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The Concept Of Management Accounting Add in library

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Question:

• Indicate the importance of management accounting in managing your organisation.

• Evaluate the main cost structures of your organisation

• Determine the price and break even sales needed for your product for a successful business, by using appropriate methods
 
 

Answer:

Introduction

The Concept of Management Accounting is a well derived concept that involves many functions mainly for a manufacturing enterprise.  The management accounting is a branch of accounting that mainly is involved in making decisions for the company and the business. Therefore it carries a huge scope to interpret and estimate the results so that proper decision could be taken on the basis of these reports. Management accounting mainly involves the various functions such as planning, budgeting, reporting and analyzing the results for taking the decisions frequently. This branch has developed and emerged as a great boon for the managers of the organization as they are able to take decisions with much ease and with better quality.

Talking about the business enterprises everybody and all the business firms are in needs of capital and funds for the business. The needs of the capital of the business vary according to the expansion and extensions that the businessman wants to do in their business and this are to be financed through various modes that are used by the business man to finance the resources that are needed by them. Out of the various sources loans from the banks are one of the common sources of finance available to the people and also the corporate around the world. As in the recent times business men prefer mix source of financing than depending on the outside funds for the entire amount of funds needed for the business.  The banks loans are given to the corporate depending on the business forecasts they have for the future as the management accountants have to present realists forecasts based on which such loans could be granted so the banks loans become the nerve cells for the business enterprises to carry on their future ventures and the loans are the ones based on which the firms are able to risk their investment upon. The loans can be outlined as a very important source of capital for the business firms at any point of time. It had been noted that many enterprises are   not able to expand as they are not availed with the loan facilities that should be allowed to them due to the lack of creditability that their firm possesses in the form of upcoming budgets and the financial planning for the companies. These examples show how important a source such as loans from banks is there for the enterprises.

The other reasons for which the banks loans are very good source of funding as they offer reasonable rates of interest. The repayment terms of the loans from banks are able to suit the enterprises and the new projects very well and they help the people to manage the options available with them for investment. The investors have great hope from the business and they cause an unnecessary risk for the company as there is a burden for repaying with the amount they have lend to the company. The loan capital helps the companies and their business to grow. But in the modern times with the risk of frauds and scams coming up the process of loan is being stricter and there is a huge need of management accountants for this purpose. The projections for the budgets and the cash flows are so important that the banks need them for giving the loans to the clients.

Although there are many sources of capital but the loans are one of the most important source that the lenders face easy to collect and fiancé their business. So it could be easily said that the implication and the need for the bank loans  as a source of capital had immensely increased in the modern run and thus there is a huge source of changes that could be brought  if the loans are used as a source of capital for the firm.

 Forecasting is also one of the important functions of the management accountant where he has to spend a lot of time for the enterprise he is dealing with. The management accountants are focused and expertise on predicting the future of the business based on the present sales and costs structure of the companies. The management of the company employs the management accountants because they feel that it is important that the projections of the revenues, cash flows and the budgets are correctly prepared as they base their decisions on these reports presented by the management. There is a huge necessity of the forecasted documents as they add great value to the decision making process for the company. The main reasons for the importance of the correct projections for these figures can be as discussed below:

  • The projections help the managers to understand the shortcoming of business if any and then make improvements there in. The figures help them to decide the decision making process and help them to analyze the working state of the organization.

  • The investors are also are interested in the future growth of the business and the cash management cycle of the business which can be easily demonstrated using the forecasted data provided they are correct and not misleading.

  • The bankers also disburse the loans to the company on the proof that they stay focused on their data and the estimates are realistic and correct.

  • The other importance of forecasting data is that it helps to create a trust on the enterprise and the performance that it can give to the people and thus it is relevant for the people to understand the importance of forecasting methods for the enterprise
 

In the process of forecasting it is very important that seasonal variations are considered because it will make the users of the information aware of the unallocated resources so that proper decisions on this can be taken and the seasonal nature of the business might be considered in taking important decisions about the nature and the flow of the business in the future.

So it could be said that the role of forecasting specially for the business is very important and it should be correct so that the decisions taken on the basis of these projections are true and help in proper decision making. The role of forecasting for management accounting is very important and submissive.

The decisions that are very important and huge for the business have to be taken on the projected figures and the business plans are made on this estimation of the figures. The decisions regarding the nature of the business decides the future course of action and the estimated figures help the business to grow.

In the present case study where the dealer is the manufacturer of sports good the business plan it could be seen that major part of the sales are being done by the international markets as the demand is maximum there. This gives a direction that the profits of the company would be more if they export the goods and also plan to expand the business in the international market as well.

The current product is a good scope of expanding business as in the upcoming times the demand of the goods will surely show a rise in the times to come and there is a huge scope of expansion and growth for the business enterprise.

The importance of the management accounting can be understood as it is a most important tool for taking decisions regarding the business operations. It helps the management to decide that how the organization would be managed by the various account management tools. It is a branch of accounting the helps the business to manage effectively the pros and cons of the business environment and thus reduces the risk faced on the new projects as there is a clear idea through the budgeted figures that are available and help the management to form correct decisions.  There are two branches of accounting namely financial and management accounting and both are quite different in the prospective and approach, where one deals with the accounting part and the other deals with the managing the course of actions.

Managerial accounting information is used by company management to determine what should be sold and how to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. This process is known as relevant cost analysis and is a technique that is taught in basic managerial accounting courses. The same process can be used to determine whether to add product lines or discontinue operations.

The major point of difference between the two concepts are explained below in detail

Basis

Management Accounting

Financial Accounting

Objective

Book keeping and recording the transaction

To ascertain the financial result and financial position.

Task

To record the transaction

To draft the financial statement

Legal binding

Management accounting report is optional to be prepared.

Financial accounting report is compulsory to be prepared.

Segment Reporting

Pertains to individual department of the organization

Pertains to entire organization.

Information

Company goal driven information

Monetary and verifiable information

Focus

It focuses on present and forecast the future

It focuses on the past recorded information.

Audience

It produces information and report for the use of organization, employees and managers

It produces reports for the external parties.


Both management accounting and financial accounting is useful for a business concern. Management accounting develops the base of accounting whereas the financial accounting carry out the other necessary task to complete the task associated with the term accounting.

Fixed and Variable Costs are both an important component for the product. The fixed costs comprise of the costs that are permanent burden for the company and the variable costs are those that are not burden for the company but incurred with the production of the product. There are many costs that comprise of the variable nature as these costs are being incurred at the time of the production as these costs are not fixed for the companies. The business tart up costs are the sunk costs also that are incurred for running the business of the enterprise and are being used for the production of the goods and services, So the costs are both important but there role in the decisions making process is quite different. The fixed costs are mostly consisting of the overheads that are not avoidable by the enterprises and have to be incurred at any costs until the shut down point is achieved. There are various areas for which there are costs that are to be fixed at the time of initial production and these costs are to be recovered to break even from the view point of the company. The variable costs are on the other hand can be regarded as recoverable costs and hence no problems occur to have a burden of costs when the production is on hold.

Calculation of the Breakeven Point For the Manufacturer

 

   

Break Even Point

 

Contribution/ Fixed Cost

 

   

Selling Price Per unit

600

assumed

 

   

Calculation Of Variable Costs

   

 

   

Wood

4.65

 

Leather

25

 

Polish

440

 

Cloth

0.6

 

per unit

470.25

 

 

   

Wages

   

23*1.5

34.5

 

 

   

Total

504.75

 

 

   

Contribution Per Unit

95.25

 

 

   

Total Fixed Costs

   

 

   

Factory lighting

  £22,000

 

Factory rent -   

£25,000

 

Factory cleaning

£10,000

 

Administration expenses

 £ 16,000

 

Selling expenses-     

£ 12,000

 

Delivery van expenses

 £7,000

 

Office rent

£ 10,000

 

Total Fixed Costs

102000

 

 

   

Break Even Point

1070.866142

units

 

 

References

https://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html

https://www.bis.org/publ/bcbs_wp1.pdf

https://www.yourarticlelibrary.com/business/business-forecasting-and-its-importance-to-business/25634/

https://www.gaaaccounting.com/the-importance-of-management-accounting-for-professional-accountants-in-business/

Adler, Paul S. "Time-and-Motion Regained," Harvard Business Review (January-February, 1993), pp. 97-108.

Awasthi, Vidya N ABC's of Activity-Based Accounting , Industrial Management (Jul-Aug 1994) pp.: 8-11, January 29, 1996.

Beaty, Carol A. "Implementing Advanced Manufacturing Technologies: Rules of the Road," Sloan Management Review (Summer, 1992), pp. 49-60.

Böer, Germain, "Making Accounting a Value Added Activity," Management Accounting (August, 1991), pp. 36-41.

"Five Modern Management Accounting Myths," Management Accounting (January, 1994), pp. 22-27.

Brimson, James A., Feature Costing: Beyond ABC, Journal of Cost Management, January/February 1998, pp. 6-12.

Briner, Russell F., Michael D. Akers, James W. Truitt, and James D. Wilson, "Coping with Change at Martin Industries," Management Accounting (July, 1989), pp.45-48.

Burt, David N., "Managing Suppliers Up to Speed," Harvard Business Review (July-August, 1989)m pp. 127-135.

Chalos, Peter, "Costing, Control, and Strategic Analysis in Outsourcing," Journal of Cost Management (Winter, 1995), pp. 31-37.

Clinton, B. Douglas, and Ko-Cheng Hsu, "JIT and the Balanced Scorecard: Linking Manufacturing Control to Management Control, "Management Accounting, September 1997, p 18-24.

Colin  Drury, and Mike Tayles, Cost System Design for Enhancing Profitability, Management Accounting, January 1998, pp. 40-42

"Cost Accounting Standards: Myths & Misconceptions", Management Accounting, January 1994, pp. 42-43.

Cooper, Robin and Regine Slagmolder, "Strategic Cost Management." Management Accounting. Vol. 89, Issue 8. (New York: February 1998), pp. 16-18.

Cooper, Robin and Regine Slagmulder, "Cost Management Beyond the Boundaries of the Firm," Management Accounting, March 1998, pp.18-19.

Curtis, Corey C. and Lynn W. Ellis, "Balanced Scorecards for New Product Development" Journal of Cost Management; Man/June 1997, Volume II, Number 3, pp. 12-18

Elram, Lisa M. and Feitzinger Ed, "Using total profit analysis to model supply chain decisions", Journal of Cost Management (July/August 1997), pp. 12-21.

Enzweiler, Albert, "Improving the Financial Reporting Process," Management Accounting (February, 1995), pp. 40-43.

Ferrara, William L., "Cost/Management Accounting--the 21st Century Paradigm," Management Accounting (December, 1995), pp. 30-36.

Fry, Timothy D, and James F. Cox "Manufacturing Performance: Local Versus Global Measures," Production and Inventory Management Journal (Second Quarter, 1989), pp. 52-56.

Fuller, Joseph B., James O'Connor, and Richard Rawlinson "Tailored Logistics: The Next Advantage," Harvard Business Review (May-June, 1993), pp. 87-98.

Gallimore, Devin F. and Richard J. Penlesky, "A Framework for Developing Maintenance Strategies," Production and Inventory Management Journal (First Quarter, 1988), pp. 16-21.

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