Management Accounting for Sports Company - Example

Management accounting for sports company TABLE OF CONTENT 1.0 Introduction 3 2.1 Demand for sports products 3 2.2 Types of costs to be incurred 4 2.3 Pricing strategy 5 2.4 Capital structure 6 2.5 Forecasting revenue and expenses 6 2.6 Importance of estimates 8 2.7 Importance of managerial accounting for the organization 9 3.0 Conclusion 10 4.0 References 11 1.0 Introduction The following report represents the analysis of a sports products manufacturing firm. The decision regarding sourcing of finance from either saving or loan needs to be analyzed with soberness focusing on the possible implications. Management accounting is a robust tool for making these decisions, and the team has employed it in the analysis. Future growth of a firm solely depends on how operations are conducted within the organization. A young organization like this need to be vigilant in all the activities it engages in producing the final product. Pricing strategy for the organization is outlined in the analysis. 2.1 Demand for sports products Change in lifestyle has resulted in the encroachment of diseases that have inconvenience the quality of life. The diseases have been termed as lifestyles diseases or disorder with obesity and cardiac problems taking center stage. Because of this medics have advised most urban dwellers to engage in physical activities to make their body flexible and reduce chances of severing from lifestyle diseases (Hammond, & King, 2005, pg 83). In addition to that, sports have become a source of income for many household; therefore, the business plan for this organization is set on realistic and attainable goals. The diversity in sports gives people the chance of engaging in different sports depending on their endowment. Global competition for different games proves the presence of a market not only today, but still in the future. Presence of competitors in this industry of manufacturing sports product cannot be ignored; in fact, their presence is appreciated in a healthy business environment. To beat the competitors, the organization has a laid down guideline on producing quality product and services to their consumers. With these facts in place, the feasibility of the organization is indisputable, and it is just a matter of time, and the organization will be a talk in the town for its growth potential. 2.2 Types of cost to be incurred All members involved in the formation of this organization are optimistic of it to grow exceptional in the near future. To ensure this happen the cost has to be minimized to the lowest possible value. Cost reduction normally leads to the challenge in quality of products and services, but the minimum level for cost reduction has to be set to eliminate the chances of quality been compromised (“Costing”, 1983, pg 94). Prime cost will include cost of acquiring material, and direct labor in the production. In addition to that, overhead charges such as electricity, and administrative cost. All these cost will sum up the production cost, so it is the responsibility of the organizational members to reduce the cost by adopting lean manufacturing and kaizen model. It is from the total production cost that the unit cost of production will be determined. Fixed cost refers to those costs that do not change with the level of production (Costing”, 1983, pg 17). For this manufacturing organization, fixed cost includes the machinery that cost £ 10,000 and office rent £ 10,000. Variable cost, on the other hand, refers to those costs that change with the level of production. Variable costs are normally numerous and when sum up exceed fixed cost especially if the demand for sports product are in demand. Variable cost will include material cost, wages, and some of the overhead like electricity. 2.3 Pricing strategy Determining the best selling price for a product is tricky and a must do task. Prices of competitors are always the challenging factor when setting the selling price. New organizations always try to set their prices close to the leading competitors. However, low prices to consumers is an indication of low quality, therefore, there should be a keen consideration (”Pricing”, 1980, pg 38). The company will determine the unit cost production (cost incurred in producing a single unit) first. It is expected the cost will be lower than the selling price for the same product in the market. A small margin will be added up as a profit, but the overall price for the product will be close to those of our competitors. The pricing strategy will be an integration of competition-based and value-based pricing. Because the organization is determined to produce quality products and remain competitive in the sports industry both strategy in pricing are essential. Arguing with the competition-based pricing strategy, it is known that other players have been operating and have built their reputation. Since this organization is a new one in the industry, it will have to find a means of creating awareness for its brand among the public. The price of the final product should be close to the price of key competitors. Quality products will require the use of high quality raw materials and services during production. Therefore, value-based pricing is better and aligns with the organization objective of providing quality sports product and services. Transformation of the raw materials into finished product involves several processes that create value it is how these processes are conducted that determines the quality of the final product. 2.4 Capital structure Decisions regarding the structure of the capital are sensitive especially to firms that are publicly held it becomes challenging. According to (Bierman, 2003, pg 56), taking a loan from financial organizations to move a company to the next level has become inevitable for most up-coming business. The organization acquired a loan that attracts an interest of 8% per annum. It can be understood that it is hard for a new company to get investors who will be willing to support it financial. The only avenue remaining is approaching financial institutions for loan. Though this might be a remedy for that moment, there are implications attached to the loan awarded to the organization. First the rate at which the organization will grow is cut-short since it has to use its profit to service the loan. Defaulting loan payment has consequences to the organization that might be even lead to the business collapse. Venturing into business there is no certainty of instant prosperity; therefore, the loan granted to the organization should have a grace period for it to be on its feet first. Secondly an organization that has high debt ratio does not attract investors for an obvious reason of uncertainty in paying off its obligation. 2.5 Forecasting revenue and expenses Forecasting the act of predicting how future is expected to occur. In managerial accounting, forecasting can be for both short and long-term regarding flow of cash either in or out the organization. The accuracy of the forecast is what that matters a lot to manage the flow of cash. According to (Lawrence, 2010, pg 70), it is indisputable that forecasting cannot be hundred percent accurate, and, therefore, there should be some bit of tolerance for the error incurred during forecasting. Forecasting the revenue for the organization should be guided by the trend in sales within the industry. It is estimated that per month the sales locally, nationally, and internationally to be one thousand, two thousand, and three thousand respectively. These estimates in the sales play a vital role in the planning and managing of costs to be incurred. First, the total sales per month are six thousands units, therefore, expenses (labor, raw material et cetera) to be incurred should be guided by the estimated sales. This being the case, it is expected the forecasting need to be a bit accurate so as eliminate chances of poor planning. For instances, if available resources can produce as per the estimate then the demand increase to eight thousand, this will strain the available resources. In addition to that, the demand will not be fully met, thus turning away customer leading to dissatisfaction on their side. Cash in and cash out are derived from the expected sales, cash out are expenses expected to be incurred within that timeframe while cash inflow are the expected income from sales the difference between them is the profit. According to (Stenzel, & Stenzel, 2003, pg 32), if the forecast is done shoddily the anticipated profit will fall short severely. It is from the profit that a firm will plan for its growth, so a forecast that is poor will restrain the growth of the organization. The forecasted demand for this organization has been done with the consideration of the trends in the market, and its status within the industry. 2.6 Importance of estimates Multi-national businesses like Kentucky Fried Chicken (KFC) depend on estimates when making their plans and managing cost for a certain period. Estimates make the management be focused on meeting what was planned for that period. This ideology can be linked to the how people actually live. Having a purpose of living is what matters in life, and that will be the guiding script in one’s daily endeavor. The same case applies to businesses that have a goal to achieve with the resources available. The management of the organization will work tirelessly to ensure the estimated sales are met. Failure to meet the target, forces the team to go back to the drawing board to assess the problem and come up with possible remedies. If the estimate goes well with a difference of ± 5%, then the estimate has to be revised. Estimates are not meant to put the ceiling for the management’s capability rather it should be a motivating factor (Lawrence, 2010, pg 52). Successful meeting the estimates provide a platform for adding new challenge in terms of adding new market for the sports products. Prosperous companies have used estimates to gauge the efficiency of the management of turning the stocks into revenue. High turnover rate indicates an efficient and hardworking team and credit has to be granted to them. There are other factors that are play part in the realization of the estimates. Quality being the key component followed by pricing decision regarding them should always be considered. Pushing sales for company growth should be based on those two factors because price can be reduced but compromise the quality. It will be difficult to meet the new estimates because of consumer’s dissatisfaction and also to win their loyalty back. 2.7 Importance of managerial accounting for the organization The value attached to management accounting is beyond measurability with any measurable instruments if there is one. For this organization, it forms the base for analyzing various costs that can be incurred in the production of sports products. Minimizing production cost, while maintaining the quality of the products is the critical concern for this discipline. Information generated by financial accounting cannot be useful unless management accounting steps in and perform analysis. This does not mean that, financial accounting should be ruled out as irrelevant. Financial accounting is the foundation of management accounting (Stenzel, & Stenzel, 2003, pg 63). Questions arising over raw material procurements and other costs incurred are best dealt with management accounting. This organization is still at its tender stage and it has to incur only cost that can move it to the next level of competition. Management accounting plays this crucial role in eliminating such costs and identifies the relevant cost. Relevant cost refers to those costs that when incurred will benefit the organization. For instance, in future the organization might wish to add new product line in their operation but this will require relevant cost analysis which is part of management accounting. 3.0 Conclusion The future of the firm is bright, and the team is optimistic of its growth in the near future. Strategy put in place are geared towards ensuring its objectives are met. The company admits the existence of competitors within the industry and decides to capitalize on product quality and price. Management accounting will control the costs incurred and determine the value different operations brings to the organization. In general, the industry is still exploitable, and the company has a potential to grow and be among the giants. 4.0 References Bierman, H. 2003. The capital structure decision. Boston: Kluwer Academic. Costing. 1983. London: Holt, Rinehart and Winston. Hammond, T., & King, D. 2005. Sports (Rev. ed.). New York: DK Pub. Lawrence, K. 2010. Advances in business and management forecasting. Bingley: Emerald. Pricing. 1980. Boston, MA: Harvard Business School, Pub. Division, Operations Dept. Stenzel, C., & Stenzel, J. 2003. Essentials of cost management. Hoboken, N.J.: Wiley. Read More