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Management Accounting and It's Benefit

University: University of CHESTER

  • Unit No: 7
  • Level: Undergraduate/College
  • Pages: 9 / Words 2347
  • Paper Type: Assignment
  • Course Code: AYB225
  • Downloads: 72
Question :

This assessment will cover following questions:

  • Generate an understanding of management accounting systems.
  • Implement a range of management accounting techniques.
  • Analyse and explain the use of planning tools used in management accounting
  • Compare ways in which organisations could implement management accounting to respond to financial problems.
Answer :

INTRODUCTION

In business term, the field of accounting that is related with gathering, reporting, summarizing and evaluating important information into internal reports of company that supper management team to make effective decision (Bennett, Schaltegger and Zvezdov, 2011). There are various system and reports that are beneficial in making and presenting detailed information about different task and activities of company. MA is also supportive in determining the actual reasons for negative results or problems and help in making better plans to remove these issues.

In this presentation report, several important MA system and reports are elaborated with their integration and benefits to company process. Report also covers use of MA techniques to calculate net profit and use of planning tools to make decision. In addition, importance of MA tools in determining and resolving financial issues are discussed.

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PROJECT 1

Calculation of net profit by using various costing methods

Calculation of net profit using marginal costing:

PARTICULARS

January

February

Sales (35 per unit)

315000

402500

less:

   

Cost of Production (12+8+5)

275000

237500

variable selling overheads (1 per unit)

11000

9500

variable cost

286000

247000

Contribution

29000

155500

less: Fixed cost expenses

   

Production overheads

20000

20000

Administration & selling cost

2000

2000

Total fixed costs

22000

22000

NET INCOME

7000

133500

Calculation of net profit using absorption costing:

Particular

January

February

Sales (35 per units)

315000

402500

Deduct:

   

Cost of Production

295020

254790

Gross Profit

19980

147710

LESS:

   

Fixed and variable expenses:

   

Variable sales overheads (@1 per unit)

9000

11500

Fixed selling expenses

2000

2000

Total costs

11000

13500

NET INCOME

8980

134210

Various types of management accounting techniques

Managementaccounting methods are crucial instruments that enable a company measure its net income by deducting all the costs involved during that time (Callahan, Stetz and Brooks, 2011). Such strategies are used by a furniture distributor like UCK to profit from the benefits of optimal resource usage and sustainable development and growth. UCK furniture typically uses marginal cost approach to become more precise, since it is known to be the most effective and efficient system. This is because it represents more productivity and that only pays variable expenses toward sales revenue. On the other side it is stated that other management reporting methods include normal costing, absorption costing, historical costing etc. The primary purpose of such methods is to assess net productivity from either the information presented in management records and studies, including estimation of various factors such as fixed and variable income, as well as the total paid by the company when paying all overhead costs.

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Data interpretation by using costing method

The above calculation define that both costing approaches are beneficial that are used to evaluate the net profit of UCK furniture for a respective year (Christ, 2014). As per the marginal costing the contribution for month of January is far lesser than the amount of February month. As in January the contribution is 29000 and in February it is 155500 thus the net profit after writing off fixed costs in the month of January is 7000 and in February is 133500.

From theabsorption costing method it is determined that net income in this method is higher than net profit from marginal costing. Such as the net income in month of January is 8980 and for month of February it is 134210. the main difference between the net profit figure is the treatment of variable cost which gets absorbed in case of absorption costing.

Advantage and disadvantage of various types of planning tools

In Management accounting, different kind of planning tool is used which is consider to be most important component through which the company may undertake while making business choices (Gond and et. al., 2012). This will allow the company to evaluate and examine the overall performance of different processes that support businesses in meeting specific goals. Some different tools are used by UCK furniture are discussed underneath:

Ratio analysis: It is crucial technique to analyse the overall financial position, profitability, liquidity, efficiency, risk and solvency within a specific time period. In UCK furniture managers uses this to make perfect utilization of resources and determine the reasons for slow growth or decline trends in any business context.

Advantages: The pattern in expense, revenue, earnings as well as other details can be identified by calculating ratios of last few years related accounting statistics. With the aid of averages, this data analysis could be helpful for predicting and considering new business operations (JOSHI, BREMSER and et. al., 2011).

Disadvantage: The major disadvantage to UCK furniture is that ratios are determined from the information recorded in financial statements and these statements includes various manipulation, difference and incorrect entries due to which decision are wrong for company.

Standard costing: This is beneficial for UCK furniture, as it support in determining the results of difference or variation from the estimated and actual figures. In case if actual cost are higher than predicted cost than the results are regarded as unfavourable. Use fixed or regular output and commodity prices, management may help to predict their additional costs and equate model estimates with real costs upon execution of the job.

Advantages: The Standard costing is also known as an efficient cost control system. Within standard accounting, managing and reducing expenses becomes a routine method for manager of company.

Disadvantage: Themajor issue faced by UCK furniture by using standard costing is the actual estimation of likely cost that are needed to be paid in future time.

Budgetary control: Budgetary management is a process that lets senior executives maintain appropriate spending limits. Such regulation is necessary as unnecessary spending has an adverse effect on business profits. Thus managers of UCK furniture tries to increase the profit figures by implementing various strategies to increase the sales (Melnyk and et. al., 2014).

Advantages: This helps to analyse existing business patterns and to assess future business policy. This means that people, products, equipment and resources are used efficiently as production is scheduled as per the availability of such items.

Disadvantage: Budgets will act as strategic effort restrictions, as each director seeks to achieve the goals that are budgeted.

Monthly expenditure for July and August

Total cost = (Highest activity per hour spend – Lower hour spend)

Total expenses (Per units): (9820-7410) / 795-505) = 8.31

Month

Calculation expense

July

= 650*8.31= 5401.5

August

= 750*8.31= 6232.5

Cash budgets

Amount

Particular

September

Opening Balance

9000

Cash Sales

39000

Sales on Account

5648

Total cash collected

53648

Less:

 

Purchase

16800

Selling and Administration expenses

13000

Equipment cost

18000

Dividend paid

4000

 

1848

Add:

 

Minimum Cash balance

5000

Estimated cash in Sept.

6848

Calculation of accounting system to analyse financial problems

Financial ratios

                                                                                        UCK Furniture   UCK Woodworks

ROCE

Operating profit/Capital employed*100

3198890.156

8.562107596

   

17.24513902

0.0856

   

0.1724

 

Operating profit margin

Operating profit / sales *100

2490000.73

8.562107596

   

0.2503

0.0856

       

Assets turnover

Revenue / Net assets

44931.07764

0.10033239

   

=0.68 times

=0.100 times

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Measures to reduce financial problems in order to lead towards sustainable success.

In the above table, calculation of different ratio helps to define the overall financial decline of UCK furniture and share price is also affected due to decrease in profitability of UCK Woodworks (Shields, 2015). It is also observed that UCK furniture is getting better returns on capital employed, on the other side the earning on capital employed to Woodworks are quite slower which is making issue of UCK furniture.

Form the calculation it is also analysed that assets turnover for UCK woodwork is higher and shows a better position in a year as compared to UCK furniture. There are different financial issues that decrease the performance and some of important measures are used by management to resolve financial problems. These are discussed below:

  • Key performance indicators (KPI): This approach is deemed an important method for evaluating and describing any worker's actual performance and that every operation with UCK furniture.
  • Financial governance: This method is beneficial in providing the code of conduct issued by government that help in defining the actual standard and rules to run certain business operation within company.

Analysis of planning tools used in company

A company uses many planning tools such as ratio analysis, budgetary control and standard costing which are used to measure and make predictions to resolve the financial problems (Suomala and Lyly-Yrjänäinen, 2012). Such methods help a UCK furniture to manage the risk and provide a number of potential scenarios so that reasonable precautions could be implemented.

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CONCLUSION

In the end of report, it is concluded that MA is an effective process that support in making valuable reports with the help of system to ease the decision making process of internal manager. Various costing methods such as marginal and absorption costing are used to calculate the net profit for the year. Different planning tools such as Ratio analysis, Standard costing and Budgetary control are effective in determining the financial issues and making effective ways to resolve the

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