Short-term Profit Maximization

Discuss about the Sources of Weapon System Cost Growth.

This assignment is based on the various cases and the decision drawn based on the same. The first and second case is on Short term profit shows that profit maximization is the main objective of the business. In order to earn more profits, there is a need for the adoption of suitable strategies. The third and fourth case is that there is a necessity to reduce overhead expenses in order to meet the cost. Fifth and sixth case is based on the importance of management accounting and the journal entries on the same.

A furniture manufacturing company Watley, is made up of highly skilled craftsman producing a high quality of furniture. Thus, the proper conclusion needs to be drawn which, the company can undertake. Watley is trying to maximize its profits. All the resources will be used to earn more profits. It is the short term concept. Short term concept ignores the costly solution that will develop in the long run. This will have negative impact on the public and can affect its sales. Profit maximization should not be the main objective of  Watley. Time value of money is ignored. £ 100 is valued more after 1 year.

The goal of the management should be to maximize  profits. Long terms gains is given to the business by the short term profits. Long term result can lead to major loss to the market.

It is clear from the above that Instead of profit maximization, satisfaction of the public is the prime motive of the Firm. The profit maximization should not be the short term objective but should be considered as the long term objective, as it will help in meeting the cost of the firm,  in the near future. Short term profit is giving business, a long term gains. Thus, there are also advantages of the short term profits. Short term profit shows that profit maximization is the main objective of the business. In order to earn more profits, there is a need for the adoption of suitable strategies. In this case the journal entries will be are as follows-

Long term gain———–Dr

To Short term Profit

The total amount of money transferred in and out of the business is called as cash flow. When there is an increase in the company’s liquid assets, there is said to be a positive cash flow. When there is a decrease in the liquid assets, there is said to be a negative cash flow. Company’s income quality can be measured with the help of cash flow. This also helps to show the solvency of the company. Cash flow problems are faced by most of the businesses. The problems faced by Waltey are as follows-

Cash Flow and Overhead Expenses

The ongoing business expenses are called as overheads. This include direct labor, direct material and direct expenses which are directly billed from the customers. This shows the low or high volume of business. The charges of Waltey need to be determined in order to make the profit. This problem is having its impact on the stock product, manufacturing goods and the business.

Thus, overhead expenses need to be reduced and need to be cut off to overcome this problem. This will help it, not to affect the productivity. There is a need to consider cheaper option for manufacturing the furniture. These expenses are needed to be audited on day to day basis.

It is necessary to reduce the overhead expenses of the company which will help in improving the productivity. It is necessary to do the auditing of the expenses on day to day basis. This will help to find out the amount incurred on the expenditure and how the amount can be allocated to different expenses. This will help in the proper management of the fund. This will also help in the reduction of the overhead expenses that hampers the growth of the firm. This include the direct material that is directly associated with the manufacturing process, direct labor that is directly associated with the labor force connected directly with the manufacturing process and the last direct expenses, the expenses that are directly associated with the manufacturing process. The journal entry for the Overhead expenses will be as follows-

Overhead expenses A/c ———-Dr

To Cash / Bank A/c

Overhead expenses are paid out with the help of cash. In the above case, Cash is going out towards the overhead expenses. So, the overhead expenses are debited and the Cash account is credited.

Proper auditing helps to maintain the records of the day to day expenses of the firm. This will help to know the amount spend on the particular expenditure. And, it also helps in maintaining proper records of the business.

The process of identification, analyzing, record maintenance and the presentation of financial information is called as management accounting. There are number of decisions taken by Waltey. For these decisions, data is provided by management accounting information. Proper execution of management accounting helps in the successful performance of the business. Management accounting helps to lower the operating expenses and increases the profits. Management accounting will help to move the business in the right direction and will help to enhance the profits of the business. This will aid in decision making. The important part of the management accounting is the budget. Proper planning and budgeting helps to know how much sale is done and how much revenue is collected by the business. There is a careful analysis of the cash expenditure. The actual and budgeted result can be compared with the help of Performance measurement. Performance measurement can be used by Watley to produce enough goods and services in order to meet the growing needs of the customers. All the relevant information on manufacturing process is provided by the management accounting. It will decide on whether to purchase the machinery in order to produce the primary products of the company. Make or buy analysis will help to choose more profitable option. With the help of data collected through management accounting, management should make continuous effort to bring improvement in the business.

Management Accounting

Thus, it is clear from the above, that there are various advantages of management accounting. Depending upon the market forces, the make or buy decision is made by the company. This will help in improving the productivity of the organisation. It also helps in finding the profitability based on the decision making process. Thus, management accounting is to identify the financial information, make a proper record, analyze the financial information and present the same.

Journal Entry in this case will be-

Profit A/c ————–Dr

To Performance Appraisal

Difference between the actual cost and the budgeted cost is called as the cost variance. It is tracked at the expense level, job or project level. It is the important part of the management reporting system. The performance of the project can be measured with the help of cost variance. This will show whether the project has been over budgeted or under budgeted.

Difference between the actual sales and the budgeted sales to a change in profit is called as the sales volume variance.

Sales volume variance = Actual Units Sold * Actual Price – Standard Price

Suppose in this case, the actual units sold is 2000

Actual Price is 20 and Standard price is 10

So, it will be expressed as-

2000* (20-10)

2000*10

20000

Therefore, the sales volume variance will be 20000

Here, in this case the journal entry will be-

Cash A/c ———–Dr

To actual sales A/c

Variance between the actual and the standard selling price that brings change in the sales revenue is called as sales price variance.

Sales price variance = Actual Unit Sold – Budgeted Unit Sales * Standard Profit per unit

Actual unit sold is 4000, budgeted unit sales is 200 and the standard profit per unit is 10

4000 – 200*10

4000-2000

2000

Increase in the market competition, decrease in the product demand and the price reduction are some of the reasons for the advertisement of the sale price variance. The standard profit in this case is lower than the one that is budgeted. Sales quantity variance is adverse when the quantity of sales is lower than that budgeted. Sales mix variance is adverse when the profitability is lower when compared with the anticipated budget. Sales volume variance needs to be investigated. Proper analysis is made with the sales quantity and sales mix variances. There is a need to decrease the competitor, product differentiation improvement, and the segmentation of the market with proper campaign of promotion sales. Analysis is made to allocate fund in order to improve the total profit of the company.

Thus, it is clear from the above that, there is a need to improve the profitability of the company by removing the adverse sales price and the sales volume. It is clear from the above that the company needs to reduce the number of competitors and expand the segmentation of the market.

Student learnt about the various uses of management accounting for carrying out the day to day activities of the business. Adverse price when removed improves the profitability of the business. It is the manner in which the sales volume variance is calculated etc.

Conclusion-

Professional Point of view-

This assignment is based on the calculation of various factors that are affecting the profitability of a business. Management accounting is used by the manager to calculate the accounts that are used in the management of the business. This assignment has been helpful to a student in various ways. It also consists of the methods that are used to reduce the overhead expenses of a business.

Personal Point of view-

This assignment has helped me to know how the accounting is used in our day to day life. It helped me to make the calculations. How the daily expenses can be reduced with suitable measures and by using the accounting policies. It will help me to manage my fund efficiently.

Reference-

Bolten, J. (2008). Sources of weapon system cost growth. Santa Monica, CA: Rand Corp.

Drury, C. (1992). Management and cost accounting. London: Chapman & Hall.

Epstein, M. and Lee, J. (2011). Advances in management accounting. Bingley, UK: Emerald.

Horngren, C. and Sundem, G. (1990). Introduction to management accounting. Englewood Cliffs, N.J.: Prentice-Hall.

Kaplan, R. (1982). Advanced management accounting. Englewood Cliffs, N.J.: Prentice-Hall.

Laidler, E. (1976). Variance accounting. London: Macmillan in association with the Institute of Cost and Management Accountants.

Oliver, L. (2000). The cost management toolbox. New York: AMACOM.