Accounting for Manufacturing Business - Decision Making to Commence a New Business

This article discusses the factors influencing the selection of business structure, pros and cons of different forms of business structure, financial and non-financial information, accounting and supporting systems, relevant accounting assumptions, capital expenditure decisions, and financial planning and budgeting process for a manufacturing business.

Running Head: Decision Making to Commence a New Business
Accounting for Manufacturing Business

Decision Making to Commence a New Business 1
Table of Contents
Part 1: Factors influencing the selection of business structure.............................................................2
Part 2: Pros and cons of different forms of business structure:.............................................................2
Part 3: Financial and non-financial information:....................................................................................4
Financial information.........................................................................................................................4
Non-financial information.................................................................................................................5
Part 4: Accounting and supporting systems..........................................................................................6
Part 5: The relevant accounting assumptions........................................................................................6
Part 6: Capital expenditure decisions for the business..........................................................................7
Part 7: Financial Planning and Budgeting Process.................................................................................7

Decision Making to Commence a New Business 2
For the purpose of this assignment, business of manufacturing of scoots tools is selected.
Part 1: Factors influencing the selection of business structure
In Australia there are primarily five types of business structures. They are: Sole
Proprietorship, Partnership, Trust, Company and Cooperative society. Following factors are
to be considered while selecting the appropriate business structure:
 Control: It depends on the level of control that the managers want to take on the
business. If they wish to operate the business individually without the intervention of
other people they must opt for the sole proprietorship form of business rather than
opting for partnership firm and company form where the control over the management
of the business is shared between two or more individuals.
 Limitation of Liability: The potential legal liability of the business has an impact on
the choice of business structure. If the managers are willing to protect his personal
assets from the debts and liabilities of business, then it must opt for company form of
business organisation.
 Cost and complexity of formation: It is easier and economic to set up the proprietor
form of business as it involves less legal formalities than setting up of a corporation
that requires fulfilment of numerous legal formalities.
 Tax Implications: There are various tax exemptions available with different forms of
business organisations. The business structure must be chosen as per the ability of
business to bear the tax burdens.
Part 2: Pros and cons of different forms of business structure:

Decision Making to Commence a New Business 3
Sole-proprietorship:
 Advantages
 Ownership of business is in sole control of a single person.
 It is the simplest and most economic structure to establish.
 Owner has sole right over the profits and assets of the business.
 Disadvantages
Liability of the owner is unlimited.
Owner has the limited access to the funds as required to operate business.
Business is subject to the owner’s life and health.
Partnership form:
 Advantages:
 It allows sharing of responsibilities and obligations of business.
 The contribution of different assets such as collective efforts of human resources,
skills helps the business to grow smoothly.
 The funds required to manufacture the scoot tools will be available from the partners
as and when required.
 Disadvantages:
 The partners of manufacturing firm will have unlimited liability.
 There is no permanence of the business as it is subjected to partnership termination
and dissolution.
 Transfer or termination by one partner can affect the on -going functioning of the
business.

Decision Making to Commence a New Business 4
 The manufacturing concern cannot expand itself in future as there are limits on
maximum number of partners in a firm.
Company:
 Advantages:
 It will be easier for the manufacturing concern to raise funds from various sources to
carry out its operations.
 There will be good scope of expansion of manufacturing business.
 The personal assets of the operators of business will be protected by the debts and
liabilities of company as company has a separate legal entity.
 The business of manufacturing of scoots tools can have unlimited life in case of
company form of business organisation.
 The business will enjoy various tax exemption benefits.
 Disadvantages:
 The managers will have to incur large sums to incorporate the company to operate as
a manufacturing business.
 The owners of the company will have to sacrifice the control over business to the
board of directors.
 The business will have to comply with the strict and huge legal formalities and other
regulations applicable on the manufacturing business.
Part 3: Financial and non-financial information:
The information that is required to start a manufacturing concern can majorly be classified
into classes i.e. financial information and the non-financial information. Such information can

Decision Making to Commence a New Business 5
be collected from various sources so that they can help the proposers of business plan to turn
the plans into reality by successful execution.
Financial information: This kind of information is expressed in the monetary terms and
helps to determine the financial feasibility of any business plan.
The prices of the products produced by competitor firms:
The information regarding the product prices of rivalry firms will be required to determine
the prices of the products that the manufacturing concern is going to produce. The product
pricing policies defined before the commencement of business will help the company to
determine the profitability potential of the business.
The rates of interest charged by various providers of finance:
The proposers will have to identify the extent of borrowing cost of the business to be incurred
while arranging the funds to set up the business. This information will helps them to
understand the financial feasibility of the manufacturing business.
The information regarding the overall cost to be incurred to operate the business:
Before commencing the manufacturing business, it is important for the business proposers to
estimate the direct and indirect cost that the business will have to incur in order to carry out
its manufacturing expenses. The correct cost information will help them to make sound
economic decisions (Zimmerman & Yahya-Zadeh, 2011).
Non-financial information: The information which is generally not expressed in the
financial terms but is capable of influencing the decision of the proposers of business plan.
The demand and supply of the scoots tools in the market:

Decision Making to Commence a New Business 6
The information regarding demand of the product that is proposed to be manufactured by the
firm must be analysed before starting the actual manufacturing operations because it will help
the firm to decide the quantum of products to be manufactured. Also, if the supply of the
scoots tools in the market is relatively higher than its demands, then the firm must not plan its
business in this particular segment.
The applicable laws and regulations:
Before initiating the manufacturing business it is of utmost important to identify all the
applicable laws and regulations on the business. A manufacturing concern may have to
comply with laws relating to environment protection along with various other requirements
under various laws such as corporate social responsibility of the business etc.
Part 4: Accounting and supporting systems
To operate the business of manufacturing of scoot tools, the firm require to record and
maintain proper financial data of the transactions and events related to the business. Such
accounting practices can be undertaken with the help of various accounting software such
ERP (Enterprise resource programme), MYOB, SAP, QUICKBOOKS etc. (Bodnar &
Hopwood, 2012). The implementation of such software facilitates the accounting and
financial functions of the company in the minimum time with minimum efforts. Such
accounting software will help the manufacturing business in complying with the applicable
financial reporting requirements as well as managing the relevant records such as inventory
records, payable records, bank reconciliation statements (Anandarajan, Anandarajan &
Srinivasan, 2012).
Other than the accounting software the various supporting system such as decision support
system, management information system and expert support systems can be utilised to

Decision Making to Commence a New Business 7
facilitate the operations of the business. These systems will enable the manufacturing firm to
retain its critical information records in one place.
Figure 1 MIS Report of a manufacturing company
Part 5: The relevant accounting assumptions
 Accrual assumption: The accounting transactions must be recorded in the financial
records on the basis of accrual concept. Under this assumption expenses are recorded
at the time of transaction but incomes are recorded when they are recognised in the
books.
 Going concern assumption: accounting of the company is done on the assumption
that business will continue to exist for a foreseeable period.
 Consistency assumption: The same accounting method shall be applied for all the
financial years (Schipper, 2003).
 Time period assumption: The financial reports of the entity must adopt a consistent
approach in reporting the uniform period.
Part 6: Capital expenditure decisions for the business

Decision Making to Commence a New Business 8
Capital expenditure decisions that could be undertaken in the course of business:
 Purchase of new machinery for the manufacturing the scoot tools
 Repairs of the machinery of manufacturing the scoot tools
 Renovation of the factory building (Murthy, 2011).
Part 7: Financial Planning and Budgeting Process
The financial planning and budgeting for the manufacturing business will be done by
anticipating the possible incomes and revenues from the business and estimating the expenses
and costs of the business. The estimation of income and expenditure can be done on the basis
of trends of demands and supply followed by the other firms in industries (Hansen, Mowen &
Guan, 2007).
References:
Anandarajan, M., Anandarajan, A., & Srinivasan, C. A. (Eds.). (2012). Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Bodnar, G. H., & Hopwood, W. S. (2012). Accounting information systems. Upper Saddle
River: Pearson.
Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control.
Cengage Learning.

Decision Making to Commence a New Business 9
Murthy, G. (2011). Capital Expenditure Decisions. Retrieved from:
http://dspace.vpmthane.org:8080/jspui/bitstream/123456789/1403/1/3%20Capital
%20Expenditure%20Decisions.pdf Accessed on: 18.06.2018.
Schipper, K. (2003). Principles-based accounting standards. Accounting horizons, 17(1), 61-
72.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and
control. Issues in Accounting Education, 26(1), 258-259.