Saturday, May 2, 2020

Management Accounting Establishing plans - Setting targets and Evaluat

Question: Describe about the Management Accounting for establishing plans, setting targets and evaluation? Answer: Introduction Management accounting is vital for smooth operation of the company and it has a major role to play when it comes to the internal point of view. Once management accounting is properly framed, it leads to better cost accounting and budgeting. In this assignment, JB Hifi is selected that deals in electrical and household appliances. It is a retailer of consumer electronics. The main aim of this study is to enhance the operating efficiency by control of cost and the report presented to the Board. It is through management accounting that the operations of the company is managed in an effective way. Importance of Management Accounting Management Accounting is an important function in tracing the cost that accrues internally and helps in moving the organization in the correct direction. In this case, we are considering JB Hifi, a retail division engaged in consumer services. It is engaged in electrical and household appliances. In short, the process can helps in identification of the measurement, interpretation and communication enabling in achievement of the goal. Moreover, it is that branch of accounting that helps in ascertainment of the process of planning, control, and decision making by providing proper information that is important for the internal management (Albrecht et. al, 2011). It helps in proper transmission of information to managers that help in execution of the plan properly. Hence, not compulsory but it a strong tool that enables the management of JB Hifi to strive for the objectives of the company. Management accounting vs. financial accounting Management accounting provides support to the management internally and this support applies mainly to the people those who are within the organization like manager, an employee who guides the organization. On the contrary, financial accounting is mainly concerned with providing information to the external parties like shareholder, creditors, etc (Albrecht et. al, 2011). Secondly, management accounting uses the concept of budget that pertains to weekly and monthly budget. It is used to trace what needs to be sold and the price that needs to be charged so that covering of all expenses can be covered without surpassing the budget. However, management accounting is optional in nature and hence, not needed legally (Needles, 2011). On the other hand, financial accounting is mainly concerned with decision-making process that helps in focusing on reports that cater to a quarter or yearly basis (Drury, 2011). Financial accounting reports are needed to be prepared compulsorily as the reports are needed to be prepared. Classification of cost Cost is called the value of money that is expended to produce something or to buy something. Classification of costs means grouping the items of cost depending upon their nature and specific purposes to render the cost information helpful and useful. On the basis of types Direct Cost- These are those types of costs that can be perfectly traced to any cost object like a product, a department etc and that too with little effort. It refers to the material, labour and expense related to production of various goods and services. For example JB Hifi is engaged in household appliances, then the raw material cost and engineers are direct costs as they are traceable clearly (Needles, 2011). Indirect Cost- These costs cannot be attributed or traced to any product or department directly. They may be fixed or variable but generally, they do not vary substantially and so are considered to be fixed. For example JB Hifi office expenses, accounting and legal expenses, advertising etc. Moreover, such are integral part of the business. On the basis of behavior Fixed Costs- These costs are those which will incur even if the production process is not carried out i.e. none units are produced like rent expense of a factory, insurance premium etc. fixed cost is regular and do not vary with the level of production. It is fixed and hence, not prone to fluctuations. Variable Cost- Costs, which vary with the production outputs, are termed as variable. When the production of a company rises, these costs also tend to rise and vice-versa. Variable cost have a tendency to fluctuate with the level of production. It is not fixed and depends upon the production. For example, commission to salespeople, which is paid only when they sell the products, is clearly variable in nature (Needles, 2011). Mixed Cost- A cost that has both the attributes of a fixed as well as variable cost is referred as Mixed Cost. It is an essential part of any organization. An example of a mixed cost is courier service in which fixed cost like depreciation incurs on the vehicle used and variable cost like fuel expense incurs (William, 2010). On the basis of function Production Cost- Any cost relating to the production of various goods and services whether its direct or indirect are called production costs. This cost is in tune to the development of a product. Examples in JB Hifi are supervisors salary, charges relating to a particular product etc. Administration Cost- Costs of the general management of the business are the administration costs and they are indirect in nature. This cost is for the management and helps in proper functioning. JB Hifi incurs cost like staff salary, rent, taxes etc Selling Cost- Any cost incurred for selling goods and services is called selling cost. JB Hifi incurs expenses of product market research, selling staffs salary etc. Distribution Cost- Any cost incurred from the production point to the customer are termed as distribution cost. This cost is mainly involved with the customer because the benefit is passed through it. Cost of transportation, warehouse charges etc are some of the noteworthy example in JB Hifi (William, 2010). Research and Development Costs- These costs are those that are incurred for development of innovative products. Example: patent cost etc. On the basis of relevance Relevant Cost- Cost that is management specific and is very helpful in removing unwanted information from a decision making process is relevant cost. This cost is important for the organization as it leads to better practice and helps the company to steer forward. Example: Cost incurred by management to accept a special order or to sell or keep a unit etc. Irrelevant Cost- Cost that will not change because of managements decision and can be either positive or negative is irrelevant cost. Such costs have to be incurred as it lays the foundation of the product development. For example in JB Hifi have fixed overheads, sunk costs etc. Variance analysis Variance analysis is used so that control can be maintained over a business. It is a quantitative investigation and identification of cause of any differences that arise between actual and planned behavior. A control mechanism helps in knowing the reason for difference between the current and the pre-determined behaviour. For example in JB Hifi variance analysis will yield a difference of Rs 1000 if a planned sales budget of a firm is Rs 10000 and actual sales is Rs 9000. Some of the most commonly derived variances in variance analysis are: Selling price variance- The difference between the actual selling price and standard selling price, multiplied by number of units sold. Favorable variance shows actual price to be lower than the budgeted price and vice-versa. Purchase price variance- The difference between actual prices paid for the materials in production process and standard cost, multiplied by number of units consumed or used. A positive purchase price variance shows that the actual costs have increased and vice-versa. Labor efficiency variance- The difference between standard quantity of labor consumed and actual amount of labor, remainder multiplied by the standard rate of labor per hour. A favorable labor efficiency variance depicts cost of labor to be less expensive than it was planned while unfavourable shows just the opposite (Horngren, 2013). Material yield variance- The difference between total standard material quantity to be used and actual level of use, remainder multiplied by the standard price of materials per unit. Unfavorable variances depict the units usage greater than expected and vice-versa (Horngren, 2013). Some other commonly derived variances are fixed overhead spending variance, variable overhead spending variance etc. Problems and limitations Variances are useful in the process of production still there are areas that are weak and have problems. Problems and limitations associated with variance analysis are firstly that variances are compiled at the end of the month but in todays world, immediate feedback is required faster than once a month. There is no consideration for the day-to-day activities. Hence, period projects a deficiency. Secondly, the source information problem of variance, many causes for variances cannot be located in accounting records and due to this, the staff has to go through other non-essential records like labor routings etc to find the cause. Thirdly, variance analysis is mainly comprised of overhead expenses instead of production expenses like direct labor cost and as a result, it becomes difficult to apply it to service sector organizations. Therefore, service organizations are not properly supported by variance analysis that remains one of the loopholes of the analysis. Lastly, variance analysis becomes meaningful only when it is derived from a valid standard but it may happen that the standard was not set perfectly or it was set perfectly but the changed conditions made it obsolete. At times, the standard may not live up to the expectation and hence, may create a major dent in the process. Thus to sum up, variance analysis is a correct tool if used properly but it also cannot tell the causes of something alone and instead it only draws attention to those areas which need further investigation. Hence, it must be utilized along with various other tools so that a proper decision can be framed and helps in getting a proper estimation (Robinson last, 2009). Operational Budget An operational budget is a budget that helps in planning operations on a day-to-day basis so that the financial problems do not exist. It combines expenses, future cost that is expected, income that is forecasted over a particular time. It is done prior to the accounting period that is why it is need expenses that are expected and revenues. Hence, it can be said that the operational budget pertains to various areas and is strongly needed in the process of control and management of JB Hifi (Needles Powers, 2013). Service Industry has a major dependency on it. There are various operational budgets pertaining in JB Hifi that pertains to sales, manufacturing, selling expenses and expenses relating to administration. Sales budget is the initial stage of a strong budget that is framed for a business. It is vital to confirm to a sales budget as other budget depends on it. Secondly, the production budget provides the number of units that can be produced. Annual production budget needs three things that is the number of units to be sold, inventory requirement and the units (Lanen et. al, 2008). Thirdly, the direct material budget helps to ascertain the units of raw materials required for the purchase. When the units purchase if ascertained, multiplication is done with the cost per unit to known the budgeted amount. Fourthly, the direct labor budget is prepared that highlights the labor hour (direct) and the labor cost that is used to ascertain the entire cost of direct labor. Fifthly, the manufacturing overhead budget is prepared to identify the variable that is expected and the overhead that is fixed. Sixthly, the selling expenses budget contains the variable, as well as fixed selling expenses (Lanen et. al, 2008). Lastly, the general and administrative expenses budget is determined that leads to detailing of the variable, as well as expenses of operational nature that is linked to the general and the area of administration. Advantages of preparing Operational Budget in JB Hifi The main advantage of different operational budget is that it helps in maintenance of the functioning of a business and more importantly when it comes to service industry. Firstly, it helps in managing the expenses that pertains to the current period. Tracking of the operational expenses helps in finding areas that helps in savings and provide benefit to the budget (Shim Siegel, 2009). It helps in easing the financial problem (Horngren, 2011). The budget helps in business function and helps to align the process of the business. Secondly, it helps in forecasting the expenses that pertains to the future. Evaluation of the performance of the past operational expenses helps in preparation of new operational budget that helps in proper alignment of the business needs. Thirdly, the operational budget is liberating in nature. It can help to limit the debt, as the main goal is establishment of the financial reserves. Saving, investing and even planning for scenario that are adverse are the main traits of an operational budget. Temporary failure can be easily cushioned with the help of budget and it brings accountability into action. Spending beyond a particular limit is restricted if the operational budget is considered with a strong set of action. Conclusion Management accounting is helpful in providing information to management that helps in establishing plans, setting targets and evaluation of the target. It differs from the objective of financial accounting that is concerned with providing financial result and financial position of the business at a specified date (Drury, 2011). Hence, from the above study it can be stated that management accounting plays an important role in stabilizing the internal operation of the company. The costing function, as well as budget is influenced by it. Therefore, managers must ensure that this area is properly maintained. References Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. Drury, C 2011,Cost and management accounting, Andover, Hampshire, UK: South-Western Cengage Learning. Horngren, C 2011, Cost accounting, Frenchs Forest, N.S.W.: Pearson Australia. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W.: Pearson Australia Group. Lanen, W. N., Anderson, S Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press. Needles, B. E. Powers, Marian 2013, Principles of Financial Accounting. Financial Needles, S. C 2011, Managerial Accounting, Nason , USA: South Western Cengage Learning . Vanderbeck, E. J 2013, Principles of Cost Accounting, Oxford university press Robinson, M., Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press Shim, J.K Siegel, J.G 2009, Modern Cost Management and Analysis, Barron's Education Series William, L 2010, Practical Financial Management, South-Western College.

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