The Role Of Management Accounting In Strategic Planning: An Essay.

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Difference between static planning and flexible budget

Static budget is the type of budgeting which incorporates the projected values in regard to outputs and inputs that are mostly conceived prior to the period in the question. They are prepared during the beginning of accounting period, highlighting how much an organization project it would receive and spend (Chenxi, 2011). It usually offers or gives realistic objective for accounting period. Flexible budget on the other hand is created after accounting period ends, highlighting how much an organization actually earned and spent. Flexible budget is the budget that is permitted to adjust based on variation in assumptions utilized in creating a budget within the management’s planning process (Drury, 2013). On the other hand, static budget is the budget that remains the same although there are substantial variations from assumptions made within the planning period.

Static budget does not vary with actual volume of output accomplished as compared to flexible budget which is mainly designed in a manner that it varies with level of the activities or output achieved. Further, static budget vary from flexible budget in scope. Here, static budget is said to fail to ascertain the costs appropriately in case of any variation in situation as compared to flexible budget which is said to easily ascertain the required cost in diverse levels of the activities (Garrison, Noreen & Brewer, 2003). Further, static budget vary from flexible budget in terms of determination of cost. Here, static budget is said to be prepared under some assumptions that all situations would remain uninterrupted while flexible budget is said to be prepared at numerous levels of the activities taking into considerations of probable variations in operational factor of the business.

Further, static budget differ from the flexible budget in terms of assumptions. In this case, static budget is said to have limited application and is said to be ineffective as the tool for the cost control compared to flexible budget which is said to have wide application as the efficient tool for the cost control (Horngren et al., 2002). Static budget and flexible budget also differs in terms of pre-requisites where static budget is said to be prepared without categorizing costs in accordance with variable nature whilst flexible budget is said to be prepared by categorizing costs in accordance with their variable nature.

Actual results could differ from the amount budgeted due to many reasons. For instance, the difference between actual results and budgeted one could be as a result of change in level of activities, as well as variation in price of a given organization (Drury, 2013). In essence, actual results differ from the budget due to variation in level of activities which could in turn effect on costs. Further, variation in prices in a given organization also could result in the difference that is observed between actual results and the budgeted one (Chenxi, 2011).

Puget Sound

Flexible Budget for 31^st May

Actual diving hours                            105 hours

Total revenue (105hours*365)                                                            38,325

Expenditures

Wages and salaries {(105*125) + 8,000}                   21,125

Supplies (105*3)                                             315

Possible reasons why actual results differ from budgeted amount

Equipment ((105*32) + 1,800}                                   5,160

Insurance                                                         3,400

Miscellaneous (105*1.80) + 630)                    819                              30819

Net Income                                                                                         7,506

Management accounting is a critical management practice in a given business which managerial accountants are considered crucial part (Ahid & Ayuba Augustine, 2012). In essence, management accounting is crucial in strategic planning since it provides relevant information and takes active function in the daily as well as strategic planning that is faced by a given firm. Management accounting also play a crucial role in strategic planning since it enhances free pricing mechanism as well as independent assortment planning. Management account gives crucial information for different users of an organization for strategic organization (Vedd & Kouhy, 2005). Further, management accounting are crucial in strategic planning since they provide the departmental heads with opportunities to speak out their minds in regard to corporate profitability and efficiency. These talks result in reduction of spending or expenditures as well as reduction of new projects which might seem a bit costly for an organization.

Further, management accounting is significant in strategic planning since it enables department heads in reflecting on the effectiveness and efficiency of the manufacturing systems and in identifying where to reduce the costs (Drury, 2013). It provides a forum where departmental heads could have some sober conversation in regard to an organization’s financial position. In addition, management accounting is important in strategic planning since it focuses on decision-making and forecasting. It also entails utilizing internal financial data that is readily available to different managers and information that organization has to publish by law (Ahid & Ayuba Augustine, 2012). This is crucial since it assist in forward planning, analysing and reviewing of performance of a given entity. In essence, management accounting is important in strategic planning since when an organization is looking forward to making strategic decision, for instance, whether to develop some new product line, acquiring other firms or expanding to other nations, individuals with expertise in management accounting could provide advises (Vedd & Kouhy, 2005).

Labour variance is a greater tool for an organization to better comprehend the costs. It assists in examining or assessing costs as well as use of labour to identify where there are any inefficiency (Garrison, Noreen & Brewer, 2003). Computing this variance is relatively simple but understanding what might result to the probable labour variance is of greater importance. One of the major causes of labour variance is employee’s pay and their skill level. It would be a bit natural to make some assumptions that utilizing newer employees paid at relatively lower rate would at times create favourable labour rate variance (Drury, 2013). Nonetheless, in case employees are newly trained, their efficiency and skills could be lower than the average rate of variance, hence, creating unfavourable labour variance. Another important cause of labour variance is bad scheduling. This is the most common source of the waste during production with some erratic workflows. When too many employees are scheduled with non-peak hours, an organization would get unfavourable labour variance while in case sufficient employees are scheduled whenever things are getting a little bit busy, an organization would end up losing an opportunity in increasing its production.

Flexible Budget for 105 Activity Level

On the other hand, organization’s management sets some standards of the quantity of materials that has to be utilized for specific jobs. Particularly on the manufacturing production line, cost per unit is said to play significant role in product cost and therefore impacts overall profitability of an organization (Garrison, Noreen & Brewer, 2003). Thus, understanding material variance is importance which is the difference between quantity of the material utilized in processing a certain products and quantity budgeted for the product, could be very crucial. Some of the major causes of material variance in an organization is use of inferior materials. Starting production of certain products using inferior materials in order to save some cash could affect material variance (Drury, 2013). This is based on the fact that low-quality or inferior materials might need to utilize more units of a specific material, resulting in unfavourable material variance.

Further, upfront standards could also result in material variance. In this case, if more materials are utilized than required, unfavourable material variance could arise. Conversely, favourable material variance could arise when fewer materials are utilized than budgeted. Therefore, any miscalculation in materials to be used might lead to temporarily unfavourable material variance.  Nonetheless, in situations where original budget standards for the materials is miscalculated, solving issues easily by making some adjustments to the numbers might be based on prior materials when the standards were met.

Task Four:  Application of Performance Measures: - Non-Financial Indicators

Throughput time

Throughput time = inspection + queue + process + move = 0.3 + 5.0 + 2.7 + 1.0 = 9 days

MCE

Manufacturing cycle efficiency = value-added/throughput = 2.7 /9 *100% =30%

Percentage of throughput spent in the non-value-added activities

Non-value added activities = queue + inspection + move = 0.3 + 5 + 1 = 6.3 days

Hence, the percentage of throughput spent in the non-value-added activities was

Non-value-added / throughput time = 6.3days/9 days *100% = 70%

Therefore, percentage of throughput would be 70% since the MCE was around 30% meaning that 30% of throughput was mostly spent in the value-added activities; that is, process time.

This is usually the total time when a specific order was received to the period when it was shipped. It is computed as follows;

Delivery cycle time = throughput time + wait time = 9 days + 14 days = 23 days

The new MCE in case all queue times were eliminated

The new MCE = value-added time/ throughput = 2.7 days/(9 days- 5 days)

=2.7 days/4 days= 0.675 or 67.5%

Task Five Pricing Decisions

While organization decision needs to be data-driven as well as comprises of some considerations of the quantitative and qualitative information, this does not imply qualitative aspects are not crucial as well. The main goal of the management accounting is to give crucial information for proper decision-making (Horngren et al., 2002). Therefore, by understanding qualitative and quantitative factors which are to be examined or assed while making accounting decisions, one can ensure that small organizations are considering all ramifications of an organization decisions. In essence, qualitative factors for decision-making are non-numerical basis used in decision-making. They are those aspects which are more subjective not only on numerical statistical information but on other related aspects which might have major impact on collected information (Thomas, 2014). With these aspects, qualitative factors are those factors which are considered relevant in decision which are tricky to measure in monetary terms. These factors might include long-term future impact on profitability as well as effect on the employee morale, scheduling as well as other internal components.

Quantitative factors in decision-making are those factors that are considered relevant in decision-making which could be either measured in monetary terms or in quantitative units. These are aspects which are numerical in basis used in decision-making such as break-even analysis, sales forecasting. In essence, quantitative factors in decision-making are those aspects based on numerical quantifiable and statistical data without any consideration of other aspects. Some of the quantitative factors in decision making included added costs as well as incremental revenue (Thomas, 2014).

References

Ahid, M., & Ayuba Augustine, D. (2012). The roles and responsibilities of management accountants in the era of globalization. Global Journal of Management and Business Research, 12(15).

Chenxi, F. (2011). Controllability, Budget Flexibility and New Model of Budgeting System. Journal of Modern Accounting and Auditing, 7(9), 974.

Drury, C. M. (2013). Management and cost accounting. Springer.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2003). Managerial accounting. New York: McGraw-Hill/Irwin.

Horngren, C. T., Bhimani, A., Srikant M.. Datar, Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.

Thomas, K. (2014). Qualitative & Quantitative Decision Making; Retrieved at 24^th May 2017 from; https://www.linkedin.com/pulse/20140920165433-34529931-qualitative-quantitative-decision-making

Vedd, R., & Kouhy, R. (2005). Interface between management accounting and strategic human resource management: Four grounded theory case studies. Journal of Applied Accounting Research, 7(3), 117-153.