This assessment will cover following questions:
- Discuss the use of planning tools used in management accounting.
- Compare ways in which company could implement management accounting in order to respond to financial.
Management accounting is the procedure of preparing management reports that provides accurate data, statistical and financial information needed by the manager of organisation for making daily basis transaction as well as short term decisions. Management accounting is also known as managerial or cost accounting (Burritt, Schaltegger and Zvezdov, 2011). In simple words it can be said that, it is a process of analysing and recording business activity for the utilisation of company's internal purpose in effect to increasing efficiency and productivity. Below mention report is going to explain advantages and disadvantages of various types of planning tools used for the purpose of budgetary control. The same is also enlightening how organisations are adopting management accounting system for responding financial problems.
P4 Advantages and disadvantages of different types of planning tools used for budgetary control
Budget is an essential document which involve detail of data related to company in detail of the specific time period by applying actual facts and figures of business research. Generally, it is being utilised for identifying the various expenses and cost come about and company is investing on quality goods and services which is produced by them. Apart from this, it is basically lays ou of one year income as well as expenses and this has to be applied by enterprise so that all the divisions work in the same manner. Moreover, the same prepared budget can be reframed according to the needs and desirable outcomes so that needed target can be accomplished. Specifically, it design the sales and income which was involved in producing the products and monetary value, expenses and so on are all involved in the production of goods and services in healthier manner.
Budgetary control – It is related to the process for which manager set financial and performance goals (Christ and Burritt, 2013). Budgetary control is the system of management control in which actual expenses and income are compared or planned, so that it can be identified that plans are being followed as well as is their any need of modification for making profits. In other words it can be said that, manager in the organisation utilise budgetary control for monitoring or controlling cost as well as other processes. There are different type of budget such as fixed, flexible, incremental, zero based and variance analysis. All these have their advantages and disadvantage description are as follows:-
Fixed budget – It is also known as static budget and the same is based on the assumptions of selling particular amount of goods during a period. Fixed budget don't get modify or flex even when the sales and several other activities get increase or decrease. There are some advantages as well as disadvantages of fixed budget:-
- Advantages – By using fixed budget, company can prepare for the future and present expenses in advance. Their is no requirement of changing budget month to month or year to year. Moreover, major advantage of the static budget is that it's easy in implementing as well as no requirement of continuous updating is there (Fullerton, Kennedy and Widener, 2014). Respective type of budget allows an organisation to see where it might be overestimating or underestimating its expenditure and profit so that it can make required modification or modify its strategy going forward.
- Disadvantages – Major disadvantages of the fixed budget is lack of flexibility. Thus, if organisation prepare budget on fixed volume of sales and after sometimes it will increase then they cannot allot extra resources for continuing it. Apart from this, if some areas of the enterprise identified underperforming, then due to fixed budget company cannot allocate addition resources for help. Budget is prepared by using past or previous data of the business so for them it is difficult to establish new.
Flexible budget – This is also known as variable budget and it is used as an expenses and revenue produced in the present production as an baseline as well as estimates how the profit and expenditure will modify based on changes in the output. In simple words, flexible budget is that which get change or adjust by the modification in volume of activities.
- Advantages – one of the major advantage is it can be updated as per the current data and company can adjust their budget i.e., allot or deduct resources as per requirement. Flexible budget control cost in more better manner because it react quickly to adverse situations (Granlund, 2011). Moreover, it provide a correct comparison within actual and expected cost for an actual activity.
- Disadvantages – Major disadvantages of the fixed budget is that lack of flexibility. Thus, if organisation prepare budget on fixed volume of sales and after sometimes it will increase then, they cannot allot extra resources for continuing it. Apart from this, if some areas in the enterprise identified underperforming, then due to fixed budget company cannot allocate addition resources for help. Budget is prepared by using past or previous data of the business so for them it is difficult to establish new.
Flexible budget – This is also known as variable budget and it use expenses and revenue produced in the present production as an baseline as well as estimates how the profit and expenditure will modify based on changes in the output (Granlund, 2011). In simple words, flexible budget is that which get change or adjust by the modification in volume of activities.
- Advantages – one of the major advantage is it can be updated as per the current data and company can adjust their budget i.e., allot or deduct resources as per requirement. Flexible budget control cost in more better manner because it react quickly to adverse situations. Moreover, it provide a correct comparison within actual and expected cost for an actual activity.
- Disadvantage – Flexible budget is time consuming and require continuous monitoring because in business several changes take place which result in increase or decreasing of sales and profit which need continuous monitoring. It is not possible to provide accurate information for owner of the business and for preparing flexible budget there is requirement of accurate data or information (Kotas, 2014). Apart from this, it is complex because there is requirement of clearly categorising expenses into fixed, variable and semi-variable.
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Incremental budget – It is the kind of budget which add specific amount of capital to the last year budget in order to allow for little increases. Incremental budget is premise of implementing some modification in the existing budget for coming on the new budget. Only amount of incremental will be added for arriving on new budget.
- Advantages – Major advantage is the simplicity of incremental budget, for owner of the business it will be possible to do work with several divisions and their will not be much discord within departments. Along with this, there is not require of detail analysis for implementing incremental budget.
- Disadvantages – This is expensive and require high spending for obtaining favourable variance (Otley and Emmanuel, 2013). Moreover, no innovation can be done in incremental budget as well as there is no cost reduction for manager.
Zero based budgeting: It is just opposite to traditional planning in respect of budgeting. In traditional planning, the owner of the company makes correction on evaluating the previous years budgets. In simple words this approach means to prepare budget right from starting point(scratch point).The main motive for preparing of zero based budgeting is to cut down the unnecessary expenses, so as to minimize the cost (Parker, 2012).
- Advantages: One of the advantage is that it reduces the unnecessary activities,identify the optimum opportunities and ensure accurate allocation of resources. Zero based budgeting remunerate the delicacy of progressive budgeting of budget escalation.
- Disadvantages: It is a time consuming method. Additionally it may be the reason for increase in employees turnover, as the budget is prepared from scratch point and it require more numbers of employees. Many department will not have much time to start from the beginning.
Planning tool – This is mainly categorised into three parts description of these are as follows:-
Forecasting tool – It is an planning tool which assist management of company in its attempts for overcoming with the future uncertainty, analysis of future trends and relying mainly on data from present as well as past (Renz, 2016). Forecasting is the tool which encourage by the management skills, effectual decisions and learning.
- Advantages – Forecasting tool is require for identifying the goals as well as the same also help the managerial social unit which is state evaluate the actual total of costs and sales which is taken for the future.
- Disadvantages – Forecasting tool is time consuming as well as expensive because it require. If there is absence of several expenses estimation which may be occur in future and budgeting manager is not aware about that. If overall activity are expenses are more than its cost, then it will result in affecting goal of company.
Scenario tools – It is the planning tool which make or design scenario related to future contingencies in advance. So that, their will be less chances of loss or any other issues. Scenario tool is that in which things are decided in advance for upcoming or future situations.
- Advantages – Major advantage of it is that scenario for the future things are decided in the advance (Schaltegger, Gibassier and Zvezdov,2013). So there is less chances of any loss and misshapen because related to the future scenario are pre-determined.
- Disadvantage – It is time consuming and expensive process as well as in some situation if such issues will not be created to implement pre-determined scenario then, it will result in waste of money as well as time spend in it.
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Contingency tools - This is necessary because business environment is dynamic in nature and several contingency can arise which require proper planning of future things. Along with this, contingency tool is best for risk management in the company.
- Advantages – Major advantage of contingency planning is that company can deal with the future uncertain or worst situations easily. Along with this, owner of business feel more prepared after doing contingency planning (Taipaleenmäki and Ikäheimo, 2013).
- Disadvantages – costly as well as time consuming and constantly updating is needed because range of potential disasters can change over time to time.
P5 Organisations are adapting management accounting system to respond to financial problem
Benchmarking – It is the procedure of performance management of organisation’s goods, services and processes. Along with is, measurement of the quality of enterprise policy, program and strategies. Major objectives of benchmarking are to identify how company accomplish their high performance level, utilisation of information for improving performance and to identify what and where improvement is required. Moreover, it is the technique for enhancing performance of administration through applying the finest process, practices and for accomplishing them. Benchmarking is concerned mainly with the analysis of three dimensions: quality, time and cost.
KPI (key performance indicators) – KPI is the value measurable which demonstrate that how effectually an organisation is achieving their key business objectives. Along with this, in companies key performance indicator is uses at several levels for identifying their success at reaching targets. High level of KPI keep eyes on entire performance of the company whereas, low level only focus on procedures or staff members in division like marketing, sales or any call centre. There are several importance of the same such as strengthen morale of staff members, support as well as influence business objectives, foster individual person growth and critical for performance management.
Key performance indicators are divided in two parts first one is financial indicators and non financial indicators. Financial indicators are helping to the company to know financial performance and how to deal with the prices of the different products. It will also helping to know financial position of the company through income statement and balance sheet. With the help of non financial indicators know about services that are provided by the company. This is using for know contingency and tax liabilities of the company.
It will helping to the companies for collects, bring off, reminder and controls financial information that are generated through key performance indicator. Financial governance are helping to know total expenses and total incomes and where need to mange proper management system there is set performance in systematic way. In benchmarking compare performance so for this need to it and manage performance and activity data, conformity, transaction and disclosure.
Accounting system tools for detecting financial problems :- In organisation several problems related to financial arise which needed to be resolve on time. So that, it will not convert in major issue or become big. Below mention are some accounting system tools which help in detecting financial problems -
- Cost control – It is important for minimising not required or extra expenses and it is the procedure of determining and decreasing expenses related to business for increasing profit. Cost control is implemented or started in the business through budgeting process. In the manager or other member compare actual outcomes with the expectations of budget (Islam and Hu, 2012).
Below mention is the example of two organisation in which they are utilising accounting tools for reducing financial problem are as follows:-
TESCO is an retail sector organisation which utilise cost control accounting tool for reducing their financial problem. This is the best technique of resolving same issues because main reason behind these problem is extra occurring cost whole product or any other activity. Through cost control tool company can easily divided funds according to the working of different departments. Thus, their will no chances of over utilisation of available resources.
ALDI is also retail sector company which is using price optimisation for resolving their financial issues. But in the same problem this accounting tool is not beneficial because through this company can identify respond of customers at different price level.
In this company adopted by inventory management accounting system to mange all types inventories. It is the management of stock and inventory in the organisation for meeting daily basis targets. Inventory management involves several aspects such as controlling and overseeing order of inventory, its storage and controlling the amount of products for sale (Hiebl And et.al., 2015).
By ALDI apply price optimization system, It is the accounting tool utilise for mathematical analysis by the organisation for identifying that how customers will respond at different prices for their goods and services by different channels.
In this management system identify financial issues are solving by Key performance indicator because it is measure performance of the company in Financial terms and non financial terms.
In price optimization system origin many financial issues that are solving by benchmarking tool because it is helping to compare performance of the company with another company. It will helping to know effective strategies related to prices and improve performance of the company.
Thus, Cost control is the best accounting tool which help in solving financial problems of the company in effective manner.
From the above assignment, it has been concluded that management accounting is necessary in the organisation for maintaining records of income and expenses. Along with this, there is requirement of professional who can do these activities in effective manner. Moreover, budget is also necessary for company so that standard and actual can be compared then gap can be filled. Apart from this, several financial problems can be raised in the business for resolving these there are several accounting system tools such as cost control, price optimistic and inventory management.
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