Managerial Accounting and Cost Concepts - Delegat's Group Limited - Case Study Example

Managerial Accounting Table of Contents Table of Contents 2 Part One 3 Part Two: Managerial Accounting and Cost Concepts 8 References 12 Part One Delegats Group Limited is one of the largest wine making companies in New Zealand which was founded in the year 1947. It is headquartered at Auckland, New Zealand. The company is engaged in the business of manufacturing wine and associated products. It uses Oyster Bay and Delegats as brand names to sell its products. It has been successfully running its business over the years in many parts of the world including New Zealand, United States, Canada, Pacific Islands, and Asian (Yahoo Finance, 2012). The company’s shares are listed in the New Zealand Stock Exchange (NZSE). This study entails about the planning, controlling and decision making process that is followed in the organization’s Management accounting department. The various skills that are required to be possessed by the management accountants of the company are also discussed in this study. Lastly the various ethical issues concerned with the organization has been included in the study. The responsibility of the companys management lies with the Board of Directors of the company. Currently the Delgats Group consists of five whole time directors who are responsible to take all the strategic decisions for the betterment of the company. Some of the important areas of responsibilities of the Board members of Delgats Group are as indicated below: They are required to adopt all the strategic plans of the company which is previously set by the Managing Director in accordance with the companys senior team of management. Next, The Board members are required to monitor all financial and operational activities carried on by the company. In addition to this, the Board members are also responsible for ensuring the fact that the company is able to develop procedures and policies effectively related to all the required disclosure requirements of the company (Delegat’s Group Limited, 2011, p.24). The company has set up lots of internal control mechanism like financial reporting, investment appraisal and operating unit control. The company is committed to provide relevant information to the shareholders on a timely basis. The company promotes high level of accountability by ensuring full participation of the shareholders. The goals and strategies of the company are clearly mentioned in the Annual Meetings with the shareholders. The two broad classifications of accounting include managerial or management accounting and financial accounting. Management accounting is concerned with the analysis of the cost information related to the company and that information is meant to be reported for the use of the internal management of the company (Coombs, Hobbs, & Jenkins, 2005, p.2). It is mainly required for the controlling, planning and decision making purposes of a company. Being a management accountant of a company one needs to possess certain skills that are required to effectively carryout his/her responsibility within the organization. First of all every management accountant of a company needs to possess analytical skills which would enable him/her to successfully analyze all the financial information related to the company. Such financial information mainly includes the information related to the different types of costs incurred by the company. Management accounting is actually a profession which requires assistance in the decision making process of the companys management, devising systems for the management of performance and planning, and facilitating expertise in control and financial reporting of the company. This helps in the planning and implementation of the strategies of the company (Needles, Powers, & Crosson, 2010, p.720). In addition to the analytical skills, the other relevant skills required by an efficient management accountant of a company include various aspects like the strategic management skills, process management skills and enterprise risk management skills. Strategic management skills refer to those skills that are required to be present in management accountants who can assist the strategic managers who are mostly the top level managers of a company to help planning for the future prospects of the company and ensure sustainable growth of the company in long term. It basically includes certain specific skills like conceptual skills, human skills and technical skills (Unl, n.d.). These skills require a person to be proactive rather than reactive which further helps the company in gaining competitive advantage in the market. The Delegats Group as discussed in this study can be supposed to have management accountants who have good strategic management skills and are effectively contributing towards the betterment of the company. The company is successful in maintaining its competitive advantage in the markets where it is operating its business and are ranked amongst the top wine making company in New Zealand. The company has set up long term strategies for itself and is performing well over the last many years. Next, the Enterprise Risk Management Skills (ERM) is of immense importance for any organization in today’s world. It is vital because of the high level of uncertainties and risks that exist in today’s business environment. This type of skill that is required to be possessed by the management accountant of a company requires him/her to have the ability to identify the likelihood of a particular event in future that is related to the primary objectives of the company. The ability to assess the impact of such relevant risks associated with the organization can help the company to take necessary steps to prevent the detrimental impact of those events on the organization. In relation to Delegats Group, it has already developed a strong risk management and internal control mechanism for itself which effectively helps the company to counter such type risks that can have a negative impact on it. Process management skills are also vital for any management accountant of a company like that of the Delegat’s Group. Process management skills actually refer to those skills which are required to be helpful in successfully managing the manufacturing process of the products produced by a company. Delegat’s Group manufactures wine and its management accountants need to have the process management skills to be able to effectively manage all its resources and manufacture wine. Another important aspect is the importance of ethics in any business organization including Delegat’s Group that is being discussed in this study. Business ethics can be defined as the study involving various decisions and activities carried on by a business concern where issues related to something being correct or incorrect are addressed. Business ethics are present so as to facilitate us with the answers to why some of the decisions taken up by some business organizations should be evaluated of ethically being correct or wrong. Making profits cannot be the sole motive of any business organization. It has its responsibility towards the environment and society in which it is operating its business activities. Ethics can be viewed from another perspective as being helpful in increasing the performance of the company as well. It is so because people are now more concerned about different unethical practices being followed in different organizations and most of them try to avoid any relationship with those countries. This has a negative impact on the company’s performance. Hence, a company following good ethical practices in its business activities can have a competitive advantage over its competitors in the market. The board of Delegats Group is committed to conduct the company affairs in an ethical way and has set high corporate governance standards. The policies of the company are prepared after going through the best corporate governance standards in New Zealand. The primary objective of the board is to build a strong relationship with the shareholders and keeping in mind the interest of the stakeholders. The company does this by adopting strategic plans as well as policies which has been set by the Managing Director of the company. The board has the right to evaluate the performance of the Managing Director. The detailed report on the performance of the Directors is been prepared annually by the company. All these suggest that the Delegat’s Group has been practicing ethical business activities quite effectively and efficiently. Part Two: Managerial Accounting and Cost Concepts Mixed cost consists of both fixed and variable cost required for running the business operations. Mixed cost consists of both fixed as well as variable component. Mixed costs are often referred to as expenses and behavioral cost. Delegat’s Group can apply mixed cost in its accounts to find out the overall cost of running the business operations. This will help the company to allocate the funds accordingly for the future operations of the business. Proper future fund planning is possible with the help of mixed cost. Manufacturing cost is of all the resource used in the process of production. The example of manufacturing cost is the electricity used to operate the office equipment, depreciation on building and factory equipment, factory personnel and factory supplies. Delegat’s Group needs to find the manufacturing cost for producing wine. This overall cost used for producing wine will help in controlling the future costs of production. Non manufacturing costs are those costs that are not incurred in the manufacturing of the product. The examples of these costs are advertising costs, sales commission, shipping costs and sales salary. Delegat’s Group needs find out the non manufacturing costs like advertising costs as it will help the company to prepare a proper marketing plan for the future as per the requirements of the company. Direct costs are those costs that are incurred in the manufacturing of the product. These costs are directly related to the production of the product. The example of these costs is direct costs, material costs and labor costs. Delegat’s Group needs to calculate the direct cost involved in the production of wine. This will help in the formulation of company’s production policy. Product costs are the cost of labor required for delivering a service to the customer. The example of product cost is direct labor, manufacturing overhead and direct material. Delegat’s Group needs to analyze the product cost as it help in finding out how much amount is been spent to deliver the product to the customers. This will help the company to find out cheaper ways of providing the product to the customer. Indirect cost is that cost which is not accountable to the cost of the object. Indirect costs can be either fixed cost or variable in nature. The example of indirect cost includes telephone charges, postage and printing, project clerical personnel, computer use etc. Delegat’s Group needs to find the indirect costs incurred in production of wine like telephone charges. This will help the company to formulate a plan in order to control the indirect costs. Period cost consists of the selling and general administrative expense identified in a particular accounting period in which they have been incurred and is charged against sales revenue of the same period. Period costs add value to the inventory. The example of period costs are insurance on factory equipment, wages of factory custodians, presidents salary etc. Delegat’s Group needs to find the period costs like insurance on factory equipment as it will help the company to plan on future purchase of machinery. Differential cost is the difference between the cost of producing a product with the help of machines and the direct labor required to produce the same number of units manually. Delegat’s Group needs to calculate the differential cost in order to find out whether it is profitable to manually produce wine or to produce wine with the help of automated machines. This would help to find out the best technique of production. Prime cost is the sum of direct material, direct labor costs and direct expense. The example of prime cost is direct labor, direct material etc. Delegat’s Group needs to calculate the prime cost in order to find out the direct cost of production. This will help the company to allocate the funds required for producing the wine. Differential revenue is the difference between two alternative revenues. The difference between two alternative sources of income falls under differential revenue. Delegat’s Group needs to calculate the differential revenue in order to find out whether purchasing new machinery or buying trucks for delivery will be more profitable for the company. Conversion cost is the sum of direct labor cost and manufacturing overhead cost. The cost element includes supervisors salary, depreciation on machinery and insurance on the production facility. The example of conversion cost includes the cost of a new equipment and training. Delegat’s Group needs to calculate the conversion cost in order to find the cost of converting raw materials into wine. Opportunity cost is the cost incurred in forgoing an alternative instead of another alternative. It is the cost of forgoing the benefits that could have been obtained using that alternative instead of another alternative. The example of opportunity cost- if a Gardner plans to grow carrots, then his opportunity cost is the cost incurred for not growing other crops instead of carrots. Delegat’s Group needs to calculate the opportunity cost of two alternative projects as it would help the company to choose the best project among the two. Sunk cost is the cost that has been incurred and cannot be recovered in the future. It is the money that is been spend cannot be recovered back. Delegat’s Group needs to calculate the sunk cost as it will help the company to estimate the amount that cannot be recovered in future. Variable costs are those costs that vary according to the volume of production. Higher volume of production indicates higher variable cost and lower volume of production indicates lower variable cost (Dittmer & Keefee, 2008). The example of variable cost- many restaurants pay their staff wages on the basis of hours worked. Higher wages will be paid to those workers who work for more hours. Delegat’s Group needs to calculate the cost of raw material, labor and packaging. This will help the company to exert proper control over the variable cost. Fixed costs are those costs that are not affected by the volume of production. These costs remain same irrespective of the volume of production. Delegat’s Group needs to calculate the salaries, insurance, rent etc in order to determine the fund that needs to be allocated annually for the fixed cost. References Coombs, H. M., Hobbs, D., & Jenkins, E. (2005). Management Accounting: Principles and Applications. London: SAGE Publications Ltd. Delegat’s Group Limited. (2011). Annual Report 2011. Retrieved from http://www.delegatsgroup.co.nz/pdfs/2011_Delegat_AReport.pdf. Dittmer, P. R., & Keefee, J. D. (2008). Principles of Food, Beverage, and Labor Cost Controls. New Jersey: John Wiley & Sons. Needles, B. E., Powers, M, & Crosson, S. V. (2010). Financial and Managerial Accounting (ed. 9). Connecticut: Cengage Learning. Unl. (no date). Can Strategic Management Skills Be Taught? Retrieved from http://www-student.unl.edu/cis/mngt475w07-875/mngt475x08/online_course/unit1/lsn01-tp05.html. Yahoo Finance. (2012). Delegats Group Limited (DGL.NZ): Profile. Retrieved from http://finance.yahoo.com/q/pr?s=DGL.NZ+Profile Read More