A local restaurant is noted for its fine food, as evidenced by the large number of customers. A customer was heard to remark that the secret of the restaurant’s success was its fine chef. Would you regard the chef as an asset of the business? If so, would you include the chef on the balance sheet of the business and at what value? Discuss. (2 MARKS)
The accounting definition of asset is significant in context to the above statement. As per the definition, assets are defined as resources from which future economic benefits are expected to flow into the entity and are also controlled by the entity itself; as a result of some past events or transactions. The chef of a fine local restaurant allows an entity like a local restaurant in the above case to have access to all the future benefits but the other condition i.e. the control factor cannot be fulfilled. It is argued here that the chef is free to leave or resign from the entity, can take leave whenever he wants, cannot be fully acquired or further sold by the entity. If the control criterion is not met, the future benefits are also not fully assured and ultimately the chef fails the asset test. Thus, it could be concluded that chef in the above case can be the USP of the restaurant but cannot be regarded as an asset in terms of accounting principles.
- Accounting provides much information to help managers make economic decisions in their various workplaces. You are required to provide examples of economic decisions that the following people would need to make with the use of accounting information: (3 MARKS)
Accounting provides management with a lot of financial data as well as information that can help the managers in the right direction with substantial proof. It is a managerial tool that allows the business to make correct business decision and on the timely manner thus, playing an important role in business management.
A manager of human resources uses accounting information:
- To make human resource decision such as hiring of new staff members within the budgeted constraints.
- To provide information regarding the cost of redesigning the manufacturing process with a view to ensure safe workplace conditions to employees.
- To analyze the cost and benefits associated with new program to take decision regarding training of employees to adapt to it.
A factory manager can use accounting information
- To make planning decisions affecting how and when products and services are produced followed by the cost of producing as well as storing these goods and services to decide on the inventory to be kept in hand.
- As a guide to ensure that the operational budget is on track as planned. In case they found any expense number to be over budgeted, they may consider all the possible reasons for such excessive expense and make decision about that.
- Other than this, factory manager can use management accounting information to analyze the quality of equipment or other economic resources used in producing goods or services. If the usage of less costly resources would not going to harm the overall quality of goods and services, the manager can employ these resources to reduce the overall operational cost.
The management team of an Australian Football League (AFL) club can use accounting information:
- To know how much funds are actually required to conduct the league in the present year and on the basis of it making decision regarding how many sponsors will be required.
- Further, to know how enhancing the presentation of the league will influence its cost.
- To also understand how a given endorsement plan and its impact on the number of tickets sold is expected to affect income.
The manager of a second-hand clothing charity can use accounting information
- To see whether the business has enough of donations and to plan strategies for procuring donations for short term and long term period.
- To plan strategy pertaining to appropriate locations or equipment required to collect, display or donate clothes.