Accounting for Managers: Financial Analysis and Budgeting

This document presents a comprehensive solution to an Accounting for Managers assignment, addressing various aspects of financial management. The solution begins by explaining different types of budgets, including fixed and flexible budgets, and their role in optimizing financial resources. It further delves into performance evaluation, emphasizing the importance of various budgets like capital expenditure, expense, and sales budgets. The document then explores key concepts such as the operating cycle, cash cycle, and relevant financial ratios like the inventory turnover and working capital ratios, highlighting their significance in evaluating a company's working capital requirements. Additionally, it discusses the role of accounting in both profit-oriented and government enterprises, emphasizing its importance for financial transparency and decision-making. The solution also covers the objectives of a costing system, including cost minimization, report preparation, budget creation, and cost allocation, and provides a detailed calculation of manufacturing and administrative overhead rates, along with a comprehensive cost analysis for a hypothetical product. It concludes by explaining the importance of overhead allocation in pricing and decision-making, and the calculation and significance of the predetermined overhead rate.

ACCOUNTING FOR MANAGERS

Accounting
Answer – 1
a. There are various kinds of companies, which utilize distinct types of budgets within
their operations in order to enhance the availability of their financial resources. Such
budget may be either a fixed budget or a flexible budget. A flexible budget can be
referred to as the budget wherein a company is capable of making in a budget based
on the volume of its operations (Robinson & Last, 2009). For instance, if a
manufacturer ascertains that the cost of his supplies and electricity is $20 per hour. He
is also well aware of the fact that the depreciation, supervision, and other fixed costs
of the factory is $50000 per month. Moreover, the production inventories operate
around 4000 and 7000 hours every month. Therefore, from this situation, it can be
determined that the flexible budget of the manufacturer is $50000+$10 per month.
The major goal of evaluation of performance is to offer an equitable measurement of
the contribution of employees to the workforce, safeguard both the employees and
employers and produce appropriate appraisal documents (Venanci, 2012).
b. It can be noted that apart from the cash budget of a company, it is also under an
obligation to prepare several other kinds of budgets. Furthermore, the budgets that are
required to be prepared before the preparation of cash budget are as follows:
 Capital expenditure budget
Expenses related to such budget can only be recorded in the tenure in which these have
incurred. Furthermore, if a capital asset is purchased by the company, then the same is
required to be reflected on the payment side of the financial statement whereas if a capital
asset is sold by the company, then the amount attained in relation to the same must be
reflected on the receipts side (Robinson & Last, 2009).
 Expense budget
Expenses associated with such kind of budget are always recorded in the period in which the
same are already paid. Furthermore, expenses that are outstanding in nature does not form
part of such budget.
 Sales budget
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Accounting
When the company attains successful sales within its operations, the same are recorded in the
cash budget or sales budget when the amount related to the same are adequately attained from
the debtors or customers respectively (Robinson & Last, 2009).
c. Operating cycle can be referred to as the average period of time that is necessary for a
business enterprise to facilitate an initial cash outlay so that production of goods can
be undertaken, the same goods can be successfully sold to the consumers, and cash in
respect of the same is properly attained from those customers. Such operating cycle is
very relevant for making an estimate of the amount of working capital that is required
by a company to enhance or develop its operations in the market (Shim & Siegel,
2009).
Cash cycle, on the other hand, can be defined as the computation of cash flow that
plays a key role in measuring the time that is consumed by a company to transform all
its investments into inventories, and other resource inputs into liquid cash.
Furthermore, the reason why it is important to understand the elements of cash cycle
and operating cycle can be attributed to the fact that it assists in evaluating all the
requirements of a company and also plays a vital role in evaluating the working
capital requirements as well.
There are different kinds of ratios that can be used to evaluate the management
effectiveness of working capital. Some of them are as follows:
 Inventory turnover ratio
This ratio is the ratio that plays a key role in reflecting how many times the company has
replaced or sold its inventories within a period of time.
 Working capital ratio
The ratio of current assets divided by current liabilities is called the working capital ratio of a
company.
d. Accounting is a very significant practice for all types of enterprises including
government enterprises. The reason behind this can be attributed to the fact that even
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Accounting
if a government company does not carry out its activities for the objective of attaining
profits, yet it is under an obligation to prepare and maintain effective financial
statements so that the users can be reasonably informed of the transactions taking
place in the books of accounts. Besides, such accounting practice can assist the
enterprises to reflect all the significant details like profitability, liquidity, and financial
position of an enterprise. Nevertheless, such accounting can be regarded as a service
activity because it assists in offering quantitative details of financial nature to all the
stakeholders that can further be utilized in making relevant economic decisions.
Therefore, it cannot be stated that government enterprises are under an obligation to
discard preparation and maintenance of accounting practices just because of the fact
that they undertake their operations, not for the purpose of attaining profits. In order
to modify and enhance the flow of operations within an enterprise, every enterprise
including government enterprises must prepare accounting system so that they can
easily pave a way for developing their future effectiveness. Overall, even though there
are no profits occurring to a government enterprise, yet they are responsible to reflect
the transactions taken place for the benefit of the general public (Needles & Powers,
2013). Hence, without preparation of accounting system, government enterprises
cannot penetrate the market effectively because the users of financial statements want
proper disclosure of every transaction accruing within the enterprise.
e. There are various types of objectives of a costing system that plays a key role in
smoothening the operations of an entity. These objectives are as follows:
 Costing system can play a key role in minimizing the costs because deviations
or trends can be ascertained with the help of such system that can be taken into
account to make proper decisions (Spiceland et. al, 2011).
 Costing system can play a vital role in the preparation of cost reports that
further assists in the simplification of the procedure and refining of other
operations.
 Costing system can assist in the preparation of various budgets for an
enterprise so that they can analyze their inflow and outflow of cash (Spiceland
et. al, 2011).
 Costing system can assist in assigning various costs to the work in progress,
material, and finished goods as a whole.
 Costing system can also assist in controlling various kinds of costs so that the
efficiency of an enterprise can be easily measured. In simple words,
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Accounting
enhancement of an entity’s efficiency can be attributed to the fact that a proper
costing system prevails within its framework.
Therefore, with the help of a costing system, costs can be properly allocated with flexibility
and ease, thereby resulting in the attainment of the proper outcome.
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Accounting
Answer - 2
a. Computation of Manufacturing overhead rate for wonder product
Manufacturing overhead for wonder product = 598,080
Machine hours = 7,000
Manufacturing overhead rate = Manufacturing overhead / total machine hours
= 598080/7000
=85.44 per machine hour
b. Computation of Administrative overhead allocation rate
Administrative overhead for wonder product = 698,520
Direct labor hours = 14.000
Administrative overhead allocation rate = Administrative overhead / direct labour
hours
=695520/14000
c. Direct material = 19,000
Manufacturing overhead = 85.44 * 400
= $34176
Administrative overhead = 49.68 * 750
= $37260
Hence, total cost = sum of direct material, manufacturing overhead and administrative
overhead
=19000+34176+37260 = $90436
Therefore, profit = 40% of 90436 = 36174
Total sales value = $(90436+36174) = $126610
d. It is vital to allocate the overhead while quoting jobs or ascertaining the prices
because it helps with the information related to the process of decision making. The
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Accounting
prices need to be set up by the management. The prices are based upon the products
cost that means the prices should not include direct cost along with overheads.
Secondly, the use of resources is efficient in nature. There are many activities taken
into consideration for producing a product that consists of setting up of production
machinery, evaluating the final product and tracing the products that are defective in
nature (Charles, 2012). If the products are chargeable for utilizing the activities then
the manager will contain an incentive so that the activities can be efficient in nature.
There are various problems associated with the overhead allocation that needs to be
corrected. The overhead allocation understates the business profitability that is above
the budgeted volume. The assignment of this overhead is done irrespective of the
volume. When the sales surpass the budgeted expectations, the accounting segment
will charge such allocation to the individual product (Vanderbeck, 2013). This will be
done considering the fact that the company has already produced enough business to
grasp the actual overhead. Such false charges will be regularly added and the profits
will be understated.
e. Predetermined rate can be stated as the rate that is utilized for the application of
manufacturing overhead to work when the inventory is in progress. The computation
of the predetermined overhead rate is done before the period starts. The initial step is
to ascertain the activity base amount that is needed to back up the operations. The
second step is to ascertain the cost of manufacturing at the level of activity. The third
step lies in the computation of the predetermined rate by dividing the overhead that is
estimated by the amount for the cost driver (Lanen et. al, 2008). It is essential and
vital for every company to know the predetermined rate for the business as it helps in
keeping track of the expenses and links with the sales and the production. The
predetermined rate enables in ascertaining the approximate total cost of every job.
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References
Charles, T.S 2012, Cost Accounting: A Managerial Emphasis, Pearson Education
Lanen, W. N, Anderson, S & Maher, M. W 2008, Fundamentals of cost accounting, NY:
Hang Loose press.
Needles, B. E.& Powers, M 2013, Principles of Financial Accounting. New York Press
Robinson, M & Last, D 2009, Budgetary Control Model: The Process of Translation.
Accounting, Organization and Society, NY Press
Shim, J. K & Siegel, J G 2009, Modern Cost Management and Analysis, Barron's Education
Series
Vanderbeck, E J 2013, Principles of Cost Accounting, Oxford university press
Venanci, D 2012, Financial Performance Measures and Value Creation , State of art . New
York: Springer.
Spiceland, J, Thomas, W & Herrmann, D 2011, Financial accounting, New York: McGraw-
Hill/Irwin University Press
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