Management Accounting - Assigment 2

Management Accounting Lecturer: Dao Nam Giang Class F04B Prepared by: Lucky Group Nguyen Thi Tu Anh – Lee Nhâm Nguyễn Ngọc Anh - DJ Nguyen Thi Ngoc – Gummy Nguyen Hien Thanh – Tany Tang Thanh Thuy - Mitchie Submission date: 29th June, 2012 Contents Executive summary Managerial Accounting was called as a field of accounting that provides economic and financial information for managers and other internal users In this program, you will learn about fundamental internal measurement and control systems, including structured measurement models, analytical techniques and system biases You also will learn how to align internal measurement and control systems with your organization’s strategy and how to maintain control without stunting initiative Whether you are the measurer or the measure in your organization, this program will deliver ideas that will help you your job better, by promoting better systems, challenging ineffective or inefficient metrics, and creating a lean measurement culture Introduction The report has main tasks bases on outcomes of scenario: Task 1include outcome: - 3.1: Explain the purpose and nature of the budgeting process 3.2: Select appropriate budgeting methods for the organization and its needs 3.3: Prepare budgets according to the chosen budgeting method Task include outcome: - 3.4: prepare a cash budget Task include outcome: - 4.1: calculate variances identify possible causes and recommendation corrective action 4.2: prepare an operating statement reconciling budgeted and actual result 4.3: report findings to management in accordance with identified responsibility centers I Budgeting process The purpose and nature of the budgeting process a The purposes and benefits of a budget: • Ensure the achievement of the organization’s objectives This is the main purpose of budget The organization’s objectives are quantified and drawn up as targets to be achieved within the timescale of the budget plan (BPP, 2004, pg.155) • Control and Evaluation Budgeting allows a company to have a certain degree of control over costs, such as not allowing many types of expenses to take place if they were not budgeted for, or assigning responsibility for these expenses A budget also helps company to evaluate business units, departments, and even individual managers (Tiffany Bradford, 2012) • Co-ordinate activities The activities of different departments need to be co-ordinate to ensure maximum integration of effort towards common goals This implies, for example, that the purchasing department should base its budget on production requirements and that the production budget should in turn be based on sales expectations (BPP, 2004, pg.155) • Planning Planning is another purpose of budgeting process, and is arguably its primary purpose Budgeting allows a company to take stock of revenue and expenses from the previous period, and judge where the business will be in future periods It also allows the organization to add and remove products and services from its plan for the future period This allows top management to get a picture of the entire business so they are able to better plan accordingly (Tiffany Bradford, 2012) • Communication and Motivation Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas Budgets also allow a company to motivate its employees by involving them in the budget While top-down budgeting does not accomplish this goal very effectively, participative budgeting can be motivating When an employee is involved in creating his or her department’s budget, that person will be more likely to strive to achieve that budget The budgeting process can also allow companies to communicate and achieve their goals, and allow them to monitor those achievements as well It is also an important step in overall of business strategic planning (Tiffany Bradford, 2012) • Provide a framework for responsibility accounting Budgets require that managers of budget centers are made responsible for the achievement of budget targets for the operations under their personal control (BPP, 2004, pg.155) b Types of budget: There are two components in master budgets including operating budgets and financial budgets Various types of budgets are shown in the picture below  Operating budgets Operating budgets include many types Firstly, it is sales budget which is the first budget prepared It is derived from the sales forecast such as management’s best estimate of sales revenue for the budget period and every other budget depends on the sales budget (Ward & Ward, 2012) The production budget is prepared after the sales budget The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory (Accounting for management, accessed 2011) In production budget, there are direct material budget, direct labor budget, and manufacturing overhead budget • Direct materials budget shows both the quantity and cost of direct materials to be purchased, which are derived from the direct materials units required for production (from the production budget) plus the desired change in ending direct materials units • (Ward & Ward, 2012) Direct labor budget shows both the quantity of hours and cost of direct labor necessary to meet production requirements It is critical in maintaining a labor force that can meet • expected production (Ward & Ward, 2012) Manufacturing overhead budget shows the expected manufacturing overhead costs for the budget period, and it distinguishes between fixed and variable overhead costs (Ward & Ward, 2012) The next is Selling and Administrative Expense Budget lists the budgeted expenses for areas other than manufacturing In large organizations this budget would be a compilation of many smaller, individual budgets submitted by department heads and other persons responsible for selling and administrative expenses For example, the marketing manager in a large organization would submit a budget detailing the advertising expenses for each budget period (Accounting for management, accessed 2011) The following budget is budgeted income statement It is the summary of various component projections of revenues and expenses for the budget period It indicates the expected net income for the period (All business, 2005)  Financial budgets Financial budgets embrace the impacts of the financial decisions of the firm (Answer, accessed 2011) The first financial budget is capital expenditure budget, which is a plan prepared for individual capital expenditure projects The time span of this budget depends upon the project Capital expenditures to be budgeted include replacement, acquisition, or construction of plants and major equipment (All business, accessed 2011) The second is cash budget considered to be the most important output in preparing financial budgets It shows anticipated cash flows and contains three sections: cash receipts, cash disbursements, and financing Cash budget also shows beginning and ending cash balances (Ward & Ward, 2012) Lastly, budgeted balance sheet is a projection of financial position at the end of the budget period It is developed from the budgeted balance sheet for the preceding year and the budgets for the current year (Ward & Ward, 2012) c Steps in the preparation of a budget: The mechanics of budget preparation need to be concerned as the focus of building up a budget It is very important because of its function to appreciate the coordinating role of budgets Hence, the follow part of this report is going to describe every step in the preparation of a budget  Budget committee Total cash disbursement $703,420 $692,400 $628,580 $2,024,400 Excess (deficiency) of cash $1,580 $19,000 $88,620 $88,620 Financing $28,420 $11,000 -$39,240 -$39,420 Ending balance of cash $30,000 $30,000 $49,200 $49,200 A method of maintaining cash balance $ 30,000 by changing the time of payment of dividends or splits it into smaller sections for each Case 1: Changing the time dividends are paid Cash budget April May June Quarter Beginning cash balance $47,000 $101,580 $90,580 $47,000 Add: Cash collections $658,000 $681,400 $687,200 $2,026,600 Total cash available $705,000 $782,980 $777,780 $2,073,600 $462,420 $477,400 $482,580 $1,422,400 Less cash disbursement Purchase of inventory Operating expense $141,000 $145,000 $146,000 $432,000 Purchase of land $0 $70,000 $0 $70,000 Cash dividends $0 $0 $100,000 $100,000 Total cash disbursement $603,420 $692,400 $728,580 $2,024,400 Excess (deficiency) of cash $101,580 $90,580 $49,200 $49,200 In this case, all of the dividends are paid at the end of the quarter, which in June As can be seen, all of the balances of month are higher than $30,000 In April and May, it is about times more than the minimum requirements Case 2: Split the dividends Cash budget April May June Quarter Beginning cash balance $47,000 $41,580 $30,580 $47,000 Add: Cash collections $658,000 $681,400 $687,200 $2,026,600 Total cash available $705,000 $722,980 $717,780 $2,073,600 Less cash disbursement Purchase of inventory $462,420 $477,400 $482,580 $1,422,400 Operating expense $141,000 $145,000 $146,000 $432,000 Purchase of land $0 $70,000 $0 $70,000 Cash dividends $60,000 $0 $40,000 $40,000 Total cash disbursement $663,420 $692,400 $668,580 $1,964,400 Excess (deficiency) of cash $41,580 $30,580 $49,200 $49,200 By using this method, the end of goal balancing can be achieved The balance of cash ending seems more stable However, this cannot ensure a high balance to the company By doing it this way, it can achieve the minimum requirements as well as ensure greater balance in cash at hand to deal with problems Task 3: 3a.Direct material, direct labor, variable manufacturing overhead 3a.1.Direct material Actual Quantity = 12,200 – 3,250 = 8,950 Actual Price = 229,360 : 12,200 = 18.8 Standard Price = 19.5 Standard Quantity = 2.4 x 3,700 = 8,880 Actual Quantity x Actual Price Actual Quantity x Standard Price 8,950 Standard Quantity x Standard Price 8,950 8,880 x x x 18.8 19.5 19.5 168,260 174,525 173,160 6,265 F 1,365 U 4,900 F We have: Price variance = (Actual Quantity x Actual Price) – (Actual Quantity x Standard Price) = 168,260 – 174,525 = - 6,265 Actual Price less than Standard Price, so price variance is favorable Therefore, Price variance = 6,265 F Maybe because two reasons: - The company has found a source of cheap raw material The company has signed long-term contracts should be reduce raw material prices So that, the company reduce costs Quantity variance = (Actual Quantity x Standard Price) – (Standard Quantity x Standard Price) = 174,525 – 173,160 = 1,365 Actual Quantity more than Standard Quantiy, so quantity variance is unfavorable Therefore, Quantity variance = 1,365 U Maybe because some reasons: - The company maintaining machines less, leading to wear and tear of materials Managers control labor less The company purchased raw material are cheap but quality is not good, so have to use more raw materials to produce Direct material variance = Price variance – Quantity variance = 6,265 (F) – 1,365 (U) = 4,900 (F) As you can see, direct material variance is favorable So that, the company should sign a contract 3a.2.Direct labor Actual Hours = 36 x 175 = 6,300 Standard Hours = 3,700 x 1.5 = 5,550 Actual Rate = 12.20 Standard Rate = 12.8 Actual Hours x Actual Rate Actual Hours x Standard Rate 6,300 6,300 x Standard Hours x Standard Rate 5,550 x x 12.20 12.8 12.8 76,860 80,640 71,040 3,780 F 9,600 U 5,820 U We have: Rate variance = (Actual Hours x Actual Rate) – (Actual Hours x Standrad Rate) = 76,860 – 80,640 = - 3,780 Actual Rate less than Standard Rate, so rate variance is favorable Therefore, Rate variance = 3,780 F Maybe because: - The company have modern machinery and equipment so reduce the number of workers So, the company must pay salaries for the number of workers is less Efficiency variance = (Actual Hours x Standard Rate) – (Standard Hours x Standard Rate) = 80,640 – 71,040 = 9,600 Actual Hours more than Standard Hours, so efficiency variance is unfavorable Therefore, Efficiency variance = 9,600 U Maybe because: - The company buy cheap raw material, so the quality is not good Low-skilled workers, so take many time to complete work Labor variance = Rate variance – Efficiency variance = 3,780 (F) – 9,600 (U) = 5,820 (U) As you can see, labor variance is unfavorable So that, the new labor mix should not be continued 3a.3.Variable manufacturing overhead Variable manufacturing OVH spending variance = Actual Hours x (Actual Rate – Standard Rate) = 6,300 hours x (12.20 per hour – 12.8 per hour) = 6,300 hours x 0.6 per hour = 3,780 favorable Variable manufacturing OVH efficiency variance = Standard Rate x (Actual Hours – Standard Hours) = $12.8 per hour x (6,300 hours – 5,550 hours) = $12.8 per hour x 750 hours = 9,600 unfavorable 3b.Flexible budget Antigua Blood Bank Cost Control Report For the Month Ended September 30 Flexible budget: Cost Total Flexible Formular Fixed 240 Per unit Cost Units Budget 320 Units Level of activities 320 240 Variable costs: Medical supplies 4,480 3,360 Lab tests 3,680 2,760 Refreshments for donors 1,984 1,488 Administrative supplies 480 640 Total variable cost 10,784 Fixed costs: Staff salaries 8,000 8,088 8,000 8,000 1,000 1,000 Rent 500 500 Utilities 225 225 Equipment depreciation 1,000 500 225 Total fixed cost 9,725 9,725 Total overhead costs 20,509 17,813 We have: Flexible budget (320 units): Variable costs: Medical supplies = (3,360 : 240) x 320 = 4,480 Lab tests = (2,760 : 240) x 320 = 3,680 Refreshments for donors = (1,488 : 240) x 320 = 1,984 Administrative supplies = (480 : 240) x 320 = 640 Total variable cost = Medical supplies + Lab tests + Refreshments for donors + Administrative supplies = 4,480 + 3,680 + 1,984 + 640 = 10,784 Total fixed costs not change in the relevant, so, we always have: Staff salaries = 8,000 Equipment depreciation = 1,000 Rent = 500 Utilities = 225 Total fixed cost = Staff salaries + Equipment depreciation + Rent + Utilities = 8,000 + 1,000 + 500 + 225 = 9,725 Total overhead costs = Total variable cost + Total fixed cost = 10,784 + 9,725 = 20,509 Flexible budget performance: Cost Total Flexible Actual Formular Fixed Budget Budget Per unit Cost Variance Level of activities 320 320 Medical supplies 170 U 4,480 4,650 Lab tests 880 F 3,680 2,800 Variable costs: Refreshments for donors 204 U 1,984 2,188 Administrative supplies 20 F 640 620 Total variable cost 526 F 10,784 10,258 8,000 8,000 1,000 1,400 500 500 225 250 Total fixed cost 425 U 9,725 10,150 Total overhead costs 101 F 20,509 Fixed costs: Staff salaries Equipment depreciation 400 U Rent Utilities 25 U 20, 408 We have, variance = | Flexible budget – Actual budget | U = Unfavorable variance when Flexible costs are less than Actual costs F = Favorable variance when Actual costs are less than Flexible costs As you can see, the variance of staff salaries and rent is As such, the actual staff salaries and rent in accordance with standards So, the company should not be investigated about two this costs The variance of administrative supplies is 20 and the variance of utilities is 25 This is a small change, in other words, the variance of the two types of costs are unlikely to be significant If this difference only occured during a single period, then it can be accepted by a certain objective reasons But if this change occurs continuously, the company should be more attention Other costs are a significant variance between actual and standard, such as: medical supplies, lab tests, refreshments for donors and equipment depreciation Therefore, the company should investigate the cause of this discrepancy If the discrepancy is good, the company should check again for correct and careful consideration in order to promote the next stage If the discrepancy is not good, the company should find out the causes and from there find their solutions Conclusion The report gives readers a view on budgetary planning and control Budgeting allows a company to have a certain degree of control over costs, such as not allowing many types of expenses to take place if they were not budgeted for, or assigning responsibility for these expenses A budget also gives a company a benchmark by which to evaluate business units, departments, and even individual managers Understanding the purpose and nature of budgeting process is necessary for a company to execute any business operations Additionally, in the report, preparation of forecasts and budgets for business is presented With clear calculation, analysis and conclusion, readers can easily understand each type of budget in different circumstances In the following part of the report, monitor performance against budgets within the business Variances are calculated and explained clearly with recommendation thereafter Therefore, managers can have right direction to apply 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