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Management Accounting and Different Types of Management Accounting System

University: LONDON CHURCHILL COLLEGE

  • Unit No: 5
  • Level: Undergraduate/College
  • Pages: 12 / Words 3006
  • Paper Type: Assignment
  • Course Code: H/508/0489
  • Downloads: 81
Question :

This assessment will cover following questions:

  • Generate an understanding of the management accounting systems.
  • Discuss the use of planning tool used in the management accounting.
  • What are the management accounting techniques?
Answer :

INTRODUCTION

Management accounting helps in preparation of different financial reports that help in analysing the operation and performance of the business. This report will identify the use of costing methods for ascertaining the financial performance and the different types of management accounting systems that can be used. The report will also evaluate different budgetary options and conclude how the management accounting tools can be used in an organization.

MAIN BODY

P1 Management accounting and different types of management accounting system.

Management accounting is also known as managerial accounting. It is defined as process of analysing the business costs & operations for preparing internal financial records, reports and the account for helping the managers of company in decision making for achieving the goals and objectives of business.

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Functions of management accounting

  • MA provides financial information to internal management for decision making.
  • MA analyses cause and effects of facts and figures presented in the accounting reports (Lasyoud, Haslam and Roslender, 2018).
  • It uses special techniques & concepts for mitigating the variances and interpretation of data.
  • It makes efforts for improving the efficiency of employees working in the organisation.
  • It analyses both quantitative and qualitative reasons of the variances.

Financial accounting system

It could be defined as specialised accounting branch for keeping track of the financial transactions of company. With the use of standard guidelines, transaction are recorded, than summarized & presented in the financial reports or the financial statements like income statement or balance sheet (McLaren, Appleyard and Mitchell, 2016).

Rules and procedures

Financial accounting runs on the rules and procedures laid down by the government authorities for recording and representing the financial transactions. They have to follow the set accounting standards for presenting the financial statements.

Accounting information systems 

Accounting information systems are the structures that business uses for collecting, storing, managing, processing, retrieving and reporting the financial data so that it could be used by consultants, accountants, business analysts, CFO regulators and auditors.

Internal control

There should be strong internal control within the organisation so that all the information provided by accounts is accurate and reliable. The control should be laid at every level from where the information is being received. It is the duty of executives to ensure that all the information are being provided are correct.

Auditing

In financial accounting all the financial information is audited by the auditors (Burritt, 2017). They ensure that all the information is being recorded using the appropriate accounting standards. They also ensure that the information provided in the financial statements is free from material misstatements.

Cost Accounting systems

It refers to business practice where the organisations are concerned with recording, summarizing and studying the cost spent by company over any service, process, products or anything in organisation. Such kind of financial statements give management visibility of their cost informations.

Product costing

Product costing refers to costs incurred for manufacturing the product item. These cost includes direct materials, direct labour, consumable production supply and factory overheads. Product costs are presented in financial statements as it includes manufacturing overheads as required by IFRS.

Activity Based Costing

ABC refers to costing method identifying the activities in organisation and assigning cost of every activity to the products & services as per actual consumption by every activity. The model assigns indirect costs to direct costs in comparison with conventional costings.

Management accounting system

Management accounting is used by organisations for helping them in making effective decision making process. By making budgets for processes they keep control over costs. By applying various concepts and techniques management accounting maintain the profitability.

P2 Methods used in MA reporting.

The purpose and uses ;

Trading and profit or loss account - Trading account is prepared by entities for showing results of the trading activities that are purchases and sale of goods. Profit & loss account is prepared for identifying the profits actually earned or sustained loss from business. It is used for decision making.

COGS - It is prepared for knowing the actual costs of the goods that are sold by business during the year considering opening and closing inventory.

Income Statement – It is prepared for knowing the profits left with company after incurring all the costs associated with business. It is used for knowing the profitability of business (Ameen, Ahmed and Hafez, 2018).

Balance sheet – Balance sheet is prepared for representing the assets and liabilities of business. It is used for identifying the financial position of business.

Cash flow statement – Cash flow statements is prepared for recording the cash inflow and outflow from business. It is used to know the liquidity of company.

Inventory management system

Inventory management refers to the management of inventory within organisation. Organisations incur costs for implementing inventory management system. This ensures the availability of inventory for the production and keeps track record of all the finished goods inventory. Inventory management systems installed in the warehouses.

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Job Costing

In job costing all the costs incurred for the job are identified separately. All the costs associated with job are recorded by the organisations. It is the most useful method of MA as it helps in knowing the cost of each job in manufacturing the product (Järvinen, 2016). It provides for optimum use of the resources so that less wastage is resulted with high level of the production. Like the cost of dying the c

M1 Benefits of MA and its application.

MA helps in maintaining and improving the profitability of company. They are applied in the internal management of company. They are applied in the production processes for reducing the costs of product and increasing profit margins.

D1 Relationship of MA systems and reporting within organisation process.

Both systems and reporting are integrated as the reports are prepared on the basis of accounting systems being followed. In each accounting systems different expenses are incurred requiring separate cash flows that are reported in the accounting reports (Bento, Mertins and White, 2018). Therefore reports cannot be prepared without the information in management accounting systems

P3 Cost calculations using appropriate techniques in cost analysis for preparing income statements.

Cost calculations

Management accounting techniques

M2 Management accounting techniques

Marginal Costing

Marginal costing refers to ascertainment by making differentiation between variable and fixed cost of the marginal costs & effects on profit related to change in volumes or output. Marginal costing only consider variable costs associated with the product.

Absorption Costing

It is a costing technique for valuing cost of product. It included both variable and fixed costs associated with manufacturing of product. Unlike marginal costing it do not consider fixed cos as period costs. It is used when company is having constant demand of products.

D2 Financial reports accurately applying & interpreting data for the complex businesses.

Cost

Cost in business refers to the monetary valuation for efforts, material, resources, time and the utilities consumed, risks and opportunity forgone for producing or delivering goods or services.

Product costing

It provides the costs that are incurred for producing a product. It includes both variable and fixed costs. Variable costs includes cost of material, labour and variable production overheads. Fixed costs are the factory rent, power and heat. Cost are allocated to products as variables and fixed. Variable cost changes with change in volume where the fixed costs remain fixed irrespective of volume.

Normal costing

It is used for deriving costs. In this costing method actual data are used for derivation of cost of product with exceptions to manufacturing overheads rate.

Standard costing

Standard costing helps in ascertaining the ideal cost within which the production of the related goods or service must be completed and this is then compared with the actual cost.

P4 Different types of planning tools used for budgetary control

Sales Budget:

Advantages

Disadvantages

Sales budget helps in estimating the revenue that the company will earn and it also helps in planning for the resources in advance (Maas, Schaltegger and Crutzen, 2016).

Sales budget is not an adequate budget as it does not take into consideration the changing trends on which sales is based.

Production Budget:

Advantages

Disadvantages

The major advantage of production budget is that it helps in ascertaining what will be the production level and therefore helps in revenue prediction as well.

The disadvantage of this budget is that it is a time-consuming process where the managers have to take into account different associated products in order to estimate the production units.

Cash Budget:

Advantages

Disadvantages

It helps in avoiding the bad debts and also assesses the monetary deficit in the business if there is any quickly.

Here, everything is based on estimation and the flexibility aspect is also not addressed in such budgets (Lopez-Valeiras, Gomez-Conde and Naranjo-Gil, 2015.).

Flexible Budget: 

Advantages

Disadvantages

It helps in incorporating the change in the economy easily and it also assists in determining what is the expected production level according to the changing business conditions.

The managers need too much time and it is complex procedure where different features need to be included in the budget at all times.

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Flexible Budget

Flexible Budget case 3

M3 Application in budgetary control

Sales Budget: Sales Budget helps in forecasting the sales level that the company must achieve. Under this, the managers are able to utilize the resources at a maximum level, and they are also able to forecast their sales.

Production Budget: The production budget is prepared to estimate the number of production units that can be manufactured form the sales forecast that has been prepared (Latan and et.al., 2018).

Cash Budget: It helps in estimating the cash inflows and outflows that will occur during a particular period and identified what will be the future requirement for cash.

Flexible Budget: This type of budget automatically gets adjusted with the changing volume or activity level and therefore is referred as flexible budget.

P5 Comparison of different adaptation methods adopted by organization for responding to financial systems

Benchmarks: These help in setting up certain standards or goals that are to be achieved with the performance levels and here actual numbers are compared to the standard or benchmark ones.

Key Performance Indicators: KPI technique helps in selecting certain criteria or levels such as the sale levels, profit share or the market share as the correct strategy for comparing the actual performance with the indicators that were set.

Balance Scorecard: Under this, the company is able to resolve its monetary as well as non- monetary issues and the performance is also measured from different perspectives such as financial as well as organizational capacity.

Budgetary targets: The budgetary target financial measure includes the development of budget that help in estimating the different figures and if the targets of the company are in lieu with the budget of the company (Konopczak and Welfe, 2017).

Flexible Budget case 5

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M4 Sustainable success

Financial governance: This indicates the manner in which the monetary or financial information is gathered stored, managed, monitored and controlled by the organization or its management team. There are various compliance as well as disclosure norms that are attained under the financial governance and this can be used to identify and root out the loopholes that exist in the managerial process of the company. The company is able to expand their profitability level along with the goodwill and managerial efficiency but the compliance norms are very rigid in nature.

Characteristics of management accountant: A management accountant needs to be prudent in their role and responsibilities where they need to evaluate the performance of the businesses, the different budgeting techniques, the various accounting strategy development and implementation and also the usage of the information systems that are linked to the management accounting systems (Granlund and Lukka, 2017). There are various skills that the management accountant needs to possess and these include quick decision-making, adept in using different analytical tools, capable of developing useful insights etc. and these will help in improving the efficiency of the company collectively.

D3 Planning tools used to solve the financial problems

Benchmarks:

Advantages

Disadvantages

It helps in improving the performance and motivates the employees to meet the standards that have been set.

The information that is provided under this is insufficient for predicting the future and the customer might not be completely satisfied.

Key Performance Indicators:

Advantages

Disadvantages

It helps in easily identifying the key performance of the employees and ultimately the progress of organization can also be tracked.

The technique does not incorporate innovation into its practices and ultimately the quality gets compromised due to the achievement of key level that has been set.

Balance Scorecard:

Advantages

Disadvantages

This technique shows the performance of the company and it also helps in integrating the performance with the vision and mission of the company (Endrikat, Hartmann and Schreck, 2017).

It is an extremely time-consuming process and the technique is also expensive because it involves both financial and non-financial measures of improvement.

Budgetary targets:

Advantages

Disadvantages

These help in developing a realistic estimation of the future targets and therefore the future performance of the company can be mapped up to a certain level.

The disadvantage of the budgetary target is that it is not a full proof measure and even after giving too much time and resources, the company might not be able to utilize its benefits completely.

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CONCLUSION

The report above helps in concluding that management accounting is an extremely important technique in identifying the different costing methods such as absorption or marginal costing plan that can be used in order to prepare the financial statements. The different types of costing reports such as activity based costing, normal costing etc. were discussed and the budget types was also evaluated. Lastly, the report evaluated the concept of financial governance and its impact on the management accounting.

You can also check out:-

Management Accounting and It's Techniques

REFERENCES

Books and Journals

Endrikat, J., Hartmann, F. and Schreck, P., 2017. Social and ethical issues in management accounting and control: an editorial.

Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting. 45. pp.63-80.

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