This assessment will cover the following questions:
- GSQ Ltd is a construction company in the UK. What methods can be used for management accounting reporting?
- Analyze the drawbacks and benefits of different planning tools for budgetary control.
INTRODUCTION
Management accounting is defined as the analysis and evaluation of financial information in order to take management decisions for the betterment of the company (Otley, 2016). The present report is based on company GSQ limited which is a manufacturing company located in the UK. The report will discuss different management accounting systems along with their application and advantages and disadvantages. Further, the report will apply some management accounting tools in order to calculate the cost. Next, the discussion will highlight the different planning tools which the company can use to manage the budgets. In the end, some management accounting systems will be discussed and how they help the company in dealing with financial problems will be outlined.
LO 1
Management accounting system and their requirement
The management accounting system are different types of system which help the company in order to evaluate the performance of the company with help of financial accounting. There are many different types of accounting system which GSQ Ltd can use in order to attain their objectives which are as follows-
Cost accounting system- This is a system which is used by GSQ Ltd in order to ascertain the cost of producing the product or services. This is very necessary for the company to ascertain the cost because of the fact that in this cost only the profit margin is added and then charged to consumers. This system is applied in GSQ ltd in order to calculate the cost of per unit production and this is done with help of different tools like lean accounting, marginal costing and many other different types.
Job- costing system- This is a system under which cost is charged to every job separately in order to ascertain cost of every job. The whole production includes different types of job and every job has its own particular cost which need to be assessed separately. This costing is applied in GSQ for estimating the individual cost of each and every job separately.
Price optimising system- This is a system which help GSQ Ltd in order to calculate the demand for the product and services at different price levels and what will be the response of the consumers at all these different levels of price (Maas, Schaltegger and Crutzen, 2016). This system is applied in GSQ for estimating its profit at different types of prices in the market.
Inventory management system- The inventory is the most important part in the manufacturing company like GSQ ltd because without inventory no work can be done. Thus, it is very necessary for GSQ ltd to manage the inventory on time and this will assist the company in completing manufacturing process on time (Quattrone, 2016). This include application of some software which assist the company in managing their inventory on time do that the manufacturing process can be completed with efficiency and effectiveness and on time as well.
Advantage of management accounting system- The use of different management accounting system is very advantageous for GSQ because of the reason that these systems help in proper planning and organizing for the business and its development. These management accounting systems help GSQ in improving all the business activities and this assist the business in building coordination among all the different business areas. Hence. This result in the development of the business as a whole and not focusing on a single issue (Dekker, 2016).
Different methods of management accounting reporting
There are a variety of different types of management accounting reporting which helps GSQ in reporting of all the information relating to management of business activities.
Budget report- This is a report in which all the estimated income and expenses are recorded and management try to actually incur that much only. This will assist GSQ ltd in order to make some estimation for all the possible income and expenses and to compare it with past records.
Performance report- This is a type of report which is prepared by GSQ in order to evaluate the performance of each and every individual. This help company in knowing the areas in which company need to improve and the areas which are good.
The management accounting report is integrated with organization process because this will enhance the process within the organization (Hopper and Bui, 2016). This is because of the reason that all these reports will help organization in deciding all the major decision for the betterment of the company.
LO 2
Absorption costing- It is the method that accumulates costs attached with the process of production and apportioning them to an individual product. It is the type of costing which is needed by an accounting standard for creating valuation of an inventory. A product might absorb wide range of the variable and the fixed costs.
Marginal costing- It refers to the cost for an additional unit of an output and this concept is been used for determining optimum capacity of production for GSQ in which it charges least or minimum for producing an additional unit. Under this variable cost is only charged to cost units whereas fixed cost for a period is entirely written off against contribution.
| Cost card using Marginal costing | |
| Particulars | Cost per unit |
| Direct Material | 8 |
| Direct Labour hour | 3 |
| Variable production overhead | 2 |
| Marginal Cost | 13 |
| Selling Price | 30 |
| Marginal Cost | 13 |
| Contribution Profit Margin | 17 |
| Profit or loss statements using Marginal costing | |||
| Amount | |||
| Sales Revenue | 50000*30 | 1500000 | |
| Marginal cost of sales | |||
| Direct materials | (50000*8) | 400000 | |
| Direct Labour hours | (16667*9) | 150000 | |
| Variable production overhead | (50000*2) | 100000 | 650000 |
| Contribution | 850000 | ||
| Fixed production overhead | 160000 | ||
| Selling expenses variable | (50000*4) | 200000 | |
| Fixed admin and distribution | 60000 | 420000 | |
| Net Income | 430000 | ||
| Cost card using Absorption Costing | ||
| Particulars | Cost per unit | |
| Direct Material | 8 | |
| Direct Labour | 3 | |
| Variable production overhead | 2 | |
| Fixed production overhead | 3.2 | |
| Absorption Cost of the product | 16.2 | |
| Selling Price | 30 | |
| Total Cost | 16.2 | |
| Profit | 13.8 | |
| Profit or loss statements using Absorption costing | |||
| Amount | |||
| Sales Revenue | 50000*30 | 1500000 | |
| Marginal cost of sales | |||
| Direct materials | 400000 | ||
| Direct Labour | 150000 | ||
| Variable production overhead | 100000 | ||
| Fixed production overhead | 160000 | 810000 | |
| Gross Profit | 690000 | ||
| Selling expenses variable | 200000 | ||
| Fixed admin and distribution | 60000 | 260000 | |
| Net Income | 430000 | ||
| Calculation of Wages per hour | |
| Wages per hour | £9.00 |
| Labour per unit | 20 |
| Number of units | 50000 |
| Time for 50000 units (minutes) | 1000000 |
| Total Hours for production | 16666.67 |
| Direct wages | £150,000 |
Interpretation- From the above results it has been stated that net profits resulted by employing marginal and absorption is same that is £ 430000 because opening and closing stock are not stated. Moreover, Absorption costing is seen as better technique than marginal costing because it gives a true picture of profitability as it includes both fixed and marginal cost as part of its production.
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LO 3
Explaining uses of different planning tools that are used in management accounting
Activity based budget- It means the budgeting method under which budgets are been prepared by using ABC that is activity based costing after taking into account the overhead costs (Kispal-Vitai and Wood, 2018). It is the planning tool that do not consider previous years budget for arriving at framing budget for current period.
|
Advantages |
Disadvantages |
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Activity based budget helps GSQ in attaining competitive edge by eliminating all kinds of an unnecessary activities so that cost can be saved. Cost saving leads to producing the goods and the services at the low cost as compared to its rivalry. |
This budgetary tool requires deep understanding of several functional areas of GSQ. In case the manager is not capable in evaluating and understanding an areas of the business, it leads to an inaccurate preparation of the budget. |
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This tool enables in viewing business as the single unit and not in departmental form. The top executives frames the budget for an entire business unit under activity based budget. |
It is stated as the complex system as it needs analysis and the research of several factors. This method consist of an estimation of the demand and on the basis of that an estimation relating to employing of the resources is made in several activities. |
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It helps GSQ in preparing the budget after the detailed and deep research analysis (Hirata and Bortoletto, 2019). It helps in removing all types of irrelevant activities of business that is attached with a particular activity and this in turn results in carrying the business operations in a smooth way. |
Under this, the budgeting process consumes lot more resources of an entity. It require to employ top top management in conducting various analyses which resulted as a time consuming activity. |
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Activity based budget assist in improving relationship between customers and organization. It helps in eliminating the unnecessary activities and in serving customers with best quality at the best price. This enforces an employees of GSQ to serve its customers in best possible manner and in ensuring customer satisfaction. |
Execution of this budgeting tool needs trained and skilled employees. This leads to high cost as GSQ needs to bear extra cost in providing training to its employees. |
Rolling budget- It is referred as the budget that is been updated continually for adding a new period for the budget (Papke-Shields and Boyer-Wright, 2017). It involves an incremental extension of an existing model for budget.
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Advantages |
Disadvantages |
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It is the budget that helps in controlling and planning in an accurate manner. It reduces uncertainty of the budgeting along with provide for short term plan. It reflects the direction in which GSQ is moving in respect of profitability and sales to management. |
This budget needs more money, efforts and time. Employees spends lot of time in framing such budget. |
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The budget for 12 month period is counted as long term because of the technological changes or advancement at fast pace. It may lead GSQ in changing with that of latest technology and also required to be updated on the basis of assumptions. |
It demoralizes an employees as the budgetary targets are been changing consistently. Therefore, spending ample of time on formulating this budget might result in demotivation among employees. |
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Rolling budget acts as the guiding tool in spending money with that of wisdom. Thus, it helps the managers of GSQ in deciding for spending wisely. |
The major limitation of this budget is that it is not been updated for an entire period but only for an incremental period. This period might comprises of some newer assumptions which are not been counted in original budget. |
Flexible budget- It is the budget that flexes or adjust changes in the activity or the volume. This budget seems as more sophisticated and meaningful as compared to the static budget.
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Advantages |
Disadvantages |
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It helps in calculating sales, profit and cost at various level of an operating capacity. |
It requires the skilled workers as changes are been made on a frequent basis with change in the activity level (Benefits and limitations of activity based budget, 2018). Availability of the skilled workers has become a challenge for an industry. Therefore, a company cannot use flexible budget. |
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It enables in determining amount or quantity of an output that need to be produced for helping the firm in achieving desired level of profit. |
Preparation of this budget is highly dependent on proper accounting related disclosures. Results generated from this budget cannot be said as correct in case there present some mistakes in final reports. It depends very much on forecast of previous business performance so historical information utilised must be accurate. |
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This tool helps management of GSQ in determining production level in different business conditions and markets. |
Flexible budget depends on factors of the production that are not in hands of management. Therefore, predictions could be inaccurate because of such conditions. |
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This budget assist in re-classification of several level of the budgeted cost with sales that in turn helps the managers in identifying profitable areas and act accordingly. |
Variance analysis facilitates useful information because each and every cost is been analysed in accordance to nature. Therefore, it became difficult for an experts in preparing the flexible budgets. |
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This budget could be re-examined based on activity levels and is not considered as rigid. |
It is expensive in nature as appointment of skilled workers includes higher salary and benefits expenses. |
LO 4
Comparing the different management accounting systems used in order to meet the financial problems
The company faces many different types of financial problems while running its business such as poor accounting practices, lack of cash flows, issues in use of accounting practices and many other problems (Bromwich and Scapens, 2016). For managing these issues there are many different systems which can be used like as follows-
Benchmarking- This is a system through which GSQ compare its position with that of their competitors and try to evaluate their performance. Here GSQ can use this system to solve the problem of quality of product. This is because of the reason that GSQ can compare the quality of their products with that of the competitors and can know that where their product is lacking.
Variance analysis- This is also a technique of dealing with the financial problems faced by GSQ. Under this technique company first set some standards in order to provide direction to the employees in which they have to work. Thus, this will help GSQ in properly budgeting the income and expenses. But in contrast to this, KEF ltd uses this technique for setting target for increasing the profits and the employees in every condition has to attain that.
Key performance indicator- This is a technique in which some key points are considered and the performance of the company is measured against that only. For this GSQ has taken the indicator of profits and it uses this and compares the current profit with past year profits and with competitors (Christ and Burritt, 2017). But in contrast to this KEF ltd uses this for comparing the number of consumers. These number of consumers are compared of KEF with competitors and also with the past year data.
CONCLUSION
From the above it has been concluded that MA systems plays an essential role in managing and maintaining an adequate inventory level with optimum use of resources. MA reports helps in the preparing for the standards on the basis of which task are been performed that in turn helps in ensuring proper controlling and gaining higher sales or revenue. Planning tools enables the managers to focus on most crucial areas of the business and reviewing the performance of an employees in order to eliminate variances. Further, there are different MA systems such as benchmarking, balanced scorecard, variance analysis and key performance indicators that helps GSQ in resolving its financial problem in an effective manner.
Related Sample: Levels of Management Accounting in Kef Ltd.
REFERENCES
- Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research. 31. pp.1-9.
- Christ, K.L. and Burritt, R.L., 2017. Water management accounting: A framework for corporate practice. Journal of cleaner production. 152. pp.379-386.
- Dekker, H.C., 2016. On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research. 31. pp.86-99.
- Hirata, E. I. and Bortoletto, W. W., 2019. PLANNING OUR EVERYDAY USING TOOLS AND TECHNIQUES OF PROJECT MANAGEMENT. Iberoamerican Journal of Project Management. 10(2). pp.14-29.
- Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research. 31. pp.10-30.
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