This summary is about management accounting, which has the main focus on different kind of costs in a business. Refers to management accounting English, International Finance & Control.
Summary Management
accounting
Introduction: The role of management accounting and
control
You collect information to find out whether you are on the right track to achieve your goal.
Valuables information concerning operating procedures to managers, so they can make important
decisions.
Management accounting and control deals with several aspects:
- Drafting budgets and progress reports.
- The identification and analysis of revenues and costs.
- The control of activities by comparing the budgets with the results.
The drafting of plans is aimed at objective monitoring of the progress in an organization as a whole,
is called Planning and control.
Planning and control: To realize business aims, companies often make use of a planning and control system.
This implies that they systematically convert strategy into plans and budgets and regularly evaluate whether
they are on the right track.
Planning and control
Control in this respect means that one tries to control the organization by making the correct
decisions based on solid information.
The often make use of the PDCA cycle (Plan, Do, Check, Act)
Plan:
Long-term goals are being converted at this stage into concrete short-term activities. Activities to be
performed are orderly expressed in figures, also called a budget.
Drafting a budget is an important part of planning and control, involving five functions:
- Planning: drafting a budget urges the organization to think carefully about the way these
budgets are to be achieved.
- Coordination: adjustment of the various operating processes (such as purchasing,
production and sales) can be positively influenced by translating the activities into concrete
quantitative objectives. The various components must learn from each other what the
demands and requirements are.
- Communication: everyone within the organization can, by means of the budget, be
informed of the short-term objectives in an effective and efficient way.
- Task setting: the drafting of a budget provides clarity concerning who is responsible for what
and what authority they have concerning expenses.
,- Evaluation: based on the budget it can be established afterwards to what extent the
objectives have been met and whether the company is on course.
, We have four different kinds of budgets:
- Variable budget= Firstly, there is the variable budget in which the extent of the allowed
costs depends on the activity level. This budget is therefore mainly used if there is a (more or
less) proportionate relationship between costs and activity level.
- Fixed budget= Secondly, there is the fixed budget. With this budget, the allowed costs for a
certain period are fixed and independent of the activity level.
- Mixed budget= The third basic type is a combination of the fixed budget and the variable budget:
the mixed budget.
- Flexible budget= Finally, there is the flexible budget. This is a budget that is periodically
adjusted to the changing circumstances. The allowed costs can in this case, after a period, be
adjusted.
All the information from these budgets is collected in a so-called Master budget. Can only be drawn
up once all budgets are ready. These budgets are often mutually dependent on each other. The
master budget can be supplemented with other statements or records in which financial/economic
objectives are mentioned.
Master budget: An organization often comprises of various parts for the various tasks and
responsibilities. Usually every part translates its own activities into a budget. All information from
these budgets is collected into a so-called master budget.
The budgeting process has also disadvantaged:
- The more accurately the budget is established, the more it will cost.
- The risk that too much focus is placed on short-term financial objectives.
(This can have an impact on the environment, social aspects or long-term objectives.)
- When a budget is ready, it can be outdated by the rapidly changing circumstances.
Do:
The planned activities are carried out, it is of importance that these activities are properly registered
in this phase. A properly functioning ICT-System is crucial here, like an ERP team. (Enterprise,
resource, planning)
Check:
The company analyses to what extent it is on track to achieve the business objectives, based on the
information from the ‘do’ phase. The reports are drawn up for this purpose regularly. The report
must be reliable and well reconciled to the objectives and they must be available in time and be
concise. Must end up with the right persons whiting the organization.
Act:
The management must decide whether it is necessary to adjust the execution or planning (and
execution.) Based on the outcome of the ‘check’ phase.
When the ‘act’ phase is completed, the entire cycle starts all over again. So can a company improve
itself.
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