Management accounting Essay Example | Topics and Well Written Essays - 1750 words - 4

Management accounting - Essay Example 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 purchased 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. 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 have 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. 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