Accounting Management Finance - Essay Example

? Finance and Accounting Management Finance Contents A. Behavioral issues that may emerge as a result of the current budgetary reporting system 3 B. Changes that should be made to the reporting system 7 C. Revised Report for the quarter ended August 8 References 11 Bibliography 13 A. Behavioral issues that may emerge as a result of the current budgetary reporting system Behavioral issues of current budgetary reporting system are quite similar with the issues of human behavior. It includes issues related to budgetary control and standard costing. Behavioral issues of standard costing include planning and operational variances which further includes materials, sales and labor variances. Planning and operational variances mean when plans or standards of a budget are normally depending on the expected environment where targets are decided. But in reality if the environment is not same as the expected one then the actual performance is compared with the standard performance to measure the changed conditions. In planning variance, we compare the set up standard with the revised standard and in operational variance we compare the actual output with the revised standard. The other important behavioral issues of standard costing involve Variable overhead variance and fixed overhead variance. Variable overhead variance can be defined as the difference between the standard or planned variable overhead cost which is allowed for the actual output and the variable overhead cost that has actually occurred. The variance is also called as expenditure variance as the variable overhead cost can vary with change in production thus a change in expenses amount can also be the reason of such variance (Drury, 2008, p.432). It can be expressed as follows- Fixed overhead is the portion of total overhead cost variance which can be occurred due to the difference between the standard cost of fixed overhead allowed for the output which is produced in actual. And the actual fixed overhead cost incurred. Fixed overhead variance can be derived as- Fixed overhead further expands itself as a. Budget or Expenditure Variance and b. Volume variance. Budget or expenditure variance is known as that portion of fixed overhead variance which occurs because of difference between actual fixed overheads and planned or budgeted fixed overheads during a particular period of time. It can be derived as follows- Volume Variance is the portion of fixed overhead variance which happens due to the difference between standard costs of fixed overhead which is allowed for the actual output and the planned fixed overheads for the particular period in which the actual out has been produced (Drury, 2008, p.438). Volume variance can derived as follows- Apart from measuring the variance analysis, we should also focus on the relationship between variance analysis and behavioral issues that occurs in an organization. Variance analysis measures the performance ability of the managers (Izhar, 2001, p.294). Managers know that their performing ability is judged by the variance analysis and their risk and reward depend either on adverse or on favorable result of variance analysis. Thus they have two ways, either they will work hard to achieve the standard amounts or they can manipulate the planned amounts. For this reason the organization should distinguish between controllable cost and uncontrollable cost. Controllable cost can be defined as those cost which can be controlled by the managers if they are efficient enough like cost of labor. It is a controllable cost and if management is efficient then they can reduce the labor cost by reducing number of the inefficient labors. They will hire only those labors that are skilled and efficient in the production line. Uncontrollable costs are those costs which cannot be controlled by management like cost of raw materials. Management cannot influence the cost of raw materials in the market (Bhattacharyya, 2011, pp. 539-540). Thus if the managers are judged by planning variance then they will be discouraged and de-motivated. It will further act on the productivity of the organization. Thus if the variances results are adverse then the true reason should be found before blaming or punishing the managers as because the ideal standards do not match with the current market scenario where the company is conducting its business. There are some other behavioral problems which have been arisen because standard costing is effective in standardized and stable environment but when economical and political environment is changing quickly then it has some problems. Standard cost tries to reduce the costs which act on the product quality or customer satisfaction. It focuses highly on cost of direct labor because of which other areas remain unattended. It tries to reduce the short term variable costs while most of the costs in today’s time are fixed costs. Standard costing concentrates only on achieving standards whereas in modern environment businesses put impact on continuous improvement (Banerjee, 2005, p. 600). Budgets are prepared to estimate the expenses and income that may occur in future. Budgets are prepared for a particular period of time in any organization (Bhattacharyya, 2011, p. 539). Behavioral issues of budgets can be defined as their impact on the efficiency of managers of the organization to achieve their goals. Budget of any company has double role, one is to forecast the expenses and income of the year and another is to measure the performance of the management. Budget can also be used as a tool to control the managerial performance. Budgetary control is also associated with Managerial and Organizational goals, developing process of budgets and the method of reporting and evaluation (Lucey, 2003, pp. 189-190). Successful controlling system of an organization depends on the efficiency of top management and their excellent inter personal relationships among different levels of hierarchy in the organization. Managements can motivate the employees through the budget process and can develop the attitude amongst managers towards budgetary control. There should be reward on fulfilling the target of the budget which will encourage and motivate the lower level managers and employees (Lucey, 2003, p. 198).There are main approaches that can improve the behavioral issues in the budgeting system. a. Imposed budget- it is the type of budget which supports the autocratic style of leadership. It is also known as top down budget as the top management only has the right to decide the budget and lower management only executes it (Chapman, 2011, pp. 603-604). Similarly it has happened in the current reporting system where only one director has made the budget of all the departments and supervisor of department ‘D’ is not satisfied with the report as it does not have contribution from the department. b. Participative budget- it is the type of budget which supports the democratic style of leadership and also known as the bottom up budget. Here lower management also contributes to the budget (Chapman, 2011, p. 602). c. Negotiated budget- it is the type of budget which combines both imposed and participative budget and it creates a situation where every level of management has equal responsibility to the budget preparation. B. Changes that should be made to the reporting system There are some necessary changes that should be made in the current reporting system. The current budgetary system was more autocratic type where the budget was imposed on departments. Supervisor of department ‘D’ was not satisfied with her report. Thus the current budgeting system should be changed and it should include contribution from each level of hierarch to the preparation of the report. Standard costing is helpful for this organization to prepare budget as standard costing is useful for those organization that sell one or more standardized product. Here in this case the organization produces and sells one standardized product. Standard costing is used when there is mass manufacturing which involves high investment in fixed assets like plant and machinery and production of uniform output in large volumes. To take the advantages of economies of scale, high investment costs can be pull out over volumes of unit produced. It estimates the costs of output and compares it with the actual costs which are used to measure the managerial controlling efficiency. The current reporting system should be changed in that manner which will create a wide system of accounting to record each and every transaction information to find the flow of processes in every stage of production. In this single product environment, standard costing is the appropriate process to produce proper reports for control. Usage of standard costing method will help in finding the variance reports and analyzing those. Standard costing will involve contribution from each department thus it will reduce the behavioral aspects attached with it. It provides deep information regarding the controlling process of workflow in the organization. It also provides useful information which will help in solving the problems quickly rather than guessing it and making adjustments on it. The future reporting system should include preparation of income statements to measure the performances and cost controlling system, new methods to make decisions with the help standard costing and variance analysis, elimination of unnecessary transactions. It should be approved by all the supervisors of every department and managers. It needs to show the planned income which can be actually generated in current market environment and the planned expenditures based on current market situation. It will be preferable if it shows additional capital employment during the period. C. Revised Report for the quarter ended August Particulars Actual Planned budget Variance Units produced 90000 92000 2000 Machine hours 27200 27600 1300 Sales 922,500 920,000 2,500 Raw materials 130,500 130,500   Variable production overheads 96,300 100,700 4,400 Direct labour 153,000 153,000   Fixed production overheads 115,300 125,400 10,100 Profits 427,400 410,400 17,000 In the above table, revised budget report for quarter ended August has been prepared by considering the old report and variance analysis method of standard costing. The difference between actual costs and the standard costs is known as variance (V, 2010, p. 606). Standard costing and variance analysis both are very important for management to plan their budget. If variance increases then management should be aware that manufacturing cost is higher than the planned costs. If actual costs are higher than the standard costs then the variance is unfavorable. It indicates that if every other thing remains constant then the company’s actual profit will be lower than the planned profit. If actual costs are less than the standard costs of the project then the variance is favorable. It indicates that if every other thing remains constant then the actual profit will be higher than the estimated profit in the report (Banerjee, 2005, pp. 598-599). Thus whenever variance occurs management should focus on the difference from the estimated amounts. In the older report, the actual sales were 922500 pounds and the planned sales were 950000 pounds. The planned sales revenue was higher because the standard units produced were higher than the actual units produced. The variance between actual and planned sales was 5000 pounds. The profit was calculated by subtracting the total amount cost of raw materials, cost of direct labor, variable production overheads and fixed production overheads from the amount of sales revenue earned. It was found that the actual profit was 427400 pounds and the planned profit was 438900 pounds. It shows that there was a huge variance of 11500 pounds in the profit. It means that the standard budget was not created properly by considering all the current market scenarios. The sales revenue was higher due to rise in units produced in the planned budget as compared to the actual one. It had also leaded the raw materials prices to rise in the planned budget. As actual units produced cannot be changed immediately, thus the standard units produced has been reduced and it will also reduce the standard cost of raw materials. It has been seen that actual selling price per unit of output was 10.25 pounds and the standard selling price per unit of output was 10 pounds. Now in the revised report I have taken 92000 units produced as standard and it gives us the sales revenue of 920000 pounds. Now the actual sales revenue is higher than the planned budget. It was done to match the actual units produced and actual sales revenue earned. But if the company wants to raise its actual units produced and sales revenue then it has to increase the number of efficient labors and machine hours. But then it will increase the labor cost as compared to the planned budget. Thus it is advised that the standard output should be 92000 units to match the actual capacity. It will reduce the standard machine hours, as to produce per units it needs .3 machine hours thus to produce 92000 units it will take 27600 machine hours. In case of cost of direct labor, actual was higher than the planned budget. Direct labor refers to those employees who are actually responsible to create the product on the line of production. Whereas, indirect labors are those who actually work in the production area but not directly related with the production line. Cost of direct labor is an uncontrollable cost and managers should not be blamed for the variance in labors (Siegel, 2006, p.423). In the old report, actual cost of the direct labor was 153000 pounds and the planned cost of direct labor was 152000 pounds. There was variance of 1000 pounds in the cost of direct labors. The reason of the variance might be due to general rise in labor wages in the market or the company might have some unproductive labors (Izhar, 2001, p.297). If we divide the amount of direct labor by the hours that machine has worked then we can get the standard and actual rate of labors (Siegel, 2006, p.423). The actual rate of labors was 5.63 pounds and the standard rate of labors was 5.33 pounds. It shows a slight difference between the rates but we need to estimate the rate of labor bit higher as practically the rate can be increased in current market and the labor rate variance is 7933.33 pounds (adverse). It has calculated by multiplying the actual machine hours worked with the difference of standard rate and actual rate of labors. It indicates a high adverse situation and as the direct labor cost is uncontrollable thus I have increased the planned cost of direct labor in the revised report which is equal with actual cost. The company should also replace the numbers of unproductive direct labors by recruiting skilled and productive labors to reduce the actual cost of labors. In case of fixed production overheads, estimated amount was higher than the actual amount of fixed production overheads in the old report. To analysis the fixed overhead variance, we need to calculate the standard fixed overhead rate per unit which 1.32 pounds and the variance is the difference between the multiplying amount of standard rate with actual units produced and actual amount of fixed production overhead which has come as 3500 (favorable). Thus I have not changed the amount of standard fixed production overheads in the revised report and as mentioned in the case, standard cost of fixed production overheads are absorbed on the machine hour basis. Now if we calculate the profit as per the revised report then we can see that, actual profit is higher than the standard profit. It was necessary to change standard cost in the old report to meet the actual current market costs. References Banerjee, B., 2005. Financial Policy And Management Accounting 7Th Ed. New Delhi: PHI Learning Pvt. Ltd. Bhattacharyya, D., 2011. Management Accounting.India: Pearson Education India. Izhar, R., 2001. Accounting, Costing and Management. New Delhi:Oxford University Press. V, R., 2010. Cost Accounting. India: Pearson Education India. Drury, C., 2008. Management and Cost Accounting. UK: Cengage Learning EMEA. Siegel, J., et al. 2006. Accounting Handbook. New York: Barron's Educational Series. Lucey, T., 2003. Management Accounting. UK: Cengage Learning EMEA. Chapman, C., 2011. Handbooks of Management Accounting Research, Volume 2 (Google eBook). USA: Elsevier. Bibliography Needles, B., 2012. Principles of Accounting, 12e. UK: Cengage Learning. Warren, C., 2013. Financial & Managerial Accounting, 12th ed. UK: Cengage Learning. Glidersleeve, R., 1999. Winning Business: How to Use Financial Analysis and Benchmarks to Outscore Your Competition, Volume 1. USA: Gulf Professional Publishing. Davis, C., et al. 2011. Managerial Accounting. USA: John Wiley & Sons. Duchac, J., et al. 2011. Accounting Principles: Using Excel for Success. UK: Cengage Learning. Hansen, D., et al. 2006. Managerial Accounting.UK : Cengage Learning. Dutta, 2003. Cost Accounting: Principles And Practice. India: Pearson Education India. Read More