Management accounting Essay Example | Topics and Well Written Essays - 1750 words

Management accounting - Essay Example The BASE formula helps in determining what caused the actual ending balances of all working capital accounts. Budgeted Balance Additions Subtractions (use to get back to actual balance) Ending Balance (actual) To understand what happened with everything else we must first understand the impact of the Raw Material Stocks. Raw Material Stocks Budgeted Balance 150,000 Additions 36,000 Subtractions 0 Ending Balance (actual) 186,000 By viewing the BASE formula we can see that the Raw Material Stocks balance was greater than the budgeted balance by 36,000 and based on the knowledge that production levels were about the same, this means that the materials would only increase not decrease because the balance was planned to be 150,000 based on production and with a 36,000 increase with the same production. A purchase of Raw Material Stocks equaling 36,000 must have been made. The issue that caused this was probably due to decreased efficiency in using materials. When Raw Materials must be pur chased beyond what is budgeted this means there is an unfavorable variance of 36,000. In order to correct this issue the company must come up with a standard of how much Raw Material stocks to use and then if costs allow, use a supervisor to ensure this standard is upheld. Creditors Budgeted Balance 66,000 Additions 36,000 Subtractions 51,000 Ending Balance (actual) 51,000 We can assume based on these numbers that the company added more debt from creditors of about 36,000 since inventory had been bought through creditors the balance increased by the amount of increase in the Raw Material Stock balance. Therefore since the ending balance of creditors was less than the beginning we can see that the company must have paid off creditors in excess of the added debt. That excess is equal to the beginning balance of 66,000 plus added debt of 26,000 minus the ending actual balance of 51,000, which means the company paid toward what was owed creditors, which was 51,000. The issue that may ha ve occurred is that current debts might have become due and therefore these debts had to be satisfied. Thus payment was made to the creditor decreasing working capital. In order to prevent this from happening again debt should be kept to a low amount, paid in a timely manner and cash should be kept in order to satisfy debt. Bank Budgeted Balance 4,500 Additions 7,500 Subtractions 51,000 Ending Balance (actual) (39,000) Due to the fact that the company paid creditors 51,000, that amount must come out of the Bank balance since there is no cash on hand. The beginning balance was only 4,500 and the ending balance was negative 39,000 therefore the company must have added 7,500 to the bank account. Where did that 7,500 come from? The issue is that there is an overdraft of the bank account. This has happened due to the purchases of Raw Material Stocks of 36,000 but the company did not generate enough cash in order to meet its burdens. To prevent this from happening again the company must i ncrease its liquidity by keeping inventory levels low, and the bank/cash balance high. Debtors Budgeted Balance 60,000 Additions 37,500 Subtractions 7,500 Ending Balance (actual) 90000 The debtors actual balance was 30,000 greater than the budgeted balance but what specifically happened was that debtors purchased the same amount of products that was involved in sales but 30,000 of these sales were credit sales. The issue is that there are more creditors that projected. This is a big problem because its likely that some of these debtors will become