Levels of Management Accounting in Kef Ltd.

LO1

Management Accounting

Management accounting refers to the accounting system in which reports are prepared and used by the management for decision making. It is used by the internal team only. According to The Institute of Cost and Management Accountants, London, management accounting is the application of professional skills in the preparation of reports that assists management in formulating policies and undertaking operations (Ax and Greve, 2017).

Management Accounting System

Management accounting system is deployed to provide useful information that can be used by the management in taking better decisions. It provides valuable data that helps in operating business efficiently.

Integrating management accounting in an organization

Management accounting helps in preparing the reports that provides accurate and timely information to managers to make decisions. Importance of integrating it in Prime Furniture's is given below.

• Helps in forecasting future: Management accounting helps in forecasting the future trends I business and helps in taking decision based on forecasts. It helps in answering whether company should diversify in different market, invest in new equipment’s, to merge or acquire another company etc.
• Helps in analysing variances: Management accounting helps in identifying performance discrepancies. This actually happens when actual performance deviate from the standard performance (Chenhall and Moers, 2015). Management accounting uses different techniques to help management to reduce such variances, mostly the negative ones.
• Analysing the rate of return: When there are more than one investment opportunities, company is required to choose the most profitable one, in how many years company will achieve breakeven point etc. Management accounting helps in answering these questions.

Origin, role, and principle of management accounting

Origin

Management accounting is derived from financial accounting but are very distinct from each other in terms of roles and functions. It was developed in England during industrial revolution.

Role

There are different roles management accounting plays and some of the important roles are stated below.

• Planning: It helps in carry out planning process to meet the short term and long term requirement. Management accounting helps in this by providing relevant accounting information that is used in decision making process.
• Organizing: Management accounting helps in formulating internal framework within which activities are required to be carried out. It also clears the roles and responsibilities of the authority. It helps in proper functioning of the organization.
• Communicating: It helps in establishing and maintaining the effective communication system. It reports performance based on the information provided. It also highlights the activities that requires more attention. Communication is plays a vital role in an organization.

Principles

The management accounting principles are of two types which are discussed in detail below.

• Principle of Causality: This principle models organization cost based the relationship between inputs and outputs of the resources involved in the production process.
• Principle of Analogy: This principle provides the user of the management accounting information to apply the skills and knowledge gained from the casual relationship using reasoning about the past and future outcomes for optimizing efforts (Hald and Thrane, 2016)

Comparison between management and financial accounting

Types of management accounting system

There are different types of management accounting systems and the most widely used systems that can be implemented by Prime Furniture's are stated below.

Cost-accounting systems: This system is usually used by the manufacturing concerns which aims at estimating the cost of production of products and services in which the organization deals in It also helps in tracking inventory through different stages of production (Cost Accounting Systems, 2019).

Benefits:

• Helps in measuring and improving efficiency by comparing and analyzing the differences.
• It helps in reducing the price by eliminating activities which are unnecessary and do not add any value.

Inventory management systems: This system aims at managing the inventory of the organization which includes management of raw material, other components and finished products. This system is capable of tracking inventory on real time basis.

Benefits:

• It increases the accuracy of data analysis and helps in preventing out of stock and wastage.
• It helps in keeping the warehouse well organized and helps in carefully tracking inventory.

Job-costing systems: It is the system associated with collecting information about the cost related to the specific production or job. This keeps track of cost with respect to the production of a product which can be used in further business operation.

Benefits:

• It can be used as a basis for estimating similar jobs that can be undertaken in future.
• It helps in detecting defective work in relation to specific job and responsibility for the same can be fixed (Jansen, 2018).

Price-optimizing systems: This model calculates how demand changes with the change in price levels and the combination of this information with other cost and inventory information helps in dealing with price.

Benefits:

• This reduces the manual work and helps team to invest their time in other value added activities.
• By automating tasks, this system has helped in quick decisions (Honggowati and et.al., 2017)..

Relevance, reliability and accuracy of information

The information provided should be relevant to the needs of the organization and should also have reliability factor which refers to the authentication of the information based on certain documentation or proofs (Mack, and Goretzki, 2017). The information provided should be accurate and timely otherwise it may lead to wrong decisions making by the users. All the three factors are important for the taking meaningful decision by the users.

Presentation of information

Information should be presented in such a way that users of the information can understand what it intends. It should include all the relevant information but the presentation of which should be understandable.

Types of management accounting reports

• Budget reports: This report is prepared for measuring the performance of the organization. These are prepared using previous experiences which helps in meeting with changing circumstances.This help the company in measuring actual performance of company with the predetermine budget of an organization.This help the company in determining which expenditure of company is too high, so that on the basis of same different action can be taken in an organization.
• Account receivable reports: This report is prepared when the company depends upon the extending credit to the debtors. This helps in analyzing the collection process and bad debts.This is one of the aging tool which is used by organization in ascertaining the bill which are due or overdue for the payment (Malina, 2018).This report is also known as one of informational report as well, as it contain some sort of information about the customer.Generally organization uses this report to synchronized thepayment process in an organization.
• Performance reports: This report presents the performance of the company as well as of each employee. This helps in taking key decisions about the future of the company. This report includes the performance indicator which need to be achieved by an organization. On the basis of the actual performance that indicator are compare and variance are being found out. This help the company and employee to plan the future activity more efficiently to achieve the goal.
• Cost reports: This type of management report used to contain the variety of cost incurred by company in manufacturing product in an organization. On the basis of such information manager in the organization used to plan the different activity in the organization to reduce the cost of company in long run of company. As with the help of that company is able to have a exact idea about the situation of company.

LO 2

Calculate cost using appropriate technique of cost analysis

Absorption costing

Cost per unit

Assessment of COGS

 Marginal costing

Interpretation- From the above evaluation it has viewed that, the profit resulted with application of absorption costing is high as compare to that of an marginal costing. As Net profit by applying absorption cost is 82335, 71500 and 87695 and marginal costing as 60200, 85150 and 85300 respectively three year . It provides a true picture of the profitability by considering both variable and the fixed cost.

LO 3

Advantage and disadvantages of different type of planning tool

Cash Flow Budgets:

Cash flow budget is document which is used as a planning tool at the time of preparing of different budget in an organization. Cash flow budget used to show the estimations of different cash receipt and cash expenditure that may occur during certain period of time. This budget help the organization in ascertaining the availability of cash at all the time in business.

Advantage of cash flow budget:

Cash flow budget used to help the company in having a day to day knowledge of situation of organization. As it help the company in identifying the potential deficit of a company. Also provide company with the information regarding surplus of money left with organization to plan future resource planning in an organization (Maskell and et.al., 2016).

Cash flow used to help the organization in becoming more resourceful, as using cash budget used to help the organization in having better idea about the way cash can be saved in an organization. This help the company in optimum utilization of resources.

Disadvantages of cash flow budget:

Cash flow used to sometime used to create the situation of theft and loss of money in the organization. As cash flow budget can be used by any employee as a informational tool to have a idea about the surplus money available in the org

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