What Is Managerial Accounting? Essay Example

Executive summary

Gopal’s profit-realization efforts are focused on recovering all invested funds by directing resources to a suitable business enterprise. Gopal focuses on achieving a faster break-even point so that he can start making money sooner. The investment plan aims to recoup the value of 20,000 units by employing the initial capital and manpower set-up and engaging appropriate revenue trends. To boost product development competitiveness, the corporation polished its markets. Its strategic alliance with ABC allows it to cut costs while also expanding its investment possibilities. As a result, the company has managed to gain a competitive advantage.

Introduction

Cost and revenue analysis are used by business operations all around the world to evaluate financial success. Taking this into account, revenue and cost analysis evaluate a company’s breakeven points and profitability in great detail. Gopal, a catering firm, incurs costs and other expenses in the same way that any other business does. Gopal management is responsible for analyzing its operations and identifying points of profitability as well as recouping invested funds. At Gopal, budgeting is the foundation for financial performance analysis. Incremental budgeting is the process of creating a budget by using the budget from the previous period or a specific period in the past. Gopal’s planned expansion is designated as a project, requiring management to adhere to appropriate budgeting practices. The success of Gopal’s expansion depends on the use of integrated budgeting platforms. The management will be well-positioned to realize the cost-benefit analysis of the company’s expansion ambitions thanks to good planning.

Analysis of increments

In production or manufacturing platforms, the increment analysis takes into account cost management and income estimates. Cost control and precise income forecasting are still critical to financial success. The operations within the organization under consideration cost and income prediction are best marked as positive in this situation of Gopal. The company’s strong income, which allows Gopal to service its costs and expenses, is a source of optimism. The original profit was $ 18 493,750. The revenue at Gopal creates room for an averagely high margin sustaining the company’s operation in the market. Despite attaining slightly low levels at some point of operation, it is essential to note that the Gopal is in a better position to cover both variable and fixed costs. The positive revenue trends at the company must be accompanied by high consideration of the cost involved to promote proper management of the cost. Breakeven analysis at Gopal is essential towards allowing the company to take note of capital required to operate and strategies to ensure the amount is recovered.

Budget variance

Budgets at Gopal express the elements of favorable or unfavorable operations. Variance analysis is applied to optimize the business budget plan and identify new opportunities, which can be created through the optimization process and more strategic spending. The variances in a budget are presented in two groups of revenue and expenses variances. Expenses variances directly link to the cost thus will be monitored for positive or negative variances (Plewa & Friedlob, 2015). Positive variances for expenses will imply high cost or increment in cost, while negative variance will imply a cost reduction. Revenue variances, on the other hand, are termed favorable when positive and unfavorable when negative.

Analysis of Gopal’s cost of operation depicts a company with a low breakeven point in units. Low breakeven point in units portrays a company that requires less duration to recover all the amount invested in production. In this case, Gopal will recover the amount invested in preparing breakfast and meals at 20,000 units of production. Taking note of the over 300,000 units produced by the company, Gopal stands a chance of high profits at the end of its financial year.

Financial performance

Overhead allocation is essential in every production or manufacturing process. Taking the case of Gopal presented above, 5.8 per direct labor marks the rate at which direct labor be allocated to all the products. The college canteen is the highest labor-consuming product. This allows the costing of the product to go slightly above the rest to allow cushioning of the high cost. Production of the three product lines seems profitable for the organization, hence maintaining all three (Baker, 2018).  The manufacturing of tea and the organization as a whole organization structure will always require a certain important decision on the two-three product lines.

ABC will provide the important roles of offering strategic directions and offering corresponding operational policies and production methods. Taking the case above, it will be easy for the management to take note of the areas raising the cost of every product line and work effective strategies not excluding the change of supply (Plewa & Friedlob, 2015). Gopal’s ABC describes a cost method that involves identification of activities in organizational operation and assigning the cost of every activity to all the products and services of the organization based on the actual consumption by each product or service ABC as a costing method assigns more indirect costs into direct costs as compared to conventional costing method ABC method promotes monitoring of activities and taking note of the level of consumption and the costing of the final product (Baker, 2018). ABC approach discourages blanket costing allowing specific and picking out consumption of individual products and services. Resources are well managed and assigned to activities under this method, and activities to cost objects based on consumption. Like any other manufacturing organization, there is a need to classify products based on their consumption.

Gopal management thus considers ABC as an effective way of realizing the cost performance of all the product lines and control of various overhead lines. Production is all about cost control and management, thus pushing any organization to profiting line and maintaining its operations. Gopal does not consider dropping any of the product lines. Thus, ABC is considered appropriate for effective monitoring of every cost line (Baker, 2018). Gopal management is determined to ensure clear and organized cost management instead of the distorted conventional costing method. Through the application of ABC, the company’s cost accounting team can effectively trace costs to individual activities.

Investment positioning 

The investment amount in the three scenarios presents investment points expected to earn returns. Investors in the position of ABC are always presented with essential decisions making situations. In most cases, the ability to determine investment viability calls on NPV analysis as either positive or negative. The two investment scenarios provide room for Present Net Value and interest amount consideration. Considering the fact that the amount involved in the scenario is a loan, this analysis will consider the cheapest in terms of the total amount and annual interest rate (Harrison, F. L., & Lock, D. (2014). The value cash flow for all three projects must be considered to assess other factors, such as what happens in the event of project failure at the initial stages. Net Present Value presents the future cash flows; NPV can be positive or negative. In the event of a negative NPV, the investment is considered less viable. In this case, both scenarios attract positive NPV. This calls for advanced analysis of the total cost of the investment (Johnson, 2016). The cost of investment, in this case, will entail the total amount the investor is expected to pay at the end of the investment period.

IRR analysis of the three projects does not consider project 3 (market/advertising campaign) the highest return project. Despite the other two projects having positive IRR are as well, project 3 (market/advertising campaign) is presented as the most viable based on IRR consideration. Project 3 (market/advertising campaign) compels Gopal management to take note of the effects of the market/advertising campaign. Based on the IRR attained, it is clear that project 3 (market/advertising campaign) will support the penetration of the Gopal into other markets. High IRR for project 3 (market/advertising campaign) indicates that the project works in favor of ABC’s positive brand image.

Project 3 (market/advertising campaign) has the highest PI, followed by project 1 and project 2. (Major equipment purchase). Despite the fact that the two initiatives have a high PI, it’s important to note that all three projects have a positive PI, indicating that the benefits in all three cases outweigh the costs. This indicates that all three initiatives are feasible. The three initiatives that will break even are thus presented to Gopal management, supporting the idea of receiving income/returns from the projects. A breakeven probability is one of the most important viability or capital budgeting considerations. As a result, Gopal must evaluate the likelihood of early breakeven points in all of its project considerations (Boness, 2015). All three initiatives under consideration will, without a doubt, cover the cost of the investment to allow Gopal to start attracting profit.

Amounts invested in projects are expected to be recovered. This is based on the fact that some projects are funded from debt finance. It is thus important for Gopal to consider the payback period of all three projects. Major equipment purchase and marketing campaigns attract a low payback period, indicating that the two projects will relieve Gopal’s management of the capital cost expense. This is based on the fact that the total cash flow of the two projects will recover the amount early to allow profit-making. However, it is essential to note that all three projects attract a payback period of the forecasted period of 8 years.

The major objectives of finance, internal customer process, and learning outcome are all captured in Gopal’s financial scorecard. In this situation, the balancing scorecard ensures that the company maintains its objectives, profitability, and shareholder interest. The financial goals are to ensure that the company can continue to operate in the market, while the consumer goals are to expand the market and maintain the loyalty that has been built up (Institute, 2019). The company’s internal procedure will set goals for a high-quality operation. As a result, Gopal’s balanced scorecard is a tool for guiding the company’s ongoing operations and quality.

Operating income is still an important aspect of any organization. Earnings before deductions, interest, and tax are referred to as operating income. Keeping this in mind, operational income must be high or fair enough to pay the company’s running expenses. In the instance of Gopal, the operational income is positive. Positive operational income means that the company has a high chance of expanding and gaining ground. Gopal’s positive operational income puts it in a strong position to meet its short- and long-term financial obligations (Stickney, 2015). Profitability and sound ratios are the foundations of any business’s stability.

Like any other organization, Gopal is keen on realizing profit or good earnings from every invested amount. Considering the need to recover or pay back the amount invested, Gopal management must consider the breakeven or points when all the amount will be fully recovered in production units as well as sales amount. Gopal’s operation and consideration of market extensions are viable. The viability is anchored around the fact that 20,000 units breakeven is low, a factor that allows the company to start profit marking at earlier stages of the business. The invested amount covering the cost will be fully recovered at 20,000 units. Recovering the cost of operation at earlier stages of production will push Gopal into early profitability, thus improving the company’s production.

Conclusion

The Company’s increment analysis points, both in sales and units, confirm the Gopal’s high and consistent revenue trends. Despite operating in the delicate services area, Gopal has mastered the art of market success. As a result, its growth will be fueled by strong revenue and profitability, which may be reinvested in new product lines and market segments. The high margin is communicated by Gopal’s financial estimates based on the breakeven point. The company’s expansion attempts are aided by the contribution margin gained each unit. Gopal has a lot of room for growth. As a result, it is the responsibility of the management

References

Harrison, F. L., & Lock, D. (2014). Advanced project management: A structured approach.Aldershot, England: Gower.

Institute, P. M. (2019). A Guide to the Project Management Body of Knowledge (PMBOK(R) Guide-Sixth Edition. Chicago: Project Management Institute.

Plewa, F. J., & Friedlob, G. T. (2015). Understanding cash flow: Finance fundamentals for nonfinancial managers series. Wiley.

Ramsey, D., & Lampo Group. (2017). Dave Ramsey: Cash flow planning: the nuts and bolts of budgeting. Brentwood, Tenn: Lampo Group.

Baker, H. K. (2011). Capital Budgeting Valuation: Financial Analysis for Today’s Investment Projects. Hoboken: John Wiley & Sons.

Boness, A. J. (2015). Capital budgeting: The public and private sectors. New York: Praeger.

Johnson, R. W. (2016). Capital budgeting. Belmont, Calif: Wadsworth Pub. Co.

Hansen, D. R., Mowen, M. M., & Guan, L. (2019). Cost management: Accounting and control. Mason, Ohio: South-Western.

Stickney, C. P. (2015). Financial accounting: An introduction to concepts, methods, and uses. Mason, OH: South-Western/Cengage Learning.