Accounting and Decision Making

Standard

ACCOUNTING AND DECISION MAKING – IDENTIFYING THE PROBLEM SITUATION

Fig 1.1- ACCOUNTING INFORMATION FOR A SINGLE PRODUCT

Accountingfig 1

 

The above illustration clearly depicts that there has been a loss of Rs.100 in one year’s time for this particular product. The reason can be attributed to the increase in the “cost of goods” whereas other expenses have remained the same in both the years. For a single product manufactured, the problem is identifiable and solvable. But when the organization is producing a range of products, you need to apply some accounting technique by which the product losing money is identified and suitable measures are taken to cut down the escalating cost.

Fig 1.2- Accouning Information for a Product Range

Accounting fig 2

The above illustration compares and contrasts the relationship of three products a company manufactures. It is seen that products P1 and P2 are doing well. Though the cost of sales has gone up for P1 and P2, the sales volume has also increased thus increasing the gross profit over the period of time.

Here the product that has to be dealt with is P3 whose sales volume has drastically gone down, yet with the same cost of sales. When there is an increase in cost of sales, two things have to be considered.

  1. Identifying the problem-product
  2. Either cut down the production cost or increase the selling-price if the product has a real demand in the market.

Uses of Accounting Data:

Accountng information helps the management to arrive at make or buy decisions, to outsource production of ceratin components to cut down or control costs, to expand the production, to increase the sales volume or to downsize their project capacity. Techniques like Break-Even Analysis, Costing and Budgeting aid in going for the right production-mix, marketing-mix and sales target plans for the respective financial years.

Aggregate Planning:

As we all know planning is the key to the future and financial planning has to be given utmost importance for a production process. Aggregate planning involves translating long-term forecasted demand into specific production rates and the corresponding labor requirements for the intermediate term. It takes into consideration a period of 6 to 18 months, breaking it into work modules weekly or monthly and planning for the specific period in terms of men, material and money.

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