Management Accounting - Assigment 2

MANAGEMENT ACCOUNTING (Assignment 2) Prepared for: Mr Jun Alejo Bathan Banking Academy, Hanoi Prepared by: B&G Group Maria - Trần Thị Hà My September – Tran Bich Phuong Aurora – Nguyen Que Anh Mary – Vu Thi Huong Tony – Mai Quoc Trung 6th, February 2011 EXECUTIVE According to the American Accounting Association - “Management Accounting includes the methods and concepts necessary for effective planning, for choosing among alternative business performances” In this assignment, my group had to work as well as an management accounting of a group of companies We need to fulfill all task from the managing director to explore the possibilities of introducing appropriate budgeting methods is one of the operating companies Base on the information which is given in the scenario, this report will cover the following tasks: • Explain the purpose and nature of the budgeting process which should normally be taken in the preparation of budgets in a manufacturing company • Select appropriate budgeting methods for the organization and its need • Prepare budget according to the chosen budgeting method • Prepare a case budget • Calculate variances, identify possible causes and recommend corrective action Contents INTRODUCTION Today economic activities are complex and diverse The market is wide and competition becomes cut-throat Hence the mere ascertainment of cost is of little use, as provided by cost accounting Besides, the modern management is interested in not only knowing the cost of production, but also in controlling the costs It is possible only if the management is in a position to determine financial cost, managerial performance, planning etc., and this gave birth to “Management Accounting” Hence, new techniques were invented to present the accounts periodically, not necessarily at the end of the year, before the management Such accounts should be prepared in such a way that the results could be easily compared with the budgeted data and efforts be made to exercise control Such new techniques were termed as “Management Accounting” This report will go on to deal with budgetary planning and control, preparing forecasts and budgets and then comparing them to the actual results Through this report, it can easily to see the differences between costing and budgetary systems and will discuss the resulting of variances After finish all duties in this assignment, all members in our group can learn many thing, and improve our personal skills We known how to work with numbers in accounting, how to calculated costing and budgeting, ect But sometime we get some problems such as calculate wrong, miss understand the guideline, and to solve them our group need to gather it again in carefully way or ask our friend After long process we work together with this assignment, all of us are try our best, so we hope will get good feed back as well as advice from you to help us improve more and more MAIN BODY III Prepare forecasts and budgets for a business Explain the purpose and nature of the budgeting process a The purpose and benefits of a budget Department managers in a business make decisions every day that affect the profitability of the business In order to make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations Planning the financial operations of a business is called budgeting A business that does not have a budget or a plan will make decisions that not contribute to the profitability of the business because managers lack a clear idea of goals of the business A budget serves five main purposes—communication, coordination, planning, control, and evaluation The detail are: COMMUNICATION In the budgeting process, managers in every department justify the resourcesthey need to achieve their goals They explain to their superiors the scope and volume of their activities as well as how their tasks will be performed The communication between superiors and subordinates helps affirm their mutual commitment to company goals In addition, different departments and units must communicate with each other during the budget process to coordinate their plans and efforts For example, the MIS department and the marketing department have to agree on how to coordinate their efforts about the need for services and the resources required COORDINATION Different units in the company must also coordinate the many different tasks they perform For example, the number and types of products to be marketed must be coordinated with the purchasing and manufacturing departments to ensure goods are available Equipment may have to be purchased and installed Advertising promotions may need to be planned and implemented And all tasks have to be performed at the appropriate times PLANNING A budget is ultimately the plan for the operations of an organization for a period of time Many decisions are involved, and many questions must be answered Old plans and processes are questioned as well as new plans and processes Managers decide the most effective ways to perform each task They ask whether a particular activity should still be performed and, if so, how Managers ask what resources are available and what additional resources will be needed CONTROL Once a budget is finalized, it is the plan for the operations of the organization Managers have authority to spend within the budget and responsibility to achieve revenues specified within the budget Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the organization is on target If performance does not meet the budget, action can be taken immediately to adjust activities Without constant monitoring, a company does not realize it is not on target until it is too late to make adjustments EVALUATION One way to evaluate a manager is to compare the budget with actual performance.Did the manager reach the target revenue within the constraints ofthe targeted expenditures? Of course, other factors, such as market and generaleconomic conditions, affect a manager’s performance Whether a manager achieves targeted goals is an important part of managerial responsibility The benefits of budgeting include: • Helps you gain control over finances Budgeting helps you to acquire control over indispensable and unnecessary expenditures whether they are at a huge business level or family levels It is the most effective means of getting rid of debts Budgeting helps you to adjust your expenses according to the needs and circumstances • Keeps you informed Personal budgeting helps you to know the exact amount of money you possess It is a self-education tool that keeps you informed about the allocation of your funds A well made and kept budget helps you to continuously remind of your plans and your gap with your goals • Improves financial communication Budgeting helps to open communication between members of a family or partners in joint business when they sit together to discuss financial issues through budgeting Both for married couples and members of organizations, who share financial resources and allocations, budgeting helps to make decisions regarding areas where money has to be spenty All members thus gain control over finances • Profitable tool Accurate knowledge about personal monetary affairs provides so much control in your hands that, you can take advantage of those opportunities that you might have missed otherwise • Helps you achieve definite objectives A budget supports you in moving towards financial goals The most important thing to be considered before any budgeting is the cause for creating a budget This will help you to make a focused effort towards achieving your tasks A few of these tasks include; buying a house or luxury car for yourself or opting for voluntary retirement when you feel the need of doing so Budgeting will help to organize your finances in such a way that you will readily have any information whenever and wherever it is desired Make budgeting, a part of your life and keep financial worries at bay b Steps in the preparation of a budget The preparation of a budget for any organization is a very important phase of the company Each year the budget is revised and also looked at The reason for this is that the budget usually outlines a framework within which the company can work It also gives a broad framework to identify if the company will have a profit or a loss and this in turn will help to reassess the goals of the company and appropriate changes in it There are various steps involved in the preparation of the budget and they are listed here: • Estimate long and short term needs of the Company The various long term needs also should be part of the budget The main reason for the formulation of the budget is due to the fact that the long term needs of the company should be identified and the budget should try to lead the company toward the goal Other than that, the short term goals which are the planning for the immediate year should also be done at the time of the budget • Calculate the income for the past year, present year and for the ensuing year: The income of the company for the past and the present year should be compared Various facts should be taken into consideration and the person or the company should be able to calculate the possible income for the next year too This will again act as a guideline for the company to function to try and achieve the immediate goals • Justify the estimated income and expenditures: Budget is a time when the previous year’s income and the expenditure are assessed and the justification for the income and also the expenditure is given, if there is a change in the income that was forecast and the actual income generated This will help to have accountability and also for the people concerned to take the whole exercise of budget seriously • Estimate the costs: The cost of various aspects is also to be estimated during the year This will make it very easy for the company to tackle any problems during the course of the year Usually estimations during budget time also leave a contingency fund that can be used to tackle any emergency need of funds • Set budget in accordance with the philosophy of the institution: The philosophy of one institution varies from that of another institution The philosophy could be the allocation of funds for a specific cause which is the primary goal of the organization This should be kept in mind at the time of the budget • Request for sufficient funds: Another important step in the preparation of the budget is that the financial management of the company that makes the budget is that the financial management of the company that makes the budget can also ask for a specific amount of money for them to tide over certain activities that need to be done The request for the funds can be made to the authorities concerned These are the various important steps of preparing the budget c Preparing functional budgets The preparation of functional budgets: A functional budget is the budget that is achievable and is related to a specific unit or process or function or department of the organisation It is a group of related activities aimed at accomplishing a major service or program for which a unit of government is responsible A functional budget is prepare for a process of function At the outset a principal budget factor or limiting factor is identified This determines scale; examples include sales volume, available finance or productive capacity d Cash budgets: A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things If you frequently visit specialty coffee shops, your annual expenditure will be substantially more e Budgeted profit and loss account and balance sheet A budgeted profit and loss account can be prepared from the data developed in:  Sales budget  Ending finished goods inventory budget  Selling and administrative expense budget  Cash budget The budgeted profit and loss account is one of the key schedules in the budget process It shows the company's planned profit for the upcoming budget period, and it stands as a benchmark against which subsequent company performance can be measured The budgeted balance sheet is developed by beginning with the current balance sheet and adjusting it for the data contained in other budgets f Flexible budgets A flexible budget is a budget that adjusts or flexes for changes in the volume of activity The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity If the plant manager is required to use more machine hours, it is logical to increase the plant manager’s budget for the additional cost of electricity and supplies The manager’s budget should also decrease when the need to operate the equipment is reduced In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget g Cost estimation An approximation of the probable cost of a product, program, or project, computed on the basis of available information Four common types of cost estimates are: • Planning estimate: a rough approximation of cost within a reasonable range of values, • prepared for information purposes only Also called ball park estimate Budget estimate: an approximation based on well-defined (but preliminary) cost data and • established ground rules Firm estimate: a figure based on cost data sound enough for entering into a binding • contract Not-to-exceed /Not-less-than estimate: the maximum or minimum amount required to accomplish a given task, based on a firm cost estimate 10 Prepare an operating statement reconciling budgeted and actual results Operating statement is a financial statement that gives operating results for a specific period A financial statement that gives operating results for a specific period (http://www.thefreedictionary.com/operating+statement) The table of operating statement of Bradley-Allen Ltd for the year ended 2012 Bradley-Allen Ltd Operating Statement For the year ended 2012 $ Budgeted profit Sales: Volume Price $ 10,000 4,125 F 3,000 A 1,125 F Direct Materials A variances Usage Price 1,250 A 300 F 950 A Direct Materials B variances Usage Price 600 F 500 A 100 F Skilled direct labor variances Efficiency Rate 300 F 178 A 122 F Unskilled direct labor variances Efficiency Rate 875 F 275 A 600 F 40 F 11,037 Fixed overhead variances spending Actual Profit 26 Report findings to management in accordance with identified responsibility centres a Responsibility center A responsibility centre is a section of an organization that is headed by a manager who has direct responsibility for its performance Responsibility centre are usually divided into different categories Here we shall describe cost (expense), revenue, profit and investment centres A cost centre is any part of an organization which incurs costs Each cost centre will have a cost code, and items of expenditure will be recorded with the appropriate cost code Information about cost centres might be collected in terms of total actual costs, total budgeted costs and total cost variances The advantages of cost centre: • • Successes and failures within different parts of the business more easily identified Help track problem and enables more effective decision making when cost reductions in • • • the business are needed Improves the quality of management decision making Improved monitoring of costs and expenditure Improved management information on profit – ability The weakness of cost centre • • This can create unnecessary work for some people in the business There may be external factors why costs are increasing and causing poor performance in • the cost centres Incorrect allocation of overheads can lead to under or overestimation of profitability A revenue centre is a section of an organization which raises revenue but has no responsibility for production Revenue centres are similar to cost centres, expect that whereas cost centres are for costs only, revenue centres are for recording revenues only A Profit centres are measurement tools used by many different industries They are a means by which management of a company can analyze revenues and related expenses generated by a profit unit A profit unit can be a product, a line of business or a person In using profit centers, management can determine easily whether the profit unit is meeting its own direct expenses and how much it is contributing to the company overhead 27 The advantages of profit centres • • • Improves speed and efficiency of decision making Allows more effective use of bonuses and other forms of financial motivation Increased motivation The disadvantages of profit centres • • • Loss of overall central control of the company Profit centre could be working towards different or non – company agendas Increased opportunity for empire building by management An investment centre manager has some say investment policy in this area of operations as well being responsible for costs and revenues The performance of an investment centre is measured by the return on capital employed b Report To: Management of Cost Center, Bradley-Allen Ltd From: B&G group Date: January 20, 2012 The advantage of the center shall not be from Profit centers and cost for a business to participate in a study focusing on their finances The use of profit and cost center allows businesses to standardize between departments and sectors of business On the other hand, the responsibility center may have some disadvantages In fact, the allocation of costs to specific profit or cost centers can be difficult in the case of Bradley-Allen, each department in Bradley-Allen has its own function, managers are required to make a budget and define the responsibilities of the central parts of their own For example, Bradley-Allen, Ltd., using improper material variance is unfavorable for $ 650 The reason for it is the material used lower quality standards However, circumstances beyond the control of the purchasing manager Therefore, it is important Purchasing Manager to select the appropriate time to make decisions The responsibilities is purchasing and controlling stock managers Moreover, they have to forecast and order enough to make the product without buying too much In addition, another example is the research and development department of BradleyAllen in division takes care of market surveys to understand customer needs so that the company may have plans to produce consistent It does tend to make sales for Bradley-Allen, so it belongs 28 to the center costs In the production of standard products, the company has to buy materials type A and type B There must be a part of Bradley-Allen responsible for this work It was purchased parts that are only dealing with the cost to purchase materials directly, so it is a cost center However, an organization can also be formed as a responsibility center Therefore, it is important to purchase materials and effective control or work time and division of human resources effectively Furthermore, application of standards for system errors in the time allocated for the job Prepared By B&G Group 29 CONCLUSION Through the assignment we realized that many things about the development of the company are very interesting Besides, we can not only understand more about the forecast and budgets for a business but also understand to calculate the variances and the way to prepare operating statement reconciling budgeted Budgeting provides an essential tool for business managers to use Budgets allow business managers to consider potential future events and anticipate their impact Budgets allow business managers to review expenses and determine whether the numbers appear reasonable The budget process also presents a good time for managers to seek opportunities for reducing expenses When companies implement a budget method, they need to consider which budget method fits their company best From the management strategy perspective, a responsibility budget is merely an artifact of the management process conducted within such a structural set up Specifically, the responsibility budget formalizes a performance target for a given business unit over a specified time scale In the typical case, goals are expressed in terms of economic quantities that reflect the utilization of resources and the financial results obtained as well as other scorecard measures Responsibility accounting systems are set up to produce these measures so that divisional performance can be compared with targets in a timely manner and, where necessary, adjusted Besides, for large systems, the operating system has even greater responsibilities and powers It is like a traffic cop The operating system is also responsible for security, ensuring that unauthorized users not access the system 30 APPENDIX  Prepare budgets according to the chosen budgeting method PRODUCTION BUDGET Good finished output required for units F03 = Budgeted sales F03 + Budgeted finished stocks increase F03 = 9,400 + 100 = 9,500 units Good finished output required for units F04 = Budgeted sales F04 + Budgeted finished stocks increase F04 = 12,200 + 400 = 12,600 units Good yield from cost centre 15 for units F03 = 100% – 5% = 95% Good yield from cost centre 15 for units F03 = 100% – 10% = 90% Gross production needed from cost centre 15 for units F03 = Good finished output required F03 / Good yield from cost centre 15 F03 = 9,500 / 95% = 10,000 units Gross production needed from cost centre 15 for units F04 = Good finished output required F04 / Good yield from cost centre 15 F04 = 9,500 / 95% = 10,000 units Good yield from cost centre 14 for units F03 = 100% – 20% = 80% 31 Good yield from cost centre 14 for units F04 = 100% – 30% = 70% Gross production needed from cost centre 14 for units F03 = Gross production needed from cost centre 15 F03/ Good yield from cost centre 14 F03 = 10,000 / 80% = 12,500 units Gross production needed from cost centre 14 for units F04 = Gross production needed from cost centre 15 F03/ Good yield from cost centre 14 F04 = 14,000 / 70% = 20,000 units Work in process stocks increase in cost centre for units F03 = Work in progress at the beginning of year 12 F03 – Work in progress at the end of year 12 F03 = 156 – 100 = 56 units Work in process stocks increase in cost centre for units F04 = Work in progress at the beginning of year 12 F04 – Work in progress at the end of year 12 F04 = 103 – 40 = 63 units Add increase in units F03 = Work in process stocks increase in cost centre for units F03 / Good yield from cost centre 14 for units F03 = 56 / 80% = 70 Add increase in units F04 = Work in process stocks increase in cost centre for units F04 / Good yield from cost centre 14 for units F04 32 = 63 / 70% = 90 units 33 Summary of production for cost centre 14 for units F03 = Good production needed from cost centre 14 F03 + Add increase in units F03 = 12,500 + 70 = 12,570 units Summary of production for cost centre 14 for units F04 = Good production needed from cost centre 14 F04 + Add increase in units F04 = 20,000 + 90 = 20,090 units Summary of production for cost centre 15 for units F03 = Gross production needed from cost centre 15 F03 = 10,000 units Summary of production for cost centre 15 for units F04 = Gross production needed from cost centre 15 F04 = 14,000 units 34 COST CENTRE UTILIZATION BUDGET Cost centre 14 utilization F03 = Summary of production budget for cost centre 14 for units F03 * Manufacturing times per unit in cost center 14 F03 = 12,570 * 1.2 = 15,084 hours Cost centre 14 utilization F04 = Summary of production budget for cost centre 14 for units F04 * Manufacturing times per unit in cost center 14 F04 = 20,090 * 0.4 = 8,036 hours Cost centre 15 utilization F03 = Summary of production budget for cost centre 15 for units F03 * Manufacturing times per unit in cost center 15 F03 = 10,000 * 0.9 = 9,000 hours Cost centre 15 utilization F04 = Summary of production budget for cost centre 15 for units F04 * Manufacturing times per unit in cost center 15 F04 = 14,000 * 1.5 = 21,000 hours 35 CONVERSION BUDGET Variable cost in cost centre 14 = (Cost centre 14 utilization F03 + Cost centre 14 utilization F04) * Variable-per hour in cost centre 14 = (15,084 + 8,036) * 6.5 = £ 150,280 Conversion cost in cost centre 14 = Variable cost in cost centre 14 + Fixed-in-total in cost centre 14 = 150,280 + 104,040 = £ 254,320 Variable cost in cost centre 15 = (Cost centre 15 utilization F03 + Cost centre 15 utilization F04) * Variable-per hour in cost centre 15 = (9,000 + 21,000) * 4.9 = £ 147,000 Conversion cost in cost centre 15 = Variable cost in cost centre 15 + Fixed-in-total in cost centre 15 = 147,000 + 123,000 = £ 270,000 Total conversion cost = Conversion cost in cost centre 14 + Conversion cost in cost centre 15 = 254,320 + 270,000 = 524,320 36 MATERIALS BUDGET Materials cost for unit F03 in cost central 14 = Summary of production for cost centre 14 for units F03 * Material cost for each unit = 12,750 * 35 = £ 439,950 Materials cost for unit F04 in cost central 14 = Summary of production for cost centre 14 for units F04 * Material cost for each unit = 20,090 * 20 = £ 401,800 Total material cost = Materials cost for unit F03 + Materials cost for unit F04 = 439,950 + 401,800 = £ 841,750 Materials cost for unit F03 in cost central 15 = Summary of production for cost centre 15 for units F03 * Material cost for each unit = 10,000*35 = £ 350,000 Materials cost for unit F04 in cost central 15 = Summary of production for cost centre 15 for units F04 * Material cost for each unit = 14,000*20 = £ 280,000 Total material cost = Materials cost for unit F03 + Materials cost for unit F04 = 350,000 + 280,000 = £ 630,000 37  Calculate variances Sales: x 950 = 76,000 Direct material: Direct material type A: x £950 = £14,250 Direct material B: x £950 = £19,000 Direct labor: • Direct labor skilled: x £950 = £4,750 • Direct labor unskilled: x £950 = £11,875  Prepare an operating reconciling budgeted • • Sales: Volume variances of Sales = 14,125 – 10,000 = 4,125 (F) Price variances of Sales = 73,000 – 76,000 = 3,000 (A)  The variance of sales = 1,125 (F) Direct materials: Direct materials A Price variance = 15,200 – 310*50 = 300 (F) Quantity variance = 310*50 – 14,250 = 1,250 (A)  The variance of direct material A = 950 (A) Direct materials B Price variance = 18,900 – 920*20 = 500 (A) Quantity variance = 920*20 – 19,000 = 600 (F) 38  The variance of direct material B= 100 (F) Direct labor: Skilled Rate variance = 4,628 – 445*10 = 178 (A) Efficiency variance = 445*10 – 4,750 = 300 (F)  The variance of direct labor skilled = 122 (F) Unskilled Rate variance = 11,275 – 1,375*8 = 275 (A) Efficiency variance = 1,375*8 – 11,875 = 875 (F)  The variance of direct labor unskilled = 600 (F) Actual profit = 10,000 + 1,125 – 950 + 100 + 122 + 600 + 40 = £ 11,037 39 REFERENCES (http://accmana3d.tripod.com/id2.html) (http://benefitof.net/benefits-of-budgeting/) (http://www.saching.com/Article/Important-steps-involved-in-preparing-a-budget/5672) (http://www.dummies.com/how-to/content/choosing-a-budget-method.html) 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