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Management Accounting and its importance - EverJoy Enterprises

University: California Institute of Technology

  • Unit No: 2
  • Level: High school
  • Pages: 24 / Words 5931
  • Paper Type: Assignment
  • Course Code: ACC20007
  • Downloads: 138
Question :

Questions- This assessment will cover the following questions:

  1. Ever Joy Enterprises is anentertainment industry of the UK. Examine the distinction between Management Accounting and Financial Accounting.
  2. What is the job costing system and its relevancy in the functioning of the Ever Joy Enterprise?
  3. What are the problem-solving tool which helps in dealing with the financial issue of the enterprise?
  4. Explain the benefits and drawbacks of the planning tools used to manage the budget of the enterprise.
Answer :
Organization Selected : EverJoy Enterprises

Introduction

This report will be prepared to discuss the concept of management accounting and write a reference manual for Ever Joy Enterprises (UK) that operates in leisure and entertainment industry in the UK. This report delineates the concept of cost accounting systems, job costing systems, and Inventory Management systems; differentiate between management accounting and financial accounting. This report will also solve a numerical problem to help Ever Joy Enterprises (UK) reviewing its concert event in Manchester region to ascertain its viability by calculating break-even point (i.e. the point at which there is neither profit nor loss) and other profitability related requirement. This report will also advise Ever Joy Enterprises (UK) on using budgeting as a pillar for planning purposes within the organization.

Task – (LO1)

Management Accounting

Management accounting is the presentation of accounting information in such a way as to assist management in the formulation of policy and the day-to-day operation of an enterprise. The management accounting collected the accounting data with the help of financial accounting and cost accounting for the purpose of policy planning, formulation, decision making and control for the enterprises. Management accounting is the vital branch of accounting which assists to the management in the preparation of various reports and strategies for their departments which enhance their productivity and efficiency. Various management accounting tools and techniques assist to the enterprises to achieve their goals and objectives on a systematic manner. In other words, management accounting is an important decision-making tool and technique used internally by the management. Tools and techniques like cost-volume-profit analysis, variance analysis, budgeting, break even analysis are some of the prominent tools and techniques used in the management accounting (Edmonds, et. al., 2016).

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Objectives of management accounting

  • Helps to the management of an enterprises in planning and formulation of policies for future
  • Helps to the management in an interpretation of financial information
  • Helps in coordinating operations
  • Helps in evaluating the efficiency and effectiveness of policies
  • Helps in controlling performance

Main tools and techniques used in management accounting are listed below:

  • Cost accounting
  • Absorption and marginal costing
  • Fund flow analysis
  • Cash flow analysis
  • Standard costing
  • Budgetary control

Advantages

Disadvantages

Increases efficiency of the enterprises

Biased interpretation

Simplifies the decision making in financial statements

Lack of knowledge

Cost transparency

Impracticable in nature

Assist in goal completion

Preferences depends upon experience and intuition

Flexibility and freedom

Lack of objectivity

Functions of management accounting

Figure: Functions of management accounting By Author, 2018

a. Differences between Management Accounting and Financial Accounting.

The management accounting and financial accounting both are important part of accounting which assists the enterprise to achieve their targets on a time and also provides useful information to their stakeholders. Some of the difference are summarized in the table which are mentioned below:

Points of difference

Management Accounting

Financial Accounting

Definition

Management accounting is an accounting framework that makes use of accounting and cost data to enable the management to make effective business plans (Weygandt, et. al., 2015).

Financial accounting is an accounting framework which records myriad of business transactions and then summarizes and records the same in the prescribed format.

Format of reporting

There is no standardized format prescribed by regulatory bodies. Since, it is internal use, the format can be altered as per modalities of the business and other factors (Warren, et. al., 2013).

While transaction is accounted for on a daily basis, there is a standardized format that needs to be followed prescribed as per the relevant applicable act.

Report

It includes summarized form of non- monetary (various reports and policies) and monetary (balance sheet, profit and loss) transactions.

It includes various final accounts of the company like trial balance, balance sheet, cash flow statement, trading & profit and loss account.

Statutory requirement

It is the statutory requirement to get the books of accounts audited.

There is no such statutory requirement as the information is used by the management.

Purpose

The management accounting is used for internal purpose.

The financial accounting is used for external purpose.

The above points show some difference in between management accounting and financial accounting. The management accounting assists to the management in preparation of financial accounting for the enterprise in every financial year. The management accounting has a wider scope than the financial accounting. It involves financial accounting and cost accounting which assists to the management in preparation of plans and policies (Weygandt, et. al., 2015).

b. Cost accounting systems (Direct Costs and Standard Costing) 

Cost accounting is an accounting mechanism in which all costs incurred are collected, classified and recorded. Cost accounting helps in allocating cost incurred on producing various products by segregating it into direct cost, indirect cost and fixed cost. Cost accounting computes the unit cost of a product which enables to ascertain cost of stock at the end of the year and cost of goods sold during the year. It analyses the cost structure of the business. Cost accounting helps the management in determining where a business is gaining or losing money. Cost accounting helps the management in determining how the business earns and make use of them. It can be used as a tool to minimize the cost of production by eliminating any unnecessary expenses/losses incurred while producing a product. It provides necessary cost information for planning, implementing and controlling. It is instrumental in assessing the profitability of various products which can be utilized by various banks and financial institutions to provide loans. Ever Joy Enterprises can integrate the cost accounting system with their organizational processes to reduce the costs and expenses and also eliminate the wastages in the manufacturing system of the enterprises (Warren, et. al., 2013).

Types or Techniques of costing

Figure: Types or Techniques of costing By Author, 2018

Following are the main types or techniques of costing for ascertaining costs:

Marginal costing: Marginal costing is a costing technique in which the variable cost, i.e., marginal cost is charged to units of cost, while the fixed cost for the period is totally written off against the contribution (Kren, 2018). It can be calculated as:

Marginal cost = Direct Material + Direct Labor + Direct Expenses + Variable Overheads

Characteristics of Marginal Costing

Figure: Characteristics of Marginal Costing By Author, 2018

Absorption costing: Absorption costing is another important costing technique in which all manufacturing costs are absorbed by the units produced. It is also known as full absorption method or full costing. In other words, the cost of a finished unit in inventory will comprise direct materials, direct labor, and both fixed and variable manufacturing overhead.

Absorption Costing min

Figure: Absorption Costing By Author, 2018

Standard costing: Standard costing is a technique of costing in which manufacturers or producers use it to identify the variances or differences in between the costs that should occurred for those goods and the actual costs of the goods that were manufactured.

Standard costs

Figure: Standard costs By Author, 2018

Uniform costing: Uniform costing is the usage of the same costing and accounting principles and standards or methods uniformly by various undertakings in the same industry. In this costing the cost statements and reports are prepared on a uniform basis and the period of accounting is common for all units’ member.

Direct costing: Direct costing is a specialized form of cost analysis that uses variable costs only to make decisions. This costing does not consider fixed costs and useful in short- term decisions making in the company. Direct costing is not useful in long- term decision making because it not considered all costs which are necessary in long- term decision making.

Historical costing: Historical costing is ascertainment of costs after they have been incurred. This costing considered past work done by the manufacturing undertakings and comparisons done by using past data of the enterprises (Kren, 2018).

c. Inventory Management Systems 

Inventory management system is a mechanism through which a business can track all the moving parts of its operations. This covers everything from production of a product to retail stores and from warehouse to shipping the product, all the movements of stock are traded in the inventory management system. In this process system finished goods and work in progress are systematically managed so that optimal use of available resources can be made. Ever Joy Enterprises can integrate its system with inventory management system in which enterprises can use technology to track the inventory level in its business operations (Goddard and Simm, 2017).

Inventory Management

Figure: Inventory Management By Author, 2018

Benefits of inventory management systems to the Ever Joy Enterprises are listed below:

  • It minimized cost of labor and other expenses
  • Reduced dead stock problems in the enterprises
  • Transparency improved in the whole system
  • It minimized costs of handling or storage
  • Enhanced partner relationship, vendor and supplier

There are three types of inventory: work-in-progress, finished goods and raw materials. The enterprises can use inventory control models like ABC (Activity Based Costing), EOQ (Economic Order Quantity), and JIT (Just in time) model to maximize the profits and minimize the inventory expenses. The Ever Joy Enterprises can use this model of inventory to eliminate the wastages and enhance their productivity in entire manufacturing system. Inventory accounting method include FIFO (First in, first out), LIFO (Last in, first out) and other methods can be used by the enterprises to calculate the level of inventory in the manufacturing system (Kren, 2018).

Inventory management also means sustaining the efficient and effective internal controls over stock or inventory which includes safeguarding the inventory from theft and damage, to track inventory movement in the system by using a purchase orders, frequently comparing physical inventory counts with amounts recorded, and maintaining an inventory ledger. The effective inventory management system assists to the Ever Joy Enterprises to track the record of level of inventory in their business operations and helpful to the enterprises to reduce the expenditures which is related to the stock and dead stock in the manufacturing system (Warren, et. al., 2013).

d. Job Costing Systems 

Job costing method is a tailor-made costing method in which work is completed according to each customer’s individual requirement. Each job is undertaken keeping into consideration specific need of the customer. They are nonstandard in nature. Each job belongs to the same category but has different characteristics. For example, visiting cards or marriage cards printed by printing press. Although visiting cards fall in the category but they are designed as per the specific need of the customer (McLaney and Atrill, 2014).

Job Costing Cost Flows

Figure: Job Costing Cost Flows By Author, 2018

Job Costing can be applied in the following areas: -

  • Repair works
  • Engineering concerns
  • Job printing
  • Ship building companies
  • Interior decoration
  • Furniture makers
  • Automobile garages
  • Construction companies

Features of Job costing

  • It focuses on the specific needs of the customers.
  • Each job is charged differently.
  • Each job is identified clearly.
  • Each job is treated as a separate accounting unit.
  • Usually the work is done in the factory except in case of interior designing etc.

The job costing systems wants to collect the subsequent three types of information:

Direct materials: The job costing system must be able to record the materials cost that is used throughout the course of the job. For example, if an organization is manufacturing the custom-made a machine, the metal piece costs which is used in the manufacturing must be collected and charged on the job. The system can collect this cost through the manual following of materials on the sheets of cost, or the data can be gathered from the online terminals in the production and warehouse area (Kren, 2018).

Direct labor: The job costing needs to record the labor cost which is used in a job. If a job is associated with the services, the direct labor may include closely all of the job cost. Direct labor is basically allocated to a job with a time sheet, time card or with a time clock application on a computer. In all these cases, the user can easily ascertain the job, so that the data related to the cost can appropriately be applied to the exact job.

Overhead: The system allocates the costs of overhead to one or more costs groups. At the end of the financial year, the total amount in each cost group is allocated to the many open jobs which are based on some apportionment procedure that is reliably applied.

e. Different types management accounting reports

Reports

Explanation

Use in the Ever Joy Enterprises

Budget Reports

Budget reports are very important for the organization. In this report, all the department's performance are recorded in it. However, all organization prepares the overall budgets to maximize the business operations, profits and also achieve future goals (Pratheepkanth, 2018).

It will help the Ever Joy Enterprises to achieve its mission and goals while staying within the budgeted amount. It will also guide the managers to provide better incentives to the employees, cut costs and renegotiate term with suppliers and vendors.

Account Receivable Aging Reports

Account receivable aging reports are important for the organization because it shows the exact amount which is receivable in the accounting period. This report shows that how much debtors are there and how much debtors become a bad debt to the company (Nørreklit and Mitchell, 2014).

If the organization depend on extending the credit, then account receivable aging reports are important to it. Ever Joy Enterprises use this report to record the debtors, bad- debts which are incurred in the accounting period. It also shows the status of each item records in this report.

Performance Reports

· The performance report is prepared by the company to review the performance of the organization and its department also. This report prepared by the organization on yearly basis to evaluate the performance (Lasyoud, et. al., 018).

.

Ever Joy Enterprises uses this report to check and review the performance of each department and the overall enterprise. The manager of the Ever Joy Enterprises uses these reports to prepare key strategic decisions about the future of the org

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