Management Accounting

Questions : 1.What are the Costs that Could be involved ? 2. What sort of forecasts ? Answers : (1) There are several factors that need to be evaluated while switching over to new business plan that involves determination of required and expected return, analysis of present business structure and estimation of proposed cost together with the potential customer target. The present case involves change in fee structure for the present members as well as for the prospective members with an attempt to change the structure of cash receipts (Arrow Kruz, 2013). Accordingly, the club is required to analyze the cost of borrowings or interest required to meet the working capital. Further, the management of the club is required to assess the required rate of return from the new membership plan covering all the estimated costs and expenses to generate income at higher rate. Besides, the organization needs to evaluate the factors of consumers income to assess if they can afford the incremental fees together with the analysis of prospective consumers reaction. For instance, DBS Group Holdings L imited, company incorporated in Singapore evaluated the rate of return expected to earn and consumers preferences while changing the plan of financial service in different regions. For financial services, factor of consumer income and inflation rate is essential for evaluation to determine the accurate returns (Dbs.com, 2017). (2) For the purpose of new business plan, financial analysis is essential for the organization to ascertain the profitability, sustainability or liquidity position from the new project. Accordingly, the management is required to analyze the proposed cost, estimate revenue and value of sources of fund to evaluate the net benefit or loss from the new or proposed business plan (Dewachter et al., 2015). Therefore, in the present situation Triple- F Health Club is required to analyze the estimated cost and forecast the revenues by preparing budgeted income statement as well as estimated balance sheet by stating the available resources for funding and estimated borrowing amount. The statement of balance sheet will be used to evaluate the financial position of the club if the new membership fees structure is considered to measure if the club can bear the related costs. For instance, Global Logistics Ltd, based in Singapore evaluated income statement and balance sheet for the purpose of new proj ect to be undertaken for transportation services. The company estimated the sales forecast based on external analysis in terms of government regulations, consumer behavior and market rates in the industry (Glprop.com, 2017). Financial analysis can also be done by considering internal factors and financial data for performance in previous years. Reference List Arrow, K. J., Kruz, M. (2013).Public investment, the rate of return, and optimal fiscal policy(Vol. 1).Routledge. Dbs.com. (2017). DBS Bank - The Development Bank of Singapore Limited | DBS Group. Retrieved 5 March 2017, from https://www.dbs.com Dewachter, H., Iania, L., Lyrio, M., de Sola Perea, M. (2015).A macro-financial analysis of the euro area sovereign bond market.Journal of Banking Finance,50, 308-325. Glprop.com. (2017). Global Website | Global Logistic Properties. Retrieved 3 March 2017, from https://www.glprop.com Management Accounting Introduction The company decided to start the manufacturing business that deals in the line of educational tools for children. The company will start with two director, husband and wife and it has been registered with the name Educational Toys. Educational Toys will be less profitable in the first year but from the end of the first year, the company will have a steep increase in sales for several years. Initially, the company planned to offer only three types of education toys. First is the Number toy, a fun related toy that teaches children the number skills and some English words. Second product is the letter toy, which has the name hints and helps to quickly grab the alphabet. Last product is the Phonic toy, an electronic device that functions similar to the mini PC and teaches phonic and math skills. The motive behind this idea is to develop the core skills within kids along with some fun. Currently, the toy industry has recorded a bumper sale of educational toys and has captured almost 30 % of the market (Toy Industry Association, INC. 2010) The initial fund required to setup and market the product will be 140,000 and it is planned to make repayment of the principal amount in equal instalments starting after one year from the establishment date. Business and product Educational Toys is a new company that has developed three types of educational toys. The toys are called educational toys because they provide some learning with fun involved in it to children. The company has planned to market the products within the U.K only with future consideration of the global distribution. Educational Toys is privately held company with husband and wife as the principal shareholders. The main objective of the management is to create a profitable company, research and develop innovative educational toys, and enhance the knowledge of children through the use of interactive toys. So, to achieve the objectives, the company has the mission to make the highest quality educational toys and introduce new features that help children to learn more from toys. Management also decided to trademark Educational Toys as its brand name (GOV.UK. 2012). At the initial stage, the company wants to market and sell only three products-Number Toy, Letter Toy and Phonic Toy. All the three types of toys have distinct functions with a variety of options. These educational toys are fun to play with, but at the same time, they are useful in teaching children the required skills. Recently, the company has finished the research on the products and they are almost complete to launch. The details of product features with their cost and selling price are as follows. Number Toy: the toy emits light and sound when touch by the stylus given along with the product. There are series of numbers on the front side of the toy, which blink when the stylus comes in contact with it. In addition to teaching the numbers, it helps children with hand and eye coordination. The planned cost of this product is 12.00 having 2.00 fixed and 10.00 variable. Letter Toy: This product resembles the Number Toy, but only difference in both products is that the Number Toy helps in teaching numbers, whereas the Letter Toy helps in teaching children the alphabets. Like Number Toy, it has light and sound features, and this product is also successful in improving childrens attention span. The cost planned for this product is exactly similar to the Number toy. So, the cost of the product is 00 with 3.00 fixed and 10.00 variable. Phonic Toy: It is an advanced toy and it looks similar to a mini laptop. At the front side, there is a touch screen and there are some buttons to get the access of the main menu. Inside the unit, there is a childs book and stylus. Stylus is used to touch the screen and the device starts reading stories loud, plays the musical instruments and guides children along the basic surrounding. The estimated cost of the product is 25 having 00 fixed and 16.00 variable. Competitors In the U.K. the market size of toy products is very huge. There are few large players in this industry and several small and regional manufacturers. The two main competitors of Educational Toys are: Lego limited: Lego Group is engaged in the development of childrens creativity with the help of playing and learning. Currently, the company provides toys, experience, and teaching material for children in more than 130 countries. It is the worlds third largest manufacturer of play materials (Lego 2013). Rob-Roy Toy Makers: It is one of the oldest toy shops in the U.K. and is selling wooden toys that make children happy and also provide some education guidance (Rob-Roy Toy Maker 2013). Target Price and Sales Forecast Management decided to keep the selling price of all three products below the competitors price to give a high level of competition in the market. Price decided by the cost department is as follows: Product Selling Price Cost Price Fixed part Variable part Number Toy 15.00 12.00 2.00 10.00 Letter Toy 17.00 13.00 3.00 10.00 Phonic Toy 25.00 21.00 5.00 16.00 The cost department has set the above prices after the price analysis of similar products by the competitors in the same market. This level of price will help the company to gain a new market as early as possible. The prices have been kept low because initially the company wants to grab as many customers it can and in the second year of working, the company has decided to increase the prices of products by some percentage. The price range for different products can provide a competitive edge among different customers, but the quality product with low price will help to attract new customers because of the low cost to be incurred in purchasing similar products (Lucey 2003). The cost of the product will include both variable, as well as, fixed cost due to the nature of the business. Variable cost of the product will include the material cost, labour cost and variable direct overhead cost, whereas the fixed cost will comprise of fixed overhead only. Administrative cost and selling and distribution cost is not apportion in the cost of the product because it is not possible to divide this cost with the number of products. Particulars Number Toy Letter Toy Phonic Toy Total Variable Cost Raw material Cost 5.00 5.50 8.00 18.50 Labour Cost 3.00 2.50 5.00 10.50 Direct manufacturing overhead 2.00 2.00 3.00 7.00 Total variable costs 10.00 10.00 16.00 36.00 Fixed Cost General Overhead Cost 2.00 3.00 5.00 10.00 Total variable and fixed cost 12.00 13.00 21.00 46.00 Un-apportioned Cost Selling and distribution cost 45,000.00 Administrative Cost 35,000.00 Number of Products and their equivalent cost Particulars Number Toy Letter Toy Phonic Toy Total No. of Product 5,000 5,000 2,500 Cost of the product 12.00 13.00 21.00 Total variable and fixed cost 60,000.00 65,000.00 52,500.00 177,500.00 Selling and distribution cost 45,000.00 Administrative Cost 35,000.00 Total 257,500.00 Calculation of Breakeven point Total fixed expenses 117,500.00 Variable Cost 36.00 Breakeven point 3263.89 or 3263 units The break even point of the company will be determined using per unit contribution margin and total fixed cost of the different products. On analysing the break even point it can be said that company need to sell 3263 units to cover its fixed expenses. The expected sales of the products are much higher than the companies break even point. The net present value calculated shows that company will have positive outflow in the coming years which will help to increase the future production in order to grab the new markets (Friedman 2009) Conclusion On analysing the operational budget and five years budget income statement it can be concluded that company will be able to generate sufficient cash flow to have a positive net present value. In the first year of working company will be able to sell 4890 units of Number toy, 4580 of letter toy and 2250 units of phonic toy. The total cost of the product will be 193,200 and net profit will be 14,260. The break even units of the company product will be 3263 units that show the company will get higher amount of safety margin that will improve overall earning of the firm. The firm will earn cash inflows as per given below table: 1 year 2 year 3 year 4 year 5 year 14,260.00 26,862.00 45,921.90 62,217.53 85,749.60 On the basis of above calculated cash inflows the net present value will be 30,960 with the consideration of five years income statement. (See appendix). The firm will earn sufficient amount of profitability and cash inflows to repay the bank borrowings that will also enable it to growth as large scale in the market (Drury 2005). Learning Outcomes This activity will help to understand the use of creative thinking and financial analysis in the business plan. It helps in learning various ways to present the cost data in the cost sheet and also provides the guidance on operational budget and forecast income statement. This activity tells how to do planning for the new business, how to find the investors, and also prepare the students to become a good entrepreneur. It shows how to calculate the break even point and net present value of the business. It also assists on how to make use of budgeted figures to conclude with the net borrowings and repayment schedule. Management Accounting Question: Write a business report on management accounting. Answer: Executive Summary ABC system provides the organizations across the world with a very powerful tool which helps them in the evaluation of the costs in an efficient manner. It helps the organizations to avoid any cost distortion which occurs as a result of employing the traditional system of accounting. In this article, there have been included researches conducted by the researchers, from the time of the inception of the concept of ABC. The various researches also prove the theory that the application and implementation of the ABC system in an organization will provide precise results than the traditional systems. Further, the ABC can not only help in the cost allocation but can also help in the evaluation of profitability of an organization. Introduction Activity Based Costing is the method of accounting of various costs related to the products. Through this method, the activities which are performed by a company are identified and then the indirect costs are allocated to the products involving those activities. This method is less arbitrary than the traditional methods and it allocates costs in a systematic manner over the products which are produced by a company. Thus, ABC can be defined as a system which helps in recognizing the connection between the various costs, products and the activities associated with manufacturing these products. This connection which is established helps in assigning the costs to various products. This method is more suitable to allocate the manufacturing costs rather than the administrative costs. For example, it will be quite difficult to allocate the costs relating to the salary of the employees over a particular product. Using ABC in the manufacturing sector helps in proper allocation of the costs si nce the data so obtained is reliable. This system of costing is also used in other costing methods such as the target costing, product line profitability analysis, service pricing and product costing (Investopedia, 2016). In this method, the focus is on reducing the overhead costs by allocating the same to the activities and that allocation depends upon the costs incurred to perform the said activity. This method is in use since the 1980's and the same has been implemented by many business houses across the world. There are various advantages of the ABC which include overall process improvement, identification of the wastes, better allocation of the prices and the flexibility to get implemented to each and every activity which a business involves. However, there are many disadvantages of using ABC as well. These disadvantages include huge costs of implementing ABC in an organization, it is time consuming to implement the same and there can be flaws in the data so obtained because the data is procured from different departments of the organization. Even a single mistake in the data can render the entire outcome useless. Hence, implementing ABC depends upon the need and want of an organization (The Next Galaxy, 2016). Literature Review According to Turney (1996), the concept of Activity Based Costing is being used since the 1980's. In a very short span of time, the ABC has evolved as an innovative and a valuable methodology of costing. But it took nearly 20 years for the ABC to get established in the industry. The concept of ABC came into picture due to the various deficiencies in the existing traditional system of costing. At present, the ABC is serving many of the needs of the business. It is now also used as a tool for analysis of profit and also to evaluate various types of profitability such as the customer and channel profitability. Over the period since its emergence, the ABC has adapted itself to a lot many areas which include the cost to serve activities as well. At present, the ABC can be said to be the foundation of management of performance (Turney, 1991). As per the views of Shields (1995), past decade has seen many organizations and firms developing and implementing the system of Activity Based Costing in their costing system. However there are many evidences available which clearly depict that the organizations are facing many issues in proper implementation of the ABC into their system which has rendered the implementation quite useless. They have not been able to derive the requisite benefits from implementing the ABC. The main reason of the failure can be said to be the fact that the organizations are focusing more on the designing and architecture of ABC rather than concentrating upon the behavioral factors. In many of the organizations it is treated as an innovation to technology and not as an administrative innovation. For the long term success of the ABC, the organizations must focus upon the behavioral variables of implementing the ABC and not the technical innovations (Shields, 1995). According to the research conducted by Gosselin (1997) in this regard, the Activity Based Costing is mostly adopted and implemented by bureaucracies. This research was conducted to find out when an organization must adopt the ABC method in the organization, the situations in which the implementation will be beneficial for the firm and the organizations and also the profits associated with the implementation. As per the results, the organizations which are having high vertical differentiation are more inclined towards adopting the Activity Based Costing. Moreover it was also found from the study that the organizations which adopt the ABC are more likely to price their products in a better way. However, despite the theoretical benefits of the ABC, many of the organizations are not implementing it (Gosselin, 1997). As per the views of Kaplan and Anderson (2003), the ABC system which was being used by the firms and the organizations initially was very expensive and also time consuming to implement. The traditional model of Activity Based Costing was very difficult for the firms to implement because of the above stated reasons. The difficulty arose due to many reasons like adding of new activities, increasing diversity of the activities of the firm and also the increasing complexity of the business conducted by the organizations. Therefore, it was required to modify the existing method so as to improve the functionality of the system. Therefore the authors in their study have suggested time-driven system of ABC. The time-driven model can be updated quickly so as to reflect the changes that occur in the undertaken processes and can be installed immediately and can be scaled to tackle thousands of transactions (Kaplan Anderson, 2003). As per the views of Cooper and Kaplan (1991), in the recent times the organizations are reducing their reliance on the traditional system of cost accounting. They are achieving this by developing the ABC system and implementing it in the organization. Initially, the cost managers used to implement the ABC system because they considered it as a precise way of calculating the costs of the products. But ABC has proved to be a very useful tool for conversion of various actions taken by the management into higher profits. The ABC system helps the managers to concentrate on those activities which can directly affect the bottom line of the organization (Cooper Kaplan, 1991). According to Edwards (2008), in the initial times, ABC was mainly meant for manufacturing industries where the productivity and the developments in the technology although had decreased the costs of labour and material but led to the increase in overhead costs of the organization. In the traditional method of cost accounting, the allocation of the costs was done arbitrarily on the basis of the machine hours and direct labour hours. But the cost allocation done with the help of ABC costing is much precise and accurate than the traditional method of cost allocation. In the ABC system, the costs are accumulated for each activity and then these costs are assigned or allocated to various products or services. The major advantage of implementing the ABC system is that it helps the organization in correctly pricing the products so manufactured by it (Edwards, 2008). According to Roztocki and Schultz (2003), the ABC has come into focus of various researchers and managers in the 1980's because of the growing distortions in the costing of a product due to using the traditional methods of cost accounting. The ABC approach is way better than the Traditional costing approach because it uses a two-stage procedure for allocating the costs to the products. It also uses multiple cost drivers to allocate the costs. The ABC system had many advantages but the outcomes of various studies show that the rate of application and implementation of the ABC in the organizations has been slower than it was expected (Roztocki Schultz, 2003). According to Lima (2011), there were many challenges that hampered the economic development of the cost accounting system in the 1980's. During the earlier times, the costing methods were devised in a way to allocate the direct costs because at that time the direct costs formed a large part of the costs incurred by the organization. But due to the increase in technology, there has been an increase in the indirect costs and a consequent decline in the direct costs. Hence, there was a need to implement the ABC in the organizations (Lima, 2011). According to Pete (2011), various challenges and the changes that are faced by the organizations have triggered the need of innovations in the financial and the costing management. Therefore, the companies operating in the current environment are using the enhanced systems of costing. Therefore, on the basis of the findings in this research the authors have suggested the companies across the world to employ the ABC and the ABM to manage their costs (Cardos Pete, 2011). According to Fei and Isa, (2010), due to the increasing complexity in the manufacturing firms, the implementation of the ABC is of utmost importance. It can be said to be one of the best strategic tools that help the management in decision making process especially the decisions relating to the pricing of the products and also to evaluate the profitability of the company. This research lays down the importance of organizational structure and culture over the technical and organizational behavior in the success of the ABC system (Fei Isa, 2010). According to Wegmann Stephen (2010), the ABC system was more of a conventional system of management accounting but later on according to the needs of the business and the growing complexity refined it to a large extent. The ABC system can now be seen as a globally accepted system which along with the allocation of the costs, can also be used by the management in the decision making and evaluation of the profitability of the organization (Wegmann Stephen, 2010). According to Kumar and Mahto (2013), ABC can be said to be a system which helps in the determination of the true costs of the product. ABC is comparatively a new system of cost accounting than the traditional systems but it is growing at a very fast pace. This method is becoming popular with the companies because this system is designed in such a manner which enables the organizations to get more accurate information of the costs. With the implementation of the ABC in the organization, the management of the organization can make decisions regarding the unprofitable activities and eliminate them from the system completely. This will help in increasing the profitability of the company (Kumar Mahto, 2013). According to Briciu Cpuneanu (2010), there are many tools which can be used to classify the costs on the basis of the ABC system so as to do a proper analysis of the costs. The ABC method uses various types of costs such as the variable costs, fixed costs, total costs and the indirect costs. Hence, ABC system is a very reliable system of allocation of costs and no costs can be left out from the process of allocation (Briciu Cpuneanu, 2010). According to the views of Mahal Hossain (2015), the ABC is a very effective tool to avoid any type of distortion to the costs of the products, which helps the organization to achieve sustainable development (Mahal Hossain, 2015). Conclusion From the above analysis of various researches conducted by the researchers, it can be concluded that the management of the company in question must switch over to the ABC system from the traditional system of costing because the outcomes from the ABC system are more reliable and accurate than the traditional system. Further, the ABC system can also be used for the evaluation of the profits of the company in a better manner, after taking into considerations all the costs which are incurred after the production of the products. References Gosselin, M. (1997). The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, Organizations and Society, 22(2), 105-122. Investopedia. (2016, May 20). Activity-Based Costing - ABC. Kaplan, R. S., Anderson, S. R. (2003). Time-Driven Activity-Based Costing. Social Science Electronic Publishing, Inc. Kumar, N., Mahto, D. (2013). Current Trends of Application of Activity Based Costing (ABC):. Global Journal of Management and Business Research Accounting and Auditing, 13(1), 1-15. Lima, C. M. (2011). The Applicability of the Principles of ActivityBased Costing System in a Higher Education Institution. Economics and Management Research Projects: An International Journal, 1(1), 57-65. Mahal, I., Hossain, M. A. (2015). Activity-Based Costing (ABC) An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4), 66-73. Roztocki, N., Schultz, S. M. (2003). Adoption and Implementation of Activity-Based Costing: A Web-Based Survey. IIE Annual Conference. Proceedings. (p. 1). Institute of Industrial Engineers-Publisher. Shields, M. D. (1995). An empirical analysis of firms' implementation experiences with activity-based costing. Journal of Management Accounting Research, 7, 148.