Management Accounting Assessment - Essay Example

Student’s Name Course Name Professor’s Name Date Management Accounting Project Role of Accounting Accounting is a discipline that is deemed useful in the process of acquiring most of the fundamental business knowledge. Accounting information helps in availing necessary functions to both profit and non-profit organizations across the globe. It is important to comprehend that accounting system for any given profit-making business is always customized to avail necessary and relevant financial information on the immediate resource capabilities of the entity and the resultant effects of their use. Accounting information is deemed useful and relevant in the event that it can be utilized by decision makers to analyze financial consequences of numerous options for executing tasks. It is important to note that accounting is not in the business of generating basic information rather it creates raw financial information outcomes generated from day-to-day operational transactions of a given entity. The accounting process involves the recording, summarizing and disclosing a given level of transactions by entities in order to avail a significant and most accurate picture of their performances and liquidity positions. Basically, it constitutes the process of identifying, measuring and thereafter communicating financial information about economic firms to all of the interested stakeholders. The role of financial accounting rests with the preparation of financial information for any given firm and thereby prepares relevant reports on the entity in order to be used specifically for both internal and external users (Hemmer and Labro 1218-1235). On the other hand, the fundamental role of management accounting is focused on availing financial information to relevant management team of an entity to aid with the processes of planning, evaluation and control of operations (Hemmer and Labro 1237). Users of accounting information vary from being either internal or external in nature. External users are the people that are placed outside the operations of a business for whom accounting functionalities are subjected to. They include; first, investors who are people interested in making investments with a given entity. They use accounting information in order to ascertain the true financial stability of the organization and the immediate safety of their investments (Sîrbulescu 2-5). Accounting information is needed to evaluate both the past and future prospective performances of an entity. Thus, financial information is thereby analyzed in order to determine the current profitability and liquidity levels of an organization before investments are materialized. Second, creditors are also deemed primary external users of accounting information. These are the real supplier of commodities to a given entity on credit terms and they might even include banking institutions and other financial lenders of money. They are majorly interested in ascertaining the financial stability of an entity before they can actively engage in the provision of credit terms or even availing loans. Their primary focus rests with establishing whether or not the entity will be able to make timely payments in case credit transactions are affected. Some of the notable accounting information these users rely on is attributed to an entity’s current assets, liabilities and quick assets that are readily availed within the financial statements (Sîrbulescu 2-5). Third, there is there government, which is also interested in relevant accounting information given that they need to establish the earnings or sales revenues for a given period for purposes of affecting taxation. For instance, income tax returns are form of taxation reports that are retrieved from financial reports of an entity within a certain specified period. Governments also embark on retrieving accounting information for purposes of compiling statistical data concerning certain business categories, which in turn assists with the compilation of the national accounts. Fourth, external users involve the immediate customers to an entity. These users need relevant and reliable accounting information in order to determine an entity’s accounting control mechanisms in order to possibly reduce production costs that translate to reduced prices for commodities they are willing and able to purchase (Sîrbulescu 2-5). In some cases commodity prices are determined and foxed by certain government agencies and thus, accounting information will be needed for purposes of ensuring that prices are positioned at a reasonable limit to cushion both customers and manufacturers from possible elements of exploitation (Sîrbulescu 2-5). Subsequently, other external users of accounting information are research scholars that perceives accounting information as being the fundamental mirror of a given business entity hence a direct resource material for them in studying financial operations of the firm at hand. For effective studies into financial operations of particular entities, research scholars utilize accounting information that is related to such aspects of purchases, sales and expenses maintained at the entity (Sîrbulescu 2-5). Another fundamental user of accounting information is the internal users, who might constitute; first, owners of the business that avail capital finds for operations. They need accounting information to ascertain whether or not these funds are put into proper use. They are also interested in the profitability and liquidity position of a firm in managing their investment funds (Sîrbulescu 2-5). Second, the management of a firm is also perceived as being core internal users. They need accounting information in matters related to the appraisal of performances of the junior employees. They also need the information to evaluate both actual and budgeted performances before they can assume a remedial action. Third, employees of a firm will also use the accounting information to determine whether or not it is able to pay them accrued bonuses depending on the size of profits they earn (Sîrbulescu 2-5). Balance Sheet and Comprehensive Income Statements Balance sheet statements for any given entity is able to provide insights on whether or not it can be pay its commitments on time, its immediate financial flexibility needed for acquisition of capital funds and also, its capacity to distribute cash resource as dividends paid out to shareholders. Balance sheets provide information related to the assets, liabilities and stakeholders equity of a given entity within a certain accounting period. Assets (both current and non-current) are items that will avail likely future economic benefits to a firm. Liabilities are commitments of an entity that will have to be settled with assets. Stakeholder’s equity is the balance that is gotten from lessening liabilities to the level of assets present within the given accounting period. The comprehensive income statement discloses both earnings and profitability levels of a given entity within a certain period. These statements allow users of accounting to engage in effective comparison of results for a specific period to results of other firms within the same industry. Some of the notable sections within the statement include; income from continuing operations that reflects sales, costs of goods sold and expenses. The outcome from this section is able to predict future probable earnings. It also constitutes net income, which serves to disclose the actual level of income the entity was able to affect within the period after paying for such commitments as operating expenses, finance costs and taxes. Cash and Accrual Basis of Accounting Under the cash basis, it is ascertained that only cash receipts and payments are recorded. This means that credit based transactions are never recorded until there is the involvement of cash either being received or paid. Notably, the basis does not affect complete record of transactions for a given trading period given that it fails to record such outstanding items like outstanding income and expenses (Vanzante 34-37). In the case of the AED 24,000 rent being paid in advance by Company A, the transaction will appear as cash received within the current accounting period only that ends in December and not for the entire 12 months that is being paid for. Under the accrual basis accounting, all of the transactions regarding a given accounting period are recorded within the books of accounts in piece-meal (Vanzante 34-37). Therefore, for the case of the AED 24,000, the money for the period between September and December will only be accounted for the December year end reports while the balance will be reflected in the following period that starts on January of 2015. Question 4 For this case, the CEO is referring to liabilities that are appearing on the financial position of Brave Brands Marketing Company. A liability is a commitment associated to an entity that arises from past transactions and whose settlement would involve a great deal of outflow from the entity’s resources that are usually in terms of assets. Some of the most common liability items that can be found within the financial position of any given entity include; long and short-term loans, trade payables, deferred revenues and also, finance lease liabilities. Question 5 Factory Overhead Items Costs ($) 1) Advertising expense 2) Amortization expense 3) Bad debt expense 4) Depreciation expense-office equipment 5) Depreciation expense-factory building 6) Depreciation expense- factory equipment 7) Factory supervision 8) Factory utilities 9) Indirect labor 10) Interest expense 11) Property taxes on factory equipment 12) Repairs expense-factory equipment 85,000 16,000 28,000 37,000 133,000 78,000 74,000 115,000 26,000 25,000 14,000 31,000 For 2010: Costs Related to Production Activity; Item $ i) Finished goods inventory Dec 31,2010 ii) Goods in process inventory, Dec 31, 2010 iii) Raw materials inventory, Dec 31, 2010 iv) Factory insurance expired v) Factor supplies used 15,000 8,000 60,000 62,000 21,000 For 2011: Costs Related to Production Activity: Item $ i) Finished goods inventory 31, Dec 2011 ii) Goods in process inventory, Dec 31,2011 iii) Raw materials inventory, Dec 31,2011 iv) Raw materials purchases v) Salaries expense vi) Miscellaneous expense 12,500 9,000 78,000 313,000 150,000 55,000 Part 2: Question 1 Total(R) Assembly ( R) Joinery (R ) Canteen (R ) Indirect labor 90,000 (80/150*90,000) 48,000 (60/150*90,000) 36,000 (10/150*90,000) 6000 Indirect material 81,000 (100/150*81,000) 54,000 (50/150*81,000) 27,000 Heating and Lighting 25,000 (20,000/50,000*25,000) 10,000 (24,000/50,000*25,000) 12,000 (6000/50,000*25,000) 3,000 Rent and Rates 30,000 (20,000/50,000*30,000) 12,000 (24,000/50,000*30,000) 14,400 (6,000/50,000*30,000) 3,600 Depreciation 56,000 (300,000/560,000*56,000) 30,000 (240,000/560,000*56,000) 24,000 (20,000/560,000*56,000) 2,000 Supervision 45,000 (80,000/150,000*45,000) 24,000 (60,000/150,000*45,000) 18,000 (10,000/150,000*45,000) 3,000 Power 36,000 (9,000/18,000*36,000) 18,000 (8,000/18,000*36,000) 16,000 (1,000/18,000*36,000) 2,000 Total 363,000 196,000 147,400 19,600 Question 2 For Assembly Department; Overhead cost rate= total overhead costs/ Direct Labor costs (Horngren and Sorter 84). = 196,000/50,000, = 3.92 For Joinery Department; Overhead cost rate= total overhead costs/ Direct Labor costs = 147,400/42,000 = 3.51 Question 3 Direct costs = (50,000*3) + (4*42,000) = R 318,000 Total over costs for the two departments = 147,400+196,000= R 343,400 Overhead cost rate= total overhead costs/ Direct Labor costs Therefore, = 343,400/318,000 = 1.08 Case 2 Price per Unit= Sales Revenue/Sales unit = 201,600/224,000 = R 0.9 Variable Cost per Unit = 120,960/224,000 = R 0.54 BEP in Sales Units = 72,000/ (0.9-0.54) = 72,000/0.36 = 200,000 ii) Margin of Safety in Units= Sales level-BEP in Units/ Selling Price/unit = 224,000-200,000/0.9 = 26,667 units iii) Profits = Sales Volume- Total Expenses (Fixed and Variable Costs) 10,000= Sales Volume- (120,960+72,000) Sales Volume = 120,960+72,000+10,000, R 202,960 Case 3 Section 1) Contribution Margin/ unit= Revenues/ unit – Variable Expenses/unit = (750,000/600,000)-(442,500/600,000) = 1.25-0.74 = 0.51 BEP in Sales Revenue= Fixed Cost/ CM = 262,500/0.51 514,706 Section 2 An increase in the selling price of a product lowers both the break-even point and the margin of safety values (Solomon and Muntean 60-62). A decrease in the variable costs per unit lowers the break-even point tremendously while it raises the margin of safety in a significant proportion (Solomon and Muntean 60). An increase in fixed cost raises the break-even point and lowers the margin of safety for a given entity (Solomon and Muntean 59-66). Works Cited Hemmer, Thomas, and Eva Labro. On the optimal relation between the properties of managerial and financial reporting systems." Journal of Accounting Research 46.5 (2008): 1209-1240. Horngren, Charles T., and George H. Sorter. Direct costing for external reporting. Accounting Review 36.1 (1961): 84 Solomon, Daniela Cristina, and Mircea Muntean. "Assessment of financial risk in firm's profitability analysis." Economy Transdisciplinarity Cognition 15.2 (2012): 58-67 Sîrbulescu, Claudia, et al. Accounting Information users in the financial statements. Agricultural Management / Lucrari Stiintifice Seria I, Management Agricol 12.3 (2010): 1-6. Vanzante, Neal. Using the basic accounting equation to help students understand differences between the cash basis and accrual basis, Management Accounting Quarterly 14.2 (2013): 34-39. Read More