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MANAGEMENT ACCOUNTING - Essay Example

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Raw material stocks: There is a 24% increase in raw material stocks compared to budget. The increase in raw material stocks may be due to higher quantity of raw materials purchased made than was necessary for the production of budgeted sales…
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MANAGEMENT ACCOUNTING
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Download file to see previous pages If the situation is allowed to continue, the company would continue to build its raw material stocks and incur inventory cost on them. The suppliers would start demanding payments for the raw material and in the long-term, this would lead to higher working capital requirement.
Finished stocks: While the sales are close to budgeted figures, the finished stocks have increased by 46% compared to budget. The increase in finished stocks means that the production of finished goods was more than sales. In planning for production, the previous stocks that the company already had may not have take been into account. Another possible reason for increase in finished stocks could be return of goods from customers that bought the goods in previous budget period. If the finished stocks are allowed to continue to increase, the company would incur unnecessary inventory cost. After a certain stage, this would become unsustainable as finished goods would stay in inventory with inventory turnover decreasing and leading to higher working capital requirement.
Debtors: The outstanding receivables have increased by 50% compared to budget with sales same as budgeted....
Bank: The bank component turning negative means that the company has used up all the money in its account and now has a loan from the bank to the amount of ? 39,000. If this is allowed to continue, the bank would keep charging interest leading to lower profitability for the company. For any new payments to be made, the company would need to draw more credit from the bank or would need to pass on all money received from customers to the suppliers. The company’s cost of capital would increase making investments in some projects less lucrative. Creditors: The liability to creditors has decreased by 77% compared to budget. The decrease in the creditors’ component means that the suppliers have been paid off a higher percentage than budgeted. Because the raw material stocks have increase and the creditors’ component has decreased, it means that all previous credit from suppliers has been repaid and a larger proportion of purchases during this budget period have been paid off as well. If this is allowed to continue, the company would be effectively paying its suppliers before getting money from the customers leading to high working capital requirement for the company, in turn leading to necessity of raising more money for the company. B) Procedures that could be put in place to control the various elements Raw material stocks: In order to reduce the raw material stocks in the short-term, the company needs to be stricter on the re-order level of the raw materials. If not already defined, the re-order levels for all raw materials needs to be defined with the procurement department and strict adherence must be ensured in placing to new orders. No new orders for raw materials should be made until the stock quantity reaches the re-order level. ...Download file to see next pagesRead More
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