Category: Cost Accounting

Introduction

The transport industry in the United States has undergone tremendous changes over the past decades as stakeholders embrace technology and new accounting standards. According to Hooper and Murray (2018, p. 28), private sector players in the transport sector have been keen on lowering the logistics cost as a way of lowering the overall cost of production to remain competitive in the market. On the other hand, the government is focused on improving transport infrastructure as a means of promoting economic growth in the country. The current cost accounting practices in the transport sector majorly focus on simplifying the processes of recording, analyzing, classifying, and allocating resources with the aim of enhancing productivity. The management should have easy access to accounting data needed to make critical decisions within the shortest period possible. In this paper, the focus of the researcher is to analyze the current cost accounting practices in the transport industry.

Research Paper Subject (RPS)

Current Cost Accounting Practices in Transportation Industry

Hooper, A. & Murray, D. (2018). An analysis of the operational costs of trucking: 2018 update. New York, NY: American Transport Research Institute.

This article focused on determining the actual cost of trucking in the United States since 2008. The authors of this document were concerned about the conflicting reports by sector players. The American Transportation Research Institute has been working with various stakeholders both in the public and in private sectors to improve conditions, lower costs, and enhance efficiency in delivering products. The study used qualitative methods to analyze the current accounting trends and the average cost of trucking in the country. They found out that the cost of trucking in the United States varies from one state to another. Factors such as extreme weather conditions, fragility, and perishability of the product, and the weight are some of the factors that have a direct impact on the cost of trucking in the country. The study found out that some of the small scale trucking companies are not keeping accurate accounting records because of factors such as limited accounting knowledge and the desire to reduce their taxable income.

Redding, S. J. & Turner, M. A. (2014). Transportation costs and the spatial organization of economic activity. NBER Working Paper Series, 20235(1), 1-59.

In this study, the researchers were interested in establishing the relationship between transportation cost and spatial distribution of economic activity. The researchers reviewed the literature on this topic to find out what other scholars have found out in this study. Their findings revealed that an improvement in transport infrastructure has a direct positive impact on the cost of operation among trucking companies. When the road infrastructure is developed, it takes a shorter period for trucks to move from one geographic location to another. Cases of a breakdown of vehicles also become less common, further lowering the cost of operation for the transport companies. When the cost of operation is low, these firms can afford to charge lower prices on the services they deliver. The study shows improved economic activities within a region also increases the number of clients within a region. Firms would then benefit from economies of scale, which would allow them to lower their prices even further.

Glaeser, E. L. & Kohlhase, J. E. (2004). Cities, regions and the decline of transport costs. Papers Regional Science, 83(1), 197-228. doi: 10.1007/s10110-003-0183-x

The study focused on determining the relationship between the growing urban centers in the United States and the reduction in the cost of transportation. In the past, firms considered it more appropriate to locate their companies closer to the raw materials. However, these scholars argue that the trend is changing, and many of the large corporations currently consider it advisable to locate their companies closer to the market. It is becoming cheaper to move goods than to move people. Locating firms closer to the market would mean that a firm would not need to spend more in moving the completed products to clients. The firm can have an arrangement with its suppliers to deliver the products to the firm’s premises as a way of lowering the overall cost of accounting. The strategy is motivated by the desire to lower the unit cost of production as the only way of remaining competitive in the market.

United States Department of Transport. (2009). Assessing the full costs of congestion on surface transportation systems and reducing them through pricing. New York, NY: U.S. Department of Transportation.

In this article, the researcher was interested in determining the cost of congestion on surface transport systems and means through which such problems can be addressed. Authors of this article collected both primary and secondary data to inform their findings and the conclusion they made. The transport sector has become a critical player in economic progress in the country. However, the scholars found out that the demand for transport services has the capacity, resulting in major congestions in highways and roads leading to major cities. The problem affects transport companies, passengers, and government because of the significant reduction of efficiency and increased cost of production. The scholars believe that promoting alternative means of transport such as the use of railroads is the best way of dealing with the problem.

Winston, C. W., & Mannering, F. (2013). Implementing technology to improve public highway performance: A leapfrog technology from the private sector is going to be necessary. Economics of Transportation, 4(13), 1-8.

The article focused on determining ways through which the performance of the United States transport system can be improved. Relying on data from both primary and secondary sources, they found out that the current practices in the transport sector may not be sustainable. Privatization is one of the best ways of improving performance within a given industry. However, there should be a clear way in which the private and public sectors of the economy should coordinate to ensure that the desired level of success is achieved. It is the role of the government to set standards. It should also create a sustainable environment where private players can prosper. However, allowing private sector players to dominate the transport sector may have a counterproductive impact if measures are not taken to deal with accounting fraud which is becoming common in the country.

Research Paper Outline (RPO)

Introduction

This section provides an introduction to the paper.

Managing Cost of Operation in the Transport Sector

Winston, C. W., & Mannering, F. (2013). Implementing technology to improve public highway performance: A leapfrog technology from the private sector is going to be necessary. Economics of Transportation, 4(13), 1-8.

The performance of the transport sector in the United States may be significantly affected if the government fails to take measures to regulate the activities of private players through better policies. In a market that is highly competitive, firms are struggling to come up with ways and means of lowering their cost of operation as the only means of charging competitive prices. The performance of the sector depends on the output of every individual player within the industry. The government must understand that regulating their practices while at the same time creating a perfect environment for the success of the players is, therefore, critical.

United Nations. (2016). Mobilizing sustainable transport for development: Analysis and policy recommendations from the United Nations secretary general’s high-level advisory group on sustainable transport. New York, NY: United Nations.

The article focused on determining the impact of the transport sector on sustainable development, poverty eradication, and the fight against climate change. The findings revealed that in the developing nations, especially in Africa and parts of Asia, the transport sector plays a critical role in promoting economic growth and combating climate change. On the other hand, the primary focus in the United States and other developed nations in Europe are to reduce emissions of greenhouse gases. The use of road transport among trucking companies is discouraged and instead, the rail system is believed to be the better option. It not only lowers the cost of operation but also lowers the production of carbon gases by significantly reducing the number of large trucks on the road.

Emerging Standards Practices in Cost Accounting

Mallett, W. J. (2018). Trends in public transportation ridership: Implications for federal policy. Congressional Research Service, 7(5700), 4-19.

The focus of the article was to determine trends in public transportation ridership and the manner in which it is affected by federal policies. Their investigation revealed that technology, cost, convenience, and inflation are some of the main factors that affect ridership in the country. The federal government must understand that through its regulatory policies, it has the capacity to promote or discourage ridership in the country, especially in major urban centers where driverless taxis are becoming common. The emerging cost accounting practices are largely based on the policies put in place by the federal government. If the federal policies are favorable to having large trucks on major highways, then accounting policies and practices will promote the practice.

Winston, C. W., & Mannering, F. (2013). Implementing technology to improve public highway performance: A leapfrog technology from the private sector is going to be necessary. Economics of Transportation, 4(13), 1-8.

The article focused on the implementation of technology as a way of improving the performance of public highways. Using information collected from secondary sources, these scholars found out that policymakers have a role to play in enacting laws that would promote well-tested technologies that can improve pricing, investment, accounting practices, and operations on the highways. The aim should always be to use technology for the benefit of both the government and private sector players. Eliminating bureaucratic and political impediments to the introduction of accounting principles is critical to improving the performance of public highways. It helps in addressing conflict among different stakeholders and the desire to engage in malpractices among large trucking companies in the country.

Duranton, G., & Turner, M. A. (2012). Urban Growth and Transportation. The Review of Economic Studies, 79 (4), 1407-1440.

The authors of this article were interested in studying urban growth and transportation in the United States from 1983 to 2003. The findings show that within a period of two years, there has been a significant increase in the population of urban centers in the United States. The number of roads and rails in the country has also increased. However, a comparative analysis of the two shows that population growth has been more rapid than infrastructural development. Such events create an imbalance, which results in congestion on the roads. Subsequently, the congested roads cause delays, inconvenience, and an increase in the overall cost of operation. Improving the infrastructure is one of the most important roles of the government that can help address such concerns.

Accounting Fraud in the Modern Business Environment

Redding, S. J. & Turner, M. A. (2014). Transportation costs and the spatial organization of economic activity. NBER Working Paper Series, 20235(1), 1-59.

The article focuses on the relationship between transportation costs and spatial organization of economic activities within a given region. The researcher conducted a survey to establish the relationship between the variables. The findings show that there is a positive correlation between lower transport costs and infrastructural development within a given region. When the transport infrastructure is developed, population increases, more jobs are created, wages increase, and trade, in general, gets a boost. Such developments tend to discourage accounting fraud if the government creates an enabling environment that promotes business development.

Glaeser, E. L. & Kohlhase, J. E. (2004). Cities, regions and the decline of transport costs. Papers Regional Science, 83(1), 197-228. doi: 10.1007/s10110-003-0183-x

The researchers in this study were interested in establishing the relationship between the growth of cities and the decline in transport costs. The secondary data they collected showed a positive correlation between the growing urban centers and the decline in transport costs. Urbanization creates an environment where a large population lives within a small geographic location. As such, firms do not need to spend more on distribution. Products will be made available to a large customer base within a small location, lowering the cost of transportation. As the cost of transportation falls, the need to engage in fraudulent accounting practices reduces. The trucking companies find it unnecessary to engage in accounting malpractices as they try to cut their cost of operations.

Managing Unethical Practices in the Transport Sector

United States Department of Transport. (2009). Assessing the full costs of congestion on surface transportation systems and reducing them through pricing. New York, NY: U.S. Department of Transportation.

The article focused on discussing the role of public transportation in managing climate change. The authors of this article argue that transport sector is one of the leading emitters of greenhouse gases in the country. The Federal Transit Administration collected and analyzed data from various sources across the country on fuel usage, rides taken, vehicles deployed, and other metrics relating to the public transport sector. They found out that the rate of emission has been increasing at a relatively high rate because of the increasing ownership of cars. Figure 1 in the appendix shows that private cars are the leading emitters of greenhouse gases, followed by bus transit, and light rail transit. The problem can only be addressed through policy change where these players will be expected to go beyond the economics of their trade and consider the impact of their activities on the environment.

Hooper, A. & Murray, D. (2018). An analysis of the operational costs of trucking: 2018 update. New York, NY: American Transport Research Institute.

The author of this article focused on analyzing the operational cost of trucking in 2018. The researcher relied mainly on information published by various entities within the United States. The current cost was compared with that of the previous years to establish a trend. The authors found out that although the current data about the actual cost varies from $ 22 to $ 370 per hour, there has been a consistent increase over the years. The increasing cost of transportation may tempt some of the truckers to engage in accounting malpractices. Government policies may help manage rising costs and discourage such practices. Such policies will be beneficial to both the government and private sector players.

Conclusion

This section provides a detailed summary of the findings.

Marked-Up Complete Research Paper

Emerging technologies and infrastructural developments have redefined the transport sector. According to Federal Transit Administration (2010, p. 1), trucking companies have to deal with emerging trends in the market where firms prefer having their production plants in major cities, which is closer to their market. The primary goal of such initiatives is to ensure that products can be availed to customers within the shortest period possible. Accounting practices are also evolving in line with the changes taking place in the transport sector. New accounting standards are emerging both nationally and internationally as firms struggle to comply with regional and global accounting policies. Companies operating in the global market have a challenging task of ensuring that their books of account meet standards set by different countries where they operate. As such, it is becoming more prudent to use international accounting standards that can be applied in different countries that embracing the national standards (Winston, 2013, p. 795). Firms such as FedEx, DHL, and Maersk Group have to embrace international accounting standards and principles to enable them to operate freely in the global market. In this paper, the focus is to discuss the current cost accounting practices in the transport industry.

References

Duranton, G., & Turner, M. A. (2012). Urban Growth and Transportation. The Review of Economic Studies, 79 (4), 1407-1440.

Federal Transit Administration. (2010). Public transportation’s role in responding to climate change. New York, NY: U.S. Department of Transportation.

Glaeser, E. L. & Kohlhase, J. E. (2004). Cities, regions and the decline of transport costs. Papers Regional Science, 83(1), 197-228. Web.

Hooper, A. (2018). An analysis of the operational costs of trucking: 2018 update. New York, NY: American Transport Research Institute.

Mallett, W. J. (2018). Trends in public transportation ridership: Implications for federal policy. Congressional Research Service, 7(5700), 4-19.

Redding, S. J. & Turner, M. A. (2014). Transportation costs and the spatial organization of economic activity. NBER Working Paper Series, 20235(1), 1-59.

United Nations. (2016). Mobilizing sustainable transport for development: Analysis and policy recommendations from the United Nations secretary general’s high-level advisory group on sustainable transport. New York, NY: United Nations.

United States Department of Transport. (2009). Assessing the full costs of congestion on surface transportation systems and reducing them through pricing. New York, NY: U.S. Department of Transportation.

Winston, C. (2013). On the performance of the U.S. transportation system: Caution ahead. Journal of Economic Literature, 51(3), 773-824.

Winston, C. W., & Mannering, F. (2013). Implementing technology to improve public highway performance: A leapfrog technology from the private sector is going to be necessary. Economics of Transportation, 4(13), 1-8.

Appendices

Appendix 1. Emissions of carbon dioxide per passenger mile

Project Budget

Fixed Costs

The first line of the financial plan is devoted to the description of fixed costs. The latter concept represents the expenditures that are constant throughout the analyzed period of time (Datar & Rajan, 2018). Firstly, telephone services include the mobile phone fees for two managers, which equal $200 each month. As such, it seeks to cover the phone calls that administrators would need to make to communicate with suppliers, clients, staff, and other people. Secondly, it is assumed that internet service fees will be paid by the building or facility administration where the mental health service will operate. In this regard, it is planned to pay $25 as a proportion of overall internet expenses. The internet is crucial for the project’s operations as it is assumed that part of the consultations with clients will be conducted online.

Next, the offices rental is also assumed to be constant throughout the year. In total, it is planned to rent five offices for managers and personal consultants and two group consultation rooms for group mental health service providers. It may seem first that the rental space does not fit the necessity of all workers, especially considering that private consultants should occupy one office. However, calculations were made based on the assumption that employees will work in shifts and, thus, use the same office during different days. Moreover, the corporate plan of the TherapyNotes program will be purchased every month for $59 (TherapyNotes, n.d.). Finally, office and equipment maintenance is also regarded as a fixed cost, but it is less predictable than other expenses in this category (Zhang et al., 2017). It is assumed that equipment and space sustenance would require around 10% of the total investments in laptops and mobile phones and rental expenditures accordingly.

Personnel Costs

Personnel expenditures can be both variable and fixed costs depending on the form of payment for labor. In the case of the current project, all the expenditures are predefined, and employees will receive fixed salaries. The latter was determined as an average wage in the region, but small corrections will be made during the process of employment as the experience and qualification of the workers will be considered. As for the number of professionals, the number of six personal consultants and four group consultants was determined to effectively satisfy the yearly demand for mental health services which approximately assumed to be 1800 patients. Additionally, certain amount of money was budgeted to conduct initial personnel training. In particular, the two managers will be taught about specifics concerning the work in the sphere of mental health service and some techniques on how to manage employees and relations with clients and suppliers effectively. Furthermore, both administrators and common workers will have the training concerning the usage of the TherapyNotes program.

Supplies and Investments

Medical and administrative supplies are variable costs as they depend on the demand. However, for the former, the budget assumes the approximate cost of $125 every month, whereas, for the latter, the biggest expenditures will incur during the first month and be equal to $210. Moreover, every three months, $100 would be spent to ensure that there are sufficient supplies, including pencils, papers, and notebooks, all the time. During the other months, supply costs are budgeted to be $10, considering some unforeseen expenses may occur.

Reference

Datar, S. M., & Rajan, M. V. (2018). Horngren’s cost accounting: A managerial emphasis. Pearson.

Principles of financial management. (n.d.). UCLA. Web.

TherapyNotes. (n.d.). TherapyNote pricing. Web.

Zhang, C., Gao, W., Guo, S., Li, Y., & Yang, T. (2017). Opportunistic maintenance for wind turbines considering imperfect, reliability-based maintenance. Renewable Energy, 103, 606-612. Web.

The article under investigation is focused on the cost system. In particular, it discusses the way cost accounting influences product costs. The authors emphasize that product costs are vital for sensible decision-making in the framework of marketing and product introduction (Collier, 2015). Professionals may resort to different cost systems when there is a necessity to measure product costs, but no agreement is yet achieved regarding the most appropriate one. The authors maintained research trying to identify a system that provides the most benefit to the organization and stopped on the utilization of the long-term variable cost. In particular, attention should be paid to manufacturing and marketing.

They stated that it is critical to remember that product costs tend to vary greatly. In some cases, this characteristic depends on the physical volume of items, labor and machine hours, or material costs, etc. In other cases, the difference and complexity in the product line matters. Thus, these costs are developed based on overhead support and marketing departments. All in all, it can be claimed that this variability is associated with the necessity to start the next phase of production, logistics, or distribution. On this basis, it is presupposed that professionals resort to long-term variable costs of manufacturing and marketing when they make vital decisions. These may include pricing, introducing, discontinuing, and reengineering or products or product lines. What is more, cost systems may turn into an influential component of the whole business that influences its success and ensures competitive advantages.

The full and variable cost can be used for the measurement of the product cost, but they fail to cost products correctly because they do not provide the inventory valuation function as expected. Financial reporting remains poor because of operational control and product costing deficiencies. They turn out to be too detailed and aggregate. Marginal costing, for example, does not work because it was developed for the conditions that are not typical today, such as small product diversity and variation in demand.

Discomfort is faced when using fixed-cost allocations because they focus on the direct labor hours, which is not actually when a lot of automated machinery is used. Multiple allocations may also be problematic because costs do not always have the same behavior. The cost of complexity should be considered by those organizations that operate in the framework of a complicated production-management environment. Transactions can be analyzed to understand what drives these costs. A direct-labor-based system and a transaction-based system can be approached to report product costs.

Still, in the framework of the conducted research where a firm tried using various systems, it was identified that the first one approaches the low-volume products as profitable while the strategic cost analysis leads to the opposite conclusion. This traditional system distorts product costs because it under-costs low-volume products and over-costs high-volume ones. Transaction-related allocation allows associating lower costs with common operations and a limited number of parts, making the value of commonality of parts accessible. It does not focus on the physical or dollar volume of materials, but this option is rarely important nowadays.

As managerial actions affect the level of expenditure, traditional variable costs fail to benefit companies as they do not focus on it. Long-term variable costs appear to be more advantageous in this perspective even though they make the use of the surplus capacity more complicated. In this way, cost drivers should be reflected as well as their association with the complexity of production for them not to be misclassified.

Reference

Collier, P. (2015). Accounting for managers: Interpreting accounting information for decision making (5^th ed). West Sussex, UK: John Wiley & Sons.

Inventory and warehouse management

A company requires an adequate supply of inventory for the smooth running of its processes. To ensure that this is fulfilled, companies incur warehousing costs; Hendon garden furniture has found itself in the dilemma of deciding on how to manage its stocks as it minimizes warehousing costs. There are two options for consideration; buying a warehouse space of sq 25,000 at £125,000 and renting space of 50,000sq @ £12,000 per annum.

Let’s analyze the two options in terms of liquidity, profitability, breakeven point;

Liquidity

This is the availability of funds to meet short term and long term financial liabilities as they fall due. The decision to buy will have the following effects;

1. There will be money outflow; this is in terms of rents or loan payments and interest repayments
2. The constant flow of income as a result of continued production (Williams, 2001).

The company will have increased financial responsibility; this will reduce working capital as follows;

Rent option, current liabilities increases by £12,000

Buying option long term liabilities increased by £25,000

Profitability

The decision to rent warehouse will rise to an expense to the company expenses reduce the amount of profit that the company makes in a certain year;

For example; the furniture garden profits are £100,000 per annum, this is the profit before the additional warehouse has been added. When the new warehouse is rented, then the profits will reduce by the amount of rent payable (assuming that the new warehouse does not lead to increased production)

New profit will be £100,000

Fewer warehouses rent £ 12,000

Net profit £88,000

If the option of buying the asset has been made, the effect it has on the trading profit is dependent on the source of financing. If the company decides to buy in cash terms; then the transitions are will be considered an asset acquisition project. Its effect in the trading account will only be an increased depreciation of the facility. If the purchase is bought through a loan financing policy, the balance sheet will have increased expenses in terms of depreciation and interest charges ( Weygand, Kimmel & Kieso, 2010).

Let’s assume that the facility will depreciate at a rate of 5% per annum straight-line method and the interest from loan financing the project is at 5% straight-line method;

Depreciation = 5/100* £125,000 =6,250

Interest on loan = 5/100*£125,000 = 6,250

The effects will be as follows;

When bought cash (this means that the company used its reserved fund to buy the asset);

Net profit

£100,000

Less depreciation £6,250

Total net profit of £93,750

When the warehouse is bought through loan finance

Net profit £100,000

Less depreciation £6,250

Less interest payable £6250

Total net profit £87, 000

Breakeven point

This is the point where the total cost of operation equals to total benefits;

Breakeven point = total cost = total revenue

The decision to buy or rent a warehouse will lead to an increase in operational cost and thus the duration taken to attain break-even will be increased.

Each product in the company produces an income of £ 15. When the additional facility is added, then this amount will reduce as there will be a cost that will go to this effect thus reducing the income contribution of each unit.

My recommendation

Analyzing the two options available for the company, I recommend that the company should acquire the additional warehouse by purchasing it; this is because of the following reasons;

1. When you compare the space that the company need, which is 5,000 sq, and the space that can be bought, then there will be an extra 20,000sq
2. The cost of renting the assets compared to the purchase cost is higher; eventually, the asset will be owned by the company
3. The company can utilize the extra space by renting to other traders; if the same rate as quoted is used in lending out the extra space then the company is likely to earn a maximum extra revenue of £48, 000 (4* 12,000) (Wheelen $ Hunger,1999).

Stock Valuation

FIFO (First In First Out method)

This method assumes that stocks that got into the company first are the stocks which have been utilized in production first. In this method the value of the stock at hand is equal to the balance of the recently purchased stocks;

For example;

Company A had the following transactions for January 2010

1. 5^th Bought stock @ £40 per units 100 units
2. 10^th Bought stock @ 50 per unit 50units
3. 15^th produced goods which utilized 120 units of raw materials

Calculating the value of the stock at the end of the month;

Total units utilized 120;

First 100 from the supply of 5^th 100

Balance supply 20 (this will be units from 10^th supplies and left a remainder of 30 units)

The value of the stock will be 30 units at 50 per unit = £1,500

Advantages

It is simple to understand and easy to use.

It is a logical method since it utilizes assumes that the first stocks in a business are the ones to be used.

It is a good method in price failures.

Disadvantages

• The method can lead to underpricing of goods if the cost of material is increasing.
• The method increases the possibility of clerical errors (Anthony, Hawkin, & Merchant, 1999).

LIFO (last in First Out)

In this method, it assumes that the units that got into the company last are the ones that will be utilized first in production. The value of a stock is the value of stock gotten earlier; using the above example then;

Utilized raw materials 120

First units from 10^th 50

Balance 70 units from 70 (there will be a balance of 30 units)

The value of the stock will be 30 units @ 40 units = £1200

Advantage

• The method is simple and straight forward.
• It recovers costs from production because the actual cost is charged to production benefits.
• The cost charged in the manufacturing account is the recent cost of production.
• In times of rising the method is responsive to the changing prices.

Disadvantages

• The method leads to clerical error since every time the new stock is bought then there must be an adjustment.
• Determining the Pricing of the product poses difficulty since the cost of producing them is different (Barry & Jermakowicz, 2010).

Average cost

Using this cost method, the value of a stock is calculated as an average; a unit value is calculated. It takes a more central position where it considers the current price and past price of materials. In the above example then;

Total units in the store 150 units

Total cost (100*40) + (50*50) = 6500

The unit value is 6500/150

The balance value after production is 30 units

The value of the units is 30*6500/150 = £1300.

Advantages

• the method adopts to raw material costs fluctuations.
• When using the method determining the price of products is easy and straight forward since the input cost is the same.
• The cost of raw materials.

Disadvantages

• The method is hard to calculate the cost of stock; it is only understood by accountants (Horngren, Srikant & George, 2006).

My Recommendations (Average cost)

Due to the fluctuating prices of materials, I would recommend the use of the Average cost method since it incorporates the price changes. At any one time, the costs of production are kept at a predictable amount which assists in easy price determination after production. The weakness that it can only be well understood by accountants is an advantage to a company since it demands professionalism in a business. With professionalism, the business will be effectively conducted.

Cost reduction strategy evaluation

Reducing costs by losing financial/ management accountant

A move to remove the position of a financial accountant to reduce operational costs will result in a major loss to the company. Management accountant undertakes a general overview of fund and project management in a company. He is involved in making current and futuristic decisions that involve funds in a company. The decision to do away with a management accountant will make the company lose the following services of the accountant;

Forecasting and planning

The financial manager is mandated with the task of estimating financial cost requirements for working capital, which are short-term and medium-term and capital investment. He is also responsible for budget-making to ensure that there is an efficient allocation of funds in the organization in the current and future (Lindquist & Smith, 2009).

Financial decisions

Finances in organizations are limited and thus managing them to ensure that they are well utilized is important. The financial decision includes investment decisions, credit management, and working capital management. This assists in fund management. A company that has well-managed funds can meet its obligations as they fall due and make sound attainable decisions. If the company loses this service, then the company will suffer a lack of good financial management (Weetman, 2010).

Investment Decision

Making the right decision on the kind of investment to make is a challenge to a business. Establishing an investment to make is crucial to a company. A balance should be made to ensure that funds are well diversified to reduce risks. Short term, medium, and long term investment projects should be taken. This is the work of financial management. If the company loses the functions of the manager, it is likely to invest its resources to places that are not viable and which can lead to a loss in the company (Dury, 2006).

Cash and credit management

Managing cash is one of the daily tasks of a financial manager, he should ensure that there is a good flow of money in all places; there is a need for short term and long term cash obligations. A good credit policy assists a company in managing its credit to suppliers and managing debts owed by its customers. When a company retains a financial manager, he is responsible for developing a policy that benefits the entire company (Imam, Richard, Clubb, 2008).

A company with well-managed finances has a comparative advantage in that it develops policies that lead to high efficiency, low cost of production, and ensuring that a firm can meet its financial obligations as they fall due. As much as an organization is making sales, to have report profits money in the firm must be well managed. If the company loses the functions of management accountant, it is likely to suffer financial difficulties, increased costs of production, excess or strained working capital, and be unable to meet its short term and long term financial obligations as they fall due (Fred, 2008)

References

Anthony, R., Hawkins, D. & Merchant, K. (1999) Accounting: text and cases. 10 the ed. Boston: McGraw Hill.

Barry J. and Jermakowicz, K. (2010). Wiley IFRS 2010: Interpretation and Application of International Financial Reporting Standards. New York: John Wiley and Sons.

Dury C. (2006). Management Accounting for business. Thomson Learning, ISBN 0-471-17067-4.

Fred, D. (2008). Strategic Management: Concepts and Cases. New Jersey: Pearson Education.

Horngren, T., Srikant M., and George F.(2006). Cost accounting: A managerial emphasis. Boston, MA: Pearson Prentice Hall.

Lindquist, T., & Smith, G. (2009). Journal of Management Accounting Research: Content and Citation Analysis of the First 20 Years. Journal of Management Accounting Research, 21249-292. Retrieved from Business Source Complete database.

Imam, S., Richard B. and Clubb, C. (2008). “The Use of Valuation Models by UK Investment Analysts”. European Accounting Review. 17(3):503-535.

Weetman, P. (2010). Financial and Management Accounting. Wiley. ISBN13: 9780273718413.

Weygand, J., Kimmel, P. and Kieso, A. (2010). Financial Accounting: IFRS, 1st edition. Illinois: Northern Illinois University.

Wheelen, L., $ Hunger, J.(1999). Strategic Management and Business Policy: Entering 21st Century Global Society. Massachusetts: Addison Wesley.

Williams, S. (2001). Making better business decisions: understanding and improving critical thinking and problem-solving skills. London: Sage.

Methodology

100 members were considered in this result for various sectors such as education, transport, telecommunication, health, and financial services, 21, 22, 27, 20, and 10 respectively. They were of sectors with different needs. This data was collected for this study on the optimum pricing strategy as shown by Excel’s statistical report. All the data was estimated to the nearest 2 decimal points while the measurements of membership were done in groups with an estimation to the nearest 1.

The data has been analyzed using SSP version 15.0 for personal Computers there were testing of data for normality using statistical tests, quantitative and qualitative variables for data were also used. They were not paired in terms of details but differences in means standard deviation have been subjected to the confidence level.

Interpretation

The result has been obtained and analyzed from the data of 100 members of five sectors. The graphs from SSP attached have all the results. The optimum profits, price, and contributions which are measured at 5% confidence are represented in the tables attached. The contribution for the education sector is 5,203,125 for 22.5members and this one can be used to measure. The price obtained using contribution is 250,000 per member in the education sector. Therefore the education sector should target over 23 members to break-even

This report on pricing, profitability, positioning and targeting of five sectors has been analyzed in contribution, raw materials costs, membership ship fees, and profits. The results show that there is accuracy in the findings and the difference is minimal. The findings of this research are most important although it does not give a proper and accurate estimate of all sectors under consideration the education sector only. The differences between optimal pricing strategy and pricing using other contributions show fewer profits.

Recommendation

There is needed to make an effort to carry out results in the future in the market using adequate statistical methodologies to obtain a good result on optimal pricing strategy. This is because a great deviancy shows that the result was not adequate and it needs further research in the five sectors to determine the best pricing strategy for membership fees in the sectors. Proper formulas should be used in order to incorporate all variables such as fixed costs, variable costs, fees, and the sectors to enable one to come up with a proper pricing strategy for good profitability. The methods that have been developed that have been used are useful in estimating this pricing strategy that gives profitability.

Model critique

The essence of this approach is, first problems must be expressed in quantity, and second, those symbolic modes of expression and reasoning one to be preferred. To the extent possible, problems are examined with a systems orientation and in practice. In the domain of the descriptive model, the focus of the study is how people behave and make decisions not on how they ought to behave. The purpose is to describe the process by which managers in full go about making decisions. Normative decision models which are the main focus of economies and statistics deal with how decisions should be made. These models prescribe for the manager the most courses of action. The model involves decision making under certainty

Sensitivity analysis

Sensitivity analysis involves analyzing various factors and variables of the pricing strategy. It involves identifying and estimating various. Then the analysis is carried out to estimate the optimal price of the membership fees. It’s a methodology framework for designing problem-solving interventions using cognitive mapping. Cognitive mapping represents a problem space by a series of interconnected causal maps. They structure the problem through agreement regarding the action plan. The methodology includes a sequence of strategy workshops that enhances the managing process of solving problems in a workshop that is the management of group dynamics and the decision-making process.

Appendix #1

Methodology

The data has been clusterized into two groups: – cluster 1 and cluster 2. This data has been compiled using a regression model and the data has been combined into 19 stages. Each stage RSQ has been calculated to find the best segmenting method. In each stage, there is a combination of a number of units of each cluster. Then the next stage is predicted and what appears in each cluster is shown. All the data was estimated to the nearest 1 while the coefficients to the nearest 3 decimal points but RSQ was done with estimation to the nearest 13 decimal points.

For cluster requirements, combination and coefficient the whole market was analyzed for the membership, then this was subjected to complex mathematics formulas to produce accurate results. It was processed using nonparametric tests to give the outcome of the result that was required

Interpretation

In segmenting the market reaches a climax when you reach stage 15 of combining cluster and cluster 2. In this cluster, a combination that gives 1 will mean a low score is poor positioning and segmentation, but a combination that gives 10 or more will mean a high score for the company to have a better standing it should have a higher score to reduce the cost. At stage 15 the coefficient is 3.232 and the appearance of 9 and 12 at cluster 1 will be 9 and cluster 2 – 12 meaning that the company has a good standing and can compete easily in the market. In stage 17 cluster 1 gives a rating of 6 while cluster two gives a rating of 9 after combing the two what appears is rating 12 for cluster one and 16 for cluster two. This means for membership to be successive stage 17 considered.

Recommendation

The best stage is stage 17 which gives a maximum RSQ for the data and a higher rating for both clusters. This stage will give a good rating as positioning segmentation and market share. This stage gives proper market targeting and shows good cluster preferences. In positioning shows that the company will have a competitive advantage at this level. At this level, the company will be able to collective action to reduce and positioning or confusion positioning.

Proper formulas should be used in order to incorporate all variables in coming up with the best market rating for clusters and proper statistical data should be used. The equations that have been developed by various researchers on the same should be used in carrying out the analysis.

Model critique

The regression model used shows the downward trend from stage 1 onward. This model needs to be improved by incorporating other models; otherwise, this single model will not give a proper and good result. The model is widely used by most marketing executives to analyze the company’s competitors’ rating in the market.

Appendix #2

References

Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting.

Drury C; (2000); Management and cost Accounting;5^th edition ,business press Thomson Learning.

Gapenski l, Brigham E; (1994) Financial Management: Theory and Practice; Dryden Press.

Ghetti A. (2008); Terrific introduction to financial management; Amazon.

Lewis M. A and Slack N. (2003); Operations management: Critical Perspectives on Business and Management; Routledge.

Ramanathan R, (2004); Analysis’ Tool for Performance Measurement; SAGE.

Reilly Investment Analysis & Portfolio Management, 8th ed. South-Western.

Schwab, Bernard, and peter rusting; (1969); A comparative analysis of the net present value and the benefit- cost value as a measure of the economic desirability of investments, journal of Finance.

Teichroew, Daniel, Alexander A. Robichek, and Michael Monalbaano, (1969); analysis for criterion Investment and financing decisions under certainty”, management science.

Wald J (2000) Biggs’s Cost accounting; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth.

Introduction

The primary objective of The Serious Reader Company is to become profitable which means that it will generate income for distribution to its owner. The financial statement, which provides details of the company’s sales, costs, expenses, and profit, is the income statement. There are different types of the income statement that companies prepare for internal purposes, which are discussed in this paper along with the reasons for making them. Furthermore, this paper describes scenarios in which understanding how costs behave is useful.

Internal Income Statements

The preparation of Internal Income Statements does not require companies to follow the rules and guidelines established by the Financial Accounting Standards Board (FASB). They are prepared to provide more details that are not included in the external income statement. Moreover, they contain confidential information which is not disclosed to the external users of financial reports (Tracy & Tracy, 2014).

The internal income statement contains information that is accessible to the top management, finance managers, and employees of a company. Businesses prepare internal income statements for various reasons. However, the primary objective is to estimate the impact of their decisions on profitability. The purpose of these statements is to provide financial information specific to a product or venture that the company is pursuing. It helps in identifying the areas which can be improved to reduce costs or expenses.

There are different approaches adopted for preparing internal income statements. These approaches differ on the basis of the treatment of fixed and variable costs. The internal income statement uses variable costing and considers fixed costs related to the manufacturing process as period costs. It implies that this type of income statement is prepared to estimate the contribution margin of a product(s) sold by the company.

Cost Behavior

Evaluating cost behavior is essential to make informed decisions that could affect the future performance of the company. The cost behavior can be explained on the basis of a linear function which could be used for estimating total costs affected by three types of costs including fixed, variable, and mixed costs (Mowen, Hansen, & ‎Heitger, 2016). The first scenario in which it is important to determine the cost behavior is the change in total costs caused by the change in the activity level. In this case, the number of units produced affects the total costs which include the variable cost per unit. Moreover, the variable cost may vary according to the level of activity, which means that it could rise when the production level increases.

In the second scenario, certain variable costs may include a fixed portion such as the telephone bill which includes the variable cost of calls made and also the fixed-line rent. The third scenario is based on a longer time horizon in which fixed costs may also be considered as variable costs by the business (Drury, 2013). Therefore, it could be stated that costs behave differently depending on the period selected for analysis.

Conclusion

It could be concluded that businesses prepare different types of the income statement for internal use as they help in making business decisions which have a direct impact on their profitability. Moreover, managers are interested in determining how different costs behave which could affect their decisions and outcomes. There are three types of costs included in the cost function including fixed, variable, and mixed variables which behave differently and affect the profitability of a company.

References

Drury, C. (2013). Management and cost accounting (4 ed.). Berlin, Germany: Springer.

Mowen, ‎. M., Hansen, D. R., & ‎Heitger, D. L. (2016). Managerial accounting: The cornerstone of business decision-making. Boston, MA: Cengage Learning.

Tracy, J. A., & Tracy, T. (2014). The comprehensive guide on how to read a financial report. New York, NY: John Wiley & Sons.

Introduction

The technique of the cost-volume-profit (CVP) relationship has been used to solve the problems. This technique is also called ‘Break-even-analyses’. The varying degrees of twists under different problems have been duly taken care of by the CVP technique as is clear from the solutions of the various problems.

Contribution Margin

The contribution margin is the difference between the sales price and the variable cost of the product. The contribution margin of Claire’s every antique at the given information of ales price and variable material cost is calculated hereunder:

This may be noted that sales commission has been ignored while making the above calculations as per instructions.

Calculation of Monthly Break-even units

Break-Even Point is the point that breaks the total cost and the selling price evenly to show the level of output or sales at which there shall be neither profit nor loss. At this point the revenue of the business exactly equals costs.

Fixed Cost

Hence Break Even point of out put or units will be = ————————

Contribution per unit

The total monthly fixed cost in the case of Claire’s Antiques is $ 75000. The design time allocation of overheads or fixed costs among Clocks, Dinette Sets, and Bedroom Suits are in the ratio of 20:35: 45 respectively. The total monthly fixed costs are apportioned as under:

Hence for meeting monthly fixed costs, the contributions have to be equal to $75000 divided proportionately among each type of antique, Claire’s Antique will have to produce and make sales monthly of 39.47 units of Clocks, 10.85 units of Dinette sets, and 7.24 units of Bedroom suits.

Contribution Margin Income Statement

Based on the total yearly sales of 620 units of Clocks, 180 units of Dinette sets, and 110 units of Bedroom sets, and also taking into sales commission as a variable cost, the Contribution Margin Income Statement is prepared as under:

Note that information about monthly fixed costs is provided at $75000. Before allocation these monthly fixed costs were converted into yearly total fixed costs and then allocated in the ratio 20:35: 45 among clocks, dinette sets, and bedroom suits respectively.

Also, the distributor’s commission has been calculated on 70% of the sales as that was expected sales through distributors.

Effects of increase in sales commission to 15%

With the increase in distributor’s sales commission by 5%, the total commission would be calculated as under:

With the increase in distributor’s commission, Claire’s Antiques will have to pay an additional $63525 as sales commission. Accordingly, the contribution and the net income will be reduced by that amount.

As Claire’s Antiques does not want to change the selling prices, the cost of the product will be reduced by that amount. The other variable cost incurred on the products is material costs. The required reduction in the material in order to maintain the same contribution is calculated as under:

Accordingly to maintain the same contribution Claire’s Antiques will have to purchase the variable material at the reduced cost per unit calculated above.

If it is not possible to reduce the material cost, which is variable, the other alternative is to make savings on fixed costs. The total fixed costs for the year are $90000 (75000*12). Claire’s Antiques will have to reduce it to $836475 (i.e.$900000- $63525) to maintain the same income with the reduced contribution.

New Break-Even Point for Dinette Sets

The changed assumptions are:

1. Sales Price is reduced by 10%, and
2. Additional advertisement costs of $1000 per month to be absorbed by Dinette sets only
3. Sales commission is ignored.

Under this scenario the yearly break-even point for Dinette sets is calculated as under:

Introduction

The accounting system of resource allocation am familiar with is activity-based coating. Activity based accounting system is an accounting system that is used in resource allocation to various activities in multinational manufacturing firms and is yet to adopted by small firms. The allocation of total general overhead by this system is allocated based on direct labour hours and machine hours in my organization. The activities of production for the company are allocated the total overhead using calculated overhead rates per hour of machine and labour. Then the figure obtained is multiplied per the number of hours each activity is using. The Labour and machine hours are taken as cost drivers for each activity. This method has assisted the company reduce customer complains of over charging in prices.

Activity-based costing system of accounting considers a number of activities that takes place in various production units. It is considered the best method of allocating overhead within production unit. In my organization direct costs are those costs which are directly and easily costs that are attributable to production and indirect costs are those costs which arise during the existence of the business as whole. Indirect cost can not be attributed to any production unit it is only distributed various production units based on activity-based system.

Main Body

The underlying principles, conventions and objects of this method similar to other methods, but the application of that principle and the methods by which the objects are to be achieved must vary with circumstances. This does not mean, however, that the processes and procedures of a business must remain unaffected by the introduction of a system of cost accounts.

This method of costing influences price because they affects supply. The lower the cost of producing a product relative to the price customers pays for it, the greater the quantity of a product the company is willing to supply. Managers who understand the cost of producing their companies’ products set prices that make the products attractive to customers while maximizing their companies’ operating incomes. In computing the relevant costs for a pricing decision the manager must consider relevant costs in all values.

This method is also used in assessing the performance of manager responsible for running production units independently. The best criteria according to my view are the one without the allocation of indirect costs. This is because of manager should be held responsible for the costs that is under their direct control. They are free to make decisions that could increase or decrease the cost of operation of a unit. The efficiency and effectiveness of a manager should be judged from his ability to generate maximum revenue from operation and to keep the cost associated with this revenue at a minimum level. This will present a clearer picture to evaluate the performance of a manager of a unit. Although each unit produce certain amount of indirect costs but these cannot be directly attributed to the unit from which it had originated. So the company devised a formula of allocating this cost to each unit based on unit’s revenue-producing capability. However as said earlier, there is no set criterion to allocate indirect costs to different units and it varies from business to business. This allocation of indirect costs is discretionary and could create distortion in evaluating the performance of a manager. So in order to help manager accountable for results they are evaluated on the basis of operation under their direct control.

The management pricing strategy will reveals company’s view of customers, competitors and cost profitability as well future success. Competitors selling similar commodity have no control over setting prices and must accept the price determined by a market consisting of many participants. Cost information only helps the company decide on the output level that maximizes its operating income. In less competitive, products are differentiated and all three factors affect prices; the value customers, place on a product and the prices charged for competing products affect demand and the costs of producing and delivering the product influence supply. As competition lessens even more, the key factor affecting decisions is the customers’ willingness to pay, not costs or competitors.

Short pricing decisions are responses to short-run demand and supply conditions, but they cannot form the basis of a long-run relationship with customers. Long-run pricing is strategic decision. A stable price reduces the need for continuous monitoring of suppliers’ prices, improves planning, desired long-run buyer-seller relationships.

Conclusion

In normal circumstances, the pricing strategy has effects on the performance of the company; therefore I will advice other companies to select a price which is above the ABC costing method considering the capital requirement and profitability for the firm. This is because the price that is attached to the product influences the utility value and sacrifice value of the customer. The customer has to sacrifice some monetary benefits that will be a clued on consuming another product which is different from the product in question.

References

Ask, U, Ax, C. and Johnson’s (1996); Cost management in Sweden: from modern to post-modern management accounting.

Drury C; (2000); Management and cost Accounting;5^th edition ,business press Thomson Learning,

Wald J (2000) Biggs’s Cost accounting; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth.

Cost accounting involves computation of the expenses in a business. It also involves preparation of budgets and computation of variances. To compute variances, cost accountants prepare standard costs then compare them with the actual cost. The aim of this is to control expenditure and thus increase costs. Cost accounting is normally concerned with the cost of production per unit. It is a subset of managerial accounting. Cost accounting involves large amounts of data to facilitate computation. The reports are usually lengthy and complicated.

Managerial accounting is concerned with production of accounting information to aid managers’ decision making. This information is obtained from all levels of the organization. Unlike cost accounting, managerial accounting involves both financial and non-financial information. Cost accounting is just one part of managerial accounting. Managerial accounting information is highly summarized. The reports are usually short and simple to understand. This helps managers to make strategic decisions.

The Lean Production Philosophy

The automobile manufacturer Toyota developed the lean production philosophy. The aim was to produce cars with the least inefficiencies possible. All activities involved in production should add value to the product. Value is determined by what the customer is willing to pay for. This philosophy identifies seven types of inefficiencies, referred to as Muda, which should be eliminated from the production line. They include inventory, defects, motion, waiting, overproduction, transport and over processing.

The implementation of this philosophy requires use of Kaizen and Just in Time philosophy. Kaizen involves making small continuous improvements in daily operations (Horngren, Sundem, & Schatzberg, 2010). Eventually, these improvements will result in eliminated waste and increased profits. Just in Time involves producing only the necessary items at the required times. The combination of this practises results in Lean Production.

Accounting in Lean Production Philosophy

There is a great difference between conventional accounting and Lean accounting. Conventional accounting recognizes inventory as an asset to the firm. Lean production philosophy classifies inventory as a waste and liability. Standard costs are used in conventional accounting. In Lean Accounting, standard costs are shunned. This is because they are not consistent with the philosophy of Kaizen. Kaizen encourages continuous improvement while conventional accounting encourages maintenance of the status quo.

Lean accounting is based on the addition of value along the supply chain. Conventional accounting aggregates all costs incurred at all stages into one pool. Companies using traditional accounting create reports less often than those using lean accounting do. The current information obtained from lean accounting is more relevant for decision-making.

Preparation for Reduced Budget

Budgetary reduction is usually considered a negative event in organizations. Dr White should prepare the staff for the impeding changes. She should summon them for a meeting and explain the rationale for the changes. However, she should make it clear that the clinic will still pursue its objectives. If any employees will be laid off, she needs to prepare them psychologically. She also needs to prepare the employees who will be retained for an increased workload.

In choosing the costs to reduce, I would recommend separating the discretionary from the fixed costs. It is easier to alter discretionary costs on short notice than to alter fixed costs. Secondly, she should rank the established discretionary costs based on relative importance (Weetman, 2007). This prioritization will enable her to establish which costs to reduce and which to maintain. For example, advertising can be reduced since there is already excess demand.

References

Horngren, C. T., Sundem, G. L., & Schatzberg, J. (2010). Introduction to Management Accounting. London: Person Education.

Weetman, P. (2007). Financial and Management Accounting: An Introduction. Chicago: Prentice Hall.

The Chief Financial Officer in the company, which is a milk production firm, known as Milk One Limited, has to decide on whether the company will be using the process costing method or the job order costing system in our firm when accounting for costs. The following is a recommendation on the best costing accounting method for our firm.

First, we shall compare as well as contrast the process costing method with the job order costing method. The job order method of costing is a cost accounting method where the costs rely on the specific kind of work done. The costs are therefore not based on the units produced but on the cost of inputs used to make a particular product or service. The process costing method of accounting on the other hand relies on the averaged costs for a given unit of production. This is to mean that the costs are related to the units of the product produced, but not to the individual costs.

Having explored the two kinds of accounting, we shall look into where each cost accounting system is used in a manner that is beneficial and in a way that will ensure there is no under costing and over cost. The job costing system that bases its way of accounting costs on the labour used in production is suitable for firms with specific services or products that are highly differentiated and there is a need to track the particular quantity of work and the raw materials used. This kind of cost accounting is most suitable for companies with highly differentiated products. Companies such as an Airline company, tour and travel companies, and advertising agencies are examples of companies in need of job order cost accounting methods (Shaw & Wild, 2011).

The cost accounting method is suitable for companies whose output is not highly distinguishable from each other. The process costing system may be easier to manage compared to that of the job order costing method. This is because obtaining the exact data needed is easier in comparison with obtaining data in the job costing cost accounting method. Companies that produce high levels of output of identical products are the best suited to use the process cost accounting method because they do not have too many unnecessary costs to include in their accounts. Oil manufacturing companies and companies that produce products for mass consumption are some of the firms that are best suited to use this system of accounting.

Our company Milk One Limited is a milk-processing firm, which produces pasteurized milk in different flavours. The milk is then distributed to various chain stores for mass sale. Since it is a small firm, there is a need to focus on one product to minimize unnecessary costs and enable the company to buy in bulk to enjoy the resulting economies of scale. This means that our company will be producing homogeneous products that have no differentiation or a little differentiation in terms of flavours. The best cost accounting system is that of the process costing system which is easier to set up and manage.

The costs of buying raw material (milk) in this case are traceable, the cost of pasteurizing the milk is traceable, the cost of packaging the milk is visible and the cost of distributing the milk is also traceable. This makes the process costing system appropriate for Milk One Limited. There is a certainty that the Chief Financial Officer of Milk One Limited takes into consideration these arguments for the advancement of the company (Shaw & Wild, 2011).

Reference

Shaw, K. & Wild, J. (2011). Managerial accounting. New York: McGraw-Hill/Irwin.