All expenses in Managerial Accounting are classified mainly under direct and indirect expenses. All these expenses require proper budgeting. It helps in financing the business operation. Business firms take one of the ways between fixed or flexible budgeting. Different other budgets like capital, sales also affect the cash and working capital budget. Operation and cash cycle analysis help managers to take decisions. It though does not affect government enterprises much.
Importance & Objectives of Flexible Budgeting
Importance of Flexible Budgeting:
Flexible budgeting is a way of budgeting where budgeting is made in several steps, and however it requires. It is not determined in one step. It is reviewed several times. It is used in a variety of situations. It depends on the type of organization also (Covaleski et al. 2009). What kind of budgeting decision NGO takes, cannot be taken by a MNC. Every activity is measured differently. These goals are function oriented. These are mainly taken for controlling a business. There are several drivers which determine the facts for the flexible budgeting.
Objectives of Flexible Budgeting:
The objective of this kind of budgeting is to change the budgeting process at several stages of budgeting. These are also determined the valuation and the outcome of the activity. It is flexible in term of temporary activity level. For example, if Tesco wants to launch new product line of fashion garments, it will require huge amount of capital. As it is a MNC, in every decision it needs huge amount of capital. As budgeting is made anticipating a future situation it is not possible always to predict it right. So, a wrong decision can make a loss of quiet huge money. It may lose customer belief also (). So, in that case flexible budgeting is a good way to reduce the anticipation threat. It is applied on production budgeting, purchase budgeting and labor budgeting. If Tesco imports a lot of product all of a certain and it fails to market it then it would increase its inventory only. This will further result in loss. Likewise if the company hires a lot of manpower, and fails to make use of them then it will prove to be a wrong decision.
Three other Budgets which are needed before Cash Budget and how they affect Cash Budget
For the effective preparation of the cash budget it has found that development of capital budget, sales budget and the cost budget is important (). While arguing on this () commented that cash flow is the element that are helping to give a direct link to capital budget, cost budget and the sales budget in linking with the cash budget. While reviewing the concept of the accountant expect it can be concluded that if the debit side of the capital budget is weighty than the credit it give positive impact over the outcome of the cash budget as it is showing the valuation of the assets is weighty than the liability side of the firm. On the other side, the development of the sales budget is helping Tesco to understand the arena where its activities are helping in the development of the business. While developing the sales budget, ASDA is able to draw effective cash budget as it is helping in judging the area where organization can effectively increase their sales.
Operating Cycle and its difference from Cash Cycle
A business is run through several intermediate steps. It starts from buying raw materials which requires money. Then it needs procurement, which also requires money. Maintenance, transportation, insurance premium also increase the overhead costs. There is a huge requirement in working Capital. It also needs some capital to store inventories of raw material, stock, and finished goods (). When customer places an order he also does it in credit. Credit sell is necessary now a day to be competitive in market. So, cash holding reduces because of all these factors. But the company also takes credit when it buys from other companies. For example, if Tesco produces and sells garments, then it sells it other sister companies in credit. The money engaged there needs time to come back. On the other side when it buys its raw material from its suppliers they also forward it in credit. So, some amount of cash flows outward. When the customer finally pays for the product the manufacturing company gets back its money. So, a huge span is required to get the money back. This is called Cash Cycle. If Tesco sells its product on a 30 days credit and buys its product on a 17 days credit then its cash cycle span is of 13 days. While operating cycle time is the time required to convert the raw materials into finished product. If M&S starts a batch production & the first finished product comes within 3 days, then 3days time is its operating cycle ().
Operating Cycle and Cash Cycle helps in Working Capital Management
Net operating cycle is the time taken by a production company time to convert its raw materials into finished goods. This process involves a huge amount of inventories involved in it. The lower the cycle is, the most profitable it would be (Garrison et al. 2010).
When a company buys some raw material it needs to invest some money into system. Some of them are taken in credit. When it tries to sell the product it also gives credit options to its customers to be competitive in market.
Cash conversion cycle = Inventory conversion period + Receivables Collection period – Payables deferral period
So, the net time required to get the whole amount back is referred as cash conversion cycle. The shorter the time is, the greater profitable it is.
These credit facilities forwarded to the customers by the big companies like Tesco and M&S increase their current liabilities. It reduces their working capital which is harmful for company’s financial health. It can be seen from the following equation (Gul and Chia, 2012).
Working Capital = Current Assets – Current Liabilities.
Ratios and Data helps in Working Capital Management
Several data like current assets and current liabilities can be analyzed under several ratios, which give us a comparative analysis of company’s working capital situation. There are several analytical ratios which help in analyzing the situation.
Current Ratio: It is the ratio of the current assets to that of the current liabilities.
If the current assets are higher than the current liabilities, the working capital ratio becomes more than 1. If the current liabilities are higher than the current assets then the working capital ratio becomes less than 1 (Zimmerman, 2012).
Sales to Working Capital ratio: It is the ratio of the company’s net sales figures to that of the working capital figures. Higher its value, higher profitable its business is. High values show that sufficient working capital is provided to generate high sales.
Working Capital Turnover Ratio: It is the ratio of net sales to the average working capital. This shows how quickly working capital is converted to sales.
Accounting is not important in Government Organization
In the concept of Feldmann and Rupert (2012) it has found that maintaining of the accounting principles is effective and taken by the private companies. While arguing on this Leitner (2013) commented that accounting is a tools and the evidence that make the criteria or the limitations for the private companies. By following this principles government are able to make the effective control over the working criteria of the company. In reference to this Government organization are free from accounting limitations as every government companies is direct linking with the fiscal accountability of the nation resource budget. The accounting report of the government companies and the private companies are varying because government companies are strictly following the guidance and the framework of the ruling government. In conclusion to the entire concept of the government companies it can be concluded that meeting with the accounting principles are not important for the government bodies and organization (Princeton.edu, 2014).
Purpose of Cost Accounting
Louderback and Holmen (2003) stated that the cost accounting is an aiding element the management that helps in the development of the specific information that rate used for the financial statements. On the other side as suggested by Horngren et al. (2012) cost accounting is basically used by the business for the effective control over the organizational stock value. While giving the effective reason over the topic as commented by Epstein and Lee (2014) it has found that without development of the cost accounting is business, accountant of the firm is not able to draw the justification of its balance sheet and the profit account of the company. The key elements of the costing accounting are as followed:
The effective recording and analysis of actual costs: Bhimani (2012) observed that cost accounting is a process that help in the taking out the generally and effective cost of the transaction that is adding extra cost to the company. While believing on this thought of Young (2014) commented that if the expenses are controlled by the business then the organization is easily available to increase the profit account of the firm. It has found that Tesco is using cost accounting in its operation as it is helping them to control their extra cost are implicit to the fund of the company.
The forecast of future costs: For effective forecasting of the firm and its development it has found that Sainsbury is using Cost Accounting in its application. This is letting Sainsbury to bring change in the share market by 3.7% as compare to the financial year 2010-2011 (www.e-conomic.co.uk, 2014).
It would be effective for the Tesco if it can take the Cost accounting in term of forecast. As per the view of (www.anagerialaccounting.org, 2014) it has found that Cost accounting is helping to control both direct and indirect costs to the company.
Cost control: Minimization of the cost is necessary for the company as it is helping in generating the revenue to the business (Hayes, 2007). In the operation field of the Tesco it is found that cost control is necessary as scarp values are the explicit expense of the business. For avoiding this extra cost Tesco and ASDA are both taking the Cost accounting aid.
Calculation of Manufacturing Overhead Allocation Rate:
Manufacturing Overhead for the year 598,080 $
Total Machine Hours for the year 14,000
|Manufacturing Overhead for the year in $||598080|
|Total Machine Hours for the year||14000|
|Manufacturing Overhead Allocation Rate in $/Hour||42|
Manufacturing overheads are the costs incurred over all the manufacturing expenses. When it is divided by the total working hours we get the rate of allocation.