ACC00724 Accounting for Managers Assignment
Added on 2020-02-19
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Costing Systems
Question 1a)A budget report compares the actual performance with the budgeted figures. Variances are identified as favourable or unfavourable. The budget may be of two types i.e. static budget and flexible budget. It is preferable to use flexible budget as it provides budgeted data for the actual level of activity whereas static budget gives budgeted data for budgeted level of activity. For example if the budgeted level of production and sales was 1000 units , all the revenues and expenses are budgeted on the level of 1000 units. However, in actual 1500 units were produced and sold. Under this situation all revenues and costs would be recalculated using the actual level of production i.e. 1500 units. The selling price and the per unit cost will remain the sameas budgeted but the budgeted total amount of revenue and costs will change as per the actual production. Also the fixed cost will not change under the flexible budget. The new budgeted figures will be compared to the actual revenue and expenses and variances will be identified and corrective action can be taken. Flexible budgets erase the possibility of volume variances [ CITATION Lan14 \l 16393 ]b)The cash budget is prepared after the operating budgets and capital expenditure budgets are prepared. The three budgets prepared before preparing the cash budget aresales budget, purchases budget and general and administrative budget. The likely timing cash flows for each of the above budget and its impact on the cash budget is discussed below:i)Sales budget – this is the first budget to be prepared as on the basis of the expected sales, the production level can be decided followed by other expenses budget. The cash flow will occur once the sales have been made depending on when the actual payment is being made. The cash flow may occur in the month of sale itself or in the following months. There would be a inflow of cash and hence would increase the cash balance in the cash budget.ii)Purchases budget – depending on expected sales, the production budget will be prepared which will determine the materials required for production. The cash flow in the purchase budget will occur when the purchases of material are
made i.e. before the production begins. Since there is a cash outflow, it will negatively affect the cash budget.iii)General and administrative expenses budget – this budget is prepared after the manufacturing budget is prepared. The cash flows will occur periodically mostly monthly. This is impact the cash budget in a negative way as it is a cash outflow.c)Operating cycle is the time taken by a company to convert the inventories into cash. Itis a sum of day’s sales outstanding and day’s inventory outstanding. This sum is deducted by the day’s payables outstanding to give the operating cycle. Both cash cycle and operating cycle measure the effectiveness with which a company is managing its working capital. While cash cycle determines how effectively a company manages its cash flow, operating cycle measures the operational efficienciesof the company. It is better to have a shorter operating cycle as a short operating cyclewill result in short cash cycle. A short operating cycle means the inventory will be converted into sales at a fast pace followed by faster receipt of cash from the debtors and a delayed payment to the suppliers. This will accelerate the movement of cash and thus improve the working capital efficiency. The operational effectiveness of a company can also be measured by using efficiency ratios like inventory turnover, receivables turnover, payables turnover, working capital ratio etc. d)No, we do not agree that government organisations do not need accounting like private enterprises. Even though government entities main goal is not profit making, however, they are liable to the public as they are using the funds provided by the public in the form of various taxes and grants. Hence, it is important for them to report the financial data with uniformity and transparency. Such information can be provided by the use of accounting systems which is the GAAP (generally accepted accounting principles). Another reason why accounting is important for government companies is for decision making purposes. The information provided by accounting systems is useful for the government representatives who are responsible for the running of the company. Such information should be organized and accounted to be helpful in decision making. Governmental accounting measures the flow of financial
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