Nowadays, management accounting is an important in the corporate world for effective decision making in the organisation. With the help of management accounting, organisation would able to get the competitive advantage over the competitors. Every department is directly or indirectly is completely linked to finance/accounting department for the organisation's success. There has been completely changed that the organisation would able to make that the company on the peak position with the help of implementing the management accounting standard. Management accounting assists the business to take the crucial business decisions and stimulate the business to take the effective business performance(Ward, 2012). Management accountants are specially known for the mix of operations, management and strategy. Management accounting assist the senior managers to make the strategy, for business management, and for the business operations.
1.1 Define Management Accounting and to distinguish Management Accounting from Financial Accounting:
Management accounting helps the organisations to make an effective and efficient strategy for making the business sustainable.
While making the strategy of IMDA Tech LTD, management accountants plays undermentioned role in the organisation.
- Investigate professional workplace
- Assess vital choices
- Outline and run performance management system
- Assess and oversee business hazard
- Lead business or corporate valuation
- Oversee monetary hazard
- Survey, review and assess risk control
- Apply risk management tool
- Detail and assess budgetary system
- Model and estimate money streams and different funds
- Prompt on mergers, acquisitions and divestment's
- Oversee change
- and so on.
While for effective management in the organisation, management accountants also helps the company to implement the plans for effective running of the business.
Financial accounting is implemented to display the monetary strength of an association to its outside partners. Top managerial staff, stockholders, financial institutions and different investors are the group who are concerned to the financial accounting reports. Financial accounting displays a particular timeframe in the past and empowers those group of audience to perceive how the organization has performed. Financial accounting reports must be documented on a yearly basis, and for publically exchanged organizations, the annual report must be made some portion of people in general record(Zimmerman and Yahya-Zadeh, 2011).
Management accounting is utilized by the top level authorities to frame crucial decisions which are related to their everyday operations. It is construct not in light of past performance, but rather on present and future trends, which does not consider correct numbers. Since administrators frequently need to frame operational decisions in a brief timeframe in a fluctuating domain, a management accounting depends intensely on anticipating of business sectors and patterns.
Management accounting is expose inside of the organisation. While on the other hands, financial accounting is implied for outer partners. However, financial management is of incredible significance to present and potential investors, management accounting is essential for supervisors to settle on present and future financial decisions. Financial accounting is exact and should stick to Generally Accepted Accounting Principles (GAAP), however management accounting is frequently to a greater degree a projection or estimate, since most directors don't have time for correct numbers when a decision is required to be made.
1.2 Importance of management accounting information as a decision making tool:
Entrepreneurs are confronted with endless decisions each day. Management accounting data gives information driven contribution to these kinds of decisions, which can enhance basic decision over the long period(Types of Budgets for Businesses. 2017). Private venture supervisors can use this effective device to help make their business more fruitful by seeing how management accounting benefits regular business choice settings.
Relevant Cost Analysis:
Management accounting information is utilized by organization administration to figure out what ought to be sold and how to offer it. For instance, an entrepreneur might be uncertain where he ought to concentrates his advertising endeavours. To assess this choice, an accounting administrator could inspect the costs that vary between publicizing options for every item, disregarding regular expenses. This procedure is known as applicable cost examination and is a strategy that is educated in fundamental management accounting courses.
Activity based costing techniques:
Activity based costing technique is used to figured out what items to offer, the business needs to decide to whom they ought to offer the items. By utilizing activity based costing systems, small business administration can decide the exercises required to frame and deliver a product line.
The motivation behind management accounting in the association is to aid competitive decision making by gathering, preparing, and imparting information which aids on making administration plan, control, and assess business procedures and firm strategy. The interesting thing about management accounting is that it is uncommon to locate a person inside an organization with the title of "management accountant." however, there are so many people work as an accountants inside the firm, yet these people commonly work as financial accountants, costs accountants, internal auditors(Definition of 'Pricing Strategies. 2017). Although, the capacity to create and utilize great management accounting is really a critical capacity for some people, including account experts, operational and so on.
Cost accounting system:
Evaluating the exact cost of items is the most challenging task for productive operations. A firm should know which items are beneficial and which ones are not, and this can be discovered just when it has evaluated the right cost of the item. Therefore, a product costing assists helps in evaluating the end estimation of materials stock, work-in-progress and completed products stock, which are needed to frame the financial statements.
Stock management system:
This is framed to manage for the bigger enterprises but it is also been used by the small scale enterprises as well(Baldvinsdottir, Mitchell and Nørreklit, 2010). The system guarantee, that the clients have enough of what they need and arrange that objective against a retailer's money related need to keep up as minimum stock as would be prudent. mismanaged stock means disappointed clients, an excess of cash trap happen and the company did not able to manage the inventory at effective way.
Job costing system:
Job costing framework includes the way toward gathering data about the cost related with a particular production work. This data might be required keeping in mind the end goal to present the cost data to a client under an agreement where costs can be repaid. The data is likewise valuable for deciding the accuracy of an organization's evaluating framework, which ought to have the capacity to set price which enables for a reasonable profits.
Price optimizing system:
Price Optimization Models are scientific model which compute how request shifts at various price levels, then join that information with data on costs and stock levels to prescribe price that could enhance benefits. The demonstrating permits organizations to utilize evaluating as an effective benefit lever, which frequently is immature. Price Optimization Models can be utilized to tailor pricing for client portions by reproducing how focused clients will react to value changes with information driven situations(Bodie, 2013).
Calculation of net profit using absorption costing and marginal costing techniques:
Net profits can be ascertained via different methods in the management accounting. Net profits of IMDA Tech LTD according to the absorption costing and marginal costing is appeared as underneath:
Absorption Costing: This is a procedure of management accounting by which different costs which are connected with various sorts of production procedures are absorbed on a product. This strategy is required to assess the stock of an organisation. forecasting is the principle component of management accounting(Garrison and et. al., 2010).
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Income Statement as per absorption costing :
Selling price £35
Direct materials £8
Direct Labour £5
Variable Production overhead £2
Variable sales overhead £5.25
Budgeted production for the period is 3000 units
Actual production for the September is 2000 units
Fixed costs for the month are given below
Budgeted cost Actual cost
Production overhead £15,000 £15,000
Administration cost £10,000 £10,000
Working 1: apportioned of fix cost per unit
£25000/2000=£12.5 per unit
Working 2: Calculate full production cost
Direct material £8
Direct labour £5
Variable cost £2
Prime cost £15
Fixed cost £12.5
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2000*27.5 = £55000 500*27.5 = £13750
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £25000
Fixed overhead: £25000
Net profit using absorption costing £
(-) Cost of Sales:
Opening inventory 0
Closing inventory ( £13750)
Total cost 41250
Net Profit £11250
Marginal costing is implemented for the inside decision-making reason for short run. At various levels of exercises, motivation behind marginal costing can be resolved about the stage at which contribution can be generated(Burritt and et. al., 2011).On the other side, marginal costing can be characterized as change in cost of opportunity which changes because of vary in production.
Income statement as per marginal costing :
Working 1: Calculate variable production cost £
Direct material 8
Direct labour 5
Variable production o/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing £
Less Variable costs
Closing inventory (7500) (22250)
Variable sales (10500)
Less Fixed costs
Fixed Production overhead 10000
selling & admin cost 10000 (12000)
Net Profit nil
P4 Budgets and their advantages and disadvantage with Pricing strategies along with Process of preparing budget
Budget is an important term because it helps in allocating all the resources according to their needs and demands. In an appropriate budget everything is mentioned and involved through which company can control all of its expenses as well as also helps in investing whole money and finance in a proper manner. Each and every department have their own budgets through which they can manage everything. It helps in reducing the risk and manage them according to their nature. Now cited organisation focus more and more on preparing budget(5 Types of Budgets for Businesses. 2017). They force to the departments and force them to prepare a budget through which everything can manage properly. Following are the different types of budgeting methods with their advantages and disadvantage:
- Master budget
- Operating budget
- Cash flow budget
- Financial budget
- Static budget
These are the famous forms of budget and helps in allocating all the resources properly. They have some advantages and disadvantages. These are discussed more properly with the help of taking all such budgets into consideration(Macintosh and Quattrone, 2010).
- Master budget: This form of budget includes all the factors which are come in a financial year of a company. It helps in providing a complete picture of its financial activity along with its healthiness. This budget includes all the factors like sales, assets, operating expenses, and income streams to allow companies to establish their goals and targets which they want to achieve and also helps in improving their performance. It is generally prepared in the large enterprise because with the help of this all managers are aligned properly. Advantages of master budget is as follow:
- a) It helps in formulating all the functional budgets in a capsule form which means it helps in formulating all the functional activities budgets into one form(Mitchell, Baldvinsdottir and Nørreklit, 2010).
- b) It helps in formulating all the functional budgets under one roof which means it is the summary of whole budget which is prepared for an annual year.
- c) It helps in estimating whole year profit of the organisation.
- d) It is helpful for the top authority because it helps inn formulating the whole budget in a capsule form so, it become easy for them to calculate all the activities in a proper manner.
But this form have several disadvantages also which are as follow:
- a) In master budget their is a lack of specification. Because it helps in determine the whole functions budgets under one roof so it become impossible for the top authority for conducting that which department is spending more and which is less(Bodie, 2013).
- b) It promotes the difficulty in reading and writing because it allocates whole budgets in one term. So, it creates an problem in understanding.
- Operating budget: It helps in estimating the day to day expenses and operations of the business. This is prepared for estimating the day to day operations expenses because it help in understanding the clear and appropriate report of the whole expenses which are taking place in an organisation on regular basis. Advantages of operating budget are as follow:
- a) Salary of employees and fixed overheads are the expenses which can not get neglected and trimmed by the company and it is a starting point of the budget. So, operating budget help in managing the current expenses of a firm. So, that their business can operate properly.
- b) It helps in building reserve because by investing in proper project company can earn profit and they can manage their daily operations properly. So, for such concern company have to maintain reserves for the organisation.
Every budgeting system have some benefits and disadvantages so, operating budget disadvantages are as follow:
- a) It takes cost in managing all the activities because a separate person should have to hired for this concern.
- Financial budget: This type of budget is prepared for the entire financial year with each and every function has its separate column. This is one of the best method of budgeting because it gives and effective overview. So, this process is generally taken by all the organisation in a effective manner. Some of the advantages and disadvantages of this modern approach are as follow:
- a) It helps in providing an effective over view of the whole financial activities and functions in a proper manner( al., 2011).
- b) It helps in making the budget effectively understandable.
- c) one of the major drawback of this budget is that it is lengthy in nature and this lengthiness make it difficult to read it properly.
Budget helps in estimating all the resources properly and in a efficient manner. This is prepared with the purpose of making the fiscal policies of organisation. So, cited firm have to use such steps through which they can prepare budget which is effective in nature and acceptable by the firm. Steps involving in preparing budget are as follow:
- Firstly company have to gather information about the different sources and projects on which they have to invest money. So, that they can analyse that how much they will going to save and what amount will be spent( al., 2010).
- Another thing of this step is to allocate all the necessary factors which help in making the budget such as different sources through which finance can be available to them.
- Along with that a effective budget includes all the monthly expenses with a proper list.
- In an appropriate budget all expenses are break down into categories.
- Total of monthly income and expenses because it helps in determine the profit and loss of business.
- Make adjustment for profit which means whole fund should be properly used in a systematic manner.
- If in budget company found that their expenses are more than their saving than they have to cut down their spendings so, that they can properly manage everything.
- Company have to review their budget on the monthly basis so, that they can manage their activities properly specially in case they are suffering loss(Herzig,et. al., 2012).
- Along with that firm also have to prepare budget for making charity, and other occasions.
- And at the last company have to balance their budget that all projects are properly financed or not and how much they save from such task.
A business can use variety of pricing strategies which helps them in their sales of product and service. The main purpose of using price strategies is that it helps in defending an organisation from new entries and many such things which affects the business more and more.
Following are the types of pricing strategies which are as follow:
- Premium pricing: In this method company generally maintain their prices high and provide quality so, that large number of customers attracts towards them(Definition of 'Pricing Strategies'. 2017).
- Penetration pricing: In this method, firm have to set their price according to the market nature. At the initial stage they low down their price and after gaining the market share they high up their prices.
- Skimming strategy: In this strategy company set their price according to the high class group. This strategy states that at the initial stage they first take all market share and then after gaining it properly they low down their price.
Such pricing strategies are to be considered while making the budgeting because it helps an organisation to maintain price according to the nature of business.
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P5 Balance scorecard approach and its implementation
Balance scorecard is the process of maintain strategic planning and management system which helps them in maintain a proper vision and strategy of an organisation and also helps them in recovering from all the external and internal factors.
This is generally used by the company to analyse their performance and helps in maintain strategic management system. This method is one of the effective way.
Imda tech suffers a loss of £1.5 million and from recovering from that they should have to use this technique because it helps them in maintain their performance along with their employees performance. Also it helps them in making strategy so, that they can analyse all the factors and implement the strategies according to manner(LukkaModell2010 ).
A company can identify its financial problem with help of this approach because in this method they include all their mission and visions. It shows the list of mix financial and non financial items. Like by using this approach it ask a question that how shareholders look by the firm. This questions answer is by using cash flow etc. This helps them in solving out their financial problem(Li et. al., 2012).
This scorecard shows the strategies which are formulate by the cited organisation. It helps in remembering all factors on daily basis by the management so, that they have to work on such factor and implement all such techniques through which they can recover their loss of £1.5 million.
From the above mentioned reports, it has been found that tools of management accounting like marginal costing, absorption costing and cost volume profit analysis are done by the management accountants of IMDA Tech LTD can keep up money related position and they can likewise outline certain techniques through analysing methodology of accounting like financial analysis and ratio analysis.
- Baldvinsdottir, G., Mitchell, F and Nørreklit, H., 2010. Issues in the relationship between theory and practice in management accounting. Management Accounting Research. 21(2). pp.79-82.
- Bodie, Z., 2013. Investments. McGraw-Hill.
- Burritt, R.L., and et. al., 2011. Environmental management accounting and supply chain management (Vol. 27). Springer Science & Business Media.
- Garrison, R.H., and et. al., 2010. Managerial accounting. Issues in Accounting Education. 25(4). pp.792-793.
- Herzig, C., and et. al., 2012. Environmental management accounting: case studies of South-East Asian Companies. Routledge.
- Li, X., and et. al., 2012. A comparative analysis of management accounting systems’ impact on lean implementation. International Journal of Technology Management. 57(1/2/3). pp.33-48.