Management Accounting

The following sample essay on “Management Accounting”: definition of management accounting, working capital and investment capital.

Firstly, management accounting is defined as a procedure of examine the cost and the operation of the business to provides useful information such as the internal financial report or any records that helps the managerial position to make vital decision. (Myaccountingcourse,n.d). As for today, we will discuss about the two cost management accounting system which are the activity-based costing and job costing.

Activity-based costing was first promoted by Kaplan and Bruns during 1980s.

(CGMA, n.d). These costing system is described as a way to calculate the total needed cost of the activities to produce a goods. Let’s say if you want to calculate how much you spend on electricity to produce a products. To calculate it, you will need to estimate that $20,000 is your total bill for the year. Another cost driver you need to determines the number of direct labor hours worked.

The accumulated of direct labor worked hours will be 1,000 hours for the year. It is then divide the electricity by the cost driver. Hence, you will get $20 ($20,000/1,000 hours) for your overhead application rate. (Blakely-Gray, 2018).

The benefits of using this system is because it obtained more accurate and reliable in determine the cost of product. In today’s world with the better technology and also advanced manufacturing environment where large share of total cost form with the support function overheads, ABC can brings more realistic cost of product which help the firm to evaluate easily the process of capital budget on invest any assets again.

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(Agarwal, n.d). Moreover, managers can have better plan and cost controlling with the information provided by the pooling of activities cost process. This can also encourage the firm to produce products with the spare capacity. With the use of this system, the flexible budget based from activity may be form. It is definitely better than the conventional budget as to explain the behavior of overhead costs, the various cost drivers are identified. (Reyhanoglu, 2004). In addition, transfer pricing is fixed easily whenever the good of Department “A” is finished and transferred to Department “B”, the product cost in these department can be identified with ease. Also, there’s an opportunity available for cost reduction. However, ABC is not beneficial to small firm as there’s no need for ABC if the overhead are relatively small or when a companies are having few product only. (HoneyHatters, n.d).

For “Job costing”, it refers to the costing where depends on the number of jobs completed. Printing 3000 leaflet for instance. (Wisestep, n.d).

Job order costing brings several benefits and drawback. The first advantages is it provides the company a predetermined rate on allocates overheads by offering a detailed analysis of material cost, labor, and overhead. Besides, it helps company to determine the job profitability and to decide to invest on the project or not. Furthermore, it facilitated the estimated cost to the same job which is then assist the company to avoid the duplication job as if the firm has to quote a price for the same job, the firm can quote it by previous job costing method basis. On the other hand, it is an expensive and complex system, thus, strict control needed. Also it is not suitable all over the job especially the cost of production is high and require more time to accomplish. (Benefits-Drawbacks, n.d). As well, since more clerical work required in recording related transactions, the profitability for the firm to use this method will be low. (Parikh, 2011). At the same time, chances of errors increased when the clerical work becoming more. (Achary, n.d).

In a nut shell, as company

Net of current assets minus current liabilities is known as” Working capital” and the working capital management aim for having enough working capital in order to maintain the liquidity of a business. Of course, not too much in order to not reduce the profitability of business. These management is very important as it means for a successful business in a long-term. There’s few of the elements of working capital. (Studylib, n.d).

Firstly, we will discuss about inventory. In company balance sheet, inventory is under current asset. (InvestingAnswer, n.d). Raw material, work-in progress and finished goods are inventories of a business. When there’s too many inventory need more cost but if not enough stock may cause reduced in sales. (EduPristin, 2018). The advantages of holding stock is that risk of shortages is not a problem, with having sufficient stock, the business avoid losing sales and have ability to give discount to customer when customer in bulk. However, finance being tying up as more inventory require more warehouse to store which need big amount of capital. Not only warehouse, the business have to pay other cost like insurance and also bear the risk of goods being damages or obsolete. (AustralianSeller, n.d). Hence, to control the stock efficiently, there two types of method which are the ABC ranking system and just in time (JIT). ABC ranking system categorized the inventory to three categories from most valuable to least valuable which are A to C. (Collignon& Vermorel, 2012). For JIT, the business only purchase from supplier when the inventory is insufficient. (Studylib, n.d). Cash is another element of working capital.

To improve the working capital position, the business can offer incentives to customers who always clear their debt on time. To avoid accounts from aging too much, the business can try to identify early and take prompt action and also try to avoid having business transaction with customer who do not have trustworthiness. As if business received cash can help to improve working capital position. Second, always maintain good relationship with the suppliers in order to get trusted and also get discount in order to save finance. Thirdly, you can also have more liquidity for working capital by reduce the fixed and variable cost that are wasteful. Besides, the business should always manage their inventory by selling it as soon as possible before it goes damage or cut stock that is no longer on trends. Additionally, always settle any disagreement between debtors or creditor in order to avoid any case goes to the court which cause the business to pay unnecessary legal fees. As well, we can save money by tax incentive. Moreover, always keep the financial report update to think ways for any improvement. Lastly, we can also improve the working capital position by identify other ways such as issuing the stock of the firm, earn more cash by selling off assets or lease the assets rather than purchase. (Kumaran, 2015).

An investment is the capital gain or income produce by an asset intended. (InvestingAnswer, n.d). Investment could be in short-term and long term. For short term investment, it usually an investment within a year. It brings several advantages and disadvantages. The main advantages of this investment is their potential growing within a short period of time. Also, the company can have more control with the money as they can sell and buy in anytime. (FinacialPlanningTips, n.d). Nevertheless, short-term investing may not always earn back profit within a short period as most of the investment may grow steadily over long term but fall in short term. (NewYorkLife, n.d).

Whereas, in long-term investment, the main advantages Investment appraisal method could be in term of net present value, internal rate of return or payback period. Most of the calculation business manager usually use NPV to assess the capital project such as the long-term improvement of building a new store. Cash inflow deduct cash outflow will be the NPV, once it’s a positive NPV means that the firm should accept the project. By these method, the projects’ lifespan can be considered. Also, high priority are given for the profitability and the risk of the project (PHDEssay, n.d). Furthermore, time value of money is also involved in the consideration of this method as during period of inflation or deflation, the value of money change. Through NPV method, it allows the firm to know how much do they pay and received per day. Nonetheless, it is hard to use as it contain a complex calculations. It is performed by a numeric table which contain the years, amount of cash flow and the factor percentage. It is then multiply the amount of cash flow with each transaction. Lastly, add up to evaluate the NPV of t project. Not only the complex calculation, the business also needed to evaluate the duration of the project with the estimated interest rate. If any false assumption will cause the miscalculation for the projects’ NPV. (PocketSense, n.d).

Internal Rate of Return is to understand the attractiveness and worthiness of investment towards a business. When the NPV of cash flow of the investment equal zero, the interest rate will be considered. This method is beneficial to manager as it is simple and easy to use which also allows them to forecast the return of investment by considers the timing of all future cash flows. It also allows manager to obtain information either to purchase a new equipment or continue to repair. IRR consider as straight forward, thus, suitable for project which is independent. IRR is more suitable when comes to measure the investment compared to other method. Despite from the advantages, IRR method ignores the project size and future cost on an investment. (Srpij, n.d).

CIMA defined payback period as “the time required to recoup the cash out flow for an investment project.” (Alamgir, 2019). So if the machines cost $15,000 and will reduce operating cost $5,000 per year then the payback period would be 3 years. The advantages of using this method is even the people who is having limited knowledge of financial, can apply with this method easily. The firm who just established can know easily the time frame to recover back their investment. Hence, companies who want to have low risk and quick return can choose project which is low payback period. While for the drawbacks, it did not take any consider with the time value of money, thus, it may be false information during evaluate the cash flow towards a project. (Parikh, n.d).

References

• Achary, S (n.d). Job Costing: Meaning, Advantages and Limitations. Retrieved from on 4th May 2019.
• Agarwal, R (n.d). Advantages and Demerits of Activity Based Costing (ABC). Retrieved from on 4th May 2019.
• Alamgir, M (2nd January 2019). What is Payback Period? (With Advantages& Disadvantages). Retrieved from on 5th May 2019.
• Australian Seller (n.d). The Pros and Cons of Holding Stocks. Retrieved from on 5th May 2019.
• Benefits-Drawbacks (n.d). Advantages and Disadvantages of Job Order Costing. Retrieved from on 4th May 2019.
• Blakely-Gray, R (21st August 2018). Activity-Based Costing for Small Business. Retrieved from on 4th May 2019.
• CGMA (nd). Activity-Based Costing. Retrieved from on 4th May 2019.
• Collignon, J & Vermorel, J (2012). ABC Analysis (Inventory). Retrieved from on 4th May 2019.
• Edu Pristine (8th January 2018). Working Capital Management. Retrieved from on 5th May 2019.
• Financial Planning Tips (n.d). The Pros And Cons Of Short-Term And Long-Term Investments. Retrieved from on 5th May 2019.
• Honey Hatters (n.d). Advantages and Disadvantages of Activity Based Costing. Retrieved from on 4th May 2019.
• Investing Answers (n.d). Inventory. Retrieved from on 4th May 2019.
• Investing Answers (n.d). Investment. Retrieved from on 5th May 2019.
• Kumaran, S (1st June 2015). 11 Best Ways to Improve Working Capital. Retrieved from on 5th May 2019.
• My Accounting Courses (n.d). What is Management Accounting? Retrieved from on 24th March 2019.
• New York Life (n.d). What are the Disadvantages of Short-Term Investing? Retrieved from on 5th May 2019.
• Parikh, V (17th May 2011). Advantages and Disadvantages of Job Costing. Retrieved from on 4th May 2019.
• Parikh, V (18th February 2011). Advantages and Disadvantages of Payback Period. Retrieved from on 5th May 2019.
• PHD Essay (n.d). The Difference between NPV and IRR. Retrieved from on 5th May 2019.
• Pocket Sense (n.d). Advantages & Disadvantages of Net Present Value Method. Retrieved from on 5th May 2019.
• Reyhanoglu, M. (2004). Activity-Based Costing System Advantages and Disadvantages. SSRN Electronic Journal. 10.2139/ssrn.644561.
• Srpij (n.d). Advantages and Disadvantages of IRR. Retrieved from on 5th May 2019.
• Study lib (n.d). The nature, elements and Importance of Working Capital. Retrieved from on 4th May 2019.
• Wisestep (n.d). Job Costing: Meaning, Objectives, Advantages & Disadvantages. Retrieved from on 4th May 2019.