The Usefulness of Management Accounting in the Field of Business - Assignment Example

Question 1 The ever increasing competition and evolving markets have made it compulsory for business to look at ways through which sustainability and better opportunities of growth can be identified. Management accounting and the developments has provided the different tools and drivers through which business future prospects have improved (Mitchell & Reid, 2000). The reason which has made businesses look towards management accounting is that it has different tools like cost oriented pricing, customer activities and includes both financial and non financial information. This improves the effectiveness of decision making and provides an opportunity through which business activities is better shaped. This will thereby help to understand the manner in which management accounting has helped businesses to be innovative and provided an edge as compared the competitors. The importance of management accounting has increased as the process of decision making involves both financial and non financial information. It has its importance in different field like allocation, target pricing, performance evaluation, activity based management and similar other activities which have thereby improved the relevance and importance of decision making. Since, management accounting covers a wider area it will provide the business with an opportunity to look at different factors so that the decision which are taken is sounder (Pant, 2001). The usefulness of management accounting in the field of business can be seen through the resource advantage theory. The theory is applied in different fields like marketing, management, economics, law, business and so on which thereby increases its uses and operations in the field of management accounting. Businesses have abundant resources which includes human, financial, legal, and physical and so on and using those resources in the best possible manner will determine the success of the business (Tomkins, 2001). Management accounting provides an opportunity where the different factors can be integrated together so that the overall risk for the business reduces and the effectiveness of the business is maximized. The process also tends to include the changes which technology is witnessing and would thereby provide an opportunity to act fast and make the required changes through which business would grow (Vokurka & Fliedner, 2005). Contingency theory is another model which highlights the manner in which management accounting would be helpful for the business. This theory highlights that businesses which are structured will help businesses to take better business decisions as the different environmental factors which has an impact on decision making can be included in the decision making process. This helps to maximize the effectiveness of decision making as the decision making process involves both the internal and external factors. This thereby shifts the business from the traditional mechanism of decision making towards a better process which would thereby help to improve the overall business performance. The process would result in positive decision making and would help to protect the valuable resources. Management accounting thereby as a tool provides some useful framework within which the executives are able to evaluate the different dimensions and take useful decisions based on it. The process provides an opportunity to look at different aspect of decision making which will improve the effectiveness though which managers work. Since, the external environment is evolving quickly so it becomes necessary that management accounting tools are included in the decision making process to multiply its effectiveness. Since, the process looks at converting the raw data into useful information through which better decisions can be taken this will thereby help to multiply the overall magnitude and mechanism through which decisions are taken. The process looks at using different variables through which decisions mechanism improves thereby helping the business to use the different resources effectively (Young & Selto, 2001). The usefulness of management accounting can be seen in the field of decision making where decisions are taken jointly as it helps to examine the different variables and the impact it has on businesses. The tool thereby provides an opportunity for the business to evaluate the decision from different angles thereby improving the accuracy of decision making. Further the process includes aggregation, collection, allocation, analysis, evaluation, and control the operation process (Simons, 2004) which thereby looks at different directions and takes decisions based on it. It will thereby provide the competitive edge which business looks at and would help to improve the overall magnitude of decision making thereby reducing errors and improving the final results. The use of management accounting and integrating the concept with different business framework has been the strong point based on which business has grown. The process takes care of different financial and non financial data which were not considered previously in decision making. These factors have a relevance and role in decision making and including those while taking decisions would help the business to gain the required positivity in decision making. This will help to ensure that the different resources are used in the best possible manner and the overall risk for the business reduces. As a result the business would be better placed to take decisions which involve different aspect of decision making. It has also been seen that businesses which have started using management accounting concepts have witnessed an improvement in overall business which includes financial, ethics, strategic management, enterprise risk management, corporate social responsibility, process management and leadership thereby helping the business over a long period of time. Management accounting has thereby helped to transform the manner in which business is carried out and has provided the opportunities through which business improvement has become possible. It helps the business to take better decisions as the model aims at different function, process and fields thereby improving the manner in which business acts. The process as a result has an impact on the financial aspect and improves the overall productivity resulting in better results and less wastages. Management accounting would thereby provide the business will the required leverage which the business looks for and would help to use even the minute of information in effective decision making. Question 2 A. Frucor is an Australian based company specializing in the production of energy drinks. The business carries out its operations in Australia and New Zealand. The business started its operations in 1962 and makes juice out of the rejected export fruits from New Zealand. Frucor has over 30 different brands of juices which include V energy drink, Just Juice, Fresh Up and many more. The business has looked towards being innovative and aims towards adding new products lines so that more and more people can be attracted towards the product offerings. Fletcher Construction Company as the name suggests works in the construction industry in Australia and New Zealand. The business has over 20,000 employees and works in four major areas which are buildings, infrastructure, roads and development of south pacific region. The business thereby concentrates towards improving the lives of people by building the necessary structure which would help to improve the overall economy. Wine & More is a wine outlet which specializes in providing people with a different range of wines from New Zealand. The business was started in 2007 and over the year has more than 6 stores in New Zealand. The wines sold in Wine & More are directly procured from the small vendors in New Zealand which has helped to ensure that the products supplied are of the finest quality. The business has grown over years as the business provides high quality wines and helps to suffice the need of people by providing the quality product which people are looking at. B. Frucor which produces juice is likely to use process costing for estimating the cost of the product. The prime reason for selecting process costing is that the goods produced by Frucor are identical and has very little difference. Since, the juice produced is homogenous and will have slight differences so using process costing would help to estimate the cost of the product accurately. This mechanism will help to allocate the direct cost of labor, materials and overhead to be allocated over all the products produced. The entire process for juice production would be same apart from some steps so using a process costing method would help to calculate the correct cost (Blocher, Chen Lin, 2000). Since, the process is same and the goods are produced in large batches where products are similar with very little difference so using process costing will help to garner the best result. This will help to estimate the cost accurately and would provide an opportunity through which estimates will be accurate. Fletcher Construction Company to calculate the cost of the product is likely to use job order costing mechanism. The prime reason for using job order costing is that each product produced by Fletcher Construction Company is different from one another. Since, each product is unique and has different features so estimating the cost of the product can be achieved through job order costing. The method will create a job cost for each product as they are different and unique from one another. The job cost will account for the direct materials and labor which are used in specific products and would thereby help to estimate the cost in a better way (Horngren, 2011). The mechanism will require that Fletcher Construction Company has subsidiary ledger which will account for work in progress, finished inventory and cost of goods sold. This will thereby help to estimate the cost accurately and would provide an opportunity to estimate the cost accurately. Further, the work is not completed in an accounting year and to account for the profit and loss in a construction industry job order costing is preferred. This will help to find out the profits and would provide an avenue through which cost estimates becomes more accurate. Wine & More to estimate the cost would look at using operational costing mechanism for estimating the cost of their product. The prime reason for using operation costing mechanism is that the product are homogenous but differs on the basis of quality and materials which are used in its production. Since, the wine are similar or homogenous in nature but are of different quality as they are procured from different vendors so using operational costing mechanism will help to estimate the cost more accurately. It is seen that wine have common characteristics but at the same time they have distinguishing factors so using operational costing mechanism will help to estimate the cost accurately. Further, operational costing mechanism is preferred for products looking identical but has differences in characteristics (Hilton, Michael & Setto, 2000). Operational costing mechanism is thereby preferred for Wine & More as the products look identical but have different characteristics. This process will also help in improving the estimate as it is appropriate and provides an opportunity to have a correct estimation of the product. C. The inventory valuation mechanism to be used for process costing system is one where valuation of work in progress and finished products are carried out. The inventory valuation needs to be carried out for both finished products and work in progress. Both the estimated will have to be done differently where estimate for finished products will be done based on products which have undergone the entire process and is completed. In a similar manner the work in progress estimate would be done based on products which are undergoing the process to be completed and will be based on the percentage of work completed. The inventory valuation method will help to judge the correct value of the product and would provide an opportunity to find out the cost of products accurately. This mechanism of inventory valuation will help to find out the correct value of the product at each stage and would thereby help to accurately estimate the cost of the product. This will also help in the accounting mechanism as it would provide an opportunity through which correct estimates can be achieved. Question 3 1. Breakeven point is where zero profits are made Breakeven pint in sales = Fixed Cost / Average Price per Unit – Variable Cost Per Unit = 350000 / (1.65 – 1.25) + (1.50 - .70) + (.85 - .25) = 350000 / 1.8 = 194444 .44 units 2. i. Actual Fixed Cost = 75000 Break Even Point for Buckle = (Common Fixed Cost + Fixed Cost of Buckle) / (Price per unit – Variable Cost per unit) = (75000 + 175000) / (1.65 – 1.25) = 625,000 units Break Even Point for Cuff Links = (Common Fixed Cost + Fixed Cost of Cuff Links) / (Price per unit – Variable Cost per unit) = (75000 + 60000) / (1.50 – 0.70) = 168,750 units Break Even Point for Buttons = (Common Fixed Cost + Fixed Cost of Buttons) / (Price per unit – Variable Cost per unit) = (75000 + 40000) / (0.85 – 0.25) = 191,666.67 units ii. Profits if the business sells the number of units identified as breakeven units is as Profits = Revenue – Cost = (625000 * 1.65 + 168750 * 1.5 + 191666.67 * .85) – 350000 – (625000 * 1.25 + 168750 * 0.7 + 191666.67 * .25) = 150000 The business if carried out their operations and manufactured the goods needed for breakeven then the overall profit for the business would be 150,000. References Blocher, E., Chen, K. Lin, T. (2000). Cost Management – A Strategic Emphasis. USA, Irwin, McGraw Hill Hilton, R., Michael, W. & Setto, F. (2000). Cost Management Strategies for Business Decisions. Illinois, New York: McGraw-Hill Horngren, C.T. (2011). Cost Accounting: A Managerial Emphasis (1st Australian Edition) Mitchell, F. & Reid, G.C. (2000). Problems, challenges and opportunities: the small business as a setting for management accounting research. Management Accounting Research, 11, 385-90 Otley, D. (2003). Management control and performance management: whence and wither? 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Journal of Business Strategy, 14(1), 31-36. Young, S.M., & Selto, F.H. (2001). New Manufacturing practices and cost management: a review of the literature and directions for research. Journal of Accounting Literature, 10, 265-298 Read More