Accounting For Managers (Doc): Assignment
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Added on 2020-03-28
Accounting For Managers (Doc): Assignment
Added on 2020-03-28
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Accounting For Managers[Type the abstract of the document here. The abstract is typically a short summary of the contentsof the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]
Question 1a) Flexible budget is a budget where the budgeted costs differ for different levels of activity. The expenses of a business are classified into variable, semi variable and fixed costs with utmost accuracy as the importance of the budget depends upon the accuracy to which the costs have been properly classified. Flexible budget helps in identifying the deviation of the actual costs of the actual quantity from the budgeted costs of the actual quantity[ CITATION Hil16 \l 16393 ] .This is very important for cost control as the reason of the deviation of actual performance from the planned performance can be known. For example, management has prepared a budget for production of 2000 units of product A as follows:Standard BudgetFlexible budgetActual200015001500Variable costs ($10 perunit)$20,000$15,000$17,000Fixed cost$50,000$50,000$50,000From the above we see that the actual deviation of variable costs has been an excess of $2000over budgeted. If we were to go by standard budget, the deviation would be favourable $3,000 which is unrealistic. Flexible budgets overcome the shortcoming of the static budgets in performance evaluation. Under static budget, the actual results are compared to the budgeted ones irrespective of the level of sales. So if the sales volume increase, the corresponding variable costs are bound to increase, however, static budget does not consider this. Flexible budgets increase the budgeted costs with an increase in the volume of sales and thus provide for a more realistic performance evaluation thus eliminating the scope of volume variances.b) Before a cash budget is prepared, the budgets that need to be prepared include Sales budget, Materials budget, and Selling and expenses budget. The likely timing of the cash flows and their impact on the cash budget is discussed below:i) Sales budget – this is the first budget and depending on the sales forecasted, other budgets follow. The sales budget will increase the cash flows as the revenues will result in receipts. The timings of the cash flow depend on the collection policy of the company. If sales are made for cash, the cash flow will increase in the month of sale. For credit sales, the cash flowwill increase in the month the cash is collected for the credit sales.
ii) Materials budget – depending on the production budget, the materials required to produce the required quantity is determined by the materials budget. The materials are purchased to beused in production and hence will result in outflow/disbursements in the cash budget. The cash outflow depends on the credit the company gets from its suppliers. For cash purchases, the month in which the material is purchased is effected and for credit purchases, the month in which the payment is being made is affected.iii) Selling expenses budget – this budget results in cash outflow and hence will increase the cash disbursements in cash budget. The cash is normally paid when such expenses are incurred.c) Operating cycle is the time required to acquire the inventory, sell it and receive cash from the customers for the inventory sold. A cash cycle is the time taken to release cash tied up in production and sales processes. Operating cycle and cash cycle can be used interchangeably however; operating cycle measures the operating efficiencies whereas cash cycle measures the effectiveness of cash flow management. Operating cycle is a sum of the day’s inventory outstanding and day’s sales outstanding whereas the cash cycle is the sum of day’s inventory outstanding and day’s sales outstanding less the days payables outstanding. A shorter operating and cash cycle means effective working capital management as the inventory is converted into sales and the sales are paid for in a shorter time period. Also the time taken to pay the suppliers is more than the time taken to receive payment. The various ratios that can be used in measuring the working capital efficiency include inventory turnover, receivables turnover and payables turnover. Inventory turnover is the number of times the company is able to turn its inventory into sales in a year. Higher the ratio, the better it is. Receivables turnover is the number of times a company can convert its receivables into cash during the year. A higher ratio means the receivables are fast moving and debtors are paying on time. Higher the ratio, the better it is. Payables turnover is the number of times the company is paying its average accounts payables in a year. Higher the ratio the better it is because this means the company is able to pay its bills on time and the ratio can be used to negotiate favourable credit terms for the company.d) No, we do not agree that government organisations do not need accounting; rather it is important for these organisations to have transparency and uniformity in the financial data being reported. Accounting refers to recording all financial transactions and thereby interpreting, reporting and summarizing this data. The source of funding for these
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