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Management Accountants are more involved in financial planning rather than historical accounting.
You are required to:
- Analytically discuss how management accounting varies from financial accounting.
- Analytically discuss the importance of break-even analysis with the help of a break-even chart.
- Evaluate the importance of any six operational budgets for a limited company.
- Discuss analytically the importance of variance analysis as a cost controlling and decision making tool.
Financial accounting stresses on the financial statements that are provided to the analysts, stockholders, creditors, and other related parties. When it comes to financial accounting, the principle of generally accepted accounting policy must be used while reporting. The main aim of financial accounting is to provide a genuine view of the financial performance, as well as the performance of the company (Albrecht et. al, 2011). It is essential to prepare financial accounting reports as it is a window to the prospect of the company. The investors refer to the financial accounting for undertaking any decision. Further, it relates to the organization as a whole and certain figures might be produced for major business units. The main stress of financial accounting is in the entire history that is the report on the prior quarter or a year. It has a specific format that enables in smooth comparison of the different organization. The financial accounting rules are done by the standards like GAAP and IFRS (Needles & powers, 2013). Financial accounting is based on certain assumptions, principles, as well as conventions like going concern, realization, consistency, historical cost, etc. The financial statement comprises of Balance Sheet, income Statement, and cash flow statement.
Management Accounting also termed as managerial accounting is a support to the managers and helps the management of the organization to frame plans and policies that help in controlling day to activities of the organization. The best feature is that it considers both the quantitative, as well as qualitative information that is captured and ascertained (Horngren, 2011). The main area of management accounting is not confined to any financial or cost information rather its draws information that is relevant and material from financial, as well as cost accounting to help the management in budgeting, goal setting, and decision making, etc. This accounting can be done as per the need of the management like weekly, monthly and quarterly. Further, the main distinction with that of financial accounting is that there is no specified format of management accounting. In short, the management accounting depends on the company profile and the taste of the management (Drury, 2011). It helps in the process of financial accounting. Moreover, management accounting report is not disclosed to the outside parties as the competitors can gain an insight into the working of the company and know about the secrets. Financial accounting deals with monetary aspect while the management accounting is associated with monetary, as well as non-monetary information.
Break-even analysis can be defined as a business tool that is used across a variety of industries to assess the performance of the business in terms of costs as there is a presence of a supply-side analysis. It can be said to be a vital element of a strong business plan as it enables the business to ascertain the structure of cost and the number of units required to be sold to cover the cost or to reap profits. It is performed as a part of a business plan to judge the practical aspect of a business and whether it is apt to go for it. It is helpful even for an established business as it helps in the process of pricing, as well as promotion together with control of cost (Shim & Siegel, 2009). Break-even analysis can be done by computing the point at which the revenue generated and received becomes equal to the total cost in link with the production of goods, as well as services.
Break-even = Fixed costs/ (Selling price per unit – variable cost)
It is even termed as the cost-volume-profit analysis as it sheds light on the operating situation that happens when the company break-even. It is the point when the sales are equal to the expenses. The break-even point can be defined as that level of sales where total revenue equals the entire cost and the net income stands at zero. It is even the zone as a no-profit-no-loss point. This concept is of immense utility to the executives of the company in forecasting of profit and undertaking planning activities (Berger, 2011). It is even used in the examination of the impact of the alternate business management process. Break-even analysis is a strong motivation tool as it helps in motivating the employee, specifically the staff of sales as it projects the profits are a various level of sales. The chart projects the influence of extra sales on the profit level of the company.
Break even chart are constantly used by the managerial economists, executives and the agencies of the governments to trace the break-even point. When it comes to break-even charts, the projection is done in a separate manner for fixed cost, variable and total cost. The break-even chart shows the level of profit or loss at various levels of activities (Berger, 2011).
The X axis denotes the number of units that appears horizontally while dollar appears on the vertical Y axis. The red line projects the total annual fixed expenses while the blue line provides the entire expenses. The total revenue line and the total expenses line meets and crosses each other. The point of crossing is termed as the break-even point. The difference that lies between the line of total expenses and the overall revenue before the intersection point is the area of loss while the difference that lies between the line of total expenses and total revenue after the intersection point is the area of profit (William, 2010). The profit area is highlighted with green color and with an increment in the sale of units, the area increases. This implies that every unit after the BE point enhances the profit level.
An operational budget is a plan for expenses needed to ensure the business functioning of a public organization or a venture. Normally, the operational budget contains forecasted material and other costs of labor required to run the business and helps in the manufacturing of products and services (Spiceland et.al, 2011). Limited companies have enormous function and therefore, the need of operational budget arises. It helps in better projection and activities. A limited requires the function of the below mentioned six budgets:
Sales budget – It is one of the primary operational budgets and it is the point of initiation as it signifies the business and the process of budgetary control begins at this stage. Sales budget holds importance because many other budgets depend on it. A sales budget helps in stressing on the business and establishes a master plan for revenue generation. It contains two major elements comprising the revenue and the expense section (Vanderbeck, 2013). The revenue section deals with the number of units that is sold with value whereas the expense section forecast the cost of selling. Hence, it helps in the sales campaign.
Production budget – It helps in ascertaining the total number of units needed to be manufactured. The function of production resides on three major factors that are the units needed to be sold, the requirement of the stock and other units. A production budget helps the company to fetch an insight into the cost. The budget contains an estimate of the units that the company needs to sell (Vanderbeck, 2013). The sale of inventory depends on two main factors that are the inventory and the sales target. It helps in detailing the cost needed to match the inventory and predicts the cost required to match the sales of the product.
The material budget can be direct as a budget that is direct in feature and helps in knowing the raw materials that are needed for the purpose of purchase. If the total number of units that are required can be projected then it can be multiplied by the cost per unit to understand the amount of the budget. After the preparation of the material budget, the preparation of labor budget is undertaken that portrays the labor hour and the labor cost so that entire labor cost can be known with ease and flexibility (Horngren, 2013).
Further, the manufacturing overhead budget is done so that it projects the labor hour, as well as the labor cost to understand the total labor cost. The manufacturing overhead budget is done to evaluate the variable and fixed overhead that is expected. It contains all the costs of manufacturing apart from the direct material cost and direct labor. The information stated in the manufacturing overhead budget forms a part of the cost of goods sold the item in the master budget.
Selling expenses budget – It helps in knowing the variable and selling expenses. This budget provides the budgeted expenses for areas apart from manufacturing. When it comes to a listed company it will comprise of various smaller, individual budget submitted by the head of various departments and other persons who are mainly responsible for selling and administrative expenses. For example, the marketing manager in listed company will submit a budget providing a detail of the advertising expenses for every budget period (Wagenhofer, 2014).
General and administrative expenses budget – It provides a solid estimation of the expenses that is operational in nature and is connected with the administration. It is prepared to ascertain the non-selling expenses for a particular period. Selling expenses are the ones that are concerned with the selling of product like promotion, advertisement, etc. This budget stress on operating expenses like salaries, office expenses, depreciation, etc. both fixed and variable expenses are included in it. This helps the office manager to estimate the depreciation for a particular period (Horngren, 2013).
Variance analysis even stated as variance or ANOVA contains evaluation of the difference between two figures. It can be described as a tool applicable to financial and operational data that vouchers for identification and determination of the cause of variance. There are various forms of variance analysis. It has a strong role to play in the case of cost control because it maintains a strict control over the expenses by continuous monitoring of the planned and actual result (Wilkinson, 2016). Effective variance analysis provides a company a strong support in terms of opportunities and helps to spot trends.
Control of cost contains clear-cut information regarding the variance or deviation that appeared. It helps in taking remedial actions and helps in the proper planning process. The difference that appears between the standard and an expected performance is variance. Variance analysis, therefore, helps in comparing the actual result with a standard one and hence, becomes one of the major tools in terms of cost control (Hilton et. al, 2008). Variances are of immense help to the cost and management accounts because it aids in the decision-making process.
The managers are able to trace the differences between the actual, as well as the budgeted cost of a project. The project managers conduct variance analysis at the various milestone of the business so that the financial data can be evaluated and the actual difference can be spotted between the actual and the budgeted one. In this manner, the managers can ascertain the quantitative data relating to the expenses, revenue, and stock level. This helps to move towards the goal and helps in redefining the scope of the business. Variance analysis helps to account managers to evaluate materiality status of a project (Lanen et. al, 2008). Forecasting for the future becomes easy when the application of variance analysis is done. It is a potent tool when it comes to the process of decision making because managers are able to forecast the sales, the volume of sales and the sales mix that pertains to the future. The managers are able to spot the factors like seasonal sales and holiday sales. Hence, it leads to proper planning of the inventories and sales. Variances cannot be termed as an end rather a means of investigation, as well as planning. Variance analysis helps the managers to safeguard themselves and their employees against various failures that were not in their capacity or control (Robinson & Last, 2009). Therefore, the managers are able to take a proper step regarding the future course of activity. In short, the variance encourages the managers to reform their planning process and ensure desired performance. Overall, it can be commented that variance analysis provides a basis for cost control that in turn leads to a smooth decision making.
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