Accounting For Managers Assignment

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Accounting for managers, bachelors of commerce, degree, assignment, semester 1, semester 2, accounting and finance.

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Budgeting
What is a Budget?
Budgeting is a process of identifying, collecting, summarizing and communicating financial
and non-financial information of particular organizations. When all of the listed information
is compiled, it is in the form of a document where all of the management’s quantitative
expression of plans for a forthcoming period is kept.
Function of Budgeting
There are a total of 7 functions of a budget, namely Forecasting, Planning, Communicating,
Motivating, Evaluating, Controlling and lastly, Authorizing. (Chinweike, 2010)

(1) Forecast: A budget is created through calculation attempts to know what the
future of the company holds. By knowing what the company will own in the
future, it enables the company to take a few steps ahead of the plan at the
current moment. A forecast also enlists the use of materials to make sure that
they are provided as and when due. (Chinweike, 2010)
(2) Planning: Once a forecast has been done, a plan will be made based on the
estimated data generated. A plan specifies what an organization wants to do
and control, such as the allocation of scarce resources and financial resources,
plant and equipment, products production methods and human resources. A
plan is also specified under goals in terms of profit, return on investment,
product leadership, market share, or product diversification. (Chinweike, 2010)

(3) Communicating: A budget is also a method to communicate to relevant parties.
A budget is a gathering of information by managers and non-managerial staffs.
Once they are gathered, it will be analyzed, challenged and criticized in order to
get a filtered version. (FlexStudy n.d.) Useless information will also be eliminated
in this process to ensure that the responsible managers actually get the budget
which they are supposed to work with. (Chinweike, 2010)
(4) Motivating: Besides that, a budget motivates people to run towards their goals.
A budget records the goals and performance objectives in financial terms for a
specific time period and so, it serves as a plan and a control system. It also acts
as an insurance to ensure that the minimum desired level of revenue is achieved.
(Chinweike, 2010)
(5) Evaluating: Next, a budget is also created to evaluate the company’s targeted
performance with the company’s actual performance. (FlexStudy n.d.) In this
stage, the user of this financial report will provide feedback to the managers
about the likely effects of their strategic plans and in return, the manager will
then take corrective action to avoid harming the company in the long run.
(Chinweike, 2010)
(6) Controlling: Followed by controlling, a budget is crucial in the growth of an
organization. The coordination of all organizational activities integrates revenue
plans, planned expenditures, asset requirements and financing needs.
(FlexStudy n.d.) Controlling, in other words, co-ordination ensures that the
different business units work in congruence with the organization’s objectives.
(Chinweike, 2010)

(7) Authorizing: Lastly, a budget is used to minimize misappropriation and to avoid
embezzlement. The assumptions and specific plans reflected in the budget
should be documented, a key element in the budgeting process. Without
backing the assumption with a solid reason or evidence, managers can shortcut
the planning process. Thus, one of the advantages of budgeting is managers are
made more accountable for their spending. It prevents the occurrence of fraud
because every transaction, no matter how tiny it is, is included as one of the
information in the evaluation. (Chinweike, 2010)

Suggestions
I suggest that Mr Raphael should prepare a budgetary report in order to know what assets
and liabilities the company might hold in the future. It is because by doing so, Mr Raphael
can know what steps to take currently to achieve the highest profit in the future. From the
report, Mr Raphael can make more accurate decisions instead of simple day-to-day business
decisions as this approach will bring negative impact on the company’s performance. Next,
due to the fact that Mr Raphael is planning to open other new branches within the State, a
budget can also help him to know how far Coffee Haven Pty Ltd is able to expand. Besides, a
budget also involves a process to filter accounting information and compile them into a
single set of documents. It eliminates useless information and helps focuses on information
useful for the company’s managers. In this case, the filtered budget will then be used by the
managers as a tool to identify areas in the company that still has room for improvements.

Cost Volume Profit Analysis(CVP)
Definition
A technique that identifies the changes in profits relative to the change in sales volume,
costs, and prices. It is a technique often used by accountants to plan ahead the operating
activities and to provide information about products to emphasize, target of sales revenue,
minimum sales revenue to avoid incurring loses, increase of fixed costs, to determine the
budget, and to identify the risks of the organization with the current level of income. (Wiley
2004)
Advantages of CVP
CVP analysis gives the managers the upper hand in decision making. Managers are able to
identify the company’s breakeven point by projecting how its expenses and production will
affect the success and failure of the company. By identifying the breakeven point, the
manager can adjust the spending and instead increase production efforts to maximize the
profitability of the firm. (Lewis n.d.) A manager is also able to make right decisions such as
production selection mix, make or buy decisions, selection of the best channel of
distribution, the type of marketing strategy, type of pricing policy to adopt and the best
method of production. (Wicks n.d.)
CVP also is a record of the company’s cost activity in detail. Cost activities such as the unit
production costs and the production power can help the managers determine the future if
the variables such as transportation expenses and material costs are changed. (Lewis n.d.)
The manager can control the cost to ensure that the company is achieving profit instead of
losses.
CVP can also serve as a price determination. CVP can enable a business to establish a
sensitivity of prices to the sales volume. (Wicks n.d.)
CVP is also one of the components in the preparation of the budget. CVP in this case is used
to determine the levels of sales to achieve the target profits. To reach that target, a flexible
budget is created to indicate the costs and the expected revenues at various stages of
production. Through this process, the managers are also able to understand the breakeven
concept, and thus they can make strategic budgets to avoid making losses. (Wicks n.d.)

Components of CVP
The components that makes up the CVP involves the production level, the fixed costs,
variable costs, price of unit sold, and sales mix. The production level is the number of units
produced and sold. While for the fixed costs, they are the company’s expenses that remain
constant regardless of the production activity. The variable costs on the other hand refer to
the company’s expenses that fluctuate following the number of output. For the sales mix, it
refers to the price of each unit sold in a multi-product company. These components are used
by company managers to calculate the important factors of the CVP, including the
breakeven analysis and the contribution margin. (Johnson n.d.)
To calculate the CVP, managers must make a few assumptions regarding the components
listed. Firstly, managers must assume that the rise in cost and profit results from an increase
in the output amount and not the increase in selling price. Secondly, managers should also
assume that the costs are divided into two components, variable costs and fixed costs.
(Johnson n.d.)
(1) Contribution Margin

Most managers might tend to think that the contribution margin is the amount of
profit made before the subtraction of fixed costs. When the company’s total profit
increases, it is followed by the contribution margin. (Johnson n.d.)
On the other hand, some companies might want their contribution margin to be in
the form of a ratio. So the formula to come up with a contribution margin ratio is :-

Once the Contribution Margin is calculated, the calculated answer can be used to
identify the breakeven point. (Johnson n.d.)
(2) Breakeven
The function of working the breakeven analysis is to identify the breakeven point of
the company. The breakeven point shows the amount of cash a company needs in
sales to start earning a profit. (Johnson n.d.)

As it is said previously, the contribution margin is used to calculate the breakeven
point.

Managers can use the breakeven point to determine the how much sales revenue is
needed to earn a specific income. This is then calculated by adding the fixed costs
and the target income, followed by dividing the total by the contribution ratio.
(Johnson n.d.)

Bibliography
Chinweike, 18 October 2010, Budgeting: What Are The Functions of Budgeting?, Investment
and Business Accountants, viewed 8 May 2013,
<http://www.accountantnextdoor.com/budgeting-what-are-the-functions-of-budgeting/>

Cost-Volume-Profit Analysis, 27 September 2004, Wiley, viewed 8 May 2013,
<http://www.wiley.com/college/sc/eldenburg/ch03.pdf>
D. Wicks n.d., The Benefits of Analyzing Cost-Volume-Profit, eHow, viewed 8 May 2013,
<http://www.ehow.com/info_8428943_benefits-analyzing-costvolumeprofit.html>

J.Lewis n.d., Advantages & Disadvantages of Cost-Volume-Profit Analysis, Chron, viewed 8
May 2013, <http://smallbusiness.chron.com/advantages-disadvantages-costvolumeprofitanalysis-35135.html>
R. Johnson n.d., How The Components of Cost to Volume Profit Analysis Work, Chron,
viewed 9 May 2013, <http://smallbusiness.chron.com/components-cost-volume-profitanalysis-work-35600.html>
The Role of Budgeting in Management Planning and Control, n.d., FlexStudy, viewed 8 May
2013, <http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075>

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