6-8 Account Receivable and Costing System

The provided assignment content discusses the importance of working capital management in organizations. It highlights the significance of understanding cash and operating cycles to minimize costs and maximize liquidity. The main ratios used to analyze efficiency in managing working capital are quick, current, and working capital ratios. These ratios help measure an organization's capacity to settle its short-term debt obligations, pay off debts using liquid assets, and ensure it has adequate cash flow for ongoing operations. Accounting is crucial in both government organizations and private enterprises as it provides financial information necessary for decision-making and accountability.

Assignment 2 1
ASSIGNMENT 2
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Assignment 2 2
ASSIGNMENT 2
Question 1
a) Importance of creating and using flexible budgets while evaluating past
performance of a profit generating organization
Flexible budget is the form of budget that shows figures for every line item from
actual figures as indicated on the organization statements as well as variance between
figures. Basically, flexible budget is usually the estimate of what costs and revenues
should have been, provided the actual activities for the period. Therefore, whenever it
is used in performance evaluation of an organization, the actual expenses are usually
compared to what costs should have been for actual activities within the period
instead of static planning budget (Horngren 2009). Flexible budget is the form of
budget that is permitted to adjust based on variations in assumptions used in creating a
budget during the management’s planning process.
The main objective of flexible budget is assessing performance of profit centre in that
it permits performance report to be created in a meaningful manner. This performance
evaluation helps in comparing actual expenses or costs incurred in production of the
products with those expenses or costs that ought to have been incurred, provided the
actual activities (Drury 2001). Thus, the main objective of flexible budget is to help in
obtaining expenses that ought to have been incurred in a project given the actual
activities. In addition, flexible budget is a performance evaluation approach aimed at
permitting correct comparison in between actual and budgeted performance. Thus,
another objective of flexible budget is to allow for comparison between actual and
budgeted performance. For example, comparison is usually distorted in case the actual
production in a company is 10,000 units which the static budget projects 9,000 units.
By reviewing original budget to around 10,000 units, it makes a detailed comparison

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in between the actual and budgeted costs, for numerous line values shows value
relative to similar output. Furthermore, flexible budget is used since it takes into
considerations of how variations in activities influence costs (Horngren 2009). For
instance, flexible budget is used in creating budgets whenever one is assessing
performance of a profit organization since the approach recognizes that budget could
be adjusted in order to indicate what costs or expenses should be for actual activities.
b) Three other budgets that might be prepared prior to cash budget
Cash budget comprises of itemization of anticipated sources and utilization of cash in
future period. It is used in ascertaining whether an organization’s operations would
give adequate amount of cash in order to meet projected cash needs. In case, this is
not the case, the management has to find extra financing sources (Drury 2001). In
essence, cash budget is usually itemized in two main segments; that is uses of cash as
well as sources of cash.
Inputs of cash budgets are basically obtained from numerous other budgets; these
include the sales budget, production as well as purchase budgets. Therefore, the three
main budgets, which are prepared prior to the preparation of the cash budget are the
sales, purchases and production budgets. Sales budget is usually the first budget
prepared since all the other budgets and particularly cash budget rely on its
information. It comprises of sales in units and selling price per units. Production
budget on the other hand is prepared in order to enlighten the management on the total
amount of units that needs to be produced. It comprises of the finished goods units
that are to be sold, desired finished goods at the year end and beginning finished
goods on hand.
c) Operating Cycle Versus Cash Cycle

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Cash cycle and operating cycles are usually measures of how efficient an organization
is in managing its cash. When an organization invests in inventories, its cash is
usually tied up till the items are sold. Thus, whatever cash is tied is not readily
available for any other use. It is thus in an organization’s will to maintain as short
cash cycle and operating cycles as possible since by doing so it can be in a position to
maximize liquidity and minimize costs of storing these inventories (Nordmeyer 2017).
The main different between the two concepts is that operating cycle represent amount
of time taken by an organization to acquire inventories, sell and receive cash from the
consumers in exchange for these inventories. Contrary, cash cycle is the amount of
time takes by an organization to covert its resources to cash. It computes amount of
time where every dollar is dedicated to numerous sales and production procedures
earlier before its conversion to cash in terms of paid invoices or account receivable.
Therefore, understanding all the components of cash as well as operating cycle would
assist organization’s management in managing or controlling their working capital
proficiently in that it helps one to understand what is to be done to minimize costs
involved and in maximizing liquidity which are crucial in working capital
management (eFinance Management 2017). In essence, understanding the concepts of
cash and operating cycles would assist in easily computing current assets, current
liabilities which are crucial in computing current, quick and working capital ratios of
an organization. Therefore, the main ratios and data used in analysing efficiency of
managing working capital are quick, current as well as working capital ratios. The
current ratio helps in measuring the capacity of an organization to settle its short-term
debt obligations while quick ratios help in measuring the capacity of an organization
to pay off its debts using its most liquid assets. On the other hand, working capital
ratio helps in measuring an organization’s efficiency and liquidity and to ensure that

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an organization is capable of continuing its key operations and it has adequate cash
flow that enable it satisfy both its upcoming operations and it maturing short-term
debt. These ratios are computed by use of both current liabilities and its current
liabilities.
d) Accounting in Government Organisations versus Private Enterprises
Accounting is the platform for reporting the financial information of an organization.
It entails measuring, communicating and identifying economic information to allow
informed decision and judgment by users of this information. Despite, these
considerations, I totally disagree with this statement that says accounting aspect is not
as significant in government entities as it is in the private organizations as the
government firms do not care at all about generating profits. This is based on the fact
that, in government entities accounting information is as much required as in private
entities where information is to be provided to potential and present shareholders,
vendors, creditors and financial analysts for their different needs. Furthermore, in
government entities accounting information is required to allow for accountability of
the government entities to the public for the task delegated to them same as the private
entities where information is required by shareholders.
e) Purpose Of Any Costing System
Costing system is usually designed to screen amount of cost incurred by an
organization. In essence, costing system is an accounting system that is established to
monitor an organization’s costs giving the management information on performance
and operations. It contains a set of processes, forms, reports and controls designed to
sum up and report to the management about the profitability, costs and revenues
(Hilton, Maher & Selto 2003). The main information supplied by the costing systems
is utilized for a number of reasons including making decision as to where to reduce

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costs in an event of an organization downturn, creating tactical and strategic plans for
the future operations, fine-tuning operations in order to generate high returns as well
as in matching the actual costs incurred alongside with the budgeted cost levels to
enhance better control. Therefore, the purpose of any costing system is to help the
management in analysis of profitability of different operations or departments.
It also assists in the analysis of the cost behaviour of numerous items of expenditure
in an organization. This would assist in future cost projection with reasonable
accuracies. Further, costing system is crucial since it assist in locating differences
between the expected results and actual results. These differences are traced to
individuals cost centres with effective costing system. Further, costing systems are
important since they assist in planning operations as well as in gaining insights into
possible effect of managerial decisions on profits and cost levels. Costing systems
also provide consistent base where performance of an organization could be measured
and provide a relevant technique whereby overheads and labour could be consistently
charged and recovered into stock.
Question 2
a) The manufacturing overheads allocation rate
In this case, manufacturing overhead allocation rate = total manufacturing overhead
costs/total machine hours
This is equal to = 598,080/7,000= 85.44
b) On the other hand, Administrative overhead allocation rate
In this scenario, administrative overhead allocation rate = total administrative
overhead costs divided by total direct labour hours = 695,520/14,000= 49.68
c) Price
Direct Material costs $19,000

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Direct labor costs (537,600/14,000*750) 28,800
Manufacturing overheads (is equal to 85.44*400 hours) $34,176
Administrative overheads (is equal to 49.68*750) 37,260
Total cost 119,236
Mark-up = 40%*119,236 =$47,694.4
Thus, total price = 119,236-47,694.4 = $71,541.6
d) Why it is important to allocate overhead expenses when deciding on prices
Management of expenses is crucial for an organization success and overhead costs
have a pivotal or crucial role in realizing favourable income margins (Drury 2001).
Therefore, overhead costs allocation is very important when deciding on prices. This
is based on the notion that allocation of overhead costs provides relevant information
in establishing base on costs of the products. Basically, it is not enough to include the
direct labour and direct material in setting prices of a given job; thus, overhead costs
have to be considered as well. Further, allocation of overhead costs is also crucial
since it promote efficient utilization of the resources (Patil & Bhangale, 2014). The
three approaches that might be taken in allocating overhead expenses include the
volume-based approach, departmental approach and activity-based approach. These
approaches experiences some issues while allocating overhead expenses which
include allocation expenses could exceed the external purchase expenses.
e) Importance of predetermined overhead allocation rates instead of actual
overhead rate
Predetermined overhead allocation rates is used in applying manufacturing overhead
to the job orders or products and is calculated at the start of every period by
subdividing estimated manufacturing overhead costs by allocation base (Drury 2013).
Predetermined overhead rate is said to set manufacturing overhead costs of the work

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in progress. Basically, predetermined overhead rate is mainly founded on the basis of
projected total overhead expenses to the projected total activities. Organizations
consider using predetermined overhead allocation rate instead of actual overhead
allocation rate since predetermined overhead rate gives a percentage to monitoring on
weekly, monthly or on quarterly basis, with amount of the expenditure and the base
being proportionate and relative to one another at a given period. Further, unlike
actual overhead rate, the predetermined overhead rate streamlines the year-end
overheads reconciliation (Hilton, Maher & Selto 2003).
Another reason why organizations use predetermined overhead allocation rate instead
of the actual overhead rate is provision of timely information for planning, control and
decision making. This is based on the fact that predetermined overhead rate is usually
computed earlier and in time thus can allow for easier planning, control of the
operations or for decision making rather than actual overhead rate which is computed
once the costs incurred and all the activities are recorded. Furthermore, organizations
make use of the predetermined overhead rates instead of the actual overhead rate in
allocation of production jobs since it is easy to apply and evade any fluctuations in the
job costs which are caused by variations in the overhead costs or production volume
all through the year contrary to actual overhead rate (Drury 2013).

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REFERENCES
Drury, C 2001, Management and Cost Accounting, Thomson Learning. ISBN 1-
86152-536-2.
Drury, CM 2013, Management and cost accounting. Springer.
eFinance Management 2017; Operating Cycle and Cash Operating Cycle; Viewed at
19th September 2017 from; https://efinancemanagement.com/working-capital-
financing/operating-cycle-and-cash-operating-cycle
Hilton, RW, Maher, M & Selto, FH 2003, Cost management: strategies for business
decisions. McGraw-Hill/Irwin.
Horngren, CT 2009, Cost accounting: A managerial emphasis, 13/e. Pearson
Education India.
Nordmeyer, B 2017, The Difference Between Operating & Cash Conversion Cycles;
Viewed at 19th September 2017 from; http://smallbusiness.chron.com/difference-
between-operating-cash-conversion-cycles-24738.html

Assignment 2 10
Patil, SS & Bhangale, P 2014, Overhead Cost in Construction Industry.