Management Accounting Budget and the Presidency

Question: Discuss about the Management Accounting for Budget and the presidency. Answer: Introduction Financial accounting is compulsory for the company and should be prepared because it is meant for the outsiders, which would provide information and help in taking investment decisions (Markowitz 2014). It is prepared at the end of every financial year whereas management accounting is not compulsory to the organization and it is prepared as per the organizations needs. The given report will analyze different aspects for financial accounting. Need for investing in the latest software of management and financial accounting The company having diversified activities in both manufacturing and service sectors has to upgrade itself according to the changing situation of demand. The company is planning to make investment in latest software of financial and management accounting. This need for taking decision would be discussed following the explanation of the differences between the two areas. (Chiu and Choi 2013). The following points differentiate the financial accounting form the management accounting: The system of accounting reveals the financial position of the company by focusing on its financial statements to the outside parties so that they can form a judgment about the companys financial health and accordingly take the investment decision. (Hamidullah 2015). On the other hand, management accounting is that system of accounting, which assists the managers in taking business decisions such as framing the strategies, policies and plan by providing relevant qualitative and quantitative information. Financial accounting dealt with the outside or third parties as well as with the internal management but management accounting is needed only for the internal management. (Kaplan and Atkinson 2015). For examples, management accounting deals with direct raw materials, wages, overhead and financial accounting focus on accounting issues, GAAP, IFRS, etc. In the technologically advance era, software plays a vital role in maintaining and preparing financial records and also for analysis and forecasting purposes (Mitrokotsa and Dimitrakakis 2013). If the company invests in the latest software, this software would help in predicting and creating the financials and the budget would be created accurately using the software. The budget can be formulated by processing the data and dissemination of the digital information (Berman 2015). There are other advantage of adopting the latest software as this would help the management accountants to save their time in calculating lengthy information and release them form the burden. Evaluation of the importance of classification of costs in business decision making Classification of costs The classification of costs is immensely important to the business as it would enable them to expand and progress the business by controlling the costs. Two major costs are direct and indirect costs. The management classifies the costs on various parameters, because they have to make choices among alternative courses of action and they are constantly faced with that (Weil et al. 2013). The classification of costs provides the management with the relevant and indispensable information for pricing of the product and measuring the income. Classification would help in measuring the efficiency of the organization by identifying the place and the amount of cost which have been incurred. Different types of costs can be further explained with the help of the following table:- Classification of costs Types Direct and indirect costs Direct costs can be classified as manufacturing costs. On the other hand, indirect costs are related to costs incurred from production of any kind of goods and services Function Production and Non-production Production costs can be classified into direct labor, direct material and factory overhead. On the other hand, non-production costs can be classified into selling and administrative expenses. Relevance Opportunity costs and Future costs Opportunity costs can be classified as value of an alternative activity, when the other alternative has been selected. On the other hand, future costs can be classified as an estimated forecast of future value of an activity. Behavior Fixed, semi variable and step costs Fixed costs are those, whose value remains unchanged over a period of time. Semi-variable costs are those expenses which contain criteria of both fixed and variable costs. On the other hand, step cost is a cost that does not change by a large amount even if the volume changes. The fixed and variable cost can be explained using a graph (refer to appendix 1). The fixed cost is represented as the horizontal line as it remains fixed at different levels of production. However, the variable cost is represented using the rising straight line as the cost changes with change in the level of production. Again, the step costs are essentially semi-fixed costs that remain constant over a specific range of output and thereafter increase with attainment of the critical level of output. The step can also be explained using a graph as presented in the appendix (Refer to appendix 2) Table 1: Classification of costs (Source: Berman 2015) Cost Control The cost of control can be explained using examples: Say, the material costs- by classifying the cost as material, the organization would be able to reduce and control the cost of material by standardizing the materials to be used and avoiding its wastes (Patterson and Hennessy 2013). Now, by classifying the costs based on overhead, the organization can ascertain the costs incurred under various heads and accordingly plan to reduce the costs incurred. Also, by classifying the coasts as labor costs, the organization can find out the costs incurred in employing labors. A business needs to be well acquainted with the area where the expenses is being incurred relating to the product manufacturing so that the budget can be prepared easily. The organization prepares the budget accordingly when the costs is classified. Costs classification would enable the management in setting up the program related to cost control so that the expenses are kept within the budget (DRURY 2013). This is done by clearly creating a difference between the areas where the saving is possible and the areas where the expenses are not flexible. Now if we classify the costs as per volume so this cost relationship to volume is very vital in measuring the performance, costing of the product and influence decision variables. Some of the cost is classified as relevant costs because they are considered appropriate for making the management decisions which are specific. Costs would neither be underestimated nor be overestimated as the costs have been assigned to proper department based on cost classification (Chiu and Choi 2013). Say for example, the costs, which have been incurred in the polishing department, are different from costs incurred in running a department of machinery. The costs, which are actually incurred in these departments, can be easily estimated. According to Berman (2015), classifying the costs would help in allocating the costs to the cost center and apportioning to the right costs unit and this would help in tracking the source where the costs have been incurred. One of the aid in the preparation of the financial statement is ascertaining the cost data which are accurate, so if the cost is classified, then the various overhead costs, prime costs and other costs can be easily find out. Therefore, the total production cost in the organization can also be ascertained which would be relevant in preparing the financial accounts. Classification also provides the useful information in adopting the proper method for accounting. Objectives of preparation of budgets The budget is created using various variables and this can be useful in measuring and evaluating the performance of the employees. The variances form the budget is used to measure the performance (Gandhi et al. 2015). Budget is also used for measuring and monitoring the actual performance of the business by comparing the actual performance with the forecasted. Budget is used by the managers to control the various activities and it act as a mechanism of control which is used for controlling the availability of resources and activities within an organization (Hamidullah 2015). The variances can be highlighted form the control and the management can take remedial actions so that the objectives relating to the budget policies are met. The strategic plans of the management are implemented by planning in very detailed way, which is produced in the budget. (Weil et al. 2013). Budgeting process would motivate the managers and encourage them to take the actions regarding the future operations and refining the existing plans and the way of handling the changing situations. Operational budget is a budgeting process followed by the company which helps them in estimating the income it would make and a detailed plan of its short term expenses (Hill and Hill 2012). The various types of operating budgets are as follows: Expense budget- One of the operational budget is expense budget which documents the expenses which have been expected during the period of budgeting (Weil et al. 2013). It includes the estimated cost of overhead and also the labor and material costs involved in the production. Revenue budget- Another form of operational budget is for judging the marketing and sales effectiveness. The variable included in preparing this budget is the quantity of sales made and the price of the product or goods sold (Kaplan and Atkinson 2015). Profit budget- It is also known as market budget. The managers who have the responsibility of managing the revenue as well as costs of their unit use this budget. It includes the schedules prepared for the coming year and the projected financial statement and it is regarded as the plan for annual profits. The objectives of preparing the operational budgets are to anticipate that whether the expenses of the budget have been adequately prepared. It also helps in controlling the activities across various units (Markowitz 2014). Using this budget, managers would be able to control the service, advertising and training of personnel in terms of the quantity and quality. This would have an indirect affect on the volume of sales and help the management in estimating the volume of sales so that all the departments would perform efficiently. Illustration of the use of standard costs for variance analysis and favorable and adverse variance Use of standard cost for variance analysis A standard cost may be described as costs, which are predetermined, and it is estimated so as to manufacture a product or to perform a service. It correlated the quality of material and labor to the technical specifications. Standard cost makes use of variance accounting for the purpose of valuing work in progress and stocks and thus providing a basis for control mechanism (Mitrokotsa and Dimitrakakis 2013). The standard of cost for the activities is established through the standard costing and it is a tool for controlling the costs Let us consider an example to explain the variance analysis. Suppose that an organization estimates its labor costs to be $ 2.5 per unit at the beginning of the year. In addition, this estimate is established by the cost analysts, engineers or by looking at the trends of past experience. Now, say the actual costs incurred be $ 3 per unit. Now, when a comparison is made between the standard cost set and the actual cost incurred, then there is a deviation of $ 0.5.Variance analysis is nothing but the deviation of the actual cost with that of the standard. This deviation or the variability of costs enables the management in coming to the conclusion that whether they have been successful in controlling the costs (Parambath et al. 2014). In addition, the costs are evaluated on the basis of its favorability and unfavoribility. If the standard costs are less than the actual costs incurred then it is regarded as unfavorable variance and on the other hand, if the actual costs incurred are les s than the standard costs then it is regarded as favorable variance. Favorable and adverse variance Favorable variance would indicate that there is a difference between the planned and the actual results and it is called favorable because it is in favor of the business (Gandhi et al. 2015). This can affect the business performance in terms, say for example the business has experienced profits increase and this can be either attributed to increased actual revenue or because of the decreased actual costs. Unfavorable variance is also the difference between the actual outcomes and the established standards of costing (Patterson and Hennessy 2013). Such deviation is not favorable to the business. Say for example the company has experienced a decreased profit and this can be attributed to the increased actual costs, that is the costs which are incurred actually is more than the expected or standards costs set in the budget. This variance can be analyzed in terms of revenue or sales considering the costs (Mitrokotsa and Dimitrakakis 2013). Conclusion It can be concluded that there are different types of costs or variances that form the basis of management accounting. Analyzing the variance serves many functions and has importance in evaluating the business performance. It helps in setting a benchmark and act as a mechanisms to control the costs. It can be also concluded that operating budget is a tool for estimating the revenue and expenses of the companies and make itself prepare in advance for dealing with any kind of variations. The current report also helps in identifying with the importance of investments in software in financial and management accounting. Therefore, this report helps in understanding that budgets can help the corporation to avoid over spending and provides balance. Again, the variance between the budget and the actual figure can help the management in adjusting the overall strategy of the company. The present report also helps in gaining a comprehensive understanding regarding the importance of the classifi cation of costs to the business as it helps in expansion and improvement of the business by controlling the costs. References Berman, L., 2015. The Office of Management and Budget and the presidency, 1921-1979. Princeton University Press. Chiu, C.H. and Choi, T.M., 2013. 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