Management Accounting and how it can be defined - Essay Example

Management Accounting 4 Management Accounting can be defined as the process of providing the information required by the Management for planning, organizing and controlling, it is concern with the information for the Management Purpose; it is the internal information for the organization itself and very rarely made public, it is not like financial accounting Information. As we go deep into Management accounting, it try's to concentrate on the accumulation of the product and service cost, statements relating to material, labour & Overheads, budgeting and for decision making. In other words a more complex definition of Management Accounting expands the simple one and states that the process of providing the information required by management for planning, Organizing and controlling for goals such as: Recording, Analyzing and reporting on the actual cost and inputs of products, services and processes in which we are very much concerned and which is also our first question Working with starting cost, function, standard of performance, revenue and quantity budgets, which is related to our second and third questions, Evaluating Alternative Opportunities, this is last and fourth question. Starting with our first question and second question simultaneously, we will find out the Total Fixed Cost, Contribution Margin, variable cost and Brake Even Point Andre is running a hair cutting saloon in which 5 Barbers work for him 40 hours/week, 50 weeks/year and being paid $9.90 per hour regardless of the number of the haircuts and every one who has a hair cut gets his hair washed so the charger for the shampoo or hair wash is assumed to be already included in it which will come under fixed cost by which his Fixed Cost per year will be $99,000 and $1,750 is the rent and other fixed expenses per month which again comes under Fixed cost by which his Total Fixed Cost per year will increase by $21,000 and the Total Fixed Cost will be $120,000/year and $10,000/month (this calculation is done on yearlymonthly basis). If we calculate on Monthlyyearly basis assuming that barbers work 4 weeks/month and 48 weeks/year including 2weeks which will be 50weeks yearly we get a fixed cost of $9,670/month and $116,040/year which is less than Yearlymonthly basis (this calculation is done generally). As we now have our T.F.C i.e. $120,000 we have to calculate Break Even Point i.e. how many haircuts should be done so that we get $120,000 and i.e. 10,000haircuts/year should be done so that we don't get a loss and that is our B.E.P in units. Here there is no Variable cost i.e. no such sort of charges which will increase or decrease the total cost. Moving to our 3rd question i.e. if 20,000 haircuts are performed what will be the Operating income (profit), as we have calculated before our T.F.C i.e. $120,000 which will not change if we do either 1or 10,000 Haircuts/year. Assuming that the cost for one hair cut $12 and if we do 20,000 haircuts our income will be $240,000 and now subtracting the total expenses or T.F.C i.e. $120,000 we get an Operating income i.e. a profit of $120,000. As we have assumed $12/haircut we have included the taxes, Wages, rent, all the fixed expenses, the cost of shampoo and other required material in it. After all this we get a good profit of $120,000 if the saloon works as mentioned i.e. 50weeks/year and the barbers work for 40hours/week. Now for supporting this statement one barber works 2000hours/year as per the calculation and has to do a Minimum of 2haircuts/hour, 80haircuts/week if he works 8hours/day, 5days/week which is again 40hours/week and in 50weeks he can do 4000haircut, if similar calculation is done for the other 4 Barbers our task for 20,000 haircuts will be achieved. In our 4th and last question Andre decides to pay in a revised or in a different way i.e. by decreasing the Wages/hour and giving money/haircut. Andre decides to pay $4/hour i.e. fixed cost and $6/haircut which is Variable cost, which changes the problem completely and makes it a bit complicated in calculating B.E.P also. Before proceeding further we will assume the earlier conditions which are, they are 5barbers, who work for 40hours/week, 50weeks/year and the rent & other fixed expenses i.e. $1,750 which again comes under Fixed Cost. In the previous problem we have calculated only the fixed cost by default but here we have to calculate Fixed Cost, Variable cost as well. The fixed cost as per the calculation is $40,000 i.e. Wages of the barbers/year and another fixed cost is $21,000/year i.e. rent and other fixed expenses and the T.F.C pre year is $61,000. Here in this problem as the money/haircut is given, the B.E.P changes as per the number of hair cuts and as our Fixed cost is $61,000 and to overcome this an average of 5,084 haircuts/year should be performed if we consider the cost pre haircut is $12 and if we consider the wages that has to be paid to the barbers i.e. again $30,504 as per 5,084 haircuts which is a big loss. Now considering 10,000haircuts/year and $12.1/haircut, our new output will be $121,000 subtracting fixed cost ($61,000) we get $60,000 and again subtracting the Variable cost (acc to 10,000 haircuts variable cost will be $60,000 as $6 is fixed per haircut) we get an exact B.E.P. so the average unit cost per haircut is $12.1 to get the B.E.P. Now moving to next part of the assignment that is more concerned with the decision making of the Managers who run the complete organization with his skills and a manager must be much capable of taking Decisions that take his organization at the top or at least run his organization smoothly or not in loss, this Subject or question completely comes under the theories of Management science which deals commonly with organizing, planning and controlling, all the minor subjects come under these 3 subjects. Now we move on to our question i.e. Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions. Here we will discuss about the legal issues with the help of which a Manager can decide a price with which his organization can get maximum profit. A manager can increase the cost by including the taxes on it with in the limit and this is very much helpful to everyone and this type of reason can be explained to the customer very easily. Same thing can be implemented to a shop also as a shopkeeper has to pay property Taxes, Electricity bill, Water bill, Shop tax, Maintenance charges, etc these can be included to the cost of Whatever he/she is selling is whatever service he/she is providing and these things customers understand very fast as they too work some where or they too run an organization and can understand a shopkeepers or any organization problems and accepts a good service from the one they are paying. Now to our last and very much important question (I want to make one thing clear that I cannot answer this question as you are accepting and please erase this statement after you read it please I request you) our question is "It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we don't even know what products might come out of our R&D activities." As it is mentioned that this statement given by a R&D manager (research and development Manager) whose work is to calculate research and try to develop his orgz by his skills, calc and research. He/she uses different methods for his /her work, and was asked to justify investment in a major research project based on its present expected value. We will start with DCF (discounted cash flow) this is a technique use to estimate the attractiveness of an investment opportunity, in simpler words it is the tech used for future investments analyzing free cash flow projection and allow them to arrive at present value. It is a very good one. Now coming to our statement, in my view this statement can be disapproved if one does a very good calculation. The formula for DFC is given below: Conclusion: According to me the conclusion for the 1st part of this assignment can be, Andre can use the earlier process of running saloon by increasing the cost of haircut and charge extra for hair wash or include it in the hair cutting cost if his salon is running nicely and can adopt the 2nd method i.e. decreasing the wages and paying as pre one hair cut. Read More