Introduction Management Accounting

The success of the organization greatly depends upon the effectiveness of management decisions. Management accounting concerns with providing prominent information to the managers that helps to take strategic business decisions. Jeffrey & Son's is a manufacturing concern that produces various popular and branded products known as Exquisite.

Present report aims at determining that how management accounting plays a significant role in achieving its business targets. The report will determine the importance of management accounting techniques such as variance analysis, budgeting and pricing decisions for the company's success. The techniques help business managers to reduce its production cost, enhance business value and its productivity. By employing this techniques business managers can make business development and ensure long term business sustainability.

Different types of cost

Cost includes all the business expenditures that have been incurred for producing the company's products. It can be classified on the basis of elements, nature and its behaviour that are explained here as under:

Cost Elements: There are three elements of a product costs that are material, labour and overhead (Demski, 2013). Jeffrey & Sons require purchasing material for manufacturing the products hence, incurred material expenditures identified as material cost. For example, steel used in auto mobile company. This is the main part of our product and without the material production cannot be possible. Another, labour expenditures incurred for making wages payments to the workers. However, direct expenses include all the business expenditures that are related to Jeffrey & Son's production in the market. For instance, payment incurred on consumables is included in direct expenses.

Nature: There are two types of cost that are direct as well as indirect cost. Direct cost often called prime cost as it directly can be attributed to a specific cost object. For instance, material, labour and production and manufacturing expenses are included in direct cost (Fullerton, Kennedy and Widener, 2013). However, indirect cost includes all the expenditures that are not related to the Jeffrey & Son's business production such as office rent and rates.

Function: On the basis of function, it can be classified into manufacturing and non manufacturing expenses. As a name suggested, manufacturing expenses are the production expenses incurred in the manufacturing process of Jeffrey & Son's. All the factory overheads of Jeffrey & Son's will be included in manufacturing expenses. However, non manufacturing expenses are unrelated to Jeffrey & Son's manufacturing process such as stationery, office and other marketing expenses are non manufacturing expenses.

Behaviour: On the basis of behaviour, it can be classified into fixed, variable, semi variable and stepped fixed cost. Fixed cost does not relate to the volume of production therefore, remain constant unrelated to increase or decrease the production. However, variable cost gets changes with changing the production volume (Needles and Crosson, 2013). Building rent, watchmen's salary, depreciation, insurance are fixed expenses while material and labour's wages are variable expenses. Further, stepped fixed cost still remains constant up to a certain production limit and tends to incline to higher level after achieving that production limit. Another, semi-variable cost remains same to the extent of a given production limit and after that it get changes with the production increases or decreases. Electricity and telephone bill are the examples of semi-variable cost.

Performance indicators for determining the areas for making potential improvement

Manufacturing organization. Key performance indicators (KPI) are the tools that measure business performance so as to take qualified and effective business decisions (Hughes and Bartlett, 2002). It determine the business performance and identify the areas at which organization require to make improvement to perform better in the market.

As per the scenario, different indicators are available that can be used by Jeffrey & Sons to assess company's performance. The company is a manufacturing organization thus; its product quality is the most important factor that measures its performance. For instance, improving the product quality states that Jeffrey & Son's performance is getting improved and vice versa. Another important indicator is employees’ productivity. Increasing the employee’s productivity implies higher the production at minimum cost for Jeffrey & Son's. This in turn, business performance will get increased. Further, customer satisfaction level measure the business ability that company’s products satisfy the customer needs effectively or not. Greater level of satisfaction indicates good business performance of Jeffrey & Son's and vice versa (Chan and Chan, 2004). Moreover, business earning capacity, profitability and financial strength is also the important tool that measure Jeffrey & Son's performance. Increasing the earnings, profits and financial status implies enhanced business performance and vice versa. In case of any negative consequences, company require to take necessary decisions in order to make improvement. This in turn, business performance can be improved.

Ways to reduce cost, enhance value and quality

By reducing cost, enhancing value and the product quality Jeffrey & Son's company can increase its profitability and achieve long term business growth.

Reduce cost: Cutting cost is a way for increasing the business profitability. Improving the workers efficiency, decreasing the unnecessary business expenditures, efficient production process are the ways that reduce business cost to a great extent (Waddock, Bodwell and Graves, 2002). Further, through regular monitoring the business operations, company can identify the factors that affect company adversely. Therefore, company can take necessary steps to reduce its cost. For instance, for reducing the material cost, Jeffrey & Son's business has to analyse the supplier's prices with the quality and purchase from the best supplier which provides the material at lower the rates with good quality. Moreover, recycling and reuse of material scrap and sales of scrap also helps to reduce cost and enhance incomes.

Enhance value: Value can be increased through improving business profitability, differentiate its products and services and increasing the employees’ turnover. Moreover, through increasing the company's revenues help to grab larger the market shares as compared to the competitors. All the factors such as competitive advantageous, higher profitability and increased worth for the shareholders helps to enhance value for Jeffrey & son's. (Cohen and Mazzeo, 2004). This in turn, Jeffrey & Son's company can increase its business value.

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Enhance quality: Along with the product cost, quality is also a most important factor that must be improved on a regular basis. Using innovation and advanced technology and technological production process helps to enhance product quality (VanDerbeck, 2012). Moreover, using standard quality of material Jeffery & Son's can enhance product quality to a great extent. Thin in turn, helps to get higher the satisfaction level of customers.

Purpose and nature of budgeting process for the budget holders

Budget: Planning the financial and operational activities of Jeffrey & Son's requires a need for preparing budget. It is a statement that accumulates all the forecasted Jeffrey & Son's expenses and incomes for upcoming years (Wu, 2005). It may be of different types includes sales budget, purchase budget, production budget and cash budget.

Purpose of budgeting process: It mainly aims at estimating future business revenues and expenditures in order to make efficient business planning. The main purpose of the budgeting process revolves around increasing the Jeffrey & Son's revenues and reducing its expenditure so as to increase its profitability (Jensen, 2003). Through preparing the budget, budget holders of Jeffrey & Son's Ltd. can manage the business operations in an effective manner. They can manage business revenues to pay its expenditures in order to enhance the business profits. Thus, the budgeting process focuses on building effective communication, coordination, planning, controlling and evaluation. In addition to it, budgeting process makes efficient utilization of Jeffrey & Son's assets that helps to yield greater the business return. Further, it monitors the business income sources and expenditures and makes control over the expenses to meet the set targets of Jeffrey & Son's (Parker and Kyj, 2006). The comparison between the actual and budgeted figures helps to evaluate variances. Therefore, Jeffrey & Son's management can take decisions to eliminate or reduce negative variance and get higher the business profits.

Appropriate budgeting method for the organization

Jeffrey & Son's Ltd. wants to commence work for preparation of forthcoming year's annual budget. The scenario stated that volatility in market and other market forces making it difficult for the mangers to prepare the business plan. However, the survival of the company greatly depends upon the business ability to take right decisions at right time and right cost. In context to the stated scenario, the organization's budget manual indicates that sales volume is the key principal in the company's budgeting process. Further, according to the marketing manager, paramount is the factor that maintains coordination in the budgetary process. On the basis of above extract, it can be concluded that Jeffrey & Son's Ltd. managers prepares its budget by adopting incremental budgeting method. In this method, current year's actual performance will be taken as base for preparing budget for future period (Neely, Bourne and Adams, 2003). Therefore, the biggest drawback of this method is that the method assumes that all the current year business activities will be continue in future period. Therefore, the method increases both the business revenues and costs without examining their importance and need.

Thus, it is clear that Jeffrey and Son's Ltd. company requires changing its budgeting method. Zero base budgeting method is most effective method for budgeting purpose. Under this method, managers determine the future business operating function and then estimate future revenues and expenditures. The budget is preparing without considering the previous year budget as base. Thus, it eliminates the unnecessary operating function hence, reduce the business cost. By preparing budget through this method, Jeffrey & Son's Ltd. can ensure optimum allocation of resources helps to increase its profits (Alaa-Aldin, 2007). Further, the method allows the company to respond changes in the market environment favourably.

Preparation of production budget and material purchase budget

Production budget: It helps Jeffrey & Son's Ltd. to identify the number of units that required being produce by the company.

Material purchase budget: It determine the quantity of material that Jeffrey & Son's required to purchase for manufacturing the required number of units.

Calculation Of Variances, Identify Possible Causes And Recommend Corrective Actions

The difference between the budgeted and actual results is known as variances. It may be of two kind’s positive as well as negative variances. Positive variances affect the company's operation in a positive manner (Malik, n.d.). However, negative variance affects operations adversely.

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Possible causes: On the basis of above computed variances, it became clear that actual business sales get declined due to decreasing per unit sales price and number of units from 4£ to 3.94£ and 4000 units to 3500 units respectively. Material cost variance arisen because of increasing the material quantity from 1400 kg to 1425 kg. Labour cost variance arises because of declining the labour hour rate from 8£ to 7.7971£. Further, it gets reduce due to decreasing the total labour hours from 350 to 345 hours. This in turn, budgeted and actual operating profits get reduced from 4160£ to 2810£ implies variance amounted to 1350£.

Recommend corrective actions: Jeffrey & Son's Ltd. company need to mitigate negative variance as impact business profits in negative direction. For mitigating sales variance, company need to increase its sales in terms of both prices and volume. By reducing material wastage, company can eliminate material variance. Labour rate get declined resulted in lowering the labour payments this in turn, total business cost get declined. Further, efficient utilization of business assets and effective market planning also helps to increase the business sales. By taking all these corrective actions, company can increase its profitability and achieve its organizational goals.

Report the findings to the responsibility centres

Responsibility centres: It is the company's subunit that gives manager authority, accountability and responsibilities (The Role of Managerial Accounting in the Management Process, n.d.). It involves revenue centre, cost centre and profit centre. Jeffrey & Son's Ltd. managers prepare report by considering the performance of all the responsibility centres that are explained below:

Revenue Centres: The centre is mainly responsible for managing the business sales. They do not have any control over the business costs (Weygandt, Kimmel and Kieso, 2015). In context to the given scenario, Jeffrey & Son's Ltd. sales get declined hence, it can be reported that the centres performance get declining. The reason for decreasing company's revenues is decreasing the sales prices from 4 to 3.94. Therefore, it is the responsibility of the centre to enhance its sales value by increasing the selling prices. Further, by providing rebates and discounts and effective marketing the products the centre can increase its revenues.

Cost centres: The centre is mainly responsible for the cost of goods and services (Newman, Fader and Bliss, 2004). They have no control over the company's sales. Jeffrey & Son's material prices get increased. Moreover, the fixed overhead of the business also get increased. Increasing the material quantity from 1400 standard to 1425 in actually tends to arising material usage variance for the business. Existed adverse material usage variance results in inclining cost to the business. Therefore, company managers will report that the centre is not performing its responsibility in an effective way. For increasing its performance, the centre requires to reduce its costs by decreasing the total business expenses.

Conclusion

The prepared report concluded that management accounting is a way that assists managers to take qualified and strategic business decisions. The management tools provide required business information to the managers that can be used to run business operations successfully. The report explained that the main purpose of management accounting for the manufacturing organization is to accurately determine the cost of goods. It helps management to reduce its cost, taking appropriate pricing decisions and maximize business profits for making business development.  Further, budgeting helps to detect any negative variances and make planning for eliminating them. This in turn, managers can build higher the business growth and long term success.

Reference

  • Cohen, A.M. and Mazzeo, M.J., 2004. Competition, product differentiation and quality provision: an empirical equilibrium analysis of bank branching decisions.
  • Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business Media.
  • Drury, C.M., 2013. Management and cost accounting. Springer.
  • Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society.
  • Hughes, M.D. and Bartlett, R.M., 2002. The use of performance indicators in performance analysis. Journal of sports sciences.

Cost centres: The centre is mainly responsible for the cost of goods and services (Newman, Fader and Bliss, 2004). They have no control over the company's sales. Jeffrey & Son's material prices get increased. Moreover, the fixed overhead of the business also get increased. Increasing the material quantity from 1400 standard to 1425 in actually tends to arising material usage variance for the business. Existed adverse material usage variance results in inclining cost to the business. Therefore, company managers will report that the centre is not performing its responsibility in an effective way. For increasing its performance, the centre requires to reduce its costs by decreasing the total business expenses.

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