Cost Accounting

The important objective of any enterprise is earnings maximization, with a minimum cost of production. The administration of any company ensures that all the managerial accounting and analysis are carried out correctly to achieve the set goals. The modern business is faced with excessive competition; hence, it is the responsibility of every company to attain a competitive advantage. Therefore, the paper discusses the thought of managerial accounting and business environment. Also, it illustrates more on the absorption costing gadget and the cost volume income relationship. Finally, it expounds more about cash glide statements, and highlight the major things to do that provide and use cash in the course of a fiscal period.

Managerial Accounting and Business Environment

Managerial accounting is the process of identifying, recording, analyzing, and presenting the financial reports to be used internally by the management for the purpose of planning, control, and decision-making (Warren, Reeve, & Duchac, 2013). It is the accounting field concerned with financial planning, through the interpretation and application of financial results for efficient management of the business. Unlike financial accounting, managerial accounting provides appropriate accounting reports to the internal users of the enterprise such as the managers (Warren, Reeve, & Duchac, 2013).

The primary areas in which managerial accounting is applicable is during the planning and budgeting of the firm. Various managers use several cost accounting techniques to plan for the sales to make and the price for each commodity to supply (Weygandt, Kimmel, & Kieso). Consequently, this ensures sufficient costs of production, making a firm to earn an optimal profit. Moreover, the managers have to put across strategies on how to finance the company’s operations, and how to manage the liquid cash. Decision making is another important area. In most instances, managers meet themselves in a situation where they have to make decisions on which projects to invest in, or which to drop (Bloomfield, 2015). Through this, they need managerial information to estimate the net present value of each project and to decide on the most efficient one. Most of the managers apply appropriate costing techniques.

Another important area is the measurement of the performance. It is the obligation of the managers to compare the actual business results to the budgeted figures, to assist them in evaluating the overall performance of the enterprise (Warren, Reeve, & Duchac, 2013). They apply various accounting procedures such as standard costing to measure the performance of every department. Finally, analyzing the business environment.

For the last few decades, competition has turned to be a common worry for every business (Vasconcelos & Ramirez, 2011). The pace of innovation and product development is unbearable. However, this has been good news for the consumers as they get quality products, at favorable prices. Many managers have learned to find ways of coping up with the change in their field.

The business environment comprises of all the micro and macro forces that affect the functioning of an enterprise (Vasconcelos & Ramirez, 2011). The micro factors include the customers, suppliers, competitors, and the government. The external factors include political, technological, ecological, economic, legal, and social-cultural factors. Most of these forces have a direct influence on the general performance of the business. The external environmental factors are uncontrollable in nature and mostly affect the overall performance of a given industry (Vasconcelos & Ramirez, 2011).

However, some external factors can be controlled to bring a competitive advantage to the firm in its industry. Through the use of managerial accounting techniques, managers can control the negative impact of the internal business environment (Demski, 2013). For instance, managers may direct the use of Just-in-time production and inventory control systems. The technique will manage the purchasing of raw materials for production and ensure that only the required units are produced. It means that stocks are reduced to a minimum, to reduce the holding cost and avoid wastage.

Apparently, in the current business environment, managers need to take every chance or strategy to remain vibrant and competitive. As stated by Vasconcelos & Ramirez 2011, due to rapid innovation, global competition, increasing customers' demand, and the rest, various managerial techniques should be employed to bring about a competitive advantage to a firm. The new business environment requires companies to develop robust strategies that will create value for their customers and earn more profits. Management, through the proper use of managerial accounting information, should design appropriate production strategies for the efficient running of the business. Administrative information will consequently support the planning, controlling, and the evaluation of the business performance (Demski, 2013). In the long run, this will enhance proper decision-making for better management of the overall business environment.

Absorption Costing System and Cost Volume Profit

Absorption cost system is also known as full costing technique. According to Kaplan & Atkinson, 2015, an absorption costing system is a managerial costing method that treats all the production expenses, regardless of whether fixed or variable costs. The overall cost of a unified product through absorption costing comprises of direct material costs, fixed and variable overheads, and direct labor costs.

Direct costs attribute directly to the final cost units. However, the overhead costs are accredited to the commodity and other expenses incurred (Kaplan & Atkinson, 2015). The variable costs are directly attributed to the product too. Nevertheless, the fixed costs are charged for different goods or services manufactured by a firm over a given period. With the full costing technique, prices are the functions of costs. Absorption costing procedure is a substantial requirement for both external and internal reporting. The expenses of the stock must include all the overhead production costs, with both variable and fixed costs.

On the other hand, cost volume profit is a cost accounting technique, concerned with the effect of the sales volume and the costs of products on the operating profit of an enterprise (Weygandt, Kimmel, & Kieso). CVP has the following assumptions; all the production costs can be differentiated as fixed or variable costs. The sales price of each unit, the total fixed costs, and variable cost per unit are constant. Finally, all the units produced are sold; hence, no wastage (Weygandt, Kimmel, & Kieso).

As stated by Kaplan & Atkinson, 2015, CVP analysis requires all the firm’s cost such as the manufacturing, selling, and administrative expenses differentiated as either variable or fixed costs. The contribution and contribution margin ratio are the first calculations when applying the CVP analysis (Kaplan & Atkinson, 2015). Contribution margin illustrates the gross profit made by a company before deducting the fixed expenses. To get the contribution margin ratio, one divides the contribution margin by the total revenue or sales made.

The two costing methods are used to obtain the net profit/loss of a firm. Despite the fact that they use different accounting procedures, they both give the financial status of an enterprise. Managers apply the two measures to get the most reliable financial result, for proper business management. In fact, they borrow information from each other, and at the end of the fiscal period, they achieve the exact firm's liquidity position.

Cash Flow Statement

The cash flow statement refers to a summary of cash receipts (inflows) and disbursements (outflows) for a given period (Weil, Schipper & Francis, 2013). In a cash flow statement, the activities that increase the liquidity position of a firm are the cash inflows, while those that decrease the cash positions are the cash outflows (Weil, Schipper & Francis, 2013). Again, in a cash flow statement, cash equivalent refers to the highly liquid short-term projects or portfolios that can be converted into known amounts of liquid cash easily without the risk of change in the value of money (Demski, 2013). Any investment qualifies to be a cash equivalent provided it has a short maturity date.

Cash flows imply the in and out movement of money in the business to acquire non-cash items. As stated by Warren, Reeve & Duchac, 2013, the receipts attained from non-cash commodities are termed as a cash flow, while a cash payment for such goods is a cash outflow.

Importance of Cash Flow Statement

With the help of the other financial statements, they provide information that assists the users to evaluate and understand the changes in the net assets of the business (Drury, 2013). Also, the statement is crucial in assessing the abilities and powers of a company in generating cash and cash equivalents from the operating activities. Apparently, this enables the users to develop models for evaluating and comparing the present value and the future cash flows of an enterprise (Drury, 2013). Another benefit is that it enhances comparability of the general performance by different businesses in the same industry. It is possible to compare performance because most of the firms use similar accounting treatment for similar events and transactions. Lastly, the financial cash flow statement is helpful in ascertaining the accuracy of the previous assessment for the future cash flows.

Preparation of Cash Flow Statement

Cash from Operating Activities

Cash flow operating activities are the activities that make up the central operations of a firm. The cash amount from these activities shows the internal solvency level of an enterprise (Kaplan & Atkinson, 2015). The examples of inflows from operating activities are cash receipts from the sales of goods and services, fees, commissions, royalties, and any other operating activity that can bring coins to the firm (Kaplan & Atkinson, 2015). These activities increase the overall cash balance in the cash flow statement.

The cash outflows from the operating activities include the cash payment for the purchase of goods and services, cash payment to the employees, insurance premiums annuities, taxes, and the rest (Warren, Reeve & Duchac, 2013). These activities decrease the general cash balance in the cash flow statement; hence, they are called cash outflows.

Cash from Investing Activities

Investing activities are the tasks involved in the procurement and the disposal of both the long-term and short-term assets. They relate to the purchase and the cash disposal of long-term fixed assets such as motor vehicles, machinery, buildings, extra. Like in the operating activities, there are both cash outflows and inflows activities in the investing tasks. The examples of expenses in investing activities are the cash payment for acquiring shares, debt instruments, warrants, and cash payment to purchase fixed assets. Cash outflow from investing activities lowers the cash balance of a firm.

According to Weygandt, Kimmel & Kieso, 2015, cash inflows from investing activities are cash received from the disposal of fixed assets, cash receipts for the payment of loans from third parties, cash receipt from the sale of warrants and shares of other enterprises excluding those held for trading purposes. Also, interests received from loans, advances, and the dividends from other investments. All these activities increase the cash balance of a firm.

Cash from Financing Activities

Financing activities relate to the long-term funding of the business. They result in changes in the capital structure of an enterprise. Cash inflows from the financing activities include cash proceeds with share issuance (preference and equity shares), cash proceeds from the issuance of loans, bonds, debentures, and other short-term and long-term borrowing (Weygandt, Kimmel, & Kieso). These activities increase the cash balance of the business.

Cash outflows from financing activities include the payment of the loans borrowed, interests paid to the preference shareholders for debentures, and dividends for equity in cash. The events bring about an adverse effect on the cash balance of the firm.

Other Peculiar Activities, and their Treatment

Extraordinary items: Items that are non-recurrent and unpredictable in nature; hence, they are classified and disclosed separately depending on where they arise. Interest and Dividend: Interest paid or received, and dividends received are recorded in the operating activities, and they increase the cash balance of the firm (Drury, 2013). While dividend paid is classified as a financing activity, which, as a result, lowers the cash balance of the financing activities.

In the case of a financial enterprise whose business is lending and borrowing, interest paid or received, and dividends received are classified as operating activities (Drury, 2013). The dividend paid is considered as a financing activity. Taxes on Income and Gains: Cash outflow from income tax should be classified as cash flows from the operating activities. Tax paid on dividends is recorded in the financing activities, together with the dividend paid. Finally, tax on capital gain should be classified under investing activities.

Methods of Preparing Cashflow Statement

The two methods of preparing the statement of cash flow are direct and indirect methods. They both give similar results; however, they differ in the manner the information for operating activities is presented.

Direct Method

Under the direct method, the items for the operating activities are recorded on the accrual basis; therefore, some adjustments have to be made to convert them into cash basis (Kaplan & Atkinson, 2015). They include the cash receipt from customers, less cash receipt to suppliers, cash payment for purchases, and other general money expenses. However, some non-cash items such as depreciation and discount on shares are excluded. Both investing and financing activities are recorded as they appear.

Indirect Method

Operating activities for an indirect method start with the net income or loss for a given period. To obtain the net cash from operating activities, one has to adjust the net loss or profit for the enterprise (Kaplan & Atkinson, 2015). Through this, addition of non-cash items is done back to the net income or loss. These non-cash items include goodwill written off, depreciation, and provision for deferred taxes. A rise in current assets and a decline in current liabilities are deducted from the net profit/loss. Contrary, a rise in current assets and a decrease in current liabilities are added up to the net benefit or loss (Kaplan & Atkinson, 2015). The income tax is subtracted to get the net cash from operating activities. The investing and financing activities are recorded the same manner recorded in the preparation of the cash flow statement of the direct method.

References

Bloomfield, R. J. (2015). Rethinking managerial reporting. Journal of Management Accounting Research, 27(1), 139-150.

Demski, J. (2013). Managerial uses of accounting information. Springer Science & Business Media.

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

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

Warren, C. S., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Cengage Learning.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Vasconcelos, F. C., & Ramirez, R. (2011). Complexity in business environments. Journal of Business Research, 64(3), 236-241.