Accounting for Managers Business Cost Accounting

Question: Describe about the Accounting for Managers for Business Cost Accounting. Answer: 1. Calculation of ratios for 2007 Current ratio Current asset 180742 Current liabilities 105064 Current ratio = current assets/current liabilities 1.72 Quick ratio Current assets 180742 Inventory 159880 Prepaid expenses 0 Current liabilities 105064 Quick ratio 0.20 Current ratio can be also be defined as the period in which the current asset and liabilities can liquidate. The current ratio is a ratio of current assets to current liabilities. The way by which quick ratio is calculated is by deducting inventories and prepaid expenses from current asset and dividing it by current liabilities. The optimum level of current ratio that a company should maintain is 2:1 whereas the optimum quick ratio is 1:1. The current ratio is 1.72 for super cheap auto limited whereas the average current ratio of the other firms is 1.76 in the same industry. Therefore, we can say that the current ratio is less when compared to the optimum current ratio as well as the average current ratio of the other firms (Needles Powers, 2013). However, this current ratio can be enhanced and the ideal current ratio can be achieved. The quick ratio is calculated as 0.20 whereas the average quick ratio of the other firms is 0.78 in the same industry. Therefore, the quick ratio is very less when compared to the optimum ratio and the average quick ratio of the firms of the industry. The company used to pay dividend 8 cents per share in 2006 but in 2007 the company decided to pay a dividend of 10.5 cents per share. The company has taken this step because it has experienced growth and wants to satisfy the shareholders. The earning per share has also increased from 2006 to 2007. We can draw this conclusion from the income statement that the company has a positive progress. It is a good indication regarding the movement of the company and is sure to provide a good response (Larry Christopher, 2012). Calculation of inventory turnover. Inventory turnover ratio Cost of goods sold 376733 Average inventory 147450 Inventory turnover ratio 2.55 Inventory turnover ratio is calculated to depict the efficiency of the firm and its management of inventories that it holds because of which this has been also given a name of efficiency ratio. This ratio is very important as it reflects the performance of the company (Needles, 2011). The two components of performance that affect this ratio is stock purchasing and sales. The more number of times the inventory is turned over the better is the performance of the company. So it is always advised to keep the inventory turnover ratio high. The company has shown increasing profits over the years which means that the company has the scope of expanding its business. The company can raise funds through equity or by taking loans (Needles, 2011). The company should raise its finance in such a way that the cost of capital does not increase. The company should analyse all the options available and choose the best one. Calculation of PE and Dividend yield ratio for 2007. PE Ratio Price per share 4.5 Earning per share 21 PE Ratio 21% The PE ratio is 21 for Supercheap auto limited whereas 16.7 is the average PE ratio of the other firms of the same industry. Therefore, we can say that the PE ratio is high when compared to the average PE ratio of the other firms. High PE ratio is a good indicator as it boasts regarding the strength of the company. Therefore, high PE ratio can be a good buy if the fundamentals are strong. Dividend yield ratio ? Cash dividend per share Current market price 4.5 Dividend yield ratio The average dividend yield of the other firms in the industry is 3.7%. 2. The different types of companies use different kinds of budget. It may be a flexible budget or a fixed budget. A company decides its budget according to the volume of operations then such company is said to make a flexible budget (Shim Siegel, 2009). For example, a manufacturer of a factory estimates that its cost of electricity and supplies is $10 per machine hour. He also estimates that the factory supervision, depreciation and other fixed cost is $60000 per month. The production equipment operates 5000 and 8000 hours per month. Then the flexible budget will be $60000+$10 per month. The main objective of performance valuation is to provide a fair and justifiable measurement of an employees contribution to the workforce, which help them to produce accurate appraisal document and provide protection to both the employer and the employee. A company has to prepare many other typed of budgets apart from the cash budget. The following are prepared prior to the preparation of cash budget- Sales budget- a number of sales will be recorded in the cash budget when the amount is received either from the customers or from the debtors. Capital expenditure budget- This expense will only be recorded in the period in which it has occurred. If a capital asset is bought then it will be shown on the payment side whereas if an asset is sold then the amount received will be recorded on the receipts side (Lanen et. al, 2008). Expenses budget- The expenses are recorded in the period in which it is actually paid. Outstanding expenses are not recorded in the cash budget. The operating cycle is the time period required to convert cash invested in raw material again into cash after passing through various stages of production (work in progress), finished goods and debtors. This operating cycle can also be referred as cash cycle. Lower the operating cycle lesser is the amount required as working capital in the firm. A manufacturing concern requires a higher working capital than a trading concern. It is necessary to understand all the element of operating cycle and cash cycle as it helps to analyse the requirements of the company and manage the working capital as per the requirements. There are various ratios and data which help us to analyse the efficiency of management of working capital. Some of them are- Working capital ratio- The ratio of current asset to current liabilities is called the working capital ratio or current ratio. Inventory turnover ratio- This is the ratio that reveals the number of times inventory is converted into cash in a given time period. (Venanci, 2012). Accounting is very important for all kind of enterprises either it is a private enterprise or a government enterprise. Even if the government does not carry on business for profits it has to prepare proper and reliable financial statements for reasonably informed users. It should reveal all the relevant information such as the financial position, profitability and liquidity of an enterprise (Robinson Last, 2009). There are certain purposes of the costing system. They are- i) Budgets are established with the help of proper costing system. The costing system ensures those proper budgets are established. ii) Cost control and motivation and measuring efficiencies. Efficiency enhancement is by dint of proper costing system. iii) Cost reduction can be attained with the help of costing system as changes are noted at the earliest and eliminated. iv) Cost reports are prepared in order to simplify the process and operations are refined. v) The assigning cost to the different level of inventories such as material, work in process and finished goods inventories. Therefore, costs are allocated with proper ease and hence, a great result is obtained (Larry Christopher, 2012). 3. Calculation Manufacturing overhead allocation rate for wonder product Manufacturing overheads for the year 598,080 Total machine hours for the year 7,000 =Manufacturing overhead / total machine hours =598080/7000 =85.44 per machine hour Calculation Administrative overhead allocation rate for wonder product Administrative overheads for the year 695,520 Direct labour hours for the year 14,000 =Administrative overhead / direct labour hours =695520/14000 =49.68 per labour hours Direct material= $19000 Manufacturing overhead= 85.44*400 =$34176 Administrative overhead=49.68*750=$37260 Total cost =(19000+34176+37260) =$90436 Profit = 40% * 90436=36174 Total sales value =$(90436+36174) =$126610 The allocation of overhead expenses is a crucial part when quoting on jobs and when generally deciding prices because of the following reasons- i) It makes taking decisions easier by providing relevant information- Setting prices for a product is one example that must be made by management. The management has a great say in deciding the prices of the product. This is a very crucial part to be played because to receive more than what we have spent requires great efforts and so setting up of prices keeping in view all the expenses is very essential. It is necessary to include direct cost but it is equally important to include the overhead also.(Horngren Foster, 2008). ii) Promote efficient use of resources- A product is emerged after passing through various stages of production and such production process involves many activities. These activities include setting up of machineries, finalising the finished products and rectifying the defects found therein. The managers need to be efficient in all their works so that they can promote efficient use of resources.(Charles, 2012). There are many problems encountered with the allocation of overheads which need to be rectified. The allocation of overhead depicts the understatement of the profits earned by business beyond the budgeted volume. Overhead allocation is distributed to all products irrespective of volume. When sales exceed the budgeted expectations, the accounting department will not discontinue to charge these allocations to the individual product even if the company has already generated enough business to cover the actual corporate overhead (Charles, 2012). Predetermined rate is the rate which is calculated before the period commences. The major use of this rate is to apply the manufacturing overhead to the work in progress. It also reveals the manufacturing cost of the product. The computation of this predetermined rate is done by dividing budgeted overhead by cost driver. It is a very important part and role which every manufacturing concern has to perform. It maintains the balance between the expenses and sales volume. Manufacturing cost or the cost of work in progress is calculated by using the predetermined rate and not by using the actual overhead rate. It helps us to achieve our goal of recovering more than what is spent. It helps us to ascertain the total cost of the job specified. References Charles, T.S 2012, Cost Accounting: A Managerial Emphasis, Pearson Education Horngren, C T Foster, G 2008, Cost Accounting: A Managerial Emphasis: United States Edition Lanen, W. N., Anderson, S Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press. Needles, S. C 2011, Managerial Accounting, Nason , USA: South Western Cengage Learning . Needles, B. E. Powers, M 2013, Principles of Financial Accounting. New York Press Robinson, M., Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press Shim, J. K Siegel, J G 2009, Modern Cost Management and Analysis, Barron's Education Series Spiceland, J., Thomas, W. and Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin University Press Vanderbeck, E J 2013, Principles of Cost Accounting, Oxford university press Venanci, D 2012, Financial Performance Measures and Value Creation , State of art . New York: Springer. Larry M. W Christopher J. S2012, Managerial and Cost Accounting, Pearson Press