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Management Accounting

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Introduction

Managing personnels in a corporation requires relevant business information for taking effective decision-making. Collection of information for this purpose through different organisational processes is difficult task. Mostly business enterprises implements management accounting to perform such complex task as it allow companies to develop an effective structure.  Management accounting is often considered as managerial-accounting and can be characterized as effective mechanism which offers financial data for decision-making to managing officials within organisation. It is mainly considered as internal system applied by managers with aim to boost overall financial and operational performance.

This study explains distinct systems and key reports linked to management accounting in context of Alpha Ltd, a mid sized manufacturer and has 50 employees staff. Company's turnover is around £500000 annually through production of local-made pizza. Study also covers multiple planning-tools and their usage in organisational structure and discussion on how these help to respond financial problems. Moreover, this report consist of a comprehensive comparison of firms with regards to application of systems to resolve different – different financial issues.    

Main Body

Task 1

Management accounting relates to use of specialized skills and expertise in preparation of financial information to support management in policy creation as well as in planning and monitoring of business operations. This provides the tools and techniques required for successful planning to choose between alternative company behaviour/actions and monitor through performance review and analysis. The fiscal data and non-financial information are provided to managers at periodic cycles, say daily, quarterly. This information involves in-depth analysis, predictions and budgets. It therefore helps the executives to schedule the business operations. It also comprises multiple visual charts,  projections and analytic thinking that managing personnel  can apply in entire decision making procedure (Boyns, Edwards and Nikitin, 2013).

Management Accounting Systems:

Following are some crucial MA-systems which enable respective corporation to generate information for business decision-making, as follows:

Cost-Accounting System: 

This is a form of accounting system which is connected to a concerted cost projection operation. It is related to company's finance unit to enable them to maintain efficacious controlling over costs and expenditures. Essentially, this accounting system's principal intention is to spot those operations that leading to increased business costs. Furthermore, it is extremely important for corporations in order to effectively minimize overall expenditures. In Sam Weller Limited this systems is implemented to minimise produced product cost with aim to increase overall profit-margin on each unit produced by company. As it supports production managers to allocate factors which are root cause of increasing costs and controlling these factor lead to lower production costs.

Price optimisation system:

It's another critical system that allows businesses to decide a set price of their products to increase consumer demand for that product. This program will determine the potential effects of various product prices on their corresponding demands. In this process, a special relationship between sales price and demanding for goods is used objectively to assess the most appropriate product price. As in context of Alpha Ltd, such mechanism is used by the managing professional to determine prices of various developed products so that they can be marketed with an efficient margin in timely manner. Such a system often enables to determine factors that increase product costs in order to minimize product sales prices while managing the same profitability level (Brewer, Garrison and Noreen, 2015).

Inventory management system: 

It can be depicted as a type of managing system allied with the synchronized system that concentrates on those operations in an enterprise pertaining to inventory input and flow. Normally a critical array of stocks/inventories are purchased and produced in a production or manufacturer company for the sale of products along with many other reasons. In this respect, daily monitoring of the quantities of materials is crucial for businesses. The accounting system mainly provides day-to-day monitoring of procurement operations and supply requires in order to maintain an operational production level including sales. Furthermore, different types of approaches are employed to measure the quantity of products e.g. LIFO, FIFO and average-cost method. This system consists primarily of 3 practices:

Average cost method: 

Here under this approach inventories/stocks are valued though application of simple-averaged rate assessed by average of  rates at which different inventories items are purchased at different dates.

LIFO method: 

This approach values inventories relying on the presumption that in a sequential series first stocks bought are sold lastly.

FIFO method:

 This is reverse of LIFO mechanism because it is assumed here that first purchased stocks would be sold at firstly in a particular sequence.

Job order costing system:

This is distinct and unique system in which different operations of business are recognised as job and aggregated incurred costs are assigned to these particular jobs.     This system is curial as it defines different jobs in production process and enhance operational efficiencies by effective allocation of costs. As in Alpha this system applied to optimise job costs and identifying factors which causes increase in job costs. This is effectively shows how much costs are involved in each job or task and help to optimise them (Burritt and Schaltegger, 2014).  

Management Accounting Reports:

Accounting reports show a company's financial situation at particular date or over a specified time-frame. Those statements/reports gather financial information through accounting books and may include details such as expenses, operating costs, productivity of the company, and local revenues. Such reports are made to allow management to make sensible about business decisions. As businesses depend on support from managerial accounting, they could more effectively gather data that allows managers direct business towards achieving their targets. Alpha Ltd also applying these reports to circulate significant business and operational information to management personnels that supports overall managerial functions. Here following discussion consist of different MA reports and their application in context of Alpha Ltd, as follows:

Inventory Management Reports:  

This report offers comprehensive details of multiple kind of inventories and  classification as per their unique use and extent of relevance in organisational processes. This report supports tacking of actual time movement of inventories in or out of business. It recognises costs and expenses incurred throughout the inventory processes. SME like Alpha plc apply this report to keep adequate records of inventories and materials as it allow them to track the actual usage of such inventories items in production processes. Recognising any factor which is responsible for inventory theft to loss is very easy through analysis of reported data in this report (Correa and Larrinaga, 2015).     

Performance Report:

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This report supports the effective utilisation of human resources like staff, employees and workers. As it contains actual performance data of different personnels within organisation. It involves a complete evaluation of performance of employees which is used by owner and top managers to allocate tasks to employees and works as per their performance quality and skills. Core aim of this report is to enhance the operational capacities of    different employees. Also decisions taken based on the outcomes of this report allow company to control employee turnover. In Alpha Ltd company using this kind of report to fix the emoluments and incentives of different employees and enhance the performance of staff according to the company's targets.

Cost accounting report:

The report contains extensive information on gross expenditure Such documented reports are useful to corporate finance unit because they advise managers of current or future funding needs through analysis of pertinent information. In reality, it highlights some activities and processes that lead to increased costs than usual costs. In the respective company, accountants prepare this kind of report in an effort to allow both their financial unit and managers to enact corrective measures appropriately.

Account receivables' ageing report:

It's also a sort of report generated for financial division of a company. This report deals with business receivables whose payments are overdue as on or after due-payment date. This report summarises all the trade debtors along with due dates and payments so this is very easy task for managers to tack the debtors who may bankrupt or amount due may be bad-debt. In corporations like Alpha management apply outcomes and information of this report to assess the company's average collection period and make provision for any doubtful debtor (Fiondella, Macchioni, Maffei and Spanò, 2016).

Benefit of MAS :

Name of MAS

Benefits

Inventory management system

It advantageous for respective corporation to asses the real usage of inventories and keep effective control over entire inventories processes like storage, handling, loading etc. Also it determines the variables which are leading to increased abnormal and normal inventories costs.  

Price optimisation system

This system enable respective corporation to analyse effects of changes in price of its products on sales quantity or demand. This also advantageous to set-prices as per the company's targeted profit margin and profitability range.   

Cost accounting system

This particular system assist managing officials to minimise overall cost of production in Alpha Ltd. It also beneficial as to determine areas where costs are over absorbed (Hanif, Rakhman and Nurkholis, 2019).  

Job Costing System

It's advantage for company is that it allow to effective and optimised allocation of different costs to company's significant tasks or jobs.

Integration of MAS and reports to organisational process:

Systems as discussed above are closely linked with different processes within company as they provide information to these systems and vis-versa. Also managing officials also try to integrate reports and systems of MA to company's processes for effective implementation of systems and formulation of reports. As accounting processes offers vital data which is used in systems like cost-accounting and inventories management and also these department generates information which is used by accounting personnels in preparation of financial reports (Hiller, Mahlendorf and Weber, 2014).       

Task 2

Assessment of costs utilising core techniques of costs-analysis with aim to frame income statement though absorptions and marginal costs:

Cost Analysis: 

Cost analysis involves analyzing the particular relationship between cost and performance. This measure indicates how much expenses are accrued for the same no. of units being made. Its provides price fluctuation results with manufacturing volume increases and decreases and vise-versa. The most efficient cost analysis approaches are considered to be marginal and absorption costs. Below discussion consists of explanations about these two approaches, as follows:

Marginal Costing:

It is simple and widely accepted method of costing which classifies all costs into fixed and variable overheads to asses the cost of goods-sold and profits.   

Absorption Costing:

This method considers all fixed and variables overheads related to production to determine overall production cost (Hirsch, Nitzl and Schauß, 2015).    

Problem 1.

(I) Income statement under absorption and marginal costing:

Cost card (Absorption costing)

 

 

£/unit

Unit Variable Price (3+2)

5

COGS Per Unit

5

 

 

Absorption cost of product

150000/ 75000= 2

 

 

Selling price

8

Less- Total cost

5

Gross Profit

3

Income statement under absorption costing:

Particulars

Amount (£)

 

 

Apr ’19

May ’19

Jun ’19

Jul ’19

Aug ’19

Sep’19

Sales revenue

 

600000

480000

720000

600000

560000

640000

Less: Cost of Sales (WN1)

 

375000

300000

450000

375000

350000

400000

 

 

 

 

 

 

 

 

Gross Profit

 

225000

180000

270000

225000

210000

240000

Less: Non-manufacturing Cost Per period

 

-50000

-50000

-50000

-50000

-50000

-50000

+/- Over/Under Absorption (WN2)

 

0

0

0

0

-20000

10000

Net Profit/Loss

 

175000

130000

220000

175000

140000

200000

Working Note:

Income statement under marginal costing technique:

Profit and loss account:

 

 

 

 

 

 

 

Particulars

Amount (£)

 

 

Apr ’19

May ’19

Jun ’19

Jul ’19

Aug ’19

Sep’19

Sales revenue

 

600000

480000

720000

600000

560000

640000

Less: Variable cost

 

-225000

-180000

-270000

-225000

-210000

-240000

Contribution Margin

 

375000

300000

450000

375000

350000

400000

Less: Fixed Manufacturing Overheads

 

150000

150000

150000

150000

150000

150000

Less: Non-manufacturing Cost Per period

 

50000

50000

50000

50000

50000

50000

Net Profit/Loss

 

175000

100000

250000

175000

150000

200000

 Cost card (Marginal costing)

 

 

 

£/unit

Unit Variable Price

3

Marginal Cost

3

 

 

Selling price

8

Less- Marginal cost

3

Contribution

5

Working Note:

  1. Preparation of reconciliation statement:

Reconciliation of Net Income under Absorption and Marginal Costing

 

Apr ’19

May ’19

Jun ’19

Jul ’19

Aug ’19

Sep’19

Net Profit as per Absorption Costing

175000

130000

220000

175000

140000

200000

+Changes in Opening Stock

0

0

30000

0

0

-30000

- Changes in Closing Stock

0

-30000

0

0

30000

20000

under and over absorption rate

-

-

-

-

-20000

10000

Net Profit as per Marginal Costing

175000

100000

250000

175000

150000

200000

Problem 2a

  1. Calculation of followings:

(A) BEP in units and revenues-

BEP (in units)= Fixed cost / contribution per unit

= 180000/ 12

= 15000 units

 BEP (in revenues)= Fixed cost/ PV ratio

= 180000/ 30*100

= £600000

Working Note:

Contribution per unit- Selling price per unit- variable cost per unit

= 40-28

= 12

 PV ratio= Contribution/ sales per unit*100

= 12/40*100

= 30%

(B) Contribution margin ratio

= 12/40*100

= 30%

 2b If machine is installed:

After installation of the new machine

 

 

 

 

 

 

Contribution Margin Per Unit =

40-14 = 26 Per unit

 

 

 

 

 

 

 

Break even point in units =

(180000+236000)/26

 

 

 

 

Ans.

16000

 

 

 

 

Break even point in Pounds =

40x16000

 

 

 

 

Ans.

640000

 

 

 

 

P/V Ratio = (Contribution Margin per unit/ Sales Price per unit)*100

65

 

BEP from P/V Ratio

640000

 

 2 c

Scenario 1. Machine is not installed:

Without installation

 

Sales

£5,40,000.00

(-) variable cost

-£3,78,000.00

Contribution

£1,62,000.00

(-) Fixed cost

-£1,80,000.00

BEP

-£18,000.00

 

 

 

 

Current

 

Sales

£6,00,000.00

(-) variable cost

-£4,20,000.00

Contribution

£1,80,000.00

(-) Fixed cost

-£1,80,000.00

BEP

£0.00

Scenario 2. If machine is installed:

After installation

 

Sales

£8,00,000.00

(-) variable cost

-£2,80,000.00

Contribution

£5,20,000.00

(-) Fixed cost

-£4,16,000.00

Profit

£1,04,000.00

 

 

 

 

Installed

 

Sales

£6,40,000.00

(-) variable cost

-£2,24,000.00

Contribution

£4,16,000.00

(-) Fixed cost

-£4,16,000.00

BEP

£0.00

2d. Should company install machine?

As per above assessment it has been cleared that decision of non installation of machine would lead to loss of 18000 while installation of machine will provide a profit of around £1,04,000.00. Thus machine's installation will be advantageous for corporation.

Crucial role of MA-techniques to preparation and presentation of income statements:

Preparation of income-statement is critical task for business managers as information stated in income-statement demonstrates company's profitability position. In companies accounting personnels prepares income-statement through more than one techniques or approaches to assess each vital aspect of company's performance. As for internal assessment and evaluation marginal and absorption methods are applied by enterprises to determine effect of variable expenses on overall profitability (Kokubu and Tachikawa, 2013).    

Interpretation:

Various forms of computation are carried out on the grounds of data provided in assessment. Primarily, under absorption and marginal costs, two income-statements are compelled. As computation shows that under absorption costs method company's net-profits are  200000, 1400000, 175000, 220000, 130000 and 175000 during month of September to April respectively. While on other side net-profits through marginal costs method are 200000, 150000, 175000, 250000, 100000 and 175000 throughout the same period. Here main cause of variation in results of net-profits under both different method is over and under absorption of fixed production variables.     

Task 3 

Explanation about main advantages and disadvantages of distinct sort of planning-tools within budgetary control process:

Planning tools are specific ways and processes by which projections and estimates are made by companies to control operations and attain targets efficiently. These tools act as guidance for achievement for financial and non financial targets. Companies like Alpha ltd apply these tools to develop a personalized framework which allow it to recognise business risks and minimise them to reduce future uncertainties (Laine, Korhonen, Suomala and Rantamaa, 2016). In this context here are several planning-tools which are commonalty used by respective company, as follows:

Zero based Budget-

Zero-based budgeting encompasses making preparations of budget with a zero-base from start to finish. It includes re-evaluating each line items of cash flows and attempting to justify overall divisional expenses. It is budgeting process in which aggregate expenses related to new period are measured based on actual expenses which are to be incurred instead of differential basis.

Advantages: 

  • It allow to take momentous operational and business decisions as it consider only single-year data to make projections.
  • Outcome of this allow enable corporation to attain short-run objectives and targets.   

Disadvantage:

  • It's outputs and information are not suitable for long term decision-making processes as it not consider historical data.
  • Lack of trend analysis is also a disadvantage of this tool as it ignores past period data and figures (Luft and Shields, 2014).

Cash Budgeting: It is core planning tool which help to control and forecast company's liquidity position. It is upgrade version of company's ordinary cash flow which clearly demonstrates actual movement of cash along with projections for coming period. This is crucial budget which help corporation to manage their cash or monies in effective way.        

Advantages: 

  • It allow business to effective allocation of cash funds and also provides effective utilisation of company's most liquid funds.  
  • It help minimisation of overall cash expenses and allocates areas where cash outflow is excessive.

Disadvantage:

  • This tool is rigid by nature as it is not possible to here to combine the effect of any non-cash transactions in this budgeting.  
  • This shows only cash consideration and projections which are not adequately defines company's profitability status.    

Master Budgeting: This tool comprises all the different budgets of corporation to make effective projection of overall performance of business in all terms. Outcomes and projections under this planning-tool help to define company's overall business future path.

Advantages: 

  • It summarises all budgets and provides complete comprehensive picture of company's operational, profitability and liquidity performance in Alpha ltd.   
  • It also provides adequate data for determining company's long term objectives and financial targets.

Disadvantage:

  • Framing of a master budget is complex and time-taking task which enhance the chances of error and omission in.
  • Update in master budget due to modification in any sub budget is very complicated task and also for other managing personnel it is difficult to analyse a master budget.

Use of planning tools in order to prepare and forecasting of budgets.

All discussed planning tools comprises different budgeting approaches which are utilised by managing officials to make projections and fame different sort of budgets. As in Alpha Ltd, master budgeting tool's approaches are used to forecast company's overall production capacity based on current performance. These tools supports company's decision and actions towards estimation of financial data.

Task 4

Effective comparison of how respective corporation is different in appropriately adapting MA-systems for responding to various financial problems:

Each organization is dealing with specific financial as well as other corporate issues in the current complex business and economic situations. Such problems could be slight or significant, but indifference and neglect can contribute to certain extraordinary circumstances. Financial issues refer to current fiscal/non-fiscal problems that directly affect the financial outputs of the company. Organization should incorporate accounting management systems to adapt to various issues (Salterio, 2012). As companies Tesco and Sainsbury have introduced various systems mentioned above to deal with various financial issues. Here are some massive financial issues that the business continually faces, as follows:

Increased cost of inventory:

Company Tesco has a vast variety of products held on its different outlets. Because of which existing business is unable to handle stocks that eventually resulted in unnecessary inventory costs such as stock-related unusual and ordinary costs. This issue may also impacts the overall profit-margin of the organization in the long run.

Decreasing sales volume:

Company Sainsbury plc has issue of decreasing sales volume due to inefficiency in determining prices of its different products. Company's managing personnels is facing difficulties in determining effective-price for company's wider range of products. Due to which demand of its products has been declined which in long-run may result in exceptional financial circumstances.     

Through implementing management accounting systems, all the above issues can be conveniently addressed by the organization. There are also methods, along-with systems for recognizing and resolving financial difficulties. Such methods allow businesses to identify issues earlier on and minimize the impact of such issues on business. Here are several key-techniques connected with MA, as outlined below:

Benchmarking:

This is a mechanism to compare the performance of company goods and services with other organizations that are perceived to be best in sector, providing standard quality levels or any product. Benchmarking enables corporations the potential to improve their performance in line with best product specifications in market. This enables corporations to build their inner potential to grow to higher levels relative to other corporations. Allows the existing targets to be tracked close to what the organization expects to achieve. Benchmarking focuses on improving all enterprise elements and performance relative to standardized results, allowing better product and service scheduling and parameters to be established (Teittinen, Pellinen and Järvenpää, 2013).

Key Financial Indicators(KPI):

The term relates to aggregation of different quantifiable standardized factors or detriments used by managing officials to manage and link all financial performance with different operations effectively. These varibels or indicators are mostly assist in deciding business actions in context of strategies formulation, financial targets and  effective comparing between different enterprises operating within same sector. Net profitability (%)ratio, gross profitability percentage, liquidity ratios and other accounting ratios are normally regarded as KPIs in business. All such function as a corporation warning system by specifying any potential/existing issues.

Financial Governance:

Financial management explains how a company gathers, handles, reviews, tracks and regulates financial details. Financial governance covers how businesses reports financial activities, processes, and observes data, compliance, activity and maintain transparency in business operations. This represents some vulnerabilities in the whole system of management and administration. This strategy emphasizes effective management of all core business operations.

Intent and aim of different system may vary from one business to other. In this regard following below is comprehensive comparison of enterprises to interpret right application of adaptation of different systems for responding to financial issues/problems, as discussed here:

 

Tesco

Sainsbury

Issue

Company generally fights with rising stock problems. This question directly affects the level of competitiveness of the organization. Organizations should aim to prevent any potential financial instability in this zone.

The biggest issue in business is a drop in overall revenue. The main trigger of such issue seems to be that the organization can not evaluate effective price level of the its different products.

Technique

Company can diagnose root causes of the above mentioned problems by benchmarking or KPIs. Benchmarking or KPIs enable companies to target specific line items that are liable for boosting operating and inventory costs in annual reports.     

Company should apply financial-governance to acknowledge controlling factors that contribute to the financial problem of the business.

System

Through implementing the inventory management system, corporation can monitor and command the movement of inventory levels in an enterprise which eventually leads to inventory cost savings and also identifies the mechanism that causes unnecessary stock managing expense. Business should also implement cost-accounting system to reduce operating expenses, allowing them to track and mitigate various overheads (Trucco, 2015).

Here the cost-optimization model can be implemented to assess and maximize the value of its wider range of retail and wholesale products, allowing the organization to set right prices and increase overall sales volume.       

Analysing how techniques of MA could aid in responding to financial problems and leading organization towards sustainable success:

Determination of effective solution of different financial difficulties/issues is most-challenging work in business. Management officials and owners are liable for addressing financial problems, and MA methods and processes are being used for this purpose in almost all companies. Since various techniques enable to develop a personalized business system for identifying and solving fiscal problems. They also promote mechanisms to minimize the impact of challenges on the quality of the company. Financial issues are critical obstacles to achieving the objective of sustained success, so the organization can accomplish these objectives by applying different techniques.

Evaluation of how planning-tools can be applied to figure out financial problems and leading organization towards sustainable success:

Planning methods also perform a central component in addressing the financial issue of a company. Because these tools encompass massive business financial elements and assist in allocating various financial resources. The variability in entire financial performance could also be monitored by master budget of business. Such tools promote significant control of all commercial activities that act as a safeguard against possible financial issue.

Conclusion

From above report it has been articulated that management accounting is integrated part of organisational structure. It is wider term which involves systems, techniques, tools and methods to support company's managerial and strategic actions. Further planning tools like master budgeting, cash budgeting etc. enables corporation to assess projected performance and take decisions accordingly.       

References

  • Alyousef, H. S. and Mickan, P., 2016. Literacy and numeracy practices in postgraduate management accounting. In Multimodality in Higher Education. (pp. 216-240). Brill.
  • Boyns, T., Edwards, J. R. and Nikitin, M., 2013. The birth of industrial accounting in France and Britain. Routledge.
  • Brewer, P .C., Garrison, R. H. and Noreen, E .W., 2015. Introduction to managerial accounting. McGraw-Hill Education.
  • Burritt, R. and Schaltegger, S., 2014. Accounting towards sustainability in production and supply chains. The British Accounting Review. 46(4).  pp.327-343.
  • Correa, C. and Larrinaga, C., 2015. Engagement research in social and environmental accounting. Sustainability Accounting, Management and Policy Journal. 6(1).  pp.5-28.
  • Fiondella, C., Macchioni, R., Maffei, M. and Spanò, R., 2016, September. Successful changes in management accounting systems: A healthcare case study. In Accounting Forum (Vol. 40, No. 3, pp. 186-204). Taylor & Francis.

 

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