Flexible Budgets Flexible budgets provide different information than static budgets. Discuss some of these differences. Is a flexible budget always better? Are there times when you’d recommend using a static budget over a flexible budget?

Flexible Budgets

Flexible budgets provide different information than static budgets. Discuss some of these differences. Is a flexible budget always better? Are there times when you’d recommend using a static budget over a flexible budget?

 

Static budgets are developed for a single  a single level of activity. A shortcoming of this approach is that it is insensitive to volume fluctuations. This presents special chal­lenges for managing a business and for performance evaluation (Horngren 2012). As actual output varies from the anticipated level, significant deviations in revenues and expenses will naturally occur. These variances can produce quite misleading signals.

 

For example, if a company produces and sells more products than anticipated, you would also expect an increase in selected variable expenses. This will appear as a cost overrun when actual results are com­pared to the static budget.

 

Flexible budgets are recommended when the activity levels change as it takes in to account volume fluctuations

 

Reference

Horngren (2012) Cost Accounting: A Managerial Emphasis Pearson Education

CVP and the Airline Industry Of the many challenges facing the industry, the most important ones include volatile fuel prices, economic weakness, natural calamities, government regulation, unionization, airport infrastructure constraints and safety concerns.

CVP and the Airline Industry

 

Of the many challenges facing the industry, the most important ones include volatile fuel prices, economic weakness, natural calamities, government regulation, unionization, airport infrastructure constraints and safety concerns.

 

1) Oil Price Volatility: Fuel price volatility continues to be one of the significant challenges, as the cost of fuel is largely unpredictable. Fuel prices remain well below the 2008 level of over $140 per barrel that had ravaged the airlines industry. The company’s ability to pass along the increased costs of fuel to its customers is limited by the competitive nature of the airline industry. Thus, even a small change in fuel prices can significantly affect profitability.

 

Impact on the break even. As fuel costs are variable costs contribution is lowered due to the difficulty in passing the increase on to the customer/passenger. If fixed costs and fare remain constant and only variable costs increase the breakeven is reached at a higher level.

2) Unionization: The airline business is labor-intensive. Most of the employees are unionized and depend on various U.S. labor organizations. The relation between airlines and labor unions are governed by the Railway Labor Act, which states that a collective bargaining agreement between an airline and a labor union does not expire. Instead it becomes amendable as of a stated date. Failure to amend terms and conditions suitably may lead to work stoppages or strikes, and thereby hamper operations.

 

Impact on the breakeven: Due to high proportion of labor costs which are fixed work stoppages or strikes can suspend operations which will result in reduced contribution. With fixed salary cost the breakeven will be reached at a higher level.

3) Federal Regulations: The airline industry is highly regulated, in particular by the federal government. All companies engaged in air transportation in the U.S. are subject to the regulations implemented by the Department of Transportation (DOT). The DOT recently laid new pricing rules for air carriers, effective January 26, 2012. As per the new rules, airline companies have to include all taxes and fees while advertising fares for their flights. As passengers are switching to low fares, the new rules might weaken travel demand, thereby leading to lower profits for the industry.

 

Impact in breakeven: As fares increase few passengers may use airlines which will reduce contribution. If fixed costs do not change the breakeven will be reached at a higher level.

Reference

Hilton (2008) Managerial Accounting McGraw-Hill

Issues in Costing

Issues in Costing
  • Determining cost: Determining costs requires keeping records of goods or materials purchased and any discounts on such purchase. In addition, if the goods are modified,the business must determine the costs incurred in modifying the goods. Such modification costs include labor, supplies or additional material, supervision, quality control, use of equipment, and other overhead costs. Principles for determining costs may be easily stated, but application in practice is often difficult due to a variety of considerations in the allocation of costs. Cost of goods sold may also reflect adjustments. Among the potential adjustments are decline in value of the goods (i.e., lower market value than cost), obsolescence, damage, etc.
  • Allocation of overheads: Overhead costs are often allocated to sets of produced goods based on the ratio of labor hours or costs or the ratio of materials used for producing the set of goods. Overhead costs may be referred to asfactory overhead for those costs incurred at the plant level Where labor hours are used, a  or overhead cost per hour of labor may be added along with labor costs. Other methods may be used to associate overhead costs with particular goods produced. Overhead rates may be standard rates, in which case there may be variances, or may be adjusted for each set of goods produced.

Determining overhead costs often involves making assumptions about what costs should be associated with production activities and what costs should be associated with other activities. Traditional cost accounting methods attempt to make these assumptions based on past experience and management judgment as to factual relationships. Activity based costing attempts to allocate costs based on those factors that drive the business to incur the costs.

  • Valuation of inventory: When multiple goods are bought or made, it may be necessary to identify which costs relate to which particular goods sold. This may be done using an identification convention, such as specific identification of the goods, first-in-first-out (FIFO), or average cost. Alternative systems may be used in some countries, such as last-in-first-out (LIFO), gross profit method, retail method, or combinations of these.

Cost of goods sold may be the same or different for accounting and tax purposes, depending on the rules of the particular jurisdiction

 

 

 

 

 

 

 

Examples

  • Determining cost: In case of custom made jobs it may be necessary to calculate cost of dyes, jigs or moulds, cost of skilled or unskilled labor etc
  • Allocation of overheads may be problematic in the above case as some jobs may require only labor and some jobs may be partly labor intensive which will require calculation of labor hour rate and machine hour rate.
  • Valuation of inventory is done on the basis of cost or net realizable value whichever is lower. In custom made jobs it is difficult to determine net realizable value.

 

 

Reference

Terry Lucey (2002) Costing Cengage Learning

 

Role of Management Accounting Review the roles of management accounting within a company. What is the most important role of management accounting? How is that different than financial accounting?

Role of Management Accounting

Review the roles of management accounting within a company. What is the most important role of management accounting? How is that different than financial accounting?

According to the Institute of Management Accountants IMA): “Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy”.[2]

The American Institute of Certified Public Accountants (AICPA) states that management accounting as practice extends to the following three areas:

  • Strategic management—advancing the role of the management accountant as a strategic partner in the organization.
  • Performance management—developing the practice of business decision-making and managing the performance of the organization.
  • Risk management—contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.

The Institute of Certified Management Accountants (ICMA), states “A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking”. Management accountants therefore are seen as the “value-creators” amongst the accountants. They are much more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (score keeping) aspects of the profession (Chadwick 1998). Management accounting knowledge and experience can therefore be obtained from varied fields and functions within an organization, such as information management, treasury, efficiency auditing, marketing, valuation, pricing, logistics, etc.

Within the area of management accounting there are almost an infinite number of tools, methods, techniques and approaches floating around.

 

Difference between Management accounting and financial accounting

 

  1. Management accounting provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders, creditors, banks, and govt.
  2. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as IRFS, GAAP.
  3. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centers.

Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company.

Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company (Lucey 2003). Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:

  • Sales Forecasting reports
  • Budget analysis and comparative analysis
  • Feasibility studies
  • Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability. Reports of this nature can be accessed by internal and external users such as the shareholders, the banks and the creditors.

 

References

Chadwick L. (1998) Management Accounting Cengage Learning

Lucey T. (2003) Management Accounting Cengage Learning

 

 

 

 

Stock Features What is callable preferred stock? Why do corporations issue such stock? Given the different features that are associated with stock (callable, cumulative, preferred, etc.), what type of stock would you want to buy personally and why?

Stock Features
  1. What is callable preferred stock? Why do corporations issue such stock? Given the different features that are associated with stock (callable, cumulative, preferred, etc.), what type of stock would you want to buy personally and why?

Answer:

 

It is quite normal for preferred stock to be subject to fixed terms relative to the company’s ability to call or buy back the shares. Call price is often set at a certain percentage of par. For example, callable at 110 would mean the company has the option to buy back $100 par value preferred at $110. Specific terms can govern the call back time window, and there may even be a mandatory buy back date. In addition to paying the call price a corporation that redeems its preferred stock must pay any dividend in arrears.

 

Corporation issue such stock because a call provision gives a corporation flexibility in adjusting its capital structure.

 

 

I would buy the callable stock if the call price is set above significantly higher than the par value.

 

If the call option is not there I would first see whether the company has history of paying regular dividend on preferred stock. I would then look for higher dividend rate amongst a number companies.  My expected dividend rate would depend upon type of company, its beta and future prospects.

 

References

 

Baker H.K., Powell G. (2009) Understanding Financial Management: A Practical Guide John Wiley & Sons

Gallagher T.J. and Andrew (Joseph D.2007) Financial Management; Principles and Practice Freeload Press, Inc.

 

 

 

 

 

 

Apple’s Cash Flow Go to http://finance.yahoo.com. Enter in “AAPL” and click on the “get quote” button, and it will bring up information on Apple. On the left hand side you’ll see a section on Financials. Within that section, click on the cash flow. Review the cash flow statement for Apple. How would you summarize Apple’s cash flow position and what does this statement tell you about where the money is coming from and where it’s going? What would you suggest Apple’s do to improve its cash position and why?

Apple’s Cash Flow

 

Go to http://finance.yahoo.com. Enter in “AAPL” and click on the “get quote” button, and it will bring up information on Apple. On the left hand side you’ll see a section on Financials. Within that section, click on the cash flow. Review the cash flow statement for Apple. How would you summarize Apple’s cash flow position and what does this statement tell you about where the money is coming from and where it’s going? What would you suggest Apple’s do to improve its cash position and why?

Answer

Period Ending Sep 28, 2012 Sep 23, 2011 Sep 24, 2010
Net Income 41,733,000   25,922,000   14,013,000  
Operating Activities, Cash Flows Provided By or Used In
Depreciation 3,277,000 1,814,000 1,027,000
Adjustments To Net Income 6,145,000 4,036,000 2,319,000
Changes In Accounts Receivables (6,965,000) (1,791,000) (4,860,000)
Changes In Liabilities 9,843,000 8,664,000 8,302,000
Changes In Inventories (15,000) 275,000 (596,000)
Changes In Other Operating Activities (3,162,000) (1,391,000) (1,610,000)
Total Cash Flow From Operating Activities 50,856,000   37,529,000   18,595,000  
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (8,295,000) (4,260,000) (2,005,000)
Investments (38,427,000) (32,464,000) (11,075,000)
Other Cash flows from Investing Activities (1,505,000) (3,695,000) (774,000)
Total Cash Flows From Investing Activities (48,227,000) (40,419,000) (13,854,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid (2,488,000) - -
Sale Purchase of Stock 665,000 831,000 912,000
Net Borrowings - - -
Other Cash Flows from Financing Activities (1,226,000) (520,000) (406,000)
Total Cash Flows From Financing Activities (1,698,000) 1,444,000   1,257,000  
Effect Of Exchange Rate Changes - - -
Change In Cash and Cash Equivalents 931,000   (1,446,000) 5,998,000  

 

Answer: Cash flow from operating activities are increasing. This shows that the business is growing. Due to improved cash flow position the company has invested heavily in capital expenditure. The company has also paid dividends in 2012 which was absent in the earlier years.  The company has also invested surplus cash in investments. Due to the comfortable liquidity the company did not borrow at all since 2010.

Summary : The money is mainly coming from operating activities. This money is invested in capital expenditure which will again generate more income for the company in future. If the investment opportunities are not enough, the surplus money is invested in investments which will earn interest or dividend. After keeping sufficient liquidity, some money is returned to the owners in the form of dividends.

 

  1. Overview of direct and indirect methods

Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.

  1. Both the direct and indirect methods will produce the same cash flow from operating activities. True
  2. Depreciation expense is added back to net income when the indirect method is used. True
  3. One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing activities will be reported. False

Reason : Cash flows from financing will not change in either of the methods

  1. The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed. False

Reason: Cash paid to suppliers is disclosed in direct method

  1. The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement preparation is used. False

Reason: It appears in both the methods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guided Response:

Analyze several of your peers’ postings. Do you agree with the posting? Let at least two of your peers know what you would add.

 

Public Relations Cite as least six steps that should be observed in developing an effective public relations program. Provide an example of a recent negative public relations issue in sports.

Public Relations

Cite as least six steps that should be observed in developing an effective public relations program. Provide an example of a recent negative public relations issue in sports.

An effective public relations program helps in winning customers and conveying the right message to the target market.  The six important steps in developing an effective public relations program are as follows

Step 1: Define and write down objectives for the publicity or media plan.

Step 2: Define the goals in achieving this objective.

Step 4: Develop a schedule for the public relation campaigns

Step 5: Develop the plan of action

Step 6: Put measures/ metrics in place to track the results of the PR Campaign.

A successful PR program cannot work unless we know the audience for whom it is meant. One should be very clear and be as specific as possible.  For example, if you are offering sports equipment, you should be clear which sports you are referring to and where is your target market located. Clarity in the selection of target market would help in designing an effective communication strategy.

Next the message to be conveyed should be simple and straightforward.  It is important to put in place important points in the message so that the target audience gets to know them.

Once the above two steps are decided upon, the media through which message is to be conveyed should be selected. It is important to pay attention to the media tool as this would help in reaching the target audience effectively. One can choose print, audio, visual or a combination of all of them.

If the steps suggested are not followed, then opportunity to gain customer confidence may be lost. This would put the company in a   loss.  One can use a platform of an industry association, to launch or communicate. Brochures, newsletters are the most obvious choices of communication. Public meetings can also be used for communicating the objectives of the program. There are several opportunities to be considered. Sometimes, sponsorships can also work where one can make use of celebrity endorsement.  As simple networking can get your task of communication done in a simple and cost effective manner.

Reference
L’Etang J. (2007) Public Relations: Concepts, Practice and Critique SAGE

Marketing Program List the principles that should be observed in a marketing program. Give two specific examples of how these can be applied to a sport program. Describe why this would be advantageous.

Marketing Program

List the principles that should be observed in a marketing program. Give two specific examples of how these can be applied to a sport program. Describe why this would be advantageous.

Marketing program is prepared to for specific market and is used on a company –wide basis. It describes various activities that need to be performed in order to achieve specific marketing objectives within a fixed time period. The first step in a marketing program is to identify customers ‘needs. This can be found by conducting suitable market research. The company should find out how it would fulfill needs the customers by offering a suitable product or service from its stable.  The offering has to generate an acceptable rate of return so that it is beneficial to the company in the long run. An analysis of current market situation (opportunities and trends) would reveal information about the current trends and needs of the customers’. Once these are know, a detailed action program, budgets, sales forecasts, strategies and projected financial statements are included in the marketing plan.

Two examples of how these can be applied to a sport program are as follows

Budget is an important activity. If a budget is not prepared then no control is possible on spending. In the latest project that our team handled, we had to design and conduct an event for a political convention. The contract was awarded to our company after a tough contest with six other established players in the business of even management. We were given an advance of $ 10,000 and were supposed to work and plan and then claim reimbursement of our expenses. Our team leader assigned the task of listing down all the work involved with an estimate of expenses likely to be spent.  This helped us in managing our fund in an efficient manner, without overshooting the budget of $10,000.

The other example is that of preparing detailed action program. For one of our projects, where we had to organize an event for a sports club, the activities were listed down and tasks were assigned to individuals. They were also given a time frame to complete the tasks and also asked to report to the team leader the progress on a weekly basis. These helped us in monitoring the project and keep a tab on the schedule of activities. By this method, the entire task could be coordinated and it was also possible to plug in loopholes or gaps in the process.

Without preparing detailed action plan, and a budget for the expenses, it would not have been possible to complete the task within the time frame and manage the expenses as well. Thus following the marketing plan proved to be advantageous for us. Thus it was beneficial to the company. It also proved to be advantageous and very cost effective for the company as it could save a lot of time and effort in completing the task. Without this, success would not have been possible or quite difficult to achieve at all.

Reference

Luther W.M. (2011) The Marketing Plan: How to Prepare and Implement It American Mgmt Assn