Management accounting systems are the most effective tools which assist the firm for gaining the business in an effective manner. This report states that an important discussion about the management accounting and its tools and techniques which is used in measurement and planning for the organization to assess its overall performance and also involves the meaningful explanations regarding the various management accounting system and they are necessary for the sound organization activities to be coordinated with the management accounting reporting (King, Clarkson and Wallace, 2010). This will help to make an understanding in regards to the management accounting system. It involves the preparation of statement of income on the basis of absorption and marginal costing. The reports will also talk about the usage of many tools of planning which are mainly used in budgetary control as an evaluation of organization performance appraisal.
It is also known as managerial accounting. Management accounting is a well-defined process to recognizing, analysing, measuring, explaining and communicating information for the chasing of an organization’s goals. This accounting covers all the accounting fields aimed at advising management of business operations (Fullerton, Kennedy and Widener, 2014). Management accountant uses information relating to the costs of goods or services purchased by the organization. With the help of management accounting, the manager formulates the policies, decisions, and strategies for day-to-day business operations of an organization.
Implementation Areas of management accounting:
Performance evaluation: It helps out the organization in evaluating the performance and productivity of an employee. The performance evaluation can be done with the help of comparing the actual performance with the planned performance which shows the deviations on which needful steps can be taken and applied.
Risk appraisal: Another advantage of the management accounting is that it determines and appraise the risk factors within the organization which can be eliminated with the help of the well-defined organization management.
Presentation of the financial statement: Management accounting provides a proper manner to present organization financial position with the help of necessary useful data and information. Various data helps and make an easy way for the organization to prepare the reports for strategies and decisions- making.
Apportionment of resources: An organization becomes capable to achieve the utilization of resources in an effective and efficient manner with the help of allocation of resources in a proper way to various divisions and departments within the organization. This makes sure that the organization achieves its objectives and goals for a long-term period.
Management Accounting vs. Financial Accounting:
There are so many differences between the management and financial accounting are discussed as below:
Users of both accounting: - The management accounting mainly uses in internal by the managers and employees of an organization whereas external users or outsiders of an organization uses the financial accounting for decision-making that whether they invest their money or not. External users include creditors, shareholders, and financial institutions.
Sources of data: - The management accounting uses the financial and non- financial data in an organization whereas the financial accounting uses only the financial data which are based on the accounting system of an organization.
Set of rules and regulations: - In management accounting, no standards or external rules is applied whereas in the financial accounting various set of rules and regulations are applicable to the organization.
Nature of both accounting: - The nature and source of information in the financial accounting are historical which was related to the past performance of an organization whereas the nature of information in the management accounting is primarily past, present and future-oriented.
Reporting:- The management accounting provides information in an efficient and effective manner to the management of an organization whereas the financial accounting gives information regarding income and profit earning of the organization and also tells the sound position of the organization.
Audit and publication:- The audit and publication of the management accounting statements and reports are not required, because these are used in the internally whereas in the financial accounting the financial statements of the organization are published for the use of general public and they are audited by the professional persons having qualified degree.
Following are the importance of the management accounting information as a decision-making tool for department managers:-
Relevant cost analysis:- A relevant cost is a cost that the only associate with a particular management decision and which will change in the future as an outcome of that decision. This cost is very useful to eliminate the immaterial information from a particular decision-making process. It is a useful tool for short-term financial decisions in an organization.
Importance of MA information as a decision-making tools for departmental managers:
Management accounting is the most effective tool which helps the organisation for gaining the sustainability in an assignment online effective manner. Here are some of the benefits of the MA systems which are mentioned hereunder:
Activity-basedcosting method:- It allocates the overhead to those items which are actually produced and use it. The ABC can be used to minimize the targeted overhead costs. It best works in an environment which is complex, where there are so many products and machines are used to manufacturing. It helps in identifying the activities that an organization performs and then assign indirect costs to products which are produced. This system recognizes the relationship between activities, costs, and products, and on the basis of this relationship, it assigns the indirect costs to the products which are produced. This costing is used in product line profitability analysis, customer profitability analysis, target costing, product costing and services costing. It helps the organization to make and develop a much better way focus on corporate and strategy regarding the costs (Dillard and Roslender, 2011).
Make or buy decisions:- The main use of management accounting information is to render useful information which is used in manufacturing the products. A make or buy decisions is the action of selecting in between manufacturing a product or purchasing it from the outsider or external suppliers. In this decisions, the main important factors to be considered are a quantitative analysis, costs which are associated with the production and capacity of the business to produce at needful levels. By completing the analysis regarding the make or buy, the managers of the organization can ascertain which option is more profitable or not.
Utilization of useful and relevant data:- The management accounting information gives a data which is useful to make a strategy and decisions for the growth of an organization business. The managers use the budgets, financial statements, and balanced scorecards for the future planning of the organization and focus on all the relevant points and mistakes. By doing focusing on the relevant data the managers can make a strategy which aims to improve continuously business processes and helps to achieve the pre-determined targets at the time.
Cost Accounting Systems ( actual, normal and standard costing):-
The cost accounting system helps the organization to forecast the cost of the product which they want to produce. The managers of the organization make the analysis of profitability, inventory and cost control of the products. Cost accounting is the major concept of the management accounting which offers the useful tools and techniques of budgetary control, standard and marginal costing and inventory control which are used by the management of the organization to improve their productivity in the product (Contrafatto and Burns, 2013).
Actual costing: it records the costs of the product on the basis of following factors:
The actualcost of materials
The actualcost of labor
The actual overhead costs incurred and allocated using the actual quantity.
The main point in an actual costing system is that it uses only the actual costs incurred and allocated using the actual quantity produced. It does not use any budgeted or standards. It is very simplest costing which is not required any pre-planning of standard costs.
Normal costing: It is used to derive the product costs. It includes the following factors:
The actual cost of materials
The actual cost of labour
The standard overhead rate that is applied by using the actual usage of the product of whatsoever allocation base is being used ( machine hours or direct labor hours)
The normal costing is different from the standard costing, in the standard costing, the standards cost are pre-determined, while in the normal costing the actual costs are used for the materials and labour.
The normal costing means a manner to find out the cost of a manufactured item using the product costs.
Standard costing: It involves the creation of estimated or standard costs for some or all the activities of the manufacturing company. The standard costs are a close approximation of actual costs. The cost accountant of the company calculates the variances. It also changes the standard costs to bring closer alignment with the actual cost.
The following elements used by the accountant in the standard costing are:
The standard cost of materials
The standard cost of labour
The standard overhead rate
It is the most effective and important method available for the controlling the costs and the performance.
Inventory management system:- This method of management accounting system is concerned with the management and supervision of inventory of the organization. This system track goods and raw materials through the entire supply chain or the portion which are used in the manufacturing operations. It covers almost everything from production to retail and all movements of inventory. The process of TECH (UK) LTD. can be mixed with this type of system to attain effective and efficient flow of stock inside the organization and at the time of sale. The organization must have an effective inventory control system to control the wastage of the inventory and the essentials elements are:-
Identification and classification of inventories.
Setting minimum and maximum limits for each and every part of the inventory in the organization.
Economic order quantity.
There should be adequate storage facilities.
Adequate reports and records.
Coordination, budgeting, and internal check.
Job costing system: This system of costing includes the process of collecting information about the costs which is associated with the particular production job. A job costing system accumulates the following three types of information:
Job costing system customized the requirements of the customer. Some customers only permit certain costs to be charged to their jobs (Cinquini and Tenucci, 2010). The TECH (UK) LTD. uses this costing system when the products are identical or customized according to the customers need and keep track expenses on these jobs. It consists the following procedures are:
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Receiving inquiry from the customers about the price, quality of the materials are used to complete the job.
Keeping the tastes and preferences of the customers in the mind while manufacturing the products.
The order will be placed to the customer when the price is assured by him.
Each and every cost related to the production process is to be recorded (Christ and Burritt, 2013).
Once the job is complete, a report is given to the cost department of the organization for finalizing the job costing. The comparison is done with the help of estimated cost which was already prepared by the cost accountant.
Different types of management accounting reports are:-
The management accounting uses different kinds of reports to help the organization management in preparing the accurate management reports and also help to make the decisions regarding in critical business situations. They also give the reliable and accurate data and information of the financial position of the organization to the managers. The various reports are prepared by the management accountant and their advantages are discussed as below:-
Reports on budgets:- The budgets are prepared to analyze the company performance in all aspects. With the help of budgets the managers of the organization review and analysis each department performance and the related cost which is incurred. The estimated budgets are usually depending upon the actual costs from the previous years (Østergren and Stensaker, 2011). With the help of this estimation, the actual figure is compared with the budgeted figure and then analyzes it in an efficient and effective manner. The TECH (UK) LTD. uses budget reports to control the unexpected costs and expenses and also compare the actual outcomes with the budgeted. If the variances or differences incurred are favorable to the organization, then it reflects the good performance of each and every department. But if, variances incurred are negative or adverse, then the managers will overcome these adverse issues more efficient way.
Accounting receivable reports:- This type of report is basically concerned with the receivables for those organizations which want to extend the credit policies to their loyal customers. Under this accounting receivable reports, all the earnings which are arises or assumed that earnings which are received in the future, are to recorded properly (Parker, 2012.). This report helps the organization to analysis the credit policy and at what point they need to tighten the policy of the credit. This assures minimizing the old bad debts and liquidity of the organization should be maintained.
Job cost reports:- Job cost reports show the costs or expenses and profitability of the specific job. It helps the organization to determines the more profitable areas so that they could fully concentrate on these areas rather than wasting the time and other resources on jobs which are less profitable. It is used to review the costs and other expenses at the time when the products are manufacturing which helps the managers to reduce the unwanted waste before the costs maximize.
Inventory Management reports:- When the organization doing the manufacturing process they have to prepare this kind of reports so that the inventory utilized in the more appropriate manner in the manufacturing process. This report helps the organization, to track the inventory level whether it is maximum or minimum and in danger level. With this report, the managers take the accurate decisions regarding the inventory. This report includes the various cost related to the labour and overhead per unit and wastages concerned with the inventory.
Performance report:-In this report, the information regarding the performance of the organization is recorded, after analysing the actual performance with the planned performance. The performance report is prepared annually. With the help of this report, the managers make the effective and productive strategy which helps the organization to earn more benefits in the future. Various stakeholders use this performance report to analyse the performance and after that, they invest in the organization (Frezatti, Aguiar, Guerreiro and Gouvea, 2011).
Job costing system:- It will assist the TECH (UK) LTD. in the approximation of all kinds of expenses or costs related to the manufacturing the products. It also helps in overall check on the quality performance done by the labour.
Cost accounting system:-TECH (UK) LTD. can evaluate the process of the manufacturing in the most effective way with the help of this system. It will assist the company in reducing and fixing the price of the product which the company is manufactured. It also gives important useful information to the managers of the company for planning and makes the appropriate decisions.
Inventory Management system:- TECH (UK) LTD. can ameliorate the efficiency and accuracy of its orders regarding the inventory with the help of this kind of system. The company will improve the savings and utilize the money in the most accurate way, without any wastage.
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Budget reports:The integration in between the process of TECH (UK) LTD and the budget reports make a way for the company activities and the managers can concentrate on the objectives and targeted results in a proper manner.
Accounts receivable report:The integration between both of them, helps the managers to collects the receivables on the time and also helps to create the proper collection policy that should be analysed on daily basis for the accuracy and its flexibility.
Job cost reports:The TECH (UK) LTD. activities should be oriented towards the cost objectives achievement and the job cost reports which make easier to finalize the strategy regarding the price and minimizing the whole cost regarding the products (Baldvinsdottir, Mitchell and Nørreklit, 2010).
Inventory management reports:The TECH (UK) LTD. activities integration with this report helps the managers to provide better control and management of levels of inventory. This report also provides the estimation of the required level of orders to be purchased.
Performance reports:The integration in between the TECH (UK) LTD. activities and the performance reports assist the company managers for future planning in the production process and other cost reduction activities.
INCOME STATEMENT AS PER ABSORPTION COSTING:-
Particulars Amount (£)
Sales (1500x£35) 52,500
Less: Cost of goods sold (1500x£20*) 30,000
Gross profit ( 1- 2) 22,500
Less: Selling and administration expenses:
Variable (15% of £52,500) 7,875
Net operating profit 4,625
Direct material 8
Direct labor 5
Variable production overhead 2
Total variable production cost 15
Add: Fixed production cost 5
Unit cost of product 20
INCOME STATEMENT AS PER THE MARGINAL COSTING:-
Particulars Amount (£)
Sales (1500x£35) 52,500
Less:- Variable expenses
Production (1500x£15) 22,500
Selling & distribution expenses 15% of £52,500 7,875
Total variable expenses 30,375
Contribution (sales-variable expenses) 22,125
Less: Fixed expenses
Selling and distribution 10,000
Total fixed expenses 25,000
Net operating expenses -2,875
Variable production cost
Unit cost of product
From the above calculation, this has been concluded that the absorption costing makes more profits than the marginal costing. Net profit of the absorption costing is 4625 which is more than the profits calculated as per the marginal costing.
In this question, TECH (UK) LTD. is needed to apply the management accounting tools and techniques in order to maximize the outcomes or profits. This helps the company to run the operations smoothly and in effective and efficient manners (marginal cost, 2017). Above tools which are used by the company for the sustainable development and growth.
The profits which are attained with the help of marginal costing and the absorption costing shows the various differences. As per the absorption costing, the company earns 4,625 profits. On the other hand, the company loss 2875 in the marginal costing.
A). Different kinds of budgets and their advantages and disadvantages:
Budget is the most effective and crucial tool which can be used by the organisation for predicting the future expanses and revenues for a particular period of time. These budget helps the management to identify the financial and other needs which would help out to make their business strategies in an effective manner. However, budgets would help out to make their business objectives in an effective manner (Hope and Fraser, 2013). On the other hand, this can be rightly said that the budgets would lead to gain the business sustainability. There are some of the budgetary tools which are mentioned hereunder:
Operational budgets: This is the budget which consider all the operational related expenses and the earnings for a particular period of time. By using this tool, company could attain certain pre-set objectives in an effective manner which could help out to gain the sustainability in the operations of the organisation. By using this budget, company could identify and assess the operational related forecasting of the operations.
This is the tool through which company could identify the expenses and revenues of the certain period of time for a certain period of time. The financial analysts helps to make operational related strategy. This provides the analysts and the investors for making the rational decisions.
Operational related expenses totally relied upon operational activities and other parts does not related to another part. This is the time consuming process which takes more time for preparing the budget. In addition to this, this is rightly observed that this does not always make an adequate financial forecasting.
Cash Budget: This is the budget which only covers the cash related expenses and the revenues for the future period of time (Weißenberger and Angelkort, 2011). This contains the cash related expenses and revenues. Therefore, this covers an efficient cash related transactions.
This budget covers the cash related transaction which occurred for a particular period of time. In addition to this, various benefits are also covered under this which simply helps to gain the strategies in an effective manner.
This does not presumes the cash forecasting of data. There would not provide the genuine forecasted cash related transactions.
B). Budget preparation process:
It is considered as plan which is formulate by the management of organisation for specific period of time. This will have huge importance for the purpose of guiding the employees in effective accomplishment of their tasks. Such budgets are of different kinds.
Strategy regarding of pricing: An organization must use pricing strategies which are effective to sell their goods or products in a market where the competition is very high and earn the profits. The organization manager should determine the prices which are offered by the competitors in the market and brand image in the minds of the customers.
Following are the pricing should be adopted by the organization for their products :
Applying the budgets for planning: The budgets are used for planning and control the whole process of the business. The planning offers a structure which assists the management of the organization to invent a plan of action, to determine the future incomes and the costs, to foresee the future events and minimize the uncertainty which arises in the future. The control is the process in which the manager compares the actual performance with the plans which are previously made (Angelakis Theriou and Floropoulos, 2010). The manager measures the deviations from the policies and plans and takes the corrective and accurate actions to bring the activities of future in the line with the budget or plans.
Costing system:- This system is also known as product costing system, which provides a structure used by the organization to estimate or find out the cost of their products for analysis of its profitability, cost control and valuation of the inventory. The determination of accurate cost of the products is critical. The organization must know about that which products are more profitable than other products by estimating the correct cost of all the products which the organization is manufactured. There are two main costing systems are: The Job costing system and the Process costing.
Auditing:-It is concerned with the determination of errors, frauds, and assets and liabilities verification of the organization balance sheet. It involves the internal audit, cost audit, financial audit and tax audit. The main objective of the audit is to enhance the organization efficiency in all aspects.
C). Importance of budget
Budget helps the organisation for making the sustainability. However, here are some of the benefits are elaborated have been defiend:
Planning tools:There are many planning tools which are used for the purpose of assessing their future transactions. This helps in performance of their functions in more effective manner. This will plays an important role in the process of budgetary control and contributes their efforts in improvement of the actual performance of employees through implementation of effective strategies (Davies and Crawford, 2011).
Forecasting tool: This tool is used by the organisation to forecast about their future activities for accomplishment of their objectives. This can be done on the basis of past records.
It is easy to formulate plans
Helps in development of exiting skills
Helps in formulation of effective future plans
plans are based on estimated figures doesn't provide accurate results
It is time taking process
Scenario tools:It is effective planning tool which helps in ascertaining the risks which are associated with project. It provides opportunity regarding formulation of plan regarding reduction of future risks.
Helps in effective management of all operations
Reduction in amount of risks
Helps in earning of large number of profits
Complicated process to assess the risks in future
Difficult to make mitigating plans
The various tools of planning assist the management of the organization to identify the problems of financial with the supported tools and techniques of the management accounting. The information got from these tools of planning which helps the managers for making the strategic decisions and also takes the financial decisions that help the organization to success. These planning tools will help in controls and decisions in the investment accordingly. The detailed analysis and data interpretation of the financial status of the organization will assist them to report externally which in turn will assure the growth of the organization.
Balance Score card approach:The balanced scorecard includes the financial measures that show the results of actions which are already taken and it also complements the measures of financial with the operations measures on the satisfaction of the customer, processed of internal, and the innovation in the organization and improvement in the activities also. The operational measures are taken for the future financial performance (Garrison, Noreen, Brewer, and McGowan, 2010).
It is a management and strategic planning system that organization use to Communicate what they are trying to carry out in the business, Align all day-to-day work that everyone is performing according to the strategy, Assign the priority to the projects, services, and products.
This card helps the managers of the organization to look all the business from four important perspectives are:
Internal business perspective
Innovation and learning perspective
The management accounting role in the sustainable success of the organization business can be explained and summarized in below:
The manager of the organization will need to support the sustainable and strategic goals with the policies and strategies which are previously developed.
The management accounting assists in the manufacturing and production reports that involves sustainability information, which helps the managers in understanding the pricing and decisions regarding the budgets and planning of essential strategies (DRURY, 2013).
The management accounting techniques and useful tools like standard costing, ABC, marginal and absorption costing etc, will assist in the integration of matters in the sustainable which involves various processes of decision-making.
Assists the organization in the development of a reporting strategy that will consolidate with the issues of sustainability which in turn will allow accessing the non-financial and financial useful information.
The organization will have an important impact in its sustainability issues with the planning tools execution:
The management accounting helps in the various planning levels and decisions regarding the strategy which is explained below:-
Implementing plans:-The managers of the organization use the methods of the management accounting and with the help of this accounting the managers gather the information which is related budgets, performance reports and cost of the product on the regular basis. This helps the TECH (UK) LTD. to resources allocation as per requirements of the various divisions and departments which are involved in each particular processes (Kaplan and Atkinson, 2015).
Planning and controlling:-This is the most important element in the management accounting and TECH (UK) LTD. put plans in the place to set a direction which is necessary for the organization to achieve its goals and control the whole system accordingly with pre-decided plans.
Competitive edge:-It can be seen that the well-organized structure of the organization focuses on their strategies and goals by creating the competitive advantage for the organization. The organization should focus on their strategies with the use of the management accounting tools and techniques and achieve the competitive advantage in the market while targeting the low cost and goodwill or brand name.
From the above mentioned report, it can be said that management accountant of cited organization assist to understand the application of various different planning tools in setting up and forecasting the budgets which will use in future. Various benefits are also been described of various planning tools. The differentiation has been made to present that, how the organization can apply management accounting in reacting to problems of finance. Tech (UK) LTD. who is producing the special charger for the mobile and other carry-on gadgets for retail outlets in the U.K
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.
DRURY, C.A., 2013. Management and cost accounting.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.
Davies, T. and Crawford, I., 2011. Business accounting and finance.
Angelakis, G., Theriot', N. and Floropoulos, I., 2010. Adoption and benefits of management accounting practices: Evidence from Greece and Finland. Advances in Accounting: 26(1):pp.87-96.
WeiBenberger, B.E. and Angelkort:H., 2011. Integration of financial and management accounting systems: The mediating influence of a consistent financial language on controllership effectiveness. Management Accounting Research, 22(3), pp.160-180.
Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.
King, R., Clarkson, P.M. and Wallace, S., 2010. Budgeting practices and performance in small healthcare businesses. Management Accounting Research, 21(1). pp.40-55.
Balchinsdottir:G.:Mitchell:F. and Norreklit, H.:2010. Issues in the relationship between theory and practice in management accounting. Management Accounting Research:21(2), pp.79-82.
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