400 778 F

Labour 32,240 13,686 18,554 F 19,700 6014 A

Variable overheads 3,224 2,745 479 F 2,200 545 A

Total Variable costs 83,824 57,609 62,300 4691 A

Contribution 37,076 45,334 55,500 10166 F

Fixed overheads 6000 6,000 6,400 400 A

Profit 31,076 39,334 8258 F 49,100 9766 F


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The 4 th column in the summary of operations isgain or reduction in profit. This shows us theeffect in costs and revenues when the businessmakes a different number of units than businesshas planned to do in the forecast budgets.

Last column in the summary of operations is the

variance. This demonstrate us the impact of changes in selling price, costs and finally if the profit which business planned to achieve in our estimations.


What does the summary of operations shows?


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As we can see our sales figures are higher thanexpected. This means that Mr. Jones business managed to sell at a higher price during the year. On the other hand, this could have an effect at the number of unitsthat business sold. As we can see in the summary of operations it was lower than business expected in the

forecast.Costs of materials which we used was also lower thanwe assumed. This can be due to this that we have sold less than it was predicted. Business could also changethe supplier for cheaper, but this could affected on thequality of goods and decrease in quantity of goods sold

or increase in the wastage.Labour was adverts, there are many reasons that could be responsible for this like over the year the staff could have changed, and the time new workers needed to

produce goods was longer, and by this business needed to pay more for wages.

What are possible reasons for all of the variances?


Variance

Sales 14857 F

Materials 778 F

Labour 6014 A

Variable overheads 545 A

Total Variable costs 4691 A

Contribution 10166 F

Fixed overheads 400 A

Profit 9766 F


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Another reason could be that change tocheaper supplier could cause more wastage

for the business, so there could be increaseof the time of the labour and this could linked to the increase of variable overheads.We also see that our fixed overheads werehigher by 400 than expected. As we know

fixed overheads don't change due to the

level of goods produced.Overall, we are able to see that out businesss profit has increased by 9766 ,even though we sold less than expected.


What are possible reasons for all of the variances?

Variance

Sales 14857 F

Materials 778 F

Labour 6014 A

Variable overheads 545 A

Total Variable costs 4691 A

Contribution 10166 F

Fixed overheads 400 A

Profit 9766 F


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Looking at the summary of operations we can see that manager should take actions, which will improve the

performance of the business and to minimise the variancesin between budgeted and actual costs. The sales of thebusiness were lower than predicted. Manager should look at the pricing strategies as well as its marketing, that thebusiness uses. Amount of materials that business used waslower, however this can be due to the lower sales. Businesscould produce less or there could be less wastage of materials. Labour was as twice lower as business

predicted. This could be because there was less staff needed as sales were lower or staff was more qualified soit took them less time to produce trainers. Manager could link this to the decrease of sales, then again if staff would be more trained they could produce even more trainersand the selling price could goes down so more peoplewould buy goods. Malwina Mroczkowska 29

Suitable management decisions/ actions which might be taken based upon the variancesdiscovered.


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List of things that manager should consider to improvebusiness performances:

pricing strategies

Marketing strategies like advertisements etc.

quality of materialsQuantity of materials business is purchasing

level of qualified staff

Decrease of wastage

Costs of variable overheads

Costs of fixed overheads, for example cost of rent,insurance, delivery vehicle etc.


Suitable management decisions/ actions which might be taken based upon the variancesdiscovered.

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Variance analysis , in budgeting is a tool of budgetary control by evaluation of performance by means of variances between budgeted amount, planned amount or standard amount and the actual amount incurred/sold. Variance analysis can be carried for bothcosts and revenues.

Variance analysis allows managers to identify problems,which need deeper investigation with a view toimplementing remedial action.

The value of variance analysis lies in managers beingable to isolate where costs that increased are actually occurring and take remedial action in that specific area.


The importance of a variance analysis

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1. Useful control information is provided by the standard: actual comparison and the resulting variances. Standards provide a yardstick against which to compare actual costs.

2. The variances allow management by exception to be practised.

3. The technical analysis necessary to set standards may lead to better

methods, greater efficiency and lower costs; after consideringmaterials, manning, methods and machinery.

4. Motivation and cost consciousness may be stimulated. It is a target of efficiency towards which employees may strive.

5. Variance analysis may help to define areas of responsibility.

6. The standards set are a useful aid to establishment of budgets, pricesand production schedules. Standard costs may rationalise pricing

policy.

7. Standard costs simplify record keeping and stock valuation becausestandards are used throughout the system, which can be used to

calculate the variances Malwina Mroczkowska 32

Importance of a variance analysis

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Advantages of variance analysis:Variance analysis is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company. This variance analysis can lead to the identification of certain typesof task that frequently overrun their budget whilst other tasks may be seen toregularly come in under their budget. Occurrences such as these require further

investigation in order to identify potential efficiency gains. The major problemwith a variance analysis approach to project monitoring is the amount of timeit takes to establish actual costs. On the majority of large projects, supported by a typical accounts department, there will be a time lag of around 6 weeksbefore spend information can be accurately reported.

Disadvantages of variance analysis:

The monitoring cycle can be so long that it renders the application of control impossible. Typically, by the time a problem has been identified throughvariance analysis it is too late to take corrective action. This is a major shortcoming of variance analysis and highlights the need for a monitoringsystem that depicts the current status of the project more effectively.

Advantages and disadvantages of a variance analysis

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Documents

Introducing Management Accounting