Management

Accounting and
procedures for Quantity
Surveying practice
Dasun Ishara Mahabaduge
NG/HNDQS/09/42
 Management Accounting and procedures for Quantity Surveying practice

Programme Higher National Diploma in Quantity Unit 03 JACS Code N411

Surveying & the Built Environment
Module Number BE-QS-M-22 Module Title Management Accounting and
procedures for Quantity Surveying
practice
Credit Value 20 Module Level H1 Module Value 1.0
Assessment Final Assessment Assessment Weighting 30%
Assignment Title Management Accounting and procedures for Quantity Surveying practice
Lecturer Mr. Indika Ranasinghe
Student Name Dasun Ishara Student Number NG/HNDQS/09/42
Mahabaduge
Handed Over on 09/09/2016 Due Date 21/09/2016
Date Submitted Pass/ Re-
Submission
Course Leader Mr. Geeth Jayathilake
Module Leader
Internal Verifier Date Verified 01-09-2016
Developed by
Final Grade Fail Pass Merit Distinction
Initial Assessor
Assessor’s Signature Date
Assessed
2nd Assessor

Comments

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 Management Accounting and procedures for Quantity Surveying practice

Acknowledgement
To do this assignment I wouldn’t be able to do this without Mr. Indika Ranasinghe’s
guidance and support. I take this opportunity to extend my sincere thanks to Mr. Indika
Ranasinghe and all the responsible individuals that contributed to make us knowledgeable
persons in this Management Accounting and procedures for Quantity Surveying practice
module.

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 Management Accounting and procedures for Quantity Surveying practice

Contents
Task 01..................................................................................................................................................3
Task 02..................................................................................................................................................8
Task 03..................................................................................................................................................9
References...........................................................................................................................................11

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 Management Accounting and procedures for Quantity Surveying practice

TASK 01

Describe how accounting (financial accounting and management accounting) could be

useful in decision making process. Specifically relate your answer to an organization in
construction industry.
Management accounting is an important part of the economic information system, with a key
role in decision making, whether we talk about small and medium enterprises or large
companies. However, management accounting is superficially treated in most economic
entities, there are entities in which professional accountants consider management accounting
as optional, as shown in the survey performed in Caras-Severin County, querying 50
economic entities from the three categories (microenterprises, SMEs and large companies)
and processing the results in SPSS.

Also management accounting is fundamental in strategic planning. When a business is

looking to make a strategic decision, for example, whether to develop a new product line,
acquire another business or expand into other countries, the CIMA trained management
accountant can provide advice. They can use a number of tools to assist decision-making.
Construction companies are different from most other companies and are faced with many
unique challenges and problems not faced by other companies in other industries. Although
the construction industry is producing a product—as do manufacturing plants—the
construction of buildings, roads, and other structures is different from manufacturing of most
other products. Because of these unique characteristics the financial management principles
applied to other product-producing industries often need to be modified before they are
applied to the construction industry, otherwise they are useless. The financial manager is
responsible for seeing that the company uses its financial resources wisely.
Roles and Responsibilities of the Financial Manager in decision making process
The role of the financial manager in a construction organization is essential to organizational
success, and more importantly, is vital to avoiding failure. That may sound extreme, but in
many circumstances, competition is so fierce and margins are so thin, reliable financial
information and analysis certainly can make the difference between success and failure.

The construction financial manager’s role may vary from company to company, partly
because different financial managers have different skills and personalities. The role also
varies depending on the size of the company. A construction financial manager’s background
often indicates the areas in which the manager will concentrate. For example, a construction
financial manager whose background is in construction operations which are estimating and
project management, initially will concentrate on the proper recording of job costs. A
construction financial manager whose background is in public accounting probably will
initially emphasize financial reporting and income tax planning. The financial manager
should recognize these influencing factors and make efforts to compensate for any
deficiencies.

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 Management Accounting and procedures for Quantity Surveying practice

The skills and personalities of the other members of the management team also
affect the role of the construction financial manager. The majority of a company’s
administrative work can be performed in any department and will be allocated among
departments partly based on the skills and personalities of the respective department
managers.
For example, most construction financial managers feel that cash management is their
responsibility. If the other management team members share this feeling, responsibility for
cash management probably will be assigned to the finance department. However, if another
management team member feels that responsibility for cash management should be shared,
some compromise will be made. To a great extent, sharing of responsibilities depends on the
skills and personalities of the management team members. Successful financial managers
respect the need for compromise in sharing responsibilities.

The financial manager’s effectiveness depends on the manager’s ability to contribute as a

member of the management team. Serving as a management team member means helping the
other managers achieve their goals, while at the same time satisfying the financial manager’s
direct responsibilities.

Financial managers are responsible for managing the company’s costs and earning a profit for
the company’s owners. Financial managers rely heavily on the reports from the accounting
system in their management of costs. Managing the company’s costs and profits includes the
following duties:
 Controlling project costs.
 Monitoring project and company profitability.
 Setting labour burden mark-ups.
 Developing and tracking general overhead budgets.
 Setting the minimum profit margin for use in bidding.
 Analysing the profitability of different parts of the company and making the necessary
changes to improve profitability.
 Monitoring the profitability of different customers and making the necessary
marketing changes to improve profitability.

Strategic Decisions
Strategic decisions are major decisions taken at the highest level of management in an
organization by the Chief Executive, Directors or Board members. They determine the
direction of the business over future months and years. They have greater and wider-reaching
consequences than the tactical decisions (such as changes to factory layout or processes) or
operational decisions, such as increasing the number of staff on a product line, made by
junior or middle managers. These affect the day-to-day running of the business.
Construction Accounting System

Construction accounting systems include the software, hardware, and personnel necessary to
operate a construction accounting system.

Construction accounting systems serve four purposes.

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 Management Accounting and procedures for Quantity Surveying practice

 The accounting system processes the cash receipts and disbursements for the
company. The accounting system should ensure that revenues are billed and collected
in a timely fashion and that timely payments are made only for bona fide expenses
incurred by the company. Failure to collect revenues or careless payment of bills can
quickly deplete the cash reserves of a company and, if left unchecked, can bankrupt a
company.

 The accounting system collects and reports the data needed to prepare company
financial statements that are used to report the financial status of the company to
shareholders and lending institutions.
These reports are needed to assure shareholders and lending institutions that the
company is solvent and is managing its financial assets in a wise manner.

 The accounting system collects and reports the data needed to prepare income taxes,
employment taxes, and other documents required by the government.

 Failure to pay taxes and file other required documents such as on time results in the
assessment of penalties.

The accounting system collects and provides the data needed to manage the finances
of the company, including data for the company as a whole, each project, and each
piece of heavy equipment.

To successfully manage the company's financial resources, the accounting system must
provide this data quickly enough for management to analyse the data and make corrections in
a timely manner.

Revenues
Revenue is the income recognized from the completion of part or all of a construction project.
For a company using the percentage-of-completion or accrual accounting methods, revenue is
recognized at the time the project’s owner is billed for the work. For a company using the
completed contract method, revenue is recognized at the completion of the project. For a
company using the cash method, revenue is recognized when the company is paid for the
work by the project’s owner. Revenue may also be referred to as contract revenue on a
construction company’s income statement and is equivalent to net sales used by other
industries. Income from nonconstruction operations is usually classified as other income.

COST REPORTING

Cost reporting is where the accounting system provides management with the accounting data
after the opportunity has passed for management to respond to and correct the problems
indicated by the data.

Cost control is where the accounting system provides management with the accounting data
in time for management to analyse the data and make corrections in a timely manner.

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 Management Accounting and procedures for Quantity Surveying practice

The accounting system for many construction companies consists of three

different ledgers.

 The general ledger

 The job cost ledger
 The equipment ledger

The general ledger tracks financial data for the entire company and is used to prepare the
company's financial statements and income taxes.

The job cost ledger is used to track the financial data for each of the construction projects.

The equipment ledger is used to track financial data for heavy equipment and vehicles.

All construction companies should have a general ledger and a job cost ledger. Companies
with lots of heavy equipment or vehicles should have an equipment ledger.

METHOD OF ACCOUNTING

There are four methods of accounting available to construction companies.

They are:
 Cash
 Accrual
 Percentage of completion
 Completed contract.

The cash and accrual methods are two widely used accounting methods and are used in
many industries.
The percentage-of-completion and completed contract methods are used when companies
enter long-term contracts.

THE BALANCE SHEET

The balance sheet is a snapshot of a company's financial assets, liabilities, and the value of
the company to its owner—often referred to as net worth or equity – at a specific point in
time.

The balance sheet is divided into three sections:

 Assets
 Liabilities
 Owner's equity

The balance sheet reports the values of each of the accounts in the balance sheet portion of
the chart of accounts at the time the balance sheet is printed.

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 Management Accounting and procedures for Quantity Surveying practice

Construction companies using the percentage-of completion accounting method

are required to recognize the estimated profits on a construction project as the project is being
completed rather than at the completion of the project. In these situations, the estimated
profits must be equally distributed over the entire project based on the expected cost of the
project.

Because long-term contracts - contracts that span more than one fiscal year - are very
common in the construction industry, many construction companies are required to use the
percentage-of-completion method.
When using the percentage-of-completion method, companies are required to report their
costs and profits in excess of billing (under billings) and billings in excess of costs and profits
(overbillings) on their financial statements.
Additionally, these companies are required to recognize their estimated profits as they are
earned even if they have not yet received these profits.

A construction company is a risky venture. Each year, many construction companies go out
of business. Operating a successful construction company requires a specialized set of
financial management skills, because of the unique nature of the construction industry.
Unlike other industries, the construction industry faces a number of challenges. They are
I. Constantly building unique, one-of-a-kind projects
II. Building a project at a different location each time
III. Dealing with retention and progress payments
IV. Relying heavily on the use of subcontractors to complete the projects.

Management accountants use complex business data to help businesses identify critical points
and isolate weak and underperforming systems. It can also uncover opportunities that lie
hidden under routines and processes.

TASK 02

Ronaldo Limited is a newly incorporated construction company. The following revenue

(sales) and purchases are expected over the first six-month period from August 2016 to
January 2017.
Purchases Sales
$ $
August 2016 220,000 250,000
September 2016 175,000 375,000
October 2016 200,000 180,000
November 2016 120,000 480,000
December 2016 270,000 560,000
January 2017 370,000 300,000

 Wages are paid each month of $ 800,000 which are paid in month that they are incurred.
 Overhead expenses are due each month of $ 350,000 and these are paid one month in
arrears.
 On 15th September 2016, a new van is to be purchased for $ 50,000.
 Sales are all on credit and we allow a two-month credit period

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 Management Accounting and procedures for Quantity Surveying practice

 Half of the purchases are on credit - we are allowed a month credit period -
and half are for immediate settlement,
 The balance at the bank as at estimated at $ 100,000
Ronaldo Limited- Cash budget for the six-month period ending 31

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

Cash inflows
Receipts from debtors - - $ 250,000.00 $ 375,000.00 $ 180,000.00 $ 480,000.00
Total cash inflows - - $ 250,000.00 $ 375,000.00 $ 180,000.00 $ 480,000.00

Cash outflows
Cash purchases $ 110,000.00 $ 87,500.00 $ 100,000.00 $ 60,000.00 $ 135,000.00 $ 185,000.00
Payments to creditors - $ 110,000.00 $ 87,500.00 $ 100,000.00 $ 60,000.00 $ 135,000.00
Wages $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00 $ 800,000.00
Overheads - $ 350,000.00 $ 350,000.00 $ 350,000.00 $ 350,000.00 $ 350,000.00
Purchase of van - $ 50,000.00 - - - -
Total cash outflow $ 910,000.00 $ 1,397,500.00 $ 1,337,500.00 $ 1,310,000.00 $ 1,345,000.00 $ 1,470,000.00

Net cash flow $ (910,000.00) $ (1,397,500.00) $(1,087,500.00) $ (935,000.00) $(1,165,000.00) $ (990,000.00)

Opening balance $ (100,000.00) $ (1,010,000.00) $(2,407,500.00) $ (3,495,000.00) $(4,430,000.00) $ (5,595,000.00)
Closing balance $ (1,010,000.00) $ (2,407,500.00) $(3,495,000.00) $ (4,430,000.00) $(5,595,000.00) $ (6,585,000.00)

Figure 1: Cash Budget

TASK 03

Refer the financial statements of Celliciace PLC, a building constructor given on

annexure 1. Analyze the financial statements and assess the performance of the
organization.
Profitability
These ratios show how well a company performs in generating a profit.
gross profit
Gross profit ratio= ×100
Sales
This ratio says the proportion of profits by the sales of products or services. It is used to
examine the ability of a business to create sellable products in a cost-effective manner. The
gross profit margin can be measured according to above manner.
Net profit
Net profit ratio= × 100
Sales
The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining
profit after all costs of production, administration, and financing have been deducted from
sales, and income taxes recognized.

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Net profit is not an indicator of cash flows, since net profit incorporates a
number of non-cash expenses, such as accrued expenses, amortization, and depreciation.

2015 2014
52,133 48,280
GP ratio= ×100 GP ratio= ×100
170,568 135,000
Gp ratio=31 % Gp ratio=36 %
34,097 30,480
NP ratio= ×100 NP ratio= ×100
170,568 135,000
NP ratio=20 % NP ratio=23 %

Celleciace PLC has managed to increase their sales by 23% over the last year 2014. However
in terms of direct and indirect expenses of Celleciace PLC has been unable to control when
compared with year 2014. It said that company’s profitability has come down during the year.

Liquidity
This is the most fundamentally important set of ratios, because they measure the ability of a
company to remain in business.
The current ratio measures the ability of an organization to pay its bills in the near-term. The
ratio is used by analysts to determine whether they should invest in or lend money to an
entity.
Current Assets
Current ratio=
Current Liabilities
The quick ratio matches the most easily liquidated portions of current assets with current
liabilities. It is used to evaluate whether a business has sufficient assets that can be converted
into cash to pay its bills. The key elements of current assets that are included in the quick
ratio are cash, marketable securities, and accounts receivable. Inventory is not included in the
ratio, since it can be quite difficult to sell off in the short term, and possibly at a loss. Because
of the exclusion of inventory from the formula, the quick ratio is a better indicator than the
current ratio of the ability of a company to pay its immediate obligations.
Despite the absence of inventory from the calculation, the quick ratio may still not yield a
good view of immediate liquidity, if current liabilities are payable right now, while receipts
from receivables are not expected for several more weeks.
(Current Assets−Inventory)
Quick assets ratio=
Current Liabilities
2015 2014

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45,389 25,900
Current ratio= Current ratio=
6,348 4,520
Current ratio=7.15 Current ratio=5.73
45,389−27,144 25,900−9,200
Quick assets ratio= Quick assets ratio=
6,348 4,520
Quick assets ratio=2.87 Quick assets ratio=3.69

Working Capital = Current Assets – Current liabilities

Working Capital (2015) = 45,389 – 6,348
= 39,041

Working Capital (2014) = 25,900 – 4,520

= 21,380

Celleciace PLC has managed their working capital position.

These ratios show the cash levels of a company and the ability to turn other assets into cash to
pay off liabilities and other current obligations. Liquidity is not only for measure how much
cash a business has. It is also a measure of company to raise enough cash or convert assets
into cash.

Efficiency
Efficiency ratios also called activity ratios measure how well companies utilize their assets to
generate income. Efficiency ratios often look at the time it takes companies to collect cash
from customer or the time it takes companies to convert inventory into cash in other words,
make sales. These ratios are used by management to help improve the company as well as
outside investors and creditors looking at the operations of profitability of the company.
Sales
Assets turnover=
Total assets
170,568
Assets turnover ( 2015 )=
121,025
¿ 1.4
135,000
Assets turnover ( 2014 )=
100,820
¿ 1.3
This ratio measures organization ability to convert the total value of assets into sale.
Therefore higher the asset turnover ratio better for an organization.

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Efficiency ratios go hand in hand with profitability ratios. Most often when
companies are efficient with their resources, they become profitable. In other words, they are
efficient at turning their assets.
Celleciace PLC has performed well in 2015 in the year 2015 according to an assets turnover
of 1.4 times.
In overall Celleciace PLC has managed to increase in sales during the year 2015. However
the company’s profitability has gone down in year 2015 compared to 2014. Nevertheless
considering the liquidity and efficiency positions it could be said that performance of
Celleciace PLC in year 2015 is better than in year 2014.

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REFERENCES

Adela Breuer, Mihaela Lesconi Frumuşanu, Andra Manciu,

http://www.oeconomica.uab.ro/upload/lucrari/1520132/01.pdf. THE ROLE OF
MANAGEMENT ACCOUNTING IN THE DECISION, s.l.: s.n.
Business case studies, 1995. Financial information in decision making. [Online]
Available at: http://businesscasestudies.co.uk/cima/financial-information-in-decision-
making/management-accounting.html#axzz4K8RK8AE8
[Accessed 19 09 2016].
J.Peterson, S., 2016. Construction accountinfg and financial management, s.l.: s.n.

Lectutre notes : Mr. Indika Ranasinghe

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