Management Accounting – Investment Appraisal

Management Accounting – Investment Appraisal

Here is an introduction to management accounting – Management accounting can be classified as one of those accounting figures specially prepared for the use of management in business organisations. Management is the opposite of audit financial statement prepared for the benefit of general public who may be interested in the records but are managers of companies. The purpose of management accounting includes the following;

– The account could be more detailed than end of the year accounts, giving information about the cost, sales and profitability of individual products or departments. It is used to develop profit forecast for the future. When a customer has a lending proposal, the banker would want to see a forecast of expected profits. If the forecast is based on management accounts the forecast would be more reliable than historical statement of accounts. Again, management accounting data is current and could be supplied regularly to bank; say every month over the terms of loan.

Most important about management accounting is that it gives current information about the state of affairs of a customer, unlike annual financial accounts that are often out of date. Management accounts cover the following areas of study namely;

• Cost – Volume – profit analysis
• Methods of Costing (a) Absorbing and marginal costing
• Budgeting
• Investment Appraisal
• Funds Flow Statements and cash budgets

Here is an example of management accounting;

Below, this management accounting items would be easily understood with typical examples;

Example – Gabriel Blocking Moulding Company has the following cost volume Profits

Sales                N14

Variables         N8

Fixed Cost       N28,000

Production                   4000 Units       7000 Units       10000 Units

Sales                            N28,000          N49,000          N70,000

Less Variable cost        16,000             28000              40000

Contributions               12000              21000              30000

Less fixed cost             (28,000)           (28000)            (28000)

Profit/(loss)                  (16,000)           (7,000)             (2,000)

From the above, it can be seen that this business of Gabriel Block Moulding Company is very vulnerable because any slight change in production cost at full capacity will result into loss or there is a slight decrease in sales price will also result in a loss. It can also be seen from the above analysis that the business is strong one because it can withstand pressure even at the least production.

Usefulness Of Cost – Volume Analysis

It is useful to both the lending banker and a business in assessing a proposition. It helps to answer a significant question which is “At what volume of sales will the business make exactly no profit and no loss? That is at what volume of sales would total revenue and total cost of sales be the same? Contribution is the difference between sales revenue and variable cost of sales.

Therefore, the break-even point is that at which contribution equals “fixed cost”. The cost volume profit analysis can be used to find out a lot of possibilities, Examples;

• What if sale price is only N14 or as high as N20?
• What if sales volume is 4000, 7000 or 10000 units?
• What if the unit variable cost is N8 or N7.00?
• What if the fixed cost is N28,000 or N31,000?

The answers above to the above questions may indicate the strength of the business. If the business can afford a cut in selling price or higher cost or a lower than expected sales in volume. That is, if actual result can be worse than expected without causing the profit to turn into loss than the business can be said to be strong.