Senior Management working with Tech (UK) Limited has asked to produce a written report denoting the function of Management Accounting system in organizations.
- Explanation of management accounting systems and reporting systems which are used in Tech (UK) Limited.
- Preparation of income statement with the use of absorption and marginal costing methods.
- Description on the use of budgets for planning and control purposes in an organisation.
- Evaluating the ways in which Tech (UK) Limited can use management accounting to deal with its financial problem.
Management accounting is an activity or a process of making an important information available to the management on the basis of which business operations has been executed in an appropriate manner. It is also known as cost accounting which helps managers to make an effective decisions regarding increasing value of an organisation through utilising available resources at an optimum manner. Preparing of financial reports includes balance sheet, profit & loss account, cash flow statement which help in knowing the actual financial position of company in market. Tech (UK), a UK-based manufacturing company which deals in producing special charger for mobile telephones and other various gadgets for the purpose of selling it to the retail outlets in UK. Such company is take for the purpose of preparing this report (Albu and Albu, 2012). The project briefly summarises the various management accounting as well as reporting system along with the difference between financial and management accounting. All other aspects are also covered under this report with the context of Tech (UK).
P1: Management accounting concept and their essential requirements
Management accounting: It is such a practices of bringing out an important data through using various accounting systems in order to enhance the value of an organisation so as to sustain in competitive market for longer period of time. It will also help stakeholders to get ensure about getting maximum return on their investment through showing them true and fair financial reports. Such value data and information can be provided with the help of using various management accounting system which be briefly described after making comparison between financial and management accounting:
Comparison between management and financial accounting
- It is an activity of maintaining valuable information of all departments through using various accounting system due to which the management are bale to make a profitable decisions for company.
- It is related with finance thus preparing only financial accounts in order to assess the actual financial position of company in market.
- They are liable to provide financial as well as non-financial data so as to make an effective plans and policies.
- It only provides financial related information thus tool less time as compared to Financial accounts.
- It helps in preparing accounts of all department in order to provide sufficient information to internal management of company.
- They are wholly liable to prepare financial accounts which help stakeholders and investors to make investment decision in order to get profitable income in return.
- Such management accounting, documents are prepared only when there is need to requirements of an organisation.
- Finance department is liable to make decision regarding preparation of financial report on annual basis.
Importance of management accounting in decision making process
Determination of aim: The aim can be determined with the help of information available through using various management accounting system.
Helps in formulation of plans: Availability of information includes financial as well as no financial will help management of various departments to make a better decisions and suitable plans to execute business activities in more effective and efficient manner (Endenich, Brandau and Hoffjan, 2011).
Measurement of performance: With the help of accounting systems, all the informations about employee’s performance, daily business transactions etc. help management in identifying and measuring the actual performance through comparing actual with desired performance and thus able to make corrective actions if any deviations found.
Different management accounting systems
Tech (UK) has different options of using management accounting systems which are briefly explained as below:
Cost management system: It refers to such management accounting system through which Tech (UK) can able to decide what amount of price should they charged from their customers in order to recover all cost incurred manufacturing process along with profit margin. Such cost includes labour coats, material cost, overhead expenses etc. equals to total product cost. Before setting prices for products and services, the management need to first find out the interest and buying behaviour of customers and according to which prices has been fixed which helps in maximising the satisfaction level of customers. For example, increasing in the price of special charger which are more in demand in market, it will help company in maximising their revenues. Such accounting system has been further dived into three different types which are as below:
- Actual costing
- Standard costing
- Normal costing
It incudes actual cost, direct cost rates as well as actual qualities that are used in manufacturing process in order to determine that cost of specific products.
It refers to an estimation of cost which to be incurred in executing business operations to produce products and services. IT is used as target cost and are developed on the basis of historical cost.
It is such type of cost allocation method which helps in assigning cost to specific products on the basis of material, labour, and overhead cost used in manufacturing process.
Inventory management system: It is another type of management accounting system with the help of which the management of Tech (UK) are able to decide what amount of inventory they have at present and what amount of inventory they should required to placed in order to fulfil needs and requirements of customers (Alleyne and Weekes-Marshall, 2011). It also directs management to allocate inventory to specific departments on the basis of their requirements and outcomes received in near future. There are different techniques of valuation of inventory which are determined as below:
FIFO: In the First In First Out method, the management decide to use materiel in production who comes first in warehouses. Du to this, the cost of oldest materials will be identified as cost first. In this, there is no requirement to follow GAAP restrictions while reporting financial outcomes.
LIFO:In this method, the valuation of cost is based on the assumptions that the materials who came in warehouses at at last will be sold at first. In this, IRS allows the use of LIFO but use it as any subsidiary.
AVCO: Under this, the valuation of cots has been determined through dividing cost of inventory by the number of products at any pint of time.
Job costing method: Such management accounting system is used with the purpose of allocating cost to particular product or group of products. Such system is more profitable when the company produce products of different nature. Through such system, the management are able to track cost which includes material, labour cost etc. which are incurred in production process. Allocation of cost is based on the future outcomes from particular products. For example, if Tech (UK) produce chargers of two and three pin then such systems becomes more profitable to company (Gond and et. al., 2012).
P2: Different types of managerial accounting reports along with their importance
The management of Tech (UK) should able to make an effective plans and policies on the basis of information available through using various types of management accounting reports. Such types of reports includes:
Budget report: It includes all important information regarding the aspects and elements which are required to produce quality products and services for the customers. Such kind of reports helps management in allocation of cost to specific business activities after analysing the outcomes that may received in future. It is prepared on the basis of previous year budget in order to avoid any discrepancies occurred in executing business activities in previous years.
Account receivable report: Such reports is prepared to record all information about the unpaid debtors of an organisation with an aim of recovering unpaid amount from them on particular data. In order to assess the unpaid amount, the management need to make segmentation of bill invoices according to their due date. This wilt direct managers to make changes in their credit polices so that debtors should not delay in making payments to company.
Performance report: It is such kind of reports which is prepared to record the performance of each departments of an organisation so as to confirm whether they are performed according to the pre-determined plans or not. It helps management in finding out the deviations if any which restricts employees to give their best. For example, to main financial performance of Tech (UK), the management can use various financial tools such as Key Performance Indicators, Balance Scorecard Approach etc.
Inventory management report: Such reports helps in updating management about the inventory level the company have at present and on the basis of which they took decision whether need to placed order of inventory to suppliers or not in order to meet needs and demands of market. This will help in supplying adequate level of stock in market so as to avoid situation of shortage (Nixon and Burns, 2012).
Benefits or importance of management accounting reports
Reduction of cost: It helps management in identifying the aspects which may affect the business operations due to which the cost of company may increased. Such reports directs management to make a suitable plans to eliminate such aspects in order to run business more successful and execute as per the standards so as to reduce cost of operations.
Decision making: It helps management in getting information about financial and non-financial transactions due to which management can easily able to find out the actual financial position of company. It further help in formulating an effective plans, enhancing performance of employees, and handle risk factors which makes positive impact on company’s productivity and profitability (Renz, 2016).
P3: Calculation of cost and preparation of income statement
Cost: It may be defined as value of money which is to acquire or produce something in standard quality in order to maximise satisfaction level of customers. Thus, irt may be increased as per the requirements in production process. Example, labour cost cost, material cost, overhead cost etc. which are incurred in manufacturing quality products.