Cost, Budgets and Strategic Decision Making in Management Accounting - Assignment Example

January 13, Management Accounting: Budget Introduction Management accounting focuses on several processes (Epstein, ). Management accounting focuses on the identification, measurement of relevant information. Similarly, management accounting includes the interpretation of the gathered cost, revenue and other relevant financial data. Management accounting includes communicating information to the affected employees. Budgets are important management priorities. A: Budget Preparation Steps The operating budget is done in several consecutive steps (Debarshi, 2011). First, the revenue or sales budget is prepared. The marketing department generates the next accounting period’s projected revenues. The projected next period’s revenues are normally grounded on the prior accounting periods’ actual revenue trends. Second, the production facility budget is prepared. The production budget is grounded on the projected next accounting period’s revenues. If the next accounting period’s expected revenues is 50 cars and the last month’s unsold cars is 15 cars, then the production budget will be to produce only the remaining 35 cars [50 cars revenue – 15 unsold cars from the prior accounting period = 35 cars] (Warren, 2015). Third, the direct materials budget and labor budget are prepared (Warren, 2015). The direct materials are used as part of the finished product. If each car needs 2 cans of paint and there are 17 cans of paint remaining from the prior accounting period, the company must purchase 53 paint cans ([35 cars x 2 cans per car] – 17 cans from prior accounting period = 53 new can purchases). If one can costs £ 5, then the budget for the next accounting period includes £ 265 (53 cans of paint x £5 per can). The labor costs must be included in the budget (Warren, 2015). The labor cost is the salary of the workers directly making the products, the car painters. Furthermore, the factory overhead budget is computed (Kinney, 2012). The factory overhead is composed of all other costs that do not fall under direct materials or direct labor classification. This includes the indirect materials figures and indirect labor amounts. The other amounts include the factory Janitors’ salaries, electricity payments, water payments, and telephone amounts. Next, the selling and administration expense budget is prepared (Bromwich, 2009). The selling expense budget includes the amounts allocated to sell the finished products, including the cars. The selling expense budget includes the sales department’s salaries and commissions, advertising, and other sales department expenses. The administration expense budget includes amounts allocated to the operations of the companies’ administration department (Moyer, 2009). Next, the budget income statement is prepared (Chapman, 2011). The budget income statement is grounded on the production budget. The statement includes the selling budget. The budget incorporates the administration budget. Further, the budget is important. For example, the production budget ensures targets are met. The budget is used for rewarding excelling employees and penalizing lackluster employees. Bottlenecks are resolved. Cash is allocated to more important activities. Management thinks in longer term format. The budget ensures excessive raw material inventories and finished goods inventories are avoided (Chapman, 2011). Budgets help Managers Control the Organisation The budget helps the management officers control the organization (Hilton, 2011). He budget helps management control, coordinate, and balance the activities of the different departments. If the marketing department employees do not reach their sales targets, management may penalize the sales personnel. Production produces what the sales department will sell (Drury 2012). Management may institute penalties such as terminating or retraining the lackluster performing production workers. If the admin overtime pay exceeds the budget admin salaries, management officers may revise the budget. In addition, all organizations will significantly benefit from the implementation of the traditional budgets (Chapman, 2011). The traditional budget serves as a guide for the employees’ activities. The employees will normally strive to meet the budget production, selling, and administration budget targets in order to get a favourable work benchmark rating. Without a budget, the production may overproduce the finished goods, reducing profits from unsold deteriorated goods. B: Importance of the Manufacturing Industry to differentiate Costs It is important for the manufacturing industry to classify costs according to behavior (Debarshi, 2011). The costs must be separated according to fixed and variable costs. Fixed costs are costs that do not increase or decrease as production increases or decreases (Horngren, C.T., Datar, S.M.). Examples of fixed costs include the production facility supervisor’s salaries. Another fixed cost is the factory monthly rent. Consequently, an erroneous management production decision will not affect the fixed cost amounts. On the other hand, the variable costs are costs that increase as production increases (Debarshi, 2011). Similarly, variable costs are costs that decrease as production decreases. One such example is the direct material costs. If there is an increase in the production of the finished goods, there is an automatic increase in the raw materials incorporated into the finished products, including the car paint used in the production of cars. Consequently, an erroneous management production decision will significantly affect the variable cost amounts. In addition, it is important to differentiate between the direct and indirect costs (Kinney, 2012). The direct costs include the direct materials incorporated into the finished products. The direct costs include the salaries of the employees directly producing the finished goods, direct labor costs. An increase or decrease in the production will generate an automatic increase or decrease in the direct costs. Consequently, an erroneous management production decision to increase or decrease production will significantly affect the direct cost amounts. On the other hand, the indirect costs (factory overhead amounts) include all amounts not classified as direct materials and indirect labor (Moyer, 2009). An increase or decrease in the production will normally not generate an automatic increase or decrease in the direct costs. Consequently, an erroneous management production decision to increase or decrease production will not significantly affect the indirect cost amounts. More importantly, It is critically important for managers to take into consideration whether the costs are direct or indirect or fixed or variable (Moyer, 2009). For example, the janitor’s salary is fixed at £ 50 per day. The manager can order the janitor hasten the cleaning of the production facility area. The manager can order the janitor to clean area 1 on Tuesdays and area 2 on Thursdays. The Janitor’s salary is pegged on a daily basis. The amount of work done by the Janitor each day does not affect the Janitor’s daily salary. Further, the manager can change the supervisor’s job tasks without affecting the supervisor’s salaries. The production facility manager can instruct the production facility supervisor to monitor the activities of two additional production groups. The manager can order the supervisor to prepare two more reports every week. The order to the supervisors will not affect the salary of the supervisor. The supervisor salary is fixed, one rate for the entire day’s work. However, the direct costs will affect the decision of the managers. If the manager orders the production department to increase the number of cars rolling out of the production line from the prior accounting period’s traditional production benchmark, the production facility manager may be required to hire additional car production employees. With more employees, the company’s direct salary amounts will likewise increase. If the manager decides to reduce the number of cars rolling out of the production facilities, the management may decide to send home some of the production employees. Consequently, the production facility salaries are reduced. Further, the variable costs will affect the production manager’s decisions (Chapman, 2011). If the manager orders the production department to add more cars coming out of the production line from the prior accounting period’s traditional production benchmark, the production facility manager may be required to purchase more paints and other direct materials. With more direct materials, including paints, used on the finished products (cars), the company’s direct materials amounts will likewise increase. If the manager decides to reduce the number of cars produced, the management will decide to purchase lesser direct material amounts, including the car paints. Consequently, the production facility direct costs are lowered. Conclusion Management accounting includes the important budget process. The budget process takes into consideration the identification of the direct costs, indirect costs, variable costs, and fixed costs. The production activity directly affects the direct costs and variable costs. Evidently, budgets must be one of management important main concerns. References: Bromwich, M., 2009. Management Accounting. London: Elsevier Press. Chapman, C. , 2011. Handbook of Management Accounting. London: Elsevier Press. Drury, C., 2012. Management and Cost Accounting. London: Cengage Learning EMEA , 2012. Debarshi, B. , 2011. Management Accounting. London: Pearson Press. Epstein, M. , 2012. Advances in Managerial Accounting. London: Emerald Press. Hilton, R. , 2011. Managerial Accounting. London: McGraw-Hill Press. Horngren, C.T., Datar, S.M., 2006. Cost Accounting: A Managerial Emphasis. London: Pearson Prentice Hall, 2011. Kinney, M. , 2012. Cost Accounting. London: Cengage Learning Press. Moyer, R. , 2009. Contemporary Financial Management . London: Cengage Learning Press. Warren, C. , 2015. Managerial Accounting. London: Cengage Learning Press. Read More