How accounting statements can help managers for making decisions. There are many
ID: 2528622 • Letter: H
Question
How accounting statements can help managers for making decisions. There are many different ways accounting statements influence decisions. Some are as follows:
1. For example, in departmental income statements financial performances of departments can be compared with each other to see if a department is under performing or over performing and then make appropriate decisions accordingly.
2. By observing the past records on variable overhead cost managers can decide what would be the best overhead base and overhead raise for determination of a variable overhead.
3. By looking at the sales and looking at the unit price, a unit variable cost, and overall fixed cost, managers can find the break-even point for a potential new product and then based on potential market, decide if launching the product would be feasible.
Please, provide an argument on each bases.
PLEASE ANSWER IN WORD FORMAT ONLY AND EACH CONCEPT IN 250 words.
Thanks
Explanation / Answer
Accounting Statements can help managers in decision-making process. These are the crucial statements which provide important point for analysis and influence decisions in different ways.
1. In departmental income statements financial performances of departments can be compared with each other to see if a department is under performing or over performing and then make appropriate decisions accordingly.
Departmental contribution is calculated by deducting direct expenses from Departmental Revenue and it is a good measure to check the performances of each department. Also the departments are classifies as cost centers, profit centers and investment centers.
The concept of responsibility accounting attaches the responsibility of each department for their performance. Performance evaluation of each department is done by setting have a benchmark for future periods. This benchmark is set up via a budget for their responsibility center. At the end of the year, managers are evaluated based on the actual figures generated by the responsibility center. This performance evaluation benchmarks are prepared in following formats by each departments.
Cost Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Expenses Budget Actual Variance %Variance
Revenue Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Product Budget Actual Variance %Variance
Profit Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Particulars Budget Actual Variance %Variance
Sales
(Variable cost)
Contribution Margin
(Direct Fixed Costs)
Department Margin
The above statement help managers in deciding which departments are burden and which are fruitful and control each accordingly.
2. By observing the past records on variable overhead cost managers can decide what would be the best overhead base and overhead raise for determination of a variable overhead.
Variable overheads have characteristic of varying roughly in accordance with the changes in production. Unlike fixed overheads they provide a good and actual basis of changes in the cost. The cost managers on the past records can ascertain what the actual bases of movement in cost are. Since these are based on current basis they provide more real picture in this respect. Cost managers can easily identify the best overhead base like machine usage hours instead of standard machine hours, Actual hours of direct labour used instead of fixed day wages so easily an overhead base can be chosen in this respect.
For example, during an economic downturn, company A may stop or cut down its production of products because there is a lack of demand. It minimizes its total variable overhead costs this way. However, the company cannot change its fixed overhead costs.
Overhead raise for can be determined of a variable overhead by choosing a correct base and controlling the costs moving up or down and this can be done through standard costing and variances and this way overheads can be controlled in a better way.
3. By looking at the sales and looking at the unit price, a unit variable cost, and overall fixed cost, managers can find the break-even point for a potential new product and then based on potential market, decide if launching the product would be feasible.
Calculation of break even point helps the company to decide in how much time it will cover its fixed costs. The calculation is as below:
BEP= Fixed Cost ;
Contribution
Where Contribution =Sales price per unit- Variable cost per unit
The Breakeven point is a level of activity at which the total revenue is equal to the total costs. At this level, the company makes no profit.
After selecting the potential market which is decided on the target profit basis calculated using Cost-Volume Profit Basis. CVP analysis looks at the relationship between selling prices, sales volumes, costs, and profits.
After predicting whether target profit achieved or not, the manager will decide if launching of the product will be feasible. The BEP and CVP help to measure profit and losses at different levels of production and sales, to predict the effect of changes in price of sales, to analysis the relationship between fixed cost and variable cost, to predict the effect on profitability if changes in cost and efficiency.
Accounting Statements can help managers in decision-making process. These are the crucial statements which provide important point for analysis and influence decisions in different ways.
1. In departmental income statements financial performances of departments can be compared with each other to see if a department is under performing or over performing and then make appropriate decisions accordingly.
Departmental contribution is calculated by deducting direct expenses from Departmental Revenue and it is a good measure to check the performances of each department. Also the departments are classifies as cost centers, profit centers and investment centers.
The concept of responsibility accounting attaches the responsibility of each department for their performance. Performance evaluation of each department is done by setting have a benchmark for future periods. This benchmark is set up via a budget for their responsibility center. At the end of the year, managers are evaluated based on the actual figures generated by the responsibility center. This performance evaluation benchmarks are prepared in following formats by each departments.
Cost Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Expenses Budget Actual Variance %Variance
Revenue Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Product Budget Actual Variance %Variance
Profit Center Performance Reports
DEPARTMENT A
Monthly Performance Report
For the month ended…..year….
Particulars Budget Actual Variance %Variance
Sales
(Variable cost)
Contribution Margin
(Direct Fixed Costs)
Department Margin
The above statement help managers in deciding which departments are burden and which are fruitful and control each accordingly.
2. By observing the past records on variable overhead cost managers can decide what would be the best overhead base and overhead raise for determination of a variable overhead.
Variable overheads have characteristic of varying roughly in accordance with the changes in production. Unlike fixed overheads they provide a good and actual basis of changes in the cost. The cost managers on the past records can ascertain what the actual bases of movement in cost are. Since these are based on current basis they provide more real picture in this respect. Cost managers can easily identify the best overhead base like machine usage hours instead of standard machine hours, Actual hours of direct labour used instead of fixed day wages so easily an overhead base can be chosen in this respect.
For example, during an economic downturn, company A may stop or cut down its production of products because there is a lack of demand. It minimizes its total variable overhead costs this way. However, the company cannot change its fixed overhead costs.
Overhead raise for can be determined of a variable overhead by choosing a correct base and controlling the costs moving up or down and this can be done through standard costing and variances and this way overheads can be controlled in a better way.
3. By looking at the sales and looking at the unit price, a unit variable cost, and overall fixed cost, managers can find the break-even point for a potential new product and then based on potential market, decide if launching the product would be feasible.
Calculation of break even point helps the company to decide in how much time it will cover its fixed costs. The calculation is as below:
BEP= Fixed Cost ;
Contribution
Where Contribution =Sales price per unit- Variable cost per unit
The Breakeven point is a level of activity at which the total revenue is equal to the total costs. At this level, the company makes no profit.
After selecting the potential market which is decided on the target profit basis calculated using Cost-Volume Profit Basis. CVP analysis looks at the relationship between selling prices, sales volumes, costs, and profits.
After predicting whether target profit achieved or not, the manager will decide if launching of the product will be feasible. The BEP and CVP help to measure profit and losses at different levels of production and sales, to predict the effect of changes in price of sales, to analysis the relationship between fixed cost and variable cost, to predict the effect on profitability if changes in cost and efficiency.
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