Free «Managerial Accounting and Happiness» Essay Sample
Part 1. Week 1 Project Essay
Above all, accounting provides an informational base for different business decisions. Moreover, the users of company information can be divided into two groups - external and internal parties. Therefore, these users of the company information have different goals and sources of information. Managerial accounting is used by the company’s internal parties, including managers and employees, with an aim of improving the firm’s current state. Therefore, financial accounting is focused on providing the general information for the company’s external users.
Managerial accounting gathers different information required by internal users who make important business decisions. Basically, there are two core types of accounting, which include financial and managerial types. Financial accounting provides financial statements for external users. In turn, managerial accounting’s main aim is offering the needed information for internal users. Therefore, financial accounting is used by external users, while managerial accounting is applied by internal users in the course of making business decisions. According to the U.S. Physical Therapy 2014 annual report, the company uses critical accounting policies that have a significant impact on the results of the company’s operating and financing activities. For example, the company recognizes revenue in those periods in which relevant services have been provided (2014 Annual Report, 2015).
Direct costs are also referred to as the costs of goods sold, and their recognition is directly related to revenue. For example, the U.S Physical Therapy clinic’s operating costs are its direct costs, since they may be clearly identified. These costs are directly followed or carried out simultaneously with the economic operations to obtain these revenues. According to the definition provided by the Business Dictionary, direct costs are expenses “that can be traced directly to (or identified with) a specific cost center or cost object such as a department, process, or product” (Direct Cost n.d.). On the other hand, indirect costs are expenditures that cannot be identified by specific cost centers, including departments, processes, or products.
What is more, there are two kinds of costs - fixed and variable. Variable costs depend on the volume of activity, while fixed costs remain unchanged with the volume. Therefore, there is an inverse relationship between the company’s output and the fixed costs’ percentage in the structure of total costs. Conversely, the percentage of variable costs will increase with the grown of output. Thus, per unit fixed costs fall with the increase of the company’s output. It should be also noted that the per unit variable costs may also be reduced by increasing the company’s output, due to increasing company’s operational efficiency and the effect of synergies.
A flexible budget reflects the size of expenses and results in different degrees of activity of the respective center of responsibility. Variable costs depend on the volume of activity, while fixed costs remain the same from month to month. Thus, it can be concluded that fixed costs are not dependant on the scale of company’s activity, while variable costs usually increase with more output.
In addition, variable costing provides an opportunity to understand the effect of fixed cost on the company’s net income. In addition, different methods of cost controlling are strongly related to variable costing. Additionally, variable costing provides the needed information for the company’s cost-volume-profit (CVP) analysis.
The CVP analysis is used to identify the relationships between the company’s costs, volumes of production, and profits. The company maximizes its profit, when the marginal product of the factor of production will be equal to its real price. It means that it is beneficial for the company to increase the labor to the point where the marginal product of labor is equal to the real price of labor. As a result, in such a way the company maximizes its income.
Part 2. Week 2 Project Essay
Economies of scale mean that the company’s average productivity rises with growing output. Due to increased average productivity, the company’s per unit fixed costs are reduced by the simultaneous increase in the company’s output.
It should also be noted that the per unit variable costs may also be reduced with increased output due to higher operational efficiency and the effect of synergies. In fact, the concept of synergy is often used in economics as additional benefits in case of combining two or more companies. The source of these advantages is the efficient use of aggregate financial capacity, complementary technologies and products produced by these companies, as well as the ability to reduce operating, administrative, and other costs. It is also noteworthy that economists consider two types of economies of scale, including internal and external. Internal economies of scale are caused by the factors that are under the company’s control, while external economies of scale are caused by external factors, including industry effects.
Moreover, each human and each firm makes expenditures for different purposes. Some of these expenditures are current, while others are related to capital. Current expenditures are linked to the current activity, while capital expenditures are linked to expanded reproduction.
More importantly, budget is a very vital plan of expected profits and losses. It is used not only by companies and governments, but also by families and individuals. That is why it is very important to know the process of budgeting, the budget’s structure and, of course, its types as applied by various economic subjects. Budgets used to play a very important role in the system of control. However, recently, many companies have not been satisfied with their budgeting systems. Many economists believe that the existing budgeting systems used by most companies are not useful anymore due to the increasing levels of complexity and competitiveness.
Historically, budgets were born in 1920s as a tool to help managers control costs and cash flows. First of all, it is reasonable to consider the types of budgets, which represent the evolution of the concepts of budgeting.
Budget is a form of routine calculation that reflects the elaborate action plan for the coming period and the scheme of cash receipts and expenditures consistent with the production program of the company. Budgets which are used by enterprises for the implementation of operational financial planning are classified according to a number of features.
Depending on the approaches to the design of budgets, there are flexible and fixed types. A flexible budget reflects the size of expenses and results in various degrees of activity of the respective center of responsibility. Variable costs depend on the volume of activity, while fixed costs remain stable over the periods. For example, the rent costs are fixed costs for the U.S Physical Therapy, while interest expenses are variable costs (2014 Annual Report, 2015).
A flexible budget shows the manner in which the CEO by changing the volume of production can affect the company’s expenses or revenues. For example, revenue, cost of basic materials, and piece-wages are planned according to the principles of the flexible budget.
On the other hand, a fixed budget does not change under the influence of the level of business activity, and for that reason it is used for scheduling partially controlled costs. An example of a fixed budget can be a spending plan for R&D or advertising. The types of fixed budgets are provided below.
- Budgets “from achieved” are based on the statistics of previous periods, considering possible changes in the enterprise’s conditions, such as the budget of overheads.
- Budgets “with analysis of additional options” differ from regular budgets based on the analysis of different options. For example, a budget may include options according to which the total costs decrease or increase by 5, 10, or 20%. This approach is intermediate between the budget “from achieved” and the budget “from scratch”.
- Budgets “from scratch” have been developed based on the assumption that the budget is established for the first time for a certain center of responsibility. This approach allowed the enterprise to avoid the mistakes that were made in the past.
- Consolidated budget consists of integrated individual budgets that characterize the projected sales, costs, and other financial transactions for the next period. Consequently, the consolidated budget is a coordinated plan for the whole enterprise that combines the budgets of individual blocks and creates a flow of information needed for decision-making and control of financial planning.
Overall, a financial budget is based on the information provided in the budget of profits and losses. Budget does not have any single standardized form. The structure of the consolidated budget is the most widely used type, since it provides division into operational and financial budgets.