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Business progress can be easily monitored with accounting information when the concern
is to earn a profit.
Accounting information is required in multiple decisions making regarding investment
shareholders.
This accounting information is used by auditors, CFO, tax agencies and banks as well
Daily book: accounting information can also be stored in the daily book. This is a book in which
accounting information like debits and credits are entered on a daily basis to manage activities
(Matejski, 2015).
Cash base record: some businesses such as sole proprietor used to manage their accounts on a
cash basis. This means the record every transaction whenever there involve cash. They record
payment when to give cash and record receipt when to receive cash from others.
Accrual basis: another method of recording transaction is accrual basis which is mostly used by
the large organization because their number of transaction are huge and so cash basis is not fit for
the large organization.
Single entry system is also a method of recording accounting information. In this method, all
transactions of receipt and payment recorded in one account by a short description of every
payment. This method of entry support cash basis accounts and small business (Schmidt, 2016).
Double entry covers to a single entry. In this system, there are always minimum two accounts in
which one account is debited and other credited. This type of account recording support accrual
basis and hence support for large business. This is the now the standard recording method of all
companies whether private or public (Schmidt, 2016).
department like it can be used to focus on changing the price or increasing and decreasing
production.
Financial accounting is mandatory and follows generally accepted accounting principles as
external stakeholders are interested and users of this information but as far as managerially is
concerned that is not mandatory and dont need to follow GAAP (Ashraf, 2011).
Setting objectives
Preparing budgets and establishing responsibility centers
Comparing actual results with budgets
If results are favorable it becomes standard otherwise, a remedial action is advised
(Venkatesh, 2015)
The budgetary control system is used to set an objective for the future planning and expected
performance. It is used to operate different department and cost Centre as well as to make the
system more centralized. There are four types of center in budgetary control which is revenue
Centre that is used to measure the inputs in monetary terms, expense center is used to maintain
the expense, profit center is used to measure the output in monetary term while investment center
is used to measure the return on investment by comparing assets employed and results achieved.
For effective budget control system, there should be budget committee and budget officer to
control related matters (Samia, 2014).
Costing methods
There are four methods of costing to make the price of the product. Costing methods are
classified on some bases. One the base of elements we categorize cost as direct labor, material
and factory overhead. On functional bases, it becomes production cost, administrative, selling
cost. When we consider variability then it is a variable cost, fixed cost or semi-variable cost
while normality leads to normal and abnormal cost (Periasamy, 2010). But when we use the cost
methods for pricing of the product then they are Cost base pricing, demand-based pricing, and
competition based pricing and customize pricing. But these methods are solely based on costing
techniques discussed above. In cost base pricing, we measure the cost of a different element like
how much hours of labor used, how much material and factory overhead used. What was the
level of administrative and promotional activities? These all calculated in the monetary term to
set the price of the product. This can be cost plus pricing where simply a percentage of cost is
added to the cost for profit margin in price. While in markup pricing a certain percentage of
margins is added at each level like wholesaler and retailer to get profit (Nitisha, 2015). Demand
base pricing suggests setting the price of the product as per demand. While competition based
pricing suggest setting the price to beat the competitor by either setting lower prices or giving
combos in the same price.
Task 2:
Sales
Direct Labor
Material
FOH
Profit
Sales:
Actual (1100)
63.5455
22.7163
19.7958
5.8182
15.2152
69900/1100 = 63.5454
Direct labor:
24420/1075 = 22.7163
Material:
23260/1175 = 19.7985
FOH:
6400/1100 = 5.8182
Profit Variance:
Budgeted (1000)
62
22
20
6
14
1.2152 (fav)
All companies prepare a budget for future planning to set targets. If budget is not prepared then it
becomes difficult for the organization to take the business on a streamline. As in this business,
there are some budgeted figures which set the target to get sales revenue of 62000 by selling
1000 units. Budgets cost for different elements are also set as direct labor 22 per hour, the
material at 20 per unit and FOH at 6 per unit. But this is not necessary that all the things go as
per plan or budget. There can be a positive or negative difference called variance. Sometimes
company outperforms or sometimes it underperforms. In above calculation there is a positive
variance in profit which means per unit profit is more than as budget although the difference is
not with a big margin but still it is positive and is favorable. When we see the cost especially at
direct labor, the budgeted cost was 22 per hour but it slightly increased to 22.7163 whereas
material and FOH cost were lower than budgeted. Moreover budgeted sales for units were set at
1000 units but actually sold are 1100. So these things covered the extra direct labor costs and
company got higher profit as compared to budgeted one.
Additionally, we should have to look down deep into the matter like what are the reasons that
more than budgeted hours are used. Either labor was trained or was lower in number as per
required. This can also lead to the Human Resource issues. Other departments can also be
monitored to make performance better and proactively taking action to any future risk. To boost
sales a quality assurance can also be done with the material that is being used in production.
Task 3:
10,000
Residual Value
3000
Estimated life
5 years
2000
3000
3000
5000
5000
Cash flows
Annual Depreciation
(10000 - 3000)/5
7000/5
1400
investment
=
2200/10000
0.22
22%
Payback period:
Payback period is a calculation which tells that in how much time a capital investment can be
recovered. A project is acceptable where payback period is less than expected and in the case of
two or more projects, the lower payback period is selected. Payback period can be beneficial on
the following grounds;
But there is some problem with this technique like this technique doesnt use asset depreciable
life. An asset sometimes required some cash outflow to perform well as per requirement so
further cash outflows are not considered in this method of risk analysis. Moreover, it doesnt take
into account profitability matters and also, it ignores the time value of money so that we can
check that what will be the present value of the future cash flows. Hence, this technique is not
useful for making a decision of huge and complex capital investment rather its better for getting
a quick idea (not decision) either to the investment made or not.
Payback period
Year
1
2
3
4
5
=
Cash flow
2000
3000
3000
5000
5000
So the payback period is somewhere between 4 th year and only 2000 are more required to get
back initial investment. So
Payback period
=
=
3 +0.4
3.4
3 + 2000/5000
So the payback period for this capital investment is 3.4 years. If the forecasted payback period is
less than above then this investment shouldnt be made or vice versa.
Financing business
Every business at the start required some initial capital. This initial investment can be made by
different ways. After start business required time to time more investment for smooth running or
starting a new venture in the shape of expansion. There are different ways which can be used;
Reinvestment of profit
An easy and cost effective way to finance a business project is to reinvest the income which is
generated by business activities. As this is a reinvestment of the income so it cannot be charged
with the interest rates like in others (Iqbal, 2012).
Bank loan
If reinvestment is sufficient then the business project can be financed by borrowing from
financial institutions like banks. But this needs to disclose your financial information to the
banks for being eligible for this. Moreover, there will be the certain cost of borrowing in the
shape of interest, mortgage or pledge (Iqbal, 2012).
Collateral
A business project can also be financed by selling account receivables with other institutions.
This process required to sell your account receivable and also a fee other than interest on
financing through this collateral (Iqbal, 2012).
Private financing
A private financing can be done by asking family and friend to lend required amount for
investment. This private financing can be done with family and friends easily. It can also be done
by selling the bond in the stock market which has certain interest rate and time to maturity. On
maturity bonds will be back and the amount should be delivered to borrowers (Iqbal, 2012).
either it can also affect other activities like it can lead to use the amount of some other activities
in maintaining operations (Ahmad, 2011).
Accounts Payables: these are the amounts owed by the company to its suppliers. Accounts
payable shows company strength to meet its short-term debt payment ability. Moreover, it also
builds credit worthiness of the organization as well as goodwill in the market. So accounts
payable should also be managed effectively (Ahmad, 2011).
Inventory: the main important part of the working capital is inventory. This is also called stock
which is used in the production of goods and services. This is the main thing that leads to meet
demands and generation of sales revenues. Inventories day out ratio is also used by the different
stakeholders to check the company working capital management and its ability to run its
operation smoothly (Ahmad, 2011).
References