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### Accounting

1. 1. CONTENTS PAGE MANAGEMENT ACCOUNTING Task 1 Page No. Identify different types of cost that BCC (PVT) Ltd would incur during their Operation…………………………………………………………………………….….…………..4 1.2 explain in detail the different types of cost mentioned above……………...………….4 1.3 explain with different examples why different costing methods are used by organizations in modern context ………………………………………..……….……..…….…10 1.4 calculates the breakeven point in value & units for BCC (PVT) Ltd ……….…….……19 1.5 if firms selling capacity is 25000 units what would be the profit or loss of BCC (PVT) Ltd……………………………………………………………………………………….……..19 1.6 what would be the number of units that BCC (PVT) Ltd needed to produce In order to make sure \$ 20000 profit…………………………………………………….…….….19 1.8 Show above details under other stock recording method………………..……………….21 1.7 What is the stock recording method used by BCC (PVT) Ltd……………………………20 1.10 prepare an income statement for BCC (PVT) Ltd based on absorption costing 1.9 If the firms sell above issue at 20 per unit what would be the profit or loss of approach……………………………………………………………………………..……………….…23 BCC (PVT) Ltd under FIFO, LIFO, and AVECO……………………………………………………22 1.11 prepare an income statement for BCC (PVT) Ltd based on marginal costing Approach……………………………………………………………………………………….……….24 1.12 Make recommendations and justify your recommendations through Calculations……………………………………………………………………………………………..24 1
2. 2. MANAGEMENT ACCOUNTING Task 2 Page No. 2.1prepare a routine cost report for magna moss (PVT) Ltd based on above Information and identify the cost per ton…………………………………………….………..26 2.2 Evaluate the indicators of productivity, efficiency and effectiveness of An organization like Magna Moss (PVT) Ltd…………………………………………….……27 2.3 Explain in detail the principle of quality & value for any organization…………….….31 2.4 Identify and asses potential improvements for Magna Moss (PVT) Ltd………………37 Task 3 Page No. 3.1 explain in detail the purpose and the nature of the budgeting process for an organization like Ramona (PVT) Ltd………………………………………………………....47 3.2 assess different budgeting method and its need for Ramona (PVT) Ltd………….…..51 3.3 prepare relevant budgets in order to draw up a master budget for Ramona (PVT) ltd…………………………………………………………………………………………………55 3.4 prepare a cash budget for the first three months for Ramona (PVT) Ltd……………….58 Task 4 Page No. Task 4 Page No. 4.1 calculate variances for the data presented for your soccer team………………………..59 4.2 identify possible causes for the variances and recommend corrective action………… 604.1 calculate variances for the data presented for your soccer team………………… 4.3 prepare anpossible causes for the variancesbudgets & actual results for action…… 4.2 identify operation statement reconciling and recommend corrective your 2 4.3 prepare an operation statement reconciling budgets & actual results for your school soccer team………………………………………………………………………………
3. 3. MANAGEMENT ACCOUNTING Task 4 Page No. 4.4 Explain responsibility centers of an organization…………………………………….….63 4.5 prepare a report on your finding in accordance with identified responsibility centers to the manager of the soccer team……………………………………………………66 3
4. 4. MANAGEMENT ACCOUNTING 1.1 Identify different types of cost that BCC (PVT) Ltd would incur during their operation.  Fixed cost  Variable cost 1. Direct material 2. Direct labor 1.2 explain in detail the different types of cost mentioned above Before we are looking in to the cost of BCC (PVT) ltd first we need to understand some basic theory of cost now we will look at them What is a cost? A Cost can be identified as the total expenses attributed to a specific item or activity. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) What is cost unit? Cost unit is defined as a unit of product or service in relation to which costs are ascertained. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) For example- call minutes (mobile phone bills) What is cost centre? Cost centre is defined as location or activity for which costs are humiliated it is a collecting place for cost (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) For example- raw material stores, production flows and canteen are all cost centers in a manufacturing company 4
5. 5. MANAGEMENT ACCOUNTING Prime cost These are cost that we can directly identify with the product or service For example- direct material, direct labor, and other direct expenses (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) What is direct material cost? A direct material cost is any material cost that can be identified specifically with a final cost objective (e.g., a particular contract (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Overheads (indirect cost) Production over heads These are cost related to production that cannot be directly identify with a product For example- factory rent, machinery rent (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Selling and distribution overheads These are cost related to sales and distribution that cannot be directly identify with the product or service(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) For example- transportation cost, sales commissions Elements of cost The below cost statement shows the buildup of the total cost for a product or services sample amounts are taken to explain this statement cost statement Details amount direct materials 15 direct labor 5 other direct expense 2 prime cost 22 production overheads 16 5
6. 6. MANAGEMENT ACCOUNTING total production cost 38 selling and other overhead 2 total cost 40 profit 10 selling price 50 (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Cost behavior Cost behavior refers to the way in which costs are affected by fluctuations in activity the most common cost behaviors happen are as follows. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Fixed cost Fixed cost does not change with the level of activity despites changes to the level of activity this cost remain unchanged. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Value Activity level FIGURE 1.1 Examples of fixed costs include rent For example Production (units) Rent cost in rupees 10000 20000 50000 20000 6
7. 7. MANAGEMENT ACCOUNTING 100000 20000 120000 20000 FIGURE 1.2 Step fix cost These cost stay fix up to a certain level of production but when a level is reach it will increase to the next step(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Value Activity level FIGURE 1.3 For example – 1-10 people can travel in a van at the same cost but when the number increase by one the cost will move on to the next step Variable cost Costs that change in proportion to production are variable costs. This means when the production level is changing the variable cost will change(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) For example- the raw material cost will increase with each additional unit produce Value Activity level FIGURE 1.4 7
8. 8. MANAGEMENT ACCOUNTING Semi variable cost Semi variable cost is a cost containing both fix and variable and component and which is thus party affected by changes to the level of activity. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Value Activity level FIGURE 1.5 For example the monthly phone bill has a rental fee plus call Conclusion We can divide the main cost in to two types they are  Fixed cost  Variable cost By using the fixed cost we can calculate the operation gearing of the company this means the fixed cost effect on sales and operation profit Operational gearing is simple and important in modern business world High fixed costs increase operational gearing. Consider two companies A and B with different cost structures but the same profits. Company A Company B sales 100000 100000 Variable cost 70000 80000 Fix cost 20000 10000 8
9. 9. MANAGEMENT ACCOUNTING Operating profits 10000 10000 FIGURE 1.6 Although the companied fixed cost and variable cost are showing different amts the operating profit for both companies are same Now assume both companies increase sales by 50% Company A Company B sales 150000 100000 Variable cost 105000 120000 Fix cost 20000 10000 Operating 25000 20000 profits FIGURE 1.7 A company is showing highest operation gearing, makes 2.5× as much profit as it did before the 50% increase in sales B Company is only able to double its operation profit this is due to high variable cost Fixed cost is fixed it won’t change but the variable cost will vary according to the production units applying a high low method an equation that could be use to forecast total cost for example month patients Total cost 1 5000 37500 2 8400 45660 3 8300 45050 4 5900 39420 FIGURE 1.8 Working (45660-37500)/(8400-5000) = 2.4 2.4*5000= 12000 37500-12000= 25500 fixed cost So y = 25500+2.4x 9
10. 10. MANAGEMENT ACCOUNTING If we have the formula we can easily calculate the cost for the products without wasting time 1.3 explain with different examples why different costing methods are used by organizations in modern context If a company already has an established costing method, in most cases, they should stick with it unless they have compelling reasons to change. Organizations are different from each other due to number of reasons 1. Legal situations 2. Organizations are made up of different individuals 3. Organization engage in different activities Based on different activities under taken organizations can have their own costing systems  Job manufacturing – job costing  Batch manufacturing – batch costing  Contract manufacturing – contract costing  Process manufacturing – process costing  Service providers – service costing Job costing Job costing is the costing method used by organizations which are engaged in one off jobs. One off jobs are normally undertaken according to specific customer requirements and are relatively short duration. Cost accounting is through opening in a new document for each job undertaken and any cost amount incurred in performing the job is also recorded in the document allowing the organization to identify the total cost of the job (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Batch costing This is the costing method used by organizations which are engage in lot of production activity here the cost accounting is through opening in a new document for each order receive and by recording all the relevant cost in delivering the order such a document is normally known as 10
11. 11. MANAGEMENT ACCOUNTING batch cost card (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Contract costing Contract costing is the costing method used by organizations with following characteristics  Long term  Work done at customer site  Cost accounting is through (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Service costing Service costing is the cost accounting method used by organization with following characteristic  Perishable  Intangible (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Process costing Process costing method is the cost accounting method use by the organization who are in to continuous production. Most process manufacturing organization use more than one process in the total operation (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) In reality not every input is likely to be converted to good units there can always to be defective unit this gives three situation 1. Expected or normal loss – with continuous production undertaken process managers are likely to identify particular number of units as defective which are inherent to the process such inherent units are known as normal losses(CIMA LECTURER STUDY TEXT 2007) 2. Abnormal loss – if the actual loss is more than the normal loss that additional loss is known as abnormal loss (CIMA LECTURER STUDY TEXT 2007) 11
12. 12. MANAGEMENT ACCOUNTING 3. Unexpected or abnormal gain – if the actual loss is less than the normal loss the difference between these is known as abnormal gain (CIMA LECTURER STUDY TEXT 2007) In process costing due to lack of resources or time available there is always work in progress which is normally identify in relative and percentage terms these percentage need to converted to equal number of completed units. If the process is manufacturing more than one type of products which are having equally high amount of value such products are known as joint products in process costing joint products are normally identified at the end of the process in joint product some products are not salable immediately where more work is required cost incurred with this more work is known as further processing cost (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Example of how process costing calculations The following information is available for process 2 in September Transfer from process one 400kg at a cost of 2150 rupees Material added 3000kg 6120 rupees Conversion costs 2344 rupees Output to finished goods 2800kg Output scrapped 400kg Normal loss 10% of material added in the period There was no opening work in progress but 200kg were in progress at the end of the month at the following stage of completion Materials 80% Conversion cost 50% The scrapped units were complete in material added but only 50% complete in respect of conversion costs all scraped units have a value of 2rupees each Wanted to write up the accounts for process Process one 400kg P1-2150 finished good 2800kg Material 3000kg M-6120 normal loss 300kg C.C-2344 Abnormal loss 100kg Closing work in progress 12
13. 13. MANAGEMENT ACCOUNTING 200kg FIGURE 1.9 Statement of equivalent input quantity output quantity Process 1 material Conversion cost Process 1 400kg Finish good 2800kg 2800kg 2800kg 2800kg material 3000 kg Normal 300kg - - - loss Abnormal 100kg 100kg 100kg 50kg loss Closing 200kg 200kg 160kg 100kg work in progress Total 3400kg 3100kg 3060kg 2950kg FIGURE 2 Statement of cost Process 1 material Conversion cost Input cost 2150 6120 2344 Scrap value (600) total 1550 6120 2344 Cost per equivalent 1550/3100=.5 6120/3060=2 2344/2950=.79 FIGURE 2.1 Statement of evaluation P1= .5*2800=1400 Finished goods M=2800*2=5600 9240 13
14. 14. MANAGEMENT ACCOUNTING C.C=2800*.79=2212 P1=100*.5=50 A.L M=100*2=200 290 C.C=50*.8=40 P1=200*.5=100 CWIP M=160*2=320 500 C.C=100*.8=80 FIGURE 2.2 NL =300*2=600 Process accounting Detail quality value Detail quality value Process 1 400kg 2150 Finish goods 2800 9240 material 3000kg 6120 Abnormal 100 290 loss Conversion 2344 Normal loss 300 600 cost Closing work 200 500 in progress 14
15. 15. MANAGEMENT ACCOUNTING 3400kg 10614 3400kg 10614 FIGURE 2.3 In addition to main cost accounting systems to handle overheads there are two main overhead cost accounting systems 1. Absorption costing 2. Marginal costing Marginal costing Marginal costing is formally defined as ‘Accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution this contribution mainly used in decision making. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Absorption costing Absorption costing is a very old method where it was develop when organization were focus on production so the o/h looked at his traditionally production o/h.OAR is calculated to relate the o/ h to end product for decision making purpose where now budgeted information is used if the OAR is budgeted or the period which actual o/h there can always been differences (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Example A company produces and sells one product only which sells for 50 rupees per unit. there were no stock at the end of may and other information is as follows Standard cost per unit Direct material - 18 Direct wages - 4 Variable production overhead – 3 Budgeted and actual costs per month Fixed production overhead – 99000 15
16. 16. MANAGEMENT ACCOUNTING Fixed selling expense Fixed administration expenses Variable selling expenses 10% of sale value Normal capacity is 11000 units per month The number of units produced and sold was June July Sales 12800 11000 Production 14000 10200 Required 1. Absorption costing 2. Marginal costing Absorption costing June July Sales revenue 640000 550000 Less- cost of sale Opening stock 40800 production 476000 346800 Closing stock 40800 13600 Over/under absorb 27000 7200 less non production cost Variable cost 64000 55000 Fix cost 40000 40000 16
17. 17. MANAGEMENT ACCOUNTING Net profit 127800 73800 FIGURE 2.4 Marginal costing June July Sales revenue 640000 550000 Less- cost of sale Opening stock 30000 production 350000 255000 Closing stock 30000 10000 Variable non production cost 64000 55000 Contribution 256000 220000 less non production cost Fix production cost 99000 99000 Fix non production cost 40000 40000 Net profit 117000 81000 FIGURE 2.5 Activity base budgeting Activity Based Costing (ABC) is a method for developing cost estimates in which the project is subdivided into quantifiable activities or a work unit the activity must be definable where productivity can be measured in units (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Example A company manufactures two products, L and M using the same equipment and similar processes an extract of the production data for these products in one period is shown below L M Quantity produced (units) 5000 7000 Machine hours per unit 1 2 17
18. 18. MANAGEMENT ACCOUNTING Set up in the period 10 40 Orders handled in the period 15 60 Overhead cost Relating to machine activity 220000 Relating to production run set ups 20000 Relating to handling of orders 45000 Total amount 285000 Required an activity based costing approach using suitable cost drivers to trade overheads to products Activity Cost pool Cost driver Cost per driver Machine 220000 22000 10 Product run set up 20000 50 400 Handling of orders 45000 75 600 FIGURE 2.6 Overheads L per unit M per unit Machine 30 10 Product run set up .8 2.3 Handling of orders 1.8 1 FIGURE 2.7 18
19. 19. MANAGEMENT ACCOUNTING 1.4 calculate the breakeven point in value & units for BCC (PVT) Ltd Breakeven point in value = fixed cost/pv ratio = 75000/.26 =288461.53 Working PV ratio = contribution per unit/selling price per unit =13/50 =.26 Breakeven point in unit = fixed cost/contribution per unit =75000/13 =5769 units 1.5 if firms selling capacity is 25000 units what would be the profit or loss of BCC (PVT) Ltd Unit to be sold = (fixed cost + target profit)/contribution per unit 25000 = 75000+target profit/13 Target profit = 250000 19
20. 20. MANAGEMENT ACCOUNTING 1.6 what would be the number of units that BCC (PVT) Ltd needed to produce in order to make sure \$ 20000 profit Unit to be sold = (fixed cost + target profit)/contribution per unit x = (75000+20000)/13 Unit to be sold =7308 units 1.7 What is the stock recording method used by BCC (PVT) Ltd? The general principle is that inventory should be valued at cost there are three main methods in which stocks are valued they are  First in first out (FIFO)  Last in last out (LIFO)  AVECO Here Bcc Company is using FIFO method because items received earlier those which are issued first this is preferred method as per the accounting standard For example FIFO Date Received Issued Balance Details Price Quantity Total Price Quantity Total Price Quantity Total Per Per Per Unit Unit Unit 1-Jan 10.00 10 100 10.00 10 100 3-Jan 10.10 10 101 10.10 10 101 10-Jan 10.00 5 50 FIGURE 2.8 On January 1st BCC is purchasing 10 units at a cost of 10.00 per unit and on 3rd of January they are purchasing 10 units at a cost of 10.10 per unit. On 10th of January they are issuing 5 20
21. 21. MANAGEMENT ACCOUNTING units at a price of 10.00 per unit so here they are issuing the items which they have purchased earlier if they issue the units at 10.10 prices per unit it will call as LIFO method 1.8 Show above details under other stock recording method LIFO This method assumes that issues should be price at the last purchase price this is not accepted for financial accounting purpose. LIFO Date Received Issued Balance Details Price Quantity Total Price Quantity Total Price Quantity Total Per Per Per Unit Unit Unit 1-Jan 10.00 10 100 10.00 10 100 3-Jan 10.10 10 101 10.10 10 101 10-Jan 10.10 5 50.5 10.00 10 100 10.10 5 50.5 15-Jan 10.20 10 102 10.20 10 102 17-Jan 10.20 10 102 10.10 5 50.5 10.00 2 20 10.00 8 80 FIGURE 2.9 AVECO This method assumes that issues are price at weighted average this is calculated every time there is a new receipt therefore every time a new order will issue aveco price is changed in resulting in a representative price at all times. This valuation is also accepted for financial accounting purpose AVECO Date Received Issued Balance Details Price Quantity Total Price Quantity Total Price Quantity Total Per Per Per Unit Unit Unit 1-Jan 10.00 10 100 10.00 10 100 3-Jan 10.10 10 101 10.10 10 101 21
22. 22. MANAGEMENT ACCOUNTING 10.05 20 201 10-Jan 10.05 5 50.25 10.05 15 150.75 15-Jan 10.20 10 102 10.20 10 102 10.11 25 252.75 17-Jan 10.11 17 171.87 10.11 8 80.88 FIGURE 3 1.9 If the firms sell above issue at 20 per unit what would be the profit or loss of BCC (PVT) Ltd under FIFO, LIFO, and AVECO Under FIFO profit calculation Details amount amount sale 440 Less-cost of sale Opening inventory - purchase 303 Closing inventory (81.6) Cost of sale (221.4) profit 218.6 FIGURE 3.1 Under LIFO profit calculation Details amount amount sale 440 Less-cost of sale Opening inventory - purchase 303 Closing inventory (80) Cost of sale (223) profit 217 22
23. 23. MANAGEMENT ACCOUNTING FIGURE 3.2 Under AVECO profit calculation Details amount amount sale 440 Less-cost of sale Opening inventory - purchase 303 Closing inventory (80.88) Cost of sale (222.12) profit 217.88 FIGURE 3.3 It is a pattern that in times as rising prices the FIFO method will give the highest closing stock value and highest profit in this scenario the LIFO method will give the lowest profit value the aveco method will always be in the middle of the other two valuation method 1.10 prepare an income statement for BCC (PVT) Ltd based on absorption costing approach Absorption costing Product X Y Z Total Sales 135000 55000 105000 295000 variable cost 75000 40000 50000 165000 fixed cost 50000 25000 25000 100000 profit 10000 -10000 30000 30000 FIGURE 3.4 1.11 prepare an income statement for BCC (PVT) Ltd based on marginal costing approach 23
24. 24. MANAGEMENT ACCOUNTING Marginal costing Product X Y Z Total Sales 135000 55000 105000 295000 variable 75000 40000 50000 165000 cost contribution 60000 15000 55000 135000 fixed cost 100000 profit 30000 FIGURE 3.5 1.12 Make recommendations and justify your recommendations through calculations Since the profit is showing 30000 under absorption costing and (10000) contribution for y product we cannot make a decision right now to cancel the product or not therefore we need to do marginal costing again without product Marginal costing without product y Product X Z Total Sales 135000 105000 240000 variable 75000 50000 125000 cost cont per 60000 55000 115000 unit fixed cost 100000 profit 15000 FIGURE 3.6 Since the profit is decrease by 15000 in marginal costing we don’t need to cancel product y 1.13 collect production details from a rival company that produces three products analyze and present these data to the management of BCC (PVT) Ltd ABC (PVT) Ltd is a company which produces chair, table, and bed products and sells them the information for the last five years sales are gathered now we will look at them 24
25. 25. MANAGEMENT ACCOUNTING 2004 2005 2006 2007 2008 chair 124000 132000 128000 107000 30000 table 134000 140000 141000 112000 48000 bed 124000 131000 124000 60000 40000 160000 140000 120000 100000 chair 80000 table 60000 bed 40000 20000 0 2004 2005 2006 2007 2008 FIGURE 3.7 The sales for the company have increased from the year of 2004 – 2006 this is due to the peace talk I Srilanka many company launched their ducts in the Jaffna market this made the company to sell more goods But due to the war starts on at the end of the 2006 period the company sales decreased dramatically on 2008 Since our army takes control of our whole country at the start of the 2009 the company is expecting to sell more products because there are more companies itching to starts their business at Jaffna 2.1prepare a routine cost report for magna moss (PVT) Ltd based on above information and identify the cost per ton \$ \$ Raw materials 33000 Productive wages 35000 Direct expenses 3000 25
26. 26. MANAGEMENT ACCOUNTING PRIME COST 71000 FACTORY OVERHEADS Unproductive wages 10500 Factory rent and taxes 2200 Factory lighting 1500 Factory heating 4400 Factory cleaning 500 Motive power haulage 3000 Directors fees 1000 Factory stationery 750 Factory insurance 1100 Depreciation(plant, 2000 machinery) Loose tools written off 600 Water supply 1200 Rent ware house 300 29050 ADMINISTRATION COST Sundry office expenses 200 expenses 800 Office stationery 900 Directors fee 2000 Rent, taxes 500 Insurance 500 Legal expenses 400 Depreciation cost (office) 1000 6300 DISTRIBUTION COST Depreciation (delivery vehicle) 200 Bad debts 100 Sales departments- salaries 1500 Advertising 300 Up keeping delivery van 700 Commission on sales 1500 4350 FINANCE COST Bank charges 50 50 TOTAL COST 110700 26
27. 27. MANAGEMENT ACCOUNTING FIGURE 3.8 Cost per ton = total cost/no of units =\$110700/10000 =\$11.07 • I made a assumption here I took the unproductive wages in factory overheads due to the idle time 2.2 Evaluate the indicators of productivity, efficiency and effectiveness of an organization like Magna Moss (PVT) Ltd Productivity is the combination of the effectiveness and efficiency to get the understanding about productivity firstly we need to understand what is effectiveness and efficiency Economic efficiency and manufacturing effectiveness is very important for organization to survive in this modern business world In the case of improving competition Manufacturing Company likes Magna moss consider some new ways to improve their value in production they can improve their productivity to reduce cost. When we look this in a economic point of view when a product is produced economically efficiently the cost of the production is low You can see that each organization needs to balance efficiency against effectiveness and where there is a conflict between efficiency and quality, the organization must decide what is more important to them. (BY: Mark Kelly http://www.careermideast.com/en/Employer/Resources/Articles/Efficiency.aspx,cited on 14 of September) The decision will often be determined by their organizational goals. Some organizations are more willing to sacrifice quality for efficiency; some do the opposite. Organizations like 'The \$2 Shop' obviously value efficiency over effectiveness. Customers save money. (BY: Mark Kelly http://www.careermideast.com/en/Employer/Resources/Articles/Efficiency.aspx,cited on 14 of September) Effectiveness is defined as the degree to which the actual outputs of the system corresponds to its desired or planned outputs (http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506) 27
28. 28. MANAGEMENT ACCOUNTING Over the last years manufacturing companies worked to reduce the cost of their supplier this facts leads the company to have operational efficiency. In typically organization they are using 40%-70% of the supply chain as a fixed this helps the organization to generate more When company like magna moss wants to increase manufacturing effectiveness firstly they need to consider the basic relationship between production process Utilization performance Returns customer Production process requirement Physical input physical FIGURE 3.9 effectiveness From this we can clearly understand final production there are many factors that influence so company needs to consider how many inputs are economic to insert for effective amount of output Efficiency is defined as the ratio of actual outputs to actual inputs after we choose to do the right things, now we should do those things in the right way. (http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506) An organization can be more efficient if it produces:  The same outputs with fewer inputs  More or better outputs for the same inputs Efficiency is not about reducing costs if it compromises the quality or quantity of outputs. When organization like Magna consider about manufacturing effectiveness they need to understand about economic efficiency firstly. 28
29. 29. MANAGEMENT ACCOUNTING There are two concept of efficiency  Technological efficiency – this is possible when the output is not able to increase without the increasing in input the formula for this is Technological efficiency = Units of output/Units of input.  Economic efficiency - this is possible when the cost of the output is low as possible economic efficiency depends on the prices of factors of production we can calculate this by Economic efficiency = Value of Output = (Price of output) X (Units of Output)/Value of Input (Price of input) X (Units of Input) (CIMA FUNDAMENTALS OF ECONOMICS LECTURER STUDY NOTES) Something technologically efficient may not be always economically efficient but something that economically efficient always technologically efficient the concept of economic efficiency is only relevant when the quality of goods being produced unchanged When company like Magna moss wants to work on their high production level they have to think two different efficiency. Statistic efficiency  Economic efficiency Improving efficiency will lead to of outcome output or quality same level of Inputs for the of inputs the same level outcomes for Improved output for the same level of Increased Improving inputs efficiency FIGURE 4 29
30. 30. MANAGEMENT ACCOUNTING Productivity, is measured by the ratio of what was produced to what was required to produce it measured in physical units, or at constant prices . (CIMA FUNDAMENTALS OF ECONOMICS LECTURER STUDY NOTES) For example productive efficiency Productivity can also be expressed as the change in output divided by the change in input Output may be expressed in units or money terms depending on the situation For example V(Utt) = Q(Ut) X P(Ut) Value equals quantity time price per unit. Where, V = value in monetary terms, Q = quantity in physical terms, P = price per unit, U = Output, and t = the time period. Input contains the use of labor, material and etc input may be expressed in units or money terms depending on the situation (By Willie Maartens 2009)http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506, Cited 15th of September) Productivity can now be expressed as V(Utt) / V(itt) = Q(Ut) / O(it) X P(Ut) / P(it), or Productivity = Efficiency x Price Recovery, for a certain time period Productivity is not production. Productivity does not refer to labor only labor is a part of the production. Where production does not only mean manufacturing, but any process where a product or service is produced. In general this measurement is used to indicate the relationship between the output and the input of production this can be a labor, materials or capital. This relationship is simpler to calculate than total productivity measures. (By Willie Maartens 2009)http://www.authorsden.com/categories/article_top.asp?catid=5&id=31506, Cited 15th of September) The relationship between total output and individual input is used as a yardstick for productivity, the result may be biased. Comparisons of inputs and sales also lead to false interpretation since the selling price is sufficient enough to cover the cost 30
31. 31. MANAGEMENT ACCOUNTING How to achieve a better results in company like Magna Motivation  Identify sources  Reduce extrinsic Satisfaction Productivity +  Find frustrations  Find distractions  eliminate  eliminate Better results FIGURE 4.1 Productivity will lead to  Achieving more output for the same input  Achieving the same output from less input  Achieving much more output for slightly more input  Getting slightly less output for much less input  Wile input decreases the output increases. (http://www.accel-team.com/productivity/productivity_01_what.html) 2.3 Explain in detail the principle of quality & value for any organization Many firms attempt to add quality and value to their products or services in order to increase sales and profitability. However, few appreciate the difference between value and quality. But by doing so, they can more finitely increase their options for adding both value and quality Quality 31
32. 32. MANAGEMENT ACCOUNTING Quality is directly related to the product. A firm can increase a product’s quality, but that increase may or may not be profitable. For example, Apple can increase the quality of its Mac operating system but that may not lead to an increase in value for the users. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Quality management refers to systematic policies, methods, and procedures used to ensure that goods and services are produced with appropriate levels of quality to meet the needs of customers. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) To achieve quality modern organizations are practicing five techniques they are  New manufacturing technique  Modern manufacturing operations technique  Total quality management  World class manufacturing  Drum buffer and rope method/synchronous manufacturing New manufacturing technique In this section there are five elements need to be looked at  Computer aided designing Traditionally organization used brizill board to design the plan but now in modern organization they are using a technique call computer aided designing here this technique will design the planning. This technique also has the capabilities of identifying the resource requirement for that planning. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Computer aided manufacturing Traditionally organization use labor centric to manufacture goods but under modern manufacturing organizations are using machine centric to produce goods here the idea is manufacturing goods using automated machine which are connected to a computer. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Flexible manufacturing Traditionally organizations have the capabilities of producing one type of products under one department but now in modern department organizations have the capabilities of producing 32
33. 33. MANAGEMENT ACCOUNTING more goods this is known as flexible manufacturing. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Electronic data interchange If organization uses email to contact with their supplier and customer it is known as EDI by using email organization share the information easily with lower cost. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007)  Enterprise resource planning system Modern understanding is that to achieve total quality everyone in organizations need to work together. If the organizations every department is connected through a computer network it is known as ERP system (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Modern manufacturing operations technique Under this method there are four techniques needs to be looked at  Manufacturing resource planning 1 (MRP1) Traditionally organization use passed information to plan the materials needed for the production but in modern organization they are using computers to evaluate the materials needed for the production here the user firstly input some information about materials such as budgeted materials needed for a unit then this will calculate the resource required for the production (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Manufacturing resource planning 2 (MRP2) Later part MRP1 was developed and gets the capabilities of identifying the labors hours needed for production and etc. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Optimized production technique (OPT) Opt have the capabilities of planning the resource requirement for the production and also have the capabilities of identifying the bottlenecks and non bottlenecks then give the solution for this bottlenecks. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Total quality management 33
34. 34. MANAGEMENT ACCOUNTING Getting the whole employees of the organization to work together in order to achieve quality and customer satisfaction. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Traditionally quality was the responsible of department call quality control but the modern idea is to involve everyone in quality there by manage quality (quality management) For traditional quality control organization, quality manage looks very attractive but to achieve this there are some elements to be looked at First in class in quality – under traditional quality control quality was the responsible of department call quality control department where the employees are not concern about the quality. But the modern concept is that to achieve TQM this trends need to be changed every one in the organization should give their 100% commitment to achieve TQM. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Continual improvement – traditionally once the organization set the standard and once it was achieved it is seen as satisfactory but in quality manage the idea is quality is multidimensional to achieve this continuous improvement needed(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Competitor’s benchmark – here the modern idea is that organization should keep on a eye on competitors product quality and give better quality products than their competitors do. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Employee empowerment and team approach – getting quality from employees from supervision is seen as traditional quality control but the modern understanding is that employees should be given their own decision making power and let them work as a team which would help the organization to sustain in long term. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Supplier quality – the quality of the output is depend on the input also therefore organization need to select few supplier try to maintain long term relationship to keep the quality of the product(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Modern manufacturing method If the products reaches the customer with lower price, higher quality, and delivered within time period to get customer satisfaction and performance it is known as modern manufacturing method(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Drum buffer and rope method 34
35. 35. MANAGEMENT ACCOUNTING CIMA defines that every activities which are carried out in organization is for the good will for them but in reality drum buffer and rope system is more Before using the latest technology organization firstly need to identify the bottleneck (drum) then they need to keep resource on bottleneck to keep on producing (buffer) they also need to have good communication between bottleneck and non bottlenecks to avoid unwanted inventory buildup. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Six sigma is another way to achieve quality Six Sigma is a smarter way to manage a business. This puts the customer first and uses facts and data to drive better solutions. Six Sigma efforts target three main areas •Improving customer satisfaction •Reducing cycle time •Reducing defects (Pete Pande and Larry Holpp http://www.icc.edu/facultyStaff/sixsigma.asp, Cited on 25of September 2009) With quality there are four main type of cost normally incurred Prevention cost – cost amounts incurred regularly in training, recruiting people, up grading machine, and cost incurred to maintain long term relationship with suppliers to prevent quality problem are known as prevention cost (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Appraisal cost – cost incurred in checking quality such as salaries paid to QC department staff and even equipment cost in checking quality are known as appraisal cost(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Internal failure cost – if products are identified as defective before being sold to the customers cost amount now incurred to reproduced is known as internal failure cost(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) External failure cost – if the customers identified the products to be defective replacement cost, rework cost, loss of good will are all considered as external failure cost(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Value 35
36. 36. MANAGEMENT ACCOUNTING Value is the worth of the package as a whole and the relationship to the quality of each part of the package is tenuous. (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) For example, Apple increased the value of the Mac package by adding Internet Explorer. These are the list of values that we can found among the companies Continual improvement – the ability of the organization to improve them self so the organization need to keep on working on improvement (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) Customer delight – the positive response that the customer feel from the organization products and service The most successful businesses have discovered that goes beyond product and service. Their business is providing delight to their customers by understanding their specific personal interests, anticipating their needs, exceeding their expectations, and making every moment and aspect of the relationship a pleasant if the customers are satisfied with the organization products and service that is good for the organization but it is just the start these it take more than to keep the same customer to come back again to the organization (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) A retailer in Raleigh, North Carolina understands the relationship between enjoyment and achievement. Talking with him, we can see that he enjoys what he does. He attributes his success to an incessant focus on the value of customer service. "Customers are our best friends. They are always right. You have to try to exceed their expectations. It’s really fun to try." Among other things, he sends fruit baskets to customers who buy big systems. Since he founded his company in 1978, he has never had a down year. Sales were up 25% in 1995 and another 34% in 1996. His profits are strong too. (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) From the information above we can clearly understand that if we make the customer delight we can achieve the profit without further difficulties 1. developing the employees – if the employees of the organization are delighted organization can achieve their target easily we can make them happy by providing compensation and job recognition at the basic level organization can compensate with 36
37. 37. MANAGEMENT ACCOUNTING better payment at the next level the organization can make a effort then develop the physical and technical skill of the employee through formal training. ((http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) 2. Maximum utilization – the organization need to find ways to use its resource utilized Resource utilization = resource required/resource available Organization can use a concept call theory of constraints to identify the bottleneck resource and non bottle neck resource. When they identified this they can think about which machine they need to allocate resource (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) 3. Commitment to society - Their greatest growth occurs at moments when companies align the development of these internal engines with the explosive emergence of new forces in society. Companies that can attune their business strategies to reflect the evolutionary changes of society in several or all of their growth engines. (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) 37
38. 38. MANAGEMENT ACCOUNTING Implementing, Institutionalizing Values Values are only good when it is implemented to all parts of the organization If don’t implement this value in all parts of the organization the value is useless. Value has the capabilities to increase the revenue and profit of the company. To fully implement and thus institutionalize a value in a company the following steps need to all occur. (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) Selection – choose the value that will suit the company and implement it to all parts of the organization. Commitment – to implement the value to the whole part of the organization commitment is needed from the whole employees working in the organization Standards -- A set of standards for each activity in the company needs to be implemented for each value. Structure – the company should have the right structure to implement value Jobs activities and systems – the company should have clearly defined job positions, job activities, and systems the value should corporate with this to achieve the target Employee responsibility -- the responsibility of the each employee to implement value should be clearly defined Skills – every one should have skills to work with the value (http://www.gurusoftware.com/gurunet/business/topics/Values.htm, Cited 6th of November 2009) The ultimate power of values is the ability to express it in every detail and act that the company performs. 38
39. 39. MANAGEMENT ACCOUNTING 2.4 Identify and asses potential improvements for Magna Moss (PVT) Ltd Magna ltd is a manufacturing company and its cost sheet has been prepared the total cost is 110700 form this cost sheet. In this cost sheet raw material, productive wages, and unproductive wages showing high amount. To understand the reason for this amount proper investigation needs to be carried out based on the investigation which was carried out me firstly I would like to give the problem 1. Magna company have recruited new employees for their manufacturing department the new employee took more time to produce goods. To get the work done quickly the organization hire skilled employees for the production and paid more for the skilled employees Total productive wages=35000/110700 is 32% percentage of the total cost 2. Newly recruited employee uses more raw materials to produce goods this is due to they don’t have productivity, efficiency and effectiveness 3. The company doesn’t have a good relationship with their supplier this leads to a high cost of raw material 4. The unproductive wages is also showing high amount Based on the problem which I have found in the above organization now it’s time to introduce new concept to their manufacturing to improve their performance there are some tools to be looked at when talking about quality now we will look at them Can Practice Total quality management Getting the whole employees of the organization to work together in order to achieve quality and customer satisfaction Traditionally quality was the responsible of department call quality control but the modern idea is to involve everyone in quality there by manage quality (quality management) For traditional quality control organization, quality manage looks very attractive but to achieve this there are some elements to be looked at First in class in quality – under traditional quality control quality was the responsible of department call quality control department where the employees are not concern about the quality. But the modern concept is that to achieve TQM this trends need to be changed every one in the organization should give their 100% commitment to achieve TQM. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 39
40. 40. MANAGEMENT ACCOUNTING Continual improvement – traditionally once the organization set the standard and once it was achieved it is seen as satisfactory but in quality manage the idea is quality is multidimensional to achieve this continuous improvement needed. .(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2005) Competitor’s benchmark – here the modern idea is that organization should keep on a eye on competitors product quality and give better quality products than their competitors do. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Employee empowerment and team approach – getting quality from employees from supervision is seen as traditional quality control but the modern understanding is that employees should be given their own decision making power and let them work as a team which would help the organization to sustain in long term. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Supplier quality – the quality of the output is depend on the input also therefore organization need to select few supplier try to maintain long term relationship to keep the quality of the product. Since the raw material is showing high figure this could be due to organization doesn’t have the good relationship with their supplier so organization need to select best supplier for them and tries to develop good relationship with them by doing like this they can get the raw material as they want with same price Can use Poka yoke (mistake proofing) concept This is an approach for mistake proofing processes using automatic devices or methods to avoid simple human errorControl upstream, close to the source of problem by for example incorporating monitoring devices to warn on defects in materials or abnormalities within the process. (www.doms.iitm.ac.in/documents/rahul/.../Process-Management.ppt, Cited on 10of November 2009) Establish control mechanisms to deal with different problems to enable operators to know which problem to cure and how to cure it with minimal disruption to the operating system Take a step-by-step approach by taking small strides, simplifying control systems and having economic viability in mind. Efficiency, technological sophistication, available skills, work methods have all got to be carefully studied for effective use of Poka-Yoke. (www.doms.iitm.ac.in/documents/rahul/.../Process-Management.ppt, Cited on 10of November 2009) 40
41. 41. MANAGEMENT ACCOUNTING Poka-Yoke encourages inter-departmental co-operation and is main vehicle for continuous improvement because it encourages continuous problem-solving activity (www.doms.iitm.ac.in/documents/rahul/.../Process-Management.ppt, Cited on 10of November 2009) Can Use the seven QC tools  Run charts and control chart – a run chart is a line graph with data plotted over time For example FIGURE 4.2 Source www.cob.sjsu.edu/gilliss_d/Spring09/.../OM_Chapter_15.ppt  Flow charts – process mapping to identify the sequence of activities or flow of materials  For example 41
42. 42. MANAGEMENT ACCOUNTING FIGURE 4.3 Source http://www.mayerton.com/fileadmin/templates/upload/services/flow.JPG  Check sheets – simple tools for data collection ensure completeness For example FIGURE 4.4 Source www.cob.sjsu.edu/gilliss_d/Spring09/.../OM_Chapter_15.ppt 42
43. 43. MANAGEMENT ACCOUNTING  Histograms - graphically represent frequency of values within a specified group For example 90 80 70 60 50 East 40 West 30 North 20 10 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr FIGURE 4.5  Scatter diagrams – graphical component of regression analysis For example Y-Values 3.5 3 2.5 2 1.5 Y-Values 1 0.5 0 0 0.5 1 1.5 2 2.5 3 FIGURE 4.6  Cause and effect diagram – represent chain of relationship often called a fishbone diagram For example 43
44. 44. MANAGEMENT ACCOUNTING FIGURE 4.7 Source www.cob.sjsu.edu/gilliss_d/Spring09/.../OM_Chapter_15.ppt  Pareto diagrams – separate the vital few from the trivial many causes provide direction for selecting projects for improvements For example 44
45. 45. MANAGEMENT ACCOUNTING Source www.cob.sjsu.edu/gilliss_d/Spring09/.../OM_Chapter_15.ppt FIGURE 4.8 Can use Kaizen concept Kaizen means continuous improvement involving everyone which broadly includes top management, managers and workers The basic philosophy of kaizen is to improving things a little bit a time, all the time which has the highest probability of success innovations can start 45
46. 46. MANAGEMENT ACCOUNTING simple and employees can built on their success in this unending process. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Commonly used tools in kaizen  PDCA – a cycle that encourages the key stages to continuous improvement namely plan-do-check-act  The flash bone diagram - here a line is drawn indicating a route to continuous improvement and off this line fish bone will appear indicating problem that may be encountered  The pareto rule – Italian economist vilfredo pareto identified that 80% of the country’s wealth was held by 20% of the population  The five why process – first developed at Toyota it encourages employee to examine questions by constantly asking why until the real issue is identified (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Conclusion Convert to Machine centric and use the concept TQM is the good way to improve the Magna moss performance Since the wages showing high amount 35000 they can introduce machine centric instead of labor centric this means instead of heavily using labor hours they can use more machine hours In this section there are four elements they can implement Computer aided designing Magna can use a technique call computer aided designing here this technique will design the planning. This technique also has the capabilities of identifying the resource requirement for that planning Computer aided manufacturing Magna can use machine centric to produce goods here the idea is manufacturing goods using automated machine which are connected to a computer Electronic data interchange If organization uses email to contact with their supplier and customer it is known as EDI by using email organization share the information easily with lower cost Enterprise resource planning system 46
47. 47. MANAGEMENT ACCOUNTING Modern understanding is that to achieve total quality everyone in organizations needs to work together. If the organizations every department is connected through a computer network it is known as ERP system If they implement these concepts they can achieve number of benefits 1. Calculability – with lesser employee and more machine the organization are now in position to identify what goes in to the production unit this calculability is now seen as a benefits 2. Control – with calculability organization are now in a position to identify what actually goes in to the production unit so they can keep their actual within the standard 3. Efficiency – efficiency means getting the customers rapidly here by using machine centric organization can reduce the cost for wages and they can produce quality goods with lesser time all these benefits leads to cost saving since the cost is reduced for the production organization can think about producing more goods and sell them with lesser price than their competitors do this will attract more and more customers. This method will help the organization to earn more profit so the organization can invest these money in other investments here the company is going to attract more customer because of the quality and price of the products 4. Predictability – calculability control and efficiency makes service delivered by the organization as expected which attracts more customers If the Magna Ltd implements the concept which I have given above they can improve the quality of product reduce the total cost and can save lot of time in producing one good By reducing the cost they can save money so they can think about new investing or they can also think about producing more goods because they can earn more money for example (assumption are made) Currently their production cost is 11.07 per unit think they are adding 36% profit to the cost so their selling price is 15 per unit, there are more than ten competitors in this market they are able to sell the goods for 14.8 due to the price of market and lack of quality in Magna goods they only able to sell 6000 units so Total sale = 6000*15 = 90000 Total cost for this = 6000*11.07=66420 Total profit = 23580 After implementing machine, total quality management they can reduce their cost for one unit to 7 47
48. 48. MANAGEMENT ACCOUNTING So if they produce more goods and apply their usual profit margin 3.93 per unit their selling price will be 10.93 this price is 3.87 less than the competitors do and the quality of the goods which was produced by Magna Moss definitely going to increase due to the concept like Modern manufacturing and total quality management, Due to this customers are going to be attracted by our selling price and our quality of goods so if Magna produce more goods (using machine centric) and sell at this price they can earn more profit other than profit to run a business brand name of the company is very important they can also get good brand name as days go (if they keep work on this) After getting brand name and repeated customer they can think about selling the 30% ownership of the company using that money they can look for other business opportunities because there are some good investment opportunities available in North east the government of Srilanka also providing more fund to invest there But to implement these concepts the management of Magna is need to invest large amount of money but if they invest the money they can improve their quality of products 3.1 explain in detail the purpose and the nature of the budgeting process for an organization like Ramona (PVT) Ltd What is budgeting? Budgeting is a quantified plan or action relating to a specific future period. A budget will act as a defined target for planning purposes as well as yard stick for control purposes. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Budget committee The budgeting process requires a high degree of coordination between the various functions of the company. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Now we will look at the multiple functions of budgeting which also known as benefits of budgeting Planning Predetermine estimate for future period is only possible if planning is undertaken for future in most situation budgetary preparation is start with sales budget the key reason for this is for most organization key limiting factor is sales demand(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 48
49. 49. MANAGEMENT ACCOUNTING Controlling After the figures are planned next part is keeping the actual within the budget this is known as budgetary control there are two methods in this  Feed back control  Feed forward control (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Feed back control Here compare the actual figures with budgeted figure at the end of the period if variances identified necessary action will be taken since the year is already finished organization is reacting to what had happen but in reality feedback control is more here to compare actual with budget there will be more information gathered this is known as feed loop control. Firstly actual information will be gathered for this organization is seen as a system. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Budget Analysis Comparator Effectors Sensor Decisions Input Process actual information FIGURE 4.9 49
50. 50. MANAGEMENT ACCOUNTING Here firstly actual information is gathered is known as sensor then this actual is well compared with budget information known as comparator then this compared information will be given to managers to make decision known as effectors Feed forward control Here the budget figures will be compared with the forecasted actual figures at the beginning of the period (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Communicating and coordination To prepare the budget relevant parties need to communicate with others once it was prepared it need to be communicated to relevant managers. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Motivation Once the budget is prepared with figures known and it is communicated to others reward waiting employees will get motivated and work for the target. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Performance evaluation Out of the five functions of budgeting performance evaluation is evaluating the performance by comparing budget and actual figures there are three methods normally use evaluate performance  Financial ratios  Balance scorecard  Bench marking .(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2005 Financial ratios By comparing budgeted ratios and actual ratios evaluating the performance will be done here. For example gross profit margin .(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2005 Balance scorecard 50
51. 51. MANAGEMENT ACCOUNTING In balance scorecard the financial and non financial performance will be compared For example financial perspective, customer perspective and innovation perspective (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Benchmarking Here the idea is organization need to identify best practice organization in eternal and they need to come with some agreement to share certain information we can divide this in to two type one is internal benchmarking and external benchmarking. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) In budgeting planning controlling and performance evaluation is mostly talked but when applying budgeting in to real environment there are some issues arises now we will look at them In an uncertain environment –unlike in past the environment we are living is rapidly changing creating two problems. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) With Drastic movement analyzing the past is not a useful one  Anyhow company prepared budget with lot of uncertainty keep the actual within budget is not possible This two issues in modern environment tries to show us budgeting is not possible one but budgeting serves a lot for organization so this is very important in an uncertain environment two possible option available in budget preparation. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007)  Three tier approach  What if analysis Three tier approach Although the movement in past information is drastic the very fact that past information make very convenient to analyze it through computer base system but the problem here is rapid changes in environment for this three tier approach suggest that organization should prepare three budgets to suits the most realistic one so organization will look past information then look in to future based on that budgets will be prepared from this organization need to select the bes 51
52. 52. MANAGEMENT ACCOUNTING and worst one(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) What if analysis There are lot of criticisms about three tier approach because preparing three budgets while preparing budget lot of resources are used and too many budget also tries to confuse who are using it so it is suggested here organization need to prepare best budget and look at the budget figures taken asking what if question on original figures taken. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) For nonprofit making organization – budgets are prepared manly based on sales demands, material purchased, labor rate and with main motive of earning profit but when preparing budgets for nonprofit making main aspect in budget is changing for example sale demand will change as no of service provided ,material is mostly donated, labor is volunteered and the most fact is not for profit so these information are confusing us when preparing budgets for nonprofit organization they need to prepare budget call program planning budget(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Beyond budgeting – beyond budgeting is a budgeting movement which argues that traditional budgeting is a problem. There are two problem mainly arises with beyond budgeting they are. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 1. When the organization set the budget for longer period they hardly changes the set budget even though the movements in the environment is changing rapidly 2. Budgets normally prepared by the top level people then imposed upon the lower level people dissatisfied with this (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) So in order to overcome this problem it is now suggested  Budgets should be prepared in such way that if any changes in environment budgets is also need to be changed  The budget should be prepare by the budget holder which will lead to better budget prepared 52
53. 53. MANAGEMENT ACCOUNTING (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 3.2 assess different budgeting method and its need for Ramona (PVT) Ltd There are two main approaches to budgeting they are • Participative budgeting (bottom up budgeting) This is a budgeting system in which all budget holders are given the opportunity to participate in setting their budget this is also known as bottom up budgeting. This method is very effective with large decentralize organization in which size of the organization is such that top level cannot prepare budget for all the different areas the organization is involved in. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) The advantages of the method are as follows Improve quality of forecast – managers who are doing a job on a day to day basis will have the best knowledge of what is achievable of the period(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Improve motivation – budget holders are more likely to work towards a budget they have set for themselves rather than one that has been forced on them(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) • Imposed budgeting (top down approach) Here the top management prepares the budget with little or no input from operating personnel. This method is suitable for new small and even company facing difficulties this is because such organization to grow and prosper top level needs to take initiatives (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 53
54. 54. MANAGEMENT ACCOUNTING Alternatives approach to budgeting • Traditional budgeting (incremental budgeting) The budget is preparing by considering the expenses during the last accounting period and adding an allowance for anticipated inflation this method is unlikely to result in an optimum allocation of resources this is because there is no justification for the inclusion of each item in the budget because current year results normally include the current budget and the current actual performance and the next period budget is based on this information where current problem likely to travel forward. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Practical example X Ltd is a manufacturing company. Transport costs for last year amounted to £100,000. Planned expansion is expected to result in £10,000 additional transport costs (estimated at current prices). Inflation is expected to be 5%. The transport budget for the next year could be based on: £100,000 + £10,000 = £110,000 to allow for expansion, Then £110,000 x 105% = £115500to allow for inflation. • Zero based budgeting (ZBB) Zero based budgeting can be defined as a budgeting method where each cost element needs to be specifically justify without accrual the budget allowance is zero and each activity is considered as if it was under taken for the 1st time resources are likely to allocated where they can be use most effectively. (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) There are three steps need to be followed in ZBB they are a description of each organizational activities in a decision packaging – with no previous budget been looked at organization need to now identify different options available for the activity been looked at(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) the packages are then evaluated and ranked in the order of priority – all the option identified now needs to be evaluated by forecasting their cost and benefit and through a cost benefit comparison the best option need to be selected(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) 54
55. 55. MANAGEMENT ACCOUNTING The resources are allocated accordingly – once the best option is identified the cost amount needs to be allocated to that option and the budget prepared accordingly(CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) • Rolling budget A budget continuously updated by adding further accounting period when earliest period has expired. In an uncertain environment planning for 12 months straight away is likely to be a problem so there are some organization who keep on adding their existing budget and when such addition are made if needed the existing period are revised this method of budgeting allows the organization to maintain a budget for a sizable fix period (CIMA MANAGEMENT ACCOUNTING AND PERFORMANCE EVALUATION OFFICIAL STUDY TEXT 2007) Suitable budgeting method for Ramona (PVT) Ltd When talking about suitable budgeting method for this organization I would like to recommend rolling budget. rolling budget is about quantifiable plan in action where when the earliest period is lapses an equal period is added from future maintaining a fix budget continuously there are number of advantages Ramona can get In modern environment uncertainty is very high making it difficult to plan for a 12 month future period all of a sudden difficult where it is much more convenient to do small addition Traditionally when the existing budget is rolled if required organization can revise the existing budget period making the budget more realistic But there are some disadvantages with this method one is frequent addition to the existing budget and the revision made is likely to take out the seriousness towards budget setting the second one is the addition and revision made by what amount and who is responsible is also likely to create conflicts But in an uncertain environment this rolling budget will suit this company 3.3 prepare relevant budgets in order to draw up a master budget for Ramona (PVT) ltd Sales budget 55
56. 56. MANAGEMENT ACCOUNTING details January February march Sales units 5000 4000 6000 Sales price 35 35 35 Sales value 175000 140000 210000 FIGURE 5 Production budget details January February march Sales unit 5000 4000 6000 Opening stock (fg) (1000) (800) (1200) Closing stock (fg) 800 1200 1000 Production unit 4800 4400 5800 FIGURE 5.1 Material usage budget details January February march Production unit 4800 4400 5800 Per unit requirements 4 4 4 Total requirements 19200 17600 23200 Rate per unit of 2.5 2.5 2.5 material Total cost 48000 44000 58000 FIGURE 5.2 Material purchase budget details January February march Production 19200 17600 23200 requirements Opening stock (rm) (4800) (3520) (4640) Closing stock (rm) 3520 4640 4000 Total purchase 17920 18720 22560 Rate per material 2.5 2.5 2.5 Total cost 44800 46800 56400 FIGURE 5.3 Labor budget details January February march Production units 4800 4400 5800 Labor hours per unit .75 .75 .75 Total requirements 3600 3300 4350 Rate per hours 8.5 8.5 8.5 Total costs 30600 28050 36975 56
57. 57. MANAGEMENT ACCOUNTING FIGURE 5.4 Variable overhead budget details January February march Direct labor hours 3600 3300 4350 needed Rate per hours 8 8 8 Total cost 28800 26400 34800 FIGURE 5.5 Production costs budget details January February march Material usage budget 48000 44000 58000 Labor budget 30600 28050 36975 Variable overhead 28800 26400 34800 budget Fixed overhead 3000 3000 3000 budget Total cost 110400 101450 132775 FIGURE 5.6 Cash budget details January February March Cash receipts December sale 2000 January sale 140000 35000 February sale 112000 28000 March sale 168000 Total cash received 142000 147000 196000 December Payable paid 15000 Administration cost 9400 9400 9400 Dividend paid 8000 Direct material January 35840 8960 Direct material February 37440 9360 Direct material march 45120 Variable cost 28800 26400 34800 Fix cost 3000 3000 3000 Labor cost 30600 28050 36975 Income tax 33900 Net cash 19360 33750 15445 Opening cash balance 20000 39360 73110 Closing balance 39360 73110 88555 FIGURE 5.7 57
58. 58. MANAGEMENT ACCOUNTING Tax calculation Details January February March Total Total net 58400 26350 69425 154175 income tax 12848 5797 15274 33918.5 FIGURE 5.8 3.4 prepare a cash budget for the first three months for Ramona (PVT) Ltd Cash budget details January February March Cash receipts December sale 2000 January sale 140000 35000 February sale 112000 28000 March sale 168000 Total cash received 142000 147000 196000 December Payable paid 15000 Administration cost 9400 9400 9400 Dividend paid 8000 Direct material January 35840 8960 Direct material February 37440 9360 Direct material march 45120 Variable cost 28800 26400 34800 Fix cost 3000 3000 3000 Labor cost 30600 28050 36975 Income tax 33900 Net cash 19360 33750 15445 Opening cash balance 20000 39360 73110 Closing balance 39360 73110 88555 FIGURE 5.9 Tax calculation 58