Accounting Terms in Business Management

This study focuses on accounting terms used in business management, including cash budget, cash position, behavioral aspects of budgeting, overhead absorption rate, and production costs. It discusses the relevance of budgeting in motivating employees and the advantages and disadvantages of single absorbing rate for overheads. The study also provides calculations for cash budget, cash position, contribution, break-even point, and profit.

BUSINESS MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
Question 1........................................................................................................................................4
Cash budget ................................................................................................................................4
Cash position of company...........................................................................................................5
Issue of relevance in behavioral aspects of budgeting................................................................7
Overhead cost rate.....................................................................................................................10
Total production cost ................................................................................................................11
Advantage and disadvantage of single absorbing rate..............................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
The study is based upon accounting terms which are used on a daily basis in organisations. These
include preparation of cash budget, cash position within the business and how the cash flow has
improved and the issues of relevance in behavioural aspects of budgeting which may motivate
and demotivate employees. In the second case, study has been done of accounting terms like
contribution, break-even point and assumptions of break even model has been emphasised. The
third case represents the overhead absorption rate, production costs and advantages and
disadvantages of singe rate for absorbing overheads compared to departmental rates.
Question 1
Cash budget
Particular Desk Amount (£)
Sales 1 = 700 * 30 = 21000
2 = 500 * 30 = 15000
3 = 600 *30 = 18000
4 = 800 * 30 = 24000
5 = 1000 * 30 = 30000
6 = 1100 * 30 = 33000
141000
1) 400 * 50 = 20000
2) 300 * 50 = 15000
3) 350 * 50 = 17500
4) 400 * 50 = 20000
5) 650 * 50 = 32500
6) 800 * 50 = 40000
145000
Total sales 286000
Total cost
Rent 12000
Filling cost 2500 * 6 15000
Marketing
and
8000

advertising
cost
Manager
salary
3000 * 6 18000
Insurance
cost
4000
Labor cost 4700 (700 + 500 + 600 +
800 + 1000 + 1100) * 30 /
60 * 12
2900 ( 400 + 300 + 350 +
400 + 650 + 800) * 30 / 60
* 12
28200
17400 102600
Total cost 102600
Cash budget 286000-102600
Cash position of company
The above mentioned cash budget indicate about the expected liquidity situation of
organization. The budget comprises with the expected sales and also the potential amount of
expenditure which organization needed to entertain against operations of company. The above
mentioned cash budget indicate that Woodrock Limited Company hold very strong liquidity
position. The expected sales of company indicate that it could address favorable inflow of cash
revenue in the next six months of business operations and also the revenue of organization could
cover up the potential level of outflow of financial resources of the organization. As the cash
budget mostly indicate the expected cash company will hold against the business operations
channelize by organization (Eschelbach, 2017). The expected amount of sales Woodrock
Limited Company will address in the next six month of tenure is 286000 and the expenditure the
organization will require to incurred is amount to total 102640. The cash balance in between the
income and expenditure is shown the liquidity position of organization that will hold by the
organization. The targeted amount of sales inflow is more than the expected amount of outflow
against the business operations incurred by the organization. Expenditure or the cash outflow
which organization will be addressed summarizes rent, fixed cost, marketing and advertising
cost, manager salary, insurance cost and labor cost. All these cost are different and will entertain
a certain amount of cash outflow. The basic aim behind the formation of cash budget is to
identify the level of cash entity will generate out of the operations it has entertained in the

organization. Projection of cash budget is totally based on the amount of inflow organization will
address in the name of any such particular and also the amount of cash outflow organization will
be required to address in the respective time frame in future on the basis of expected figures will
conclude in the budget. The estimation of cash budget is based on the inflow of cash in
organization and also the outflow of cash organization needed to entertain in order to channelize
the business operations for the respective time frame.
In context to Woodrock Limited Company it can be projected that level of cash inflow in
organization is more than the expected amount of outflow organization needed to address for the
first six month of time frame that indicate that company hold a very strong liquidity or cash
position in business. In the next six month of business operations Woodrock Limited Company
will only consider the inflow of cash in form of sales outcomes of organization. In cash budget
all types of potential inflow organization will witness are included in the budget. In case of
Woodrock Limited Company only the inflow of company for the next six months of doing
business transactions is in form of sales only so only the sales revenue expected for next six
months for both the segment like desk and cabinet are included to identify the level of inflow
organization will address against the business operations entertained by entity. Woodrock
Limited Company can focus over improving the income in from of collection from debtors if any
to boost the cash position of firm in the next six months. Liquidity condition always reflect the
amount of cash organization contain in its bank so that all kind of potential expenditure
organization can bear against the liquidity situation it hold in business (Javed and Zhuquan,
2018). The expected amount of cash outflow which business entity is going to address in the next
six months’ time frame are approximately half the total amount of inflow organization is going
to entertain in against to deliver business operations. Woodrock Limited Company has also
controlled its overall cost incurred in the next six months that also denote that company is
sustaining an effective level of control in between the overall inflow and the outflow which is
expected to be incurred by entity in the next six-month time frame. Some of the cash outflow of
organization can also controlled by organization such as marketing ad advertising cost that is
controllable in nature (Ahmed and Adnan, 2018). If the company control its level of cash
outflow than it will further boost to overall liquidity position of organization as it further boosts
up the cash positon of business entity. On the basis of the overall evaluation about the cash
position of organization it can analysis that Woodrock Limited Company hold very strong

liquidity position in against to deliver business operations. Cash and liquidity situation of
organization impact over every single functional direction associated with the company. In the
regular trading activities liquidity situation play strong role in the overall business operations
entertained by the business entity.
The current cash budget indicate that company hold a very strengthened liquidity and
cash position against the business operations delivered by organization. Henceforth, it can be
stated that it ca further boost up the overall liquidity against the business operations entertained
by organization with the support of limiting the overall expected cash outflow against the inflow
of cash in business. Controlling cost is also a key factor that impact over the business operations
which support the entity to deliver business objectives in the most profitable way possible.
Issue of relevance in behavioural aspects of budgeting
Dysfunctional budgeting
When the budget goals are same as manager goals, the budget can increase the positive
behaviour. It is a sort of matching between organisation goals and managerial goals. They are
said to be as goal congruence. This infuses motivation in employees and helps in excelling of
performance. Managers participating in the budget process will also feel motivated to make a fair
budget meeting the organisation's objectives. It happens at times that due to improper
implementation and unreasonable management expectations the reaction of subordinates can
become negative. This causes conflict and interferes with the goals of the organisation (Brink,
Coats and Rankin, 2018).
Participative budgeting: The top management prepares the budget and does not take in
inclusion other subordinates and employees. They do not take their suggestions and there is no
involvement of employee in budget making. There exist communication gap between the
management and subordinates. Employees cannot suggest their grievances regarding lack of
machinery and other facilities directly to the management but only to their line managers. The
subordinates are left out of their creative suggestions to be incorporated in the budget making.
By making a participative approach in budget making, employees feel motivated to voice their
opinions and committed to the organisational objectives. By making employees participate in the
budget making, employees can consider the goals as their own goals and this can increase the

morale and performance of the employee. Facilities such as refreshments or just a snooker game
addition can also give a message to the employee that they are being cared for and looked after
well in organisation. When setting targets, the interaction with the employee will help realise the
management whether the targets set are achievable and it will also help in knowing the
perspective of management to the employees.
Budgetary slack: In this approach the managers induce a padding up of budget by under
estimating the revenues and over estimating the costs and resources needed. This is basically
done so because if the budget exceeds the requirement then there is a provision for the same. It
often happens that managers do it in most of the industries in which thee occurs a difference in
allocated resources and actual resources needed. It is seen that they are able to meet their targets
within budget but actually they have crossed the actual requirements and are only saved due to
padding up of resources. This is not a positive sign as it can lead to a misuse of resources.
Managers also do the padding up to generate incentives for completing the targets (Jones, 2017).
Budgetary pressure: Budgets should not induce excessive pressure on the line managers,
subordinates and employees. The budget making should not be too high on restrictions and not
too low also. It should give ample space for the line managers to make its employees function
with available resources and produce desired results. It is necessary to have a balance in goal
setting of budget as this will ease of unnecessary pressure on employees and managers and
motivate them to do better. If the goals can be easily achieved the managers will lose interest and
this will lead to a decrease in motivation and thus decrease performance. The upper level
managers have to be careful in charting out goals and responsibilities to be accomplished by the
managers and their subordinates.
Absence of top management support: There should be participation and cooperation extended
by top management to lower and middle management. It helps in the preparation and execution
of budgets. Top management need to show their commitment in addressing the issues faced by
the low level managers and thus this will motivate them to carry on with their tasks. Planning
and control function will get affected if there is a lack of attention by the top management to
their subordinates.

Q2. a) Revenue generated= 13*53000=689000
Direct cost per unit= Materials+ Labour+Variable overheads=5.25+2.95+1.85=10.05
Total direct costs=10.05*53000=532650
Contribution=689000-532650=156350
Contribution can be defined as the total direct costs subtracted from revenues which can
also be said to cover the fixed costs the business incurs during a reporting period. An excess of
money earned over direct costs denotes contribution.
b) Break even point (units)= Total Fixed costs/ Revenue per individual unit-Variable costs per
individual unit= 59000+47600/13-10.05=36135.59
Break even point (sales)= 36135.59*13=469762.67
Margin of safety(sales)= Current sales-Break even sales=689000-469762.67=219237.33
Margin of Safety(units)=Current sales per units-Break even point=53000-36135.59=16864.41
c)Profit=53000*13-53000*10.05=156350
Profit after fixed cost expenses=156350-(59000+47600)=49750
d)Profit=90000
Let x denote the total required units.
X(13-10.05)=90000
2.95x=90000
x=90000/2.95=30508.
e) Let selling price be x.
Profit=53000*x-53000*10.05
90000=53000(x-10.05)
90000/53000=x-10.05
x=11.74
f) The sales price currently=13
desired increase=9/100*13=1.17

new sale price=13+1.17=14.17
sales revenue increase estimated=17/100*689000=117130.
New sales revenue=117130+689000=806130.
Profit after advertising deduction=53000*14.17- 53000*10.05-45000=173360
Earlier profit=156350.
It can be a good strategy for the company to focus on advertising expenditure and increasing
sales rate by 9%. It will increase the profit even after deducting advertising expenses.
g) Assumptions to the Break even model
 The fixed costs are assumed to be constant at all output levels.
 The costs have to be taken as fixed or variable costs.
 The cost and revenue functions are taken as linear.
 The model assumes constant rate of increase in variable cost (Calabrò , 2017).
 The factor price is taken to be constant. Factors are anticipated revenue and costs of
doing business.
 It is assumed that changes in input prices such as material, wages, rent and advertisement
can be ruled out.
 The sales price per unit is taken to be constant throughout the output level.
 The business is assumed to have a constant product mix and produces one kind of
product.
 Inventory is assumed to be constant at the start and end of the accounting period.
 Costs and sales revenue is affected only by sales volume.
 Unit variable cost is taken as constant as the change in total variable cost ids considered
to be proportionate at output level.
 Factors such as efficiency, production and technology are not prone to change (Morano
and Tajani, 2017).

Question 3
Overhead cost rate
Particular Ratio Assemble
department
Joinery
department
Canteen
Indirect labor 12 : 10 : 3 13440 11200 3360
Indirect material 17 : 8 14960 7040
Heating and
lighting
3 : 4 : 1 4875 6500 1625
Rent rates 3 : 4 : 1 5250 7000 1750
Depreciation 50 : 40 : 3 10215 8172 613
Supervision 12 : 10 : 3 7200 6000 1800
Power 15 : 13 : 2 4500 3900 600
Total cost 60440 49812 9748
Canteen cost 12 : 10 5317 4431
Total overhead
cost
65757 54243
Assemble department
= Total overhead cost / labor hours
= 65757 / 2100 hours
= £ 31.31 / hour
Joinery department
= 54243 / 1400 hours
= £ 38.745 / hour
Total production cost
Particular Amount (£)
Direct material and direct labor 850
Indirect labor 24640
Indirect material 22000
Total cost of production 44790

Advantage and disadvantage of single absorbing rate
Single rate of absorbing rate indicates about utilizing same rate for absorbing different
overhead cost in organization. Advantage and disadvantage associated with utilizing single rate
of absorbing can be demonstrated in the following points.
Advantage of using single absorbing rate
There are several advantage cater if the overhead cost is absorbed on the basis of single
rate of overhead. It enables the management to absorb overhead cost immediately after the
production of good in organization. This technique provide opportunity for absorbing overhead
cost immediately irrespective of the level of business entity. This method favors the immediate
treatment of overhead cost in the accounting books. This is the key advantage associated with the
overhead cost of production where the accountant and production manager do not require to face
any confusion in absorbing the overall overhead cost and also in calculating the total production
cost of good produced in the organization. It further makes it easier for the entity to calculate the
total per unit cost of overhead. By segregating the total overhead cost incurred the per unit cost
of overhead is calculated by the business entity (Gamkrelidze and Japaridze, 2020). It also
provides the scope of segregating cost over an even basis as compare to other tactics of
absorbing overhead cost of production of the organization. All the advantage demonstrated are
among the key and primary advantage against the overhead cost of producing the total unit in the
organization. This technique makes it more simple to crate and identify the total production cost
and also to determine the selling price of the per unit product. It also clears all the doubts and
issues related to charging overhead cost of production in the industry.
The disadvantages of using single rate for overhead absorption are:
It is hard to know which of the cost centres is consuming the money allocated. It does not give a
specific allocation of resources being allocated to different sections as is in the case of
departmental rate of costing (Argade, S.L., 2020).
It is not suitable for a factory where there are a number of departments and jobs are not spending
equal amount of time in each department. In some of the cases, the jobs or units do not pass
through all the departments in the factory. Comparing to departmental rates, it is applied to the
jobs or units depending on the time spent in each department instead of single overhead
absorption rate. The single overhead rate can be applied in factories where only one major
product is treated on continuous basis.

CONCLUSION
To conclude the study, it can be said that analysis of the accounting terms leads to an
understanding of their prominence and their utility in decision-making. The cash budget
relevance for the company has been illustrated and apart from this cash flow prominence in
maintenance of working capital has been highlighted. The budget issues relating to management
and its influence on the employees and other low level managers has been discussed. The break
even analysis and its assumptions regarding various key factors have been discussed with
company's approach of using advertising and increasing revenue. The overhead costs were
numerically illustrated and merits and demerits of single rate use in organisations for calculating
absorption rates were discussed.

REFERENCES
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