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You are a junior member of staff, in a medium sized firm of accountants, you started about six months ago and are training.
Your Manager has asked you, as studying is fresh in your mind, to provide background information for a report he is going to write to justify and explain the nature and need for proper management accounting for a client.
The client is a small business Cakes for Occasions Limited (C4O) it specialises in producing speciality cakes for occasions such as weddings, birthdays and christenings. They have a small bakery with 45 staff, including managers, who manufacture the products and do all administration.
You have been asked to write a memo for your manager, covering some of the questions the client has asked. This will then be used as the basis of a report for the client, which your manager will produce at a later date.
You are to include examples; there is guidance in the appendices provided, to illustrate the usefulness of management accounting. These completed appendices with workings, should be attached to the end of the memo as they will not be part of the word count
You are required to clarify areas where the client is unsure of the use of management accounting and complete examples given by your senior, to illustrate best practise in using your management accounting skills.
Your memo should cover the following five areas, guidance is provided for each part:
Management accounting covers a number of different aspects of the business,it has fundamental differences to the financial accounting discipline, including examples using C4O Ltds business your memo should include:
Some businesses take great effort to distinguish between fixed and variable costs it is important to be able to define and explain the nature of cost behaviour to C4O Ltd. Explain a number of aspects of cost behaviour in the context mentioned below:
Costing methods vary, the fundamental costing methods are absorption and marginal costing.
Decision making, in particular cost volume profit analysis, is an important part of management accounting.
Budgets are important for small businesses such as C4O Ltd, but they have to be planned correctly. C4O Ltd have provided you with details of expected sales and costs for the first week of next month, using marginal costing.
They have requested you to convert this information into a set of basic operating budgets.
They would also like to more fully understand, what budgets are and an idea of what are important issues when constructing operating budgets. To do this include in your memo the following:
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To: The Manager
From: Siluzia FerrazMilengo
Priority: High
Date: 19 August 2014
Subject: Cakes for Occasions Limited (C4O) – Accounting clarifications
Discussion:
This memorandum will discuss various background information issues related to business accounting such as; the fundamental difference between business accounting and financial accounting; cost type and their behavior; absorption costing and budgeting & variance analysis. It is described that how cost behavior under various cost centers is giving the budgeted cost to finally prepare the budget for C4O Ltd.
1.1 Management Accounting
Accounting system takes note of economic activities happening in an organization. On the basis of information supplied by accounting system, different stake holders take actions for their benefits. One stakeholder is managers, using this information for the sake of administering the business activities in an organization. This is known as management accounting.
The goals of both are basically different. Management accounting helps managers in decision making, implementing the strategy; provides the way of performing a job in better way; and in doing cost-benefit analysis. Financial accounting mainly focuses on providing information to the external stakeholders. The main differences are given below.
1.2. Cost centers and their use in management accounting
In every organization to maintain coordination and achieving the goal, various responsibility centers like cost center, revenue center, profit center and investment center is opened where and the accountability of each center is given to the manager for managing and control purposes. A cost center is a responsibility center where the manager is accountable for the costs only. Cost center incurs costs and does not directly participate in the profit of the business. It even doesn't participate directly in the revenue generation.