Management Accounting Report Cost Classification - Inventory Essay Example
Jupiter LTD - Management Accounting Report Cost Classification introduction. |1 | | |Email: [email protected] com | JUPITER LIMITED Management Accounting Report Prepared for: Jupiter Ltd. Chief executive officer Prepared by: Date: April 03 2012 TABLE OF CONTENTS EXECUTIVE SUMMARY2 THE ROLE OF MANAGEMENT ACCOUNTING3 CLASSIFICATION OF COSTS4 INVENTORY VALUATION METHODS7 RECOMENDATIONS 11 Bibliography12 Jupiter Ltd. Management Accounting Report EXECUTIVE SUMMARY 1 2
This report discusses in detail the management accounting in relation to Jupiter Ltd. It starts by highlighting the role of management accounting in an enterprise such as decision making planning and budgeting. It then talks about the different cost and cost classification methods. The report goes on to talk about the main inventory valuation methods and how different approaches can be useful in Jupiter Ltd. The report then moves onto the sets of recommendations where a special advise about management accounting system are given. Jupiter Ltd. Management Accounting Report THE ROLE OF MANAGEMENT ACCOUNTING
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WHAT IS MANAGEMENT ACCOUNTING Throughout history humans were producing goods. A trade among them often involve barter and sharing. As a time progress , trade has started to organize in a form of different companies. Such a companies in order to gain profit have to be organize properly. A first signs of management accounting are traceable back to Mesopotamia. Modern management accounting starts after first accounting revolution in 1950 where a direct costing mathematics was first introduced. Nowadays, a main role of management accounting is to help organize a integral processes within an organization.
It provides crucial data necessary to decision making process. This decision can be divided to strategic , tactic , planning and control decision. In order to support this activities an management accountants using very sophisticated methods such as budgeting, cost allocation , performance measuring or job costing. According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the application of the principles of accounting and financial management to create, protect, preserve and increase value to the stakeholders of profit and not-for-profit enterprises, both public and private. (CIMA Official Terminology). Weetman added that it is mainly direct to managers “.. because they have close involvement with the business, they have access to a wide range of information and will seek those aspects of the information which are most relevant to their particular judgements and decision.. ” HOW MANAGEMENT ACCOUNTING MIGHT HELP JUPITER LTD. A management accounting system is a system which is adjusted to a every company needs. Every organization is different so a methods of accountancy have to be different as well.
A main aim of such a system is to provide a systematic information to top management which help in decision making process in a specific circumstances. Thus, management accounting is an integral part of organization and do not need to be present outside. Whereas, is a very idiosyncratic and sophisticated system it might help with : Reduce uncertainty f. e about cost allocation To choose on which problems company should focus the most Solving a problem. To choose a best way possible to perform an undertaking task To control a performance of particular tasks, plans and budget
A good managing of such a information might help an organization for proper costing therefore, might assist to produce better results. In a today’s world where there is a big threat of competitors it might help to win over them. This is specially important for small to medium businesses where a barrier of entry are low. An enormous speed of technology and great marketing techniques can be sometimes very seductive thus a good knowledge of enterprise’s financial situation provided by management accounting system support every purchase decision.
Fallowing functions might: Planning functions: Can support a decision and reduce a risk. Might answer a question about selling a particular dishwasher. Is it profitable or not. Control function : It showing a difference between a goals and real profit. It might trace to who or what is responsible for a particular situation. It can show on which days business operate its best. Organizational function: Help to organize a business for a best performance possible It’s very useful in resources allocation. Can assist in decision to which department transfer the most founds.
Communication function: Help to reduce lack of communication between a management and labours. Can encourage a sell department to achieve a better results. As it’s shown above a management accounting system is a crucial and often enough irreplaceable part of modern business. Besides the fact that it help with good controlling of business it create a meaningful information and help with decision process of every level of management as well. CLASSIFICATION OF COSTS COSTS One of methods of supporting a small to medium businesses are a bank loans.
In order for a business owner to take such a credit, he or she must know how much it is needed. A amount of money which is sum up from fixed , variable and semi variable cost create a total cost. A fixed costs , according to CIMA official terminology is”cost which is incurred for an accounting period, and which , within certain output or turnover limits, tends to be unaffected by fluctuations in the level of activity(output or turnover)”. Such an activities are “general description to cover any physical operation of enterprise”(Weetman 2003) In case of Jupiter Ltd. his activities are selling of dishwashers. All activities causing cost are called driving costs according to Weetman. Knowledge of all these activities can produce a great activity based costing system which is “ key input and value adder to performance management system”(Turney 2011). Fixed cost for Jupiter Ltd. are cost like Rent a property Insurance Salary paid to management Advertising in South Wales Argus newspaper For better understanding of fixed cost a fallowing graphics might be useful A variable cost are all cost which varies in a proportion to direct output.
The more is produce or sold the more a variable cost vary. Such a cost can be 1. A number of miles driven by sales person 2. A commission to sales person. 3. A number of dishwashers for sale For better understanding of variable cost a fallowing graphics can be useful Other very important type of cost are semi-variable cost. According to Institute of Costs and Works Accountants of India semi-variable costs are cost which are partly fixed and partly variable such as telephone expenses or electricity charges. In a case of Jupiter Ltd. semi-variable cost might be cost of maintaining a dishwashers which is fixed per year but can be variable by a number of call-outs. (Weetman 2003) The costs of a business activity can be also divided as direct and indirect in connection to a traceability. Direct costs are “those costs that can be identified specifically with a particular sponsored project, an instructional activity or any other institutional activity, or that can be directly assigned to activities relatively easily with a high degree of accuracy. (OMB Circular A-21, Section D. 1. ) Such a costs are i. e 1. Salaries 2. Travels of sales person 3. Consultancy 4. Advertising of particular dishwasher Indirect costs are “those [costs] that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity. ” (OMB Circular A-21, Section E. 1) An indirect cost can be 1. Office supplies 2. Branding
The main goal of cost classification together with a cost coding(a specific system involved to code a particular cost and make easier to trace it for a particular output) are very useful for managers to fulfil a management accounting function : planing, decision making and control INVENTORY VALUATION METHODS VALUE OF INVENTORY An inventory of a business belong to total cost of such a business. Notwithstanding in today’s world we are paying different prices for every item. All the more prices vary throughout a certain period of time and also vary from supplier to supplier.
So what is a cost. Is it a price which have been paid for an item, a current value of item or a average values of all products in a warehouse. Although, there is no a single answer for such a question a special methods to value an inventory had been involved. To make easier to value an inventory an entrepreneur can choose over a fallowing methods. First In First Out Last In First Out Average cost of inventory Specific identification cost FIRST IN FIRST OUT FIFO “The principle that oldest items or costs are the first to be used.
Most commonly applied to the pricing of issues materials, based on using first the costs of the oldest materials in stock”(Official CIMA terminology. ) An inventory with limited shelf life will naturally use a FIFO methods. Things such as a bread or yogurt have to be issued under this pattern , otherwise they may go beyond usage date. According to FIFO pattern an enterprise accounts an items from a stock which came the earliest. For better understanding of FIFO method let’s examine a particular example. A Jupiter Ltd. issued a dishwasher A in March for a different prices to warehouse. |Quantity |Unit Cost ? |Total cost ? | |1 March |3 |200 |600 | |10 March |10 |230 |2300 | |14 March |8 |190 |1520 | |Total |21 | |4420 |
There are a 21 dishwashers in warehouse at a total value of ? 4420. Now, if there is a need to supply a shop for 15 dishwashers. According to FIFO method a company will use. | |Quantity |Unit Cost ? |Total cost ? | |3 |200 |600 | | |10 |230 |2300 | | |2 |190 |380 | |Total |15 | |3280 |
Which means that in the warehouse will left | |Quantity |Unit Cost ? |Total cost ? | | |6 |190 |1140 | |Total |6 | |1140 |
A FIFO methods is a most common approach in inventory valuation techniques. It is also regarded as a most effective method. A FIFO is allowed by the most respected accounting standards in a world like International Financial Reporting Standards and United States Generally Accepted Accounting Principles . ”Another plus of this method is that your inventory will always be measured using the most current costs, virtually the same as its upcoming replacement value” (www. netplaces. om) LAST IN FIRST OUT According to CIMA a LIFO method is “A little-used method of pricing the issue material using a purchase price of a latest unit in stock” A LIFO approach might be useful for Jupiter Ltd. in situation where is a big demand for particular brand new and trendy dishwasher. It is better for company to issue this item first “LIFO follows that pattern, turning the most recently received inventory into the merchandise that just got sold” (www. netplaces. com).
Thus, nowadays where a because of inflation and unstable economic, a prices are rising constantly, LIFO method can be most liked by a tax accountants. Whereas, company register a highest possible total cost, it reduce a profit taxable. For better understanding of LIFO method let’s examine particular example. A Jupiter Ltd. issued a dishwasher A in March for a different prices to warehouse. | |Quantity |Unit Cost ? |Total cost ? |1 March |3 |200 |600 | |10 March |10 |230 |2300 | |14 March |8 |190 |1520 | |Total |21 | |4420 |
There are a 21 dishwashers in warehouse at a total value of ? 4420. Now, if there is a need to supply a shop for 15 dishwashers. According to LIFO method a company will use. | |Quantity |Unit Cost ? |Total cost ? | |8 |190 |1520 | | |7 |230 |1610 | |Total |15 | |3130 | Which means that in the warehouse will left | |Quantity |Unit Cost ? |Total cost ? | |3 |200 |600 | | |3 |230 |690 | |Total |6 | |1290 | Hence, a LIFO method value stock on a prices which been paid for a particular item sometimes few years ago, therefore, a true value of an enterprise can be lowered.
Thus, LIFO method is forbidden for some international standards for instance IFRS. FIFO VS LIFO According to Alam and Seng Loh whom examined both methods on a results of Heckman (1976, 1979) and Lee’s (1978) studies. “First, they found strong evidence that self-selection is present in their sample of LIFO and FIFO companies, . Second, that LIFO enterprises would, on average, pay more taxes as FIFO ? rms, and FIFO ? rms could have had tax savings had they been LIFO ? rms. Overall, the results suggest that the difference between the LIFO/FIFO tax savings could partly be the function of ? rm size.
Finally, they believe that the inventory method (LIFO or FIFO) is re? ective of the various economic constraints confronting the ? rm. Hence, the inventory method used by a ? rm is a rational economic decision”. (Alam and Seng Loh 2004 in Advances in Management Accounting ) WEIGHTED AVERAGE COST Weighted average cost is a method based on a average cost of all items purchased. In this method every item is counted as a part of whole. This mean a value of a stock is recalculated every time a new purchase occur. | |Quantity |Unit Cost ? |Total cost ? |1 March |3 |200 |600 | |10 March |10 |230 |2300 | |14 March |8 |190 |1520 | |Total |21 | |4420 |
There are a 21 dishwashers in warehouse at a total value of ? 4420. Now,according to an average cost method a cost of every dishwasher in a stock will cost Which mean that every 15 dishwashers will be accounted for same average price. While an average method might be useful for company with a hundreds of items which every got different price on them and prices are vary , its might not be a good idea to use it in selling dishwashers. Specific identification cost A specific identification method might be a great solution whenever a specifically branded dishwasher will be purchased.
Which mean that there will be only one such a item in stock. Such an item is removed from inventory whenever is sold on a price it was bought. RECOMENDATIONS Does the Management Accounting system can leverage my sales? No, but it can help to collect meaningful information about particular product Which method of inventory valuation I should use? It it highly recommended to use a mixture of FIFO and LIFO, using LIFO is more tax efficient though Do I have to keep a notebook and do all calculation myself? No, most of modern Management Accounting System are automated and using computer software/apps.
Do I really need a management accounting system? No, Management Accounting is not necessary for a successful business, but it can help much in decision making process and give a crucial information on particular problem. Can I buy just any software which will do a job for me? Yes, however a management accounting is a very specific process and is highly recommended to hire a specialist.. Bibliography Activity Base Analysis | Accountingformanagement. com. 2012. Activity Base Analysis | Accountingformanagement. com. [ONLINE] Available at: http://www. accountingformanagement. om/activity_base_definition. htm. [Accessed 15 April 2012]. Alam, PA, 2004. CHOICE OF INVENTORY METHOD AND THE SELF-SELECTION BIAS. Advances in Management Accounting, 12, 237-263 Cost Behavior-True and Step Variable Costs|Committed and Discretionary Fixed Costs-Definition|Examples-. 2012. Cost Behavior-True and Step Variable Costs|Committed and Discretionary Fixed Costs-Definition|Examples-. [ONLINE] Available at: http://www. accountingformanagement. com/variable_cost_and_fixed_cost. htm. [Accessed 15 April 2012]. Do Ceu, MC, 2010. Studies in Managerial and Financial Accounting.
Management accounting and information technology, ,429-453. FIFO LIFO Inventory Valuation Methods. 2012. FIFO LIFO Inventory Valuation Methods. [ONLINE] Available at: http://www. oldschoolvalue. com/blog/valuation-methods/fifo-lifo-average-inventory-valuation/. [Accessed 15 April 2012]. Four Ways to Value Inventory – Accounting. 2012. Four Ways to Value Inventory – Accounting. [ONLINE] Available at: http://www. netplaces. com/accounting/the-inventory-cost-connection/four-ways-to-value-inventory. htm. [Accessed 15 April 2012]. Graham Eaton, 2001. Official Terminology 2000 Edition (Cima Professional Handbook). th Edition. CIMA Publishing. Hardy, DWH, 1993. In Defence of Base Stock Valuation. Managerial Finance, 1, 134-137. Inventory Cost or Market Value. 2012. Inventory Cost or Market Value. [ONLINE] Available at: http://taxguide. completetax. com/text/Q12_2332. asp. [Accessed 15 April 2012]. Inventory Investment Affects Profits and Cash Flow. 2012. Inventory Investment Affects Profits and Cash Flow. [ONLINE] Available at: http://bizfinance. about. com/od/inventory/a/Inventory_Investment. htm. [Accessed 15 April 2012]. Inventory valuation – Wikipedia, the free encyclopedia. 2012.
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