Disadvantaged Business Enterprise - Essay Example

DBE 1001 Accounting and Finance Assignment DBE, which is the abbreviation of “disadvantaged business enterprise”, is a wide to cover and there are many things we need to consider but in this piece of writing I am going to Compare and contrast absorption costing with marginal costing and DBE. First off, we need too briefly look at the most imperative parts of accounting and finance. So I am starting off with the basic of accounting; Basic Accounting Terminologies: Scientific works in the theories of finances and accounts in the concordance with the specification of the research object are determined to be multilateral and many-levelled. The definition of the economical relations coordinated in the process of formation, distribution and usage of finances, as capital sources is widely spread. For instance; in “the general theory of finances” there are two definitions of finance and accounts: 1. Finances of the socialistic state represent economical (cash) relations, with the help of which, in the way of planned distribution of the incomes and savings the funds of money sources of the state and socialistic manufactures are formed for guaranteeing the growth of the production, rising the material and cultural level of the people and for satisfying other general society requests”. 2. “Finances characterise the formation of centralized ad decentralized money sources, economical relations relatively with the distribution and usage, which serve for fulfilment of the state functions and obligations and also provision of the conditions of the widened further production”. This definition is brought without showing the environment of its action. We share partly such explanation of finances and think expedient to make some specification. The system of creation and usage of necessary funds of cash resources for guarantying socialistic widened further production represent exactly the finances of the socialistic society. And the totality of economical relations arisen between state, manufactures and organisations, branches, regions and separate citizen according to the movement of cash funds make financial relations”. Just to more simplify the term “Accounts”, Accounts are simply established to provide a record of individual business transactions as they apply to a certain area or item. Your personal checking account is established in order to provide a record of individual personal financial transactions you create when you write a check. All of the accounts are listed in a general ledger. Today, the actual ledger book has long since been replaced by accounting software that creates a general ledger on the computer. The concept however has not been altered. The general ledger is the central location for maintaining all your accounts. Journal entries refer to the posting or entering of the financial transactions to a particular account. I could use the official definitions here, but the best way to understand accounts and finances is to learn it in easy terminologies, therefore I am going to use very simple definitions and examples which will be helpful for anyone to understand the subject in matter loud and clear. In first place, finance overcomes the limits of distribution and redistribution service of national profits, although it is the fundamental foundation of finance. Formation and utilisation of the reduction fund which is the part of financial domain does not belong to the distribution, redistribution of national profits but to the distribution of already arose value. This latest first comes out to be a part of value of chief industrial funds, afterward it is moved to the cost price of a geared up product (that is to the value too) and after its realisation and it is set the depression finance. Its foundation is granted before hand as a depression form in the consistence of the ready products cost value. Secondly, main objective of finances is much broader then “fulfillment of the state functions and responsibilities and preparation of conditions for the widened further output”. Finance exists on the state level and on the manufactures and subdivisions level too and in such considerations, when the most fraction of the manufactures are not state. V. M. Rodionova has a different position about this subject: “real formation of the financial resources begins on the stage of distribution, when the value is realized and concrete economical forms of the realized value are separated from the consistence of the profit”. V. M. Rodionova makes an accent of finances, as distributing relations, when D. S. Moliakov underlines industrial foundation of finances. although both of them give quite substantiate debate of finances, as a system of formation, distribution and usage of the funds of money sources, that comes out of the following definition of the finances: “financial cash relations, which forms in the process of distribution and redistribution of the partial value of the national wealth and total social product, is related with the subjects of the economy and formation and usage of the state cash incomes and savings in the widened further production, in the material stimulation of the workers for satisfaction of the society social and other requests”. Debits and Credits: Every single transaction made in the accounting course falls into one of the two categories: it is either debit or credit. A “debit” is a transaction of value “added” to an account. A “credit” is a transaction of value “removed” from an account. In simple words; in debit, value is added. In Credit, value is removed. For instance; in your checking account a deposit is a debit and a check is a credit. The way you make those transactions totally depends on the type of your account. Total absorption costing Total absorption costing (TAC) is a technique of Accounting cost which implicates the full cost of manufacturing or rendering a service. This doesn’t only include the costs of supplies and labor, but also of all manufacturing expenditures (whether they are ‘fixed’ or ‘variable’). One of the main causes for immersing overheads into the cost of units is for inventory estimation purposes. The principles of absorption costing The main principles of absorption costing are as following: (a) Fixed production costs are an essential part of the production cost of an item and so should be wrapped up into product costs. With absorption costing, fixed production costs are absorbed into product element costs using a prearranged overhead absorption rate, based on the normal level of production for the phase. (b) Inventories are valued at their complete production cost including absorbed fixed production costs. If the factual production is dissimilar from the normal level, or actual consumption on fixed production costs is dissimilar from that calculated and there may be an under or over absorption of determined production costs for the period. This amount is written down against the absorption costing earnings for the period. Example of Absorption costing By Using the examples, assume that the normal level of activity is 15,000 Splashes per month and that estimated fixed production costs were £30,000 for the month. Required Arrange profit statements for September, using absorption costing, for the three sales levels given. Resolution The fixed production cost per unit, based on the normal level of action, is £30,000/15,000 = £2 per unit. The entire production cost per unit = £6 + £2 = £8 with production of 20,000 Splashes the defined overhead will be over-absorbed. Costing In business, accounting and retail, a cost is a value of money that has been used to raise something, and thus is not obtainable for use anymore. In economics, a cost is a substitute that is given up as a consequence of a conclusion. In business, the cost perhaps is one of the acquisitions, in which case the amount of money spent to attain it is counted as cost. In this instance, money is the input that is departed in order to acquire the matter. This acquirement cost may be the summation of the cost of construction as incurred by the original creator, and supplementary costs of dealings as incurred by the acquirer over and above the price paid to the producer. Generally, the price also includes a mark-up for benefit over the cost of production. Costs are habitually further accounted based on their timing or their pertinency. Marginal cost In economics and finance, marginal cost is the conversion in total cost that arises when the quantity produced changes by one unit. For instance; it is the cost of producing one more unit of a good. Mathematically, the marginal cost (MC) function is carried as the derived function of the total cost (TC) with respect to quantity (Q). Note that the marginal cost may vary with volume, and so at each degree of production, the marginal cost is the cost of the next unit developed. The profit and loss account (P & L), called the income statement in the US, shows the profit or loss a company has made over a period of time. The ratios investors look at most often, such as the PE and yield, are calculated using numbers from the P & L. In a simple consequence the profit or loss equalises the increase or decrease in the companys properties as shown on the balance sheet. This is seldom true and the statement of total known gains and losses reconciles the P &L to the changes in equity demonstrated on the balance sheet The P & L can be disingenuous and there are a quantity of accounting techniques that can shift losses (or gains, though that is rarer) from the P & L to the balance sheet. The P & L had better be looked at in conjunction with the notes, the cash flow statement (which is harder to wangle) and the other accounting statements. The shortest possible P & L would be: sales less costs = total profit. In conformity with the accruement principle, costs and revenues are corresponded so that, for example, sales and purchases made on credit throughout a year, but possibly not yet paid for, will be included in the P & L for the year. The profit and loss account is planned to grant a reasonably summarising breakdown of costs, and to a lesser degree revenues. This heads to the general figure of a P & L that looks like this: Sales Also called revenues. Not always synonymous with turnover. Revenue recognition is not always simple. Cost of sales The direct costs of things sold Gross profit Sales minus cost of sales Other operating expenses Depreciation, admin, marketing etc. Operating profit Gross profit less other expenses Interest costs Interest payable less receivable Pre-tax profit Operating profit less interest Profit after tax Pre tax profit less tax Retained profit Profit after tax less dividends The most comprehensive profit and loss account is given in the annual report, but UK listed companies are expected to make annual and half year results proclamations as well. The full year consequences announcement is shorter and covers the same period as the annual report, but it is released earlier. Many businesses make periodical announcements, as companies in the United States and many other countries are required to. As you would have thought, United Kingdom listed companies that also have a secondary or duple listing in a country that requires periodical announcements. As it is apparent, the P & L contains several profit numbers. Each of these gives us divergent, and useful, information. In addition, the P & L usually gives us adequate information to calculate several other profit numbers such as EBITDA and EBITA Many businesses will show exceptionals individually. If there were any broke off business, or plans to cast aside of a business within a short period, these are also shown individually. These can give capitalists a more beneficial idea of the underlying business (the justification for doing it). For example, if the company has decided to sell a particular operation and the price has been agreed, shareowners don’t really need to be anxious too much about that operations performance. A faction balance sheet will need to be amalgamate, which takes extra lines such as those for share or profit in comrades and joint ventures, and the subtraction of minority interests. As well as the assessment proportions, the P & L provides the numbers for measures of the performance and efficiency of the business, such as margins, ROCE, and some measurements of financial stableness such as interest cover. The P & L is backward looking and investors will need to deem correcting some items such as paying off that are not useful for modelling future cash flows. From a capitalist’s standpoint the P & L is necessary, but can be misleading and should not be looked at in segregation. Cost assortment The marginal costing technique makes a discriminating distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are planned by a firm following the marginal costing technique. Stock/Inventory Valuation Under marginal costing, inventory for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method. Marginal Contribution Marginal costing practice makes use of marginal contribution for marking several decisions. Marginal part is the difference between sales and marginal cost. It forms the basis for estimating the effectiveness of different products or departments. The principles of marginal costing The rules of marginal costing (also known as variable costing) are as following: (a) Period fixed costs are the similar for any volume of sales and production (provided that the level of activity is within the relevant range). Hence, by selling an extra product or service the following will happen: • Revenue will rise by the sales value of the item sold • Costs will step-up by the variable cost per unit • Profit will increase by the amount of contribution earned from the extra item. (b) Likewise, if the volume of sales falls by one item, the profit will fall by the amount of contribution made from the item. The marginal costing idea is that profit measurement should be based on an analysis of total share that is sales value less the variable cost of sales. (c) Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs. Absorption costing is therefore misleading, and it is more appropriate to deduct fixed costs from total contribution for the stage to derive a profit figure. (d) When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no additional fixed costs are obtained when output is increased. Supporters of marginal costing argue that the evaluation of closing inventories should be at variable Production cost (direct materials, direct labor, direct expenses (if any) and variable production overhead). In a nutshell, there are several types of accounting, each of which examines revenue and earnings differently from other methods. Accounting and finance recognises revenue and expenses in the order in which they are received or spent. BIBLIOGRAPHY 1. Finance, Credit, Investments-modern Interpretation [Online] Available at: http://www.redessociales.net/2009/07/finance-credit-investments-modern-interpretation/ [Accessed 08 March 2010] 2. Profit and loss account [Online] Available at: http://moneyterms.co.uk/profit_and_loss/ [Accessed 12 March 2010] 3. Cost[Online] Available at: http://en.wikipedia.org/wiki/COST [Accessed 10 March 2010] 4. Finance terminologies [Online] Available at: http://financial-dictionary.thefreedictionary.com/ [Accessed 10 March 2010] 5. Finance, Credit, Investments-modern Interpretation [Online] Available at: http://derechogt.org/?tag=finance/ [Accessed 08 March 2010] 6. Basic Accounting Terminology 101[Online] Available at: http://www.moneyinstructor.com/art/basicaccounting.asp [Accessed 16 March 2010] Read More