The purpose of this report is to evaluate the effectiveness of management accounting in the context of given of business scenario. In this report director of finance of Tech UK has asked to trainee management accountant to write a financial report of organisation to analyze its current situation by considering:
- Explain the management accounting system and its essential requirement in Tech UK.
- Provide an information with the help of income statement by considering different methods as absorption and marginal costing.
- Determine different types of budgets and its advantages and disadvantages within TECH UK.
- Discuss the appropriateness of management accounting in context of resolving financial issues of business.
INTRODUCTION
Accounting is the process of classifying, summarising, analysing, interpreting and communicating to support the plans of business, control and monitor them for enhancing the performance of the business. On the other hand, Management accounting is the process of enhancing the accounting in such a manner that it becomes useful for the managers of the company. It enables the internal management of the business to conducts the activities more effectively and efficiently. The most of the management accounting information is financial in nature but it is interpreted in such as manner that it helps the managers to take decisions on hand.
The name management accounting itself defines that it is the study of managerial aspect of accounting. The purpose of management accounting is to redesign the accounting information in such a manner that it becomes helpful for the managers in the policy formation, execution control and maintaining effectiveness in the accounting (Baldvinsdottir, Mitchell and Nørreklit, 2010).
TASK 1
1.1 Difference between financial accounting and management accounting
There are many significant differences in financial accounting and management accounting which are defined as follows:
|
Financial Accounting |
Management Accounting |
|
Financial accounting is regulated by the law such as US-GAAP, IFRS and they have certain pre specified standards. (contents, principles) |
Management accounting is also regulated and they are established by the entrepreneurs but it does not have standards. |
|
Financial accounting takes the past economic events and historical data is used in the financial statements. |
The management accounting considers historical as well as future data and information for planning the actions of the organisation. |
|
Financial accounting has reporting obligations because the statements are regulated by law. |
There is no such type of obligations in management accounting and the operations of company are decided by themselves. |
|
Financial accounting is done for the financial years. |
The management accounting is done acording to the time horizon decided by the management. |
|
It is obligatory to compile the financial statements of the financial year. |
There is no such obligation as to compile the financial statements, it is defined by the company itself. |
|
Financial accounting information is generally presented in the financial values. |
The Information presented in the management accounting is generally quantitative. |
1.2 Importance of management accounting as the decision making tool for the managers
Management accounting helps the managers in taking effective decisions by providing necessary information to the managers. The management accounting takes into consideration the historical data and it is studied to make possible impact on the future decision making. Many types of management accounting information are used in the decision making which are discussed as below:
ABC costing: ABC costing is one of the most effective management accounting system which helps in determining the activities of the company and allocating various direct and indirect cost with the operations. As the name implicates it helps in prioritising the activities and functions based on the priorities. The costs are allocated in such a way that it does not effect the traditional methods of cost allocation does not get affected (Bodie, 2013).
Evaluating Effective information: Proper evaluation and analysis of information and data is done so that this can lead in proper decision making and strategic planning process. There are different type of information which is need to determined whose implication can affect the profitability of business.
Relevant cost analysis: The different cost is determined and analysis is done as to find the important factors that is associated with reducing the cost and improving the profitability of business. The relevant information is used in making decisions and strategies.
1.3 Cost accounting systems
Cost accounting systems are prepared to find out the total cost that is incurred in the overall production activities, manufacturing cost and functional cost. The major purpose of cost accounting systems is to minimise the cost of production and increase the profitability of business. All forms of direct and indirect cost are considered in the cost accounting.
Actual costing: The actual costing system considers the actual cost that are incurred in the cost accounting format. The costs such as direct cost , overheads cost and other indirect costs which are linked to the production process are included in this accounting system. Actual material cost , actual labour cost and actual overheads are included in the actual costing system. It is calculated as the following formula:
Actual direct cost = Actual cost rate * Actual quantities used
Actual indirect cost = Allocated indirect cost rates * Actual quantities of the cost of allocation bases
Standard costing: Standard costing is associated with the cost of direct material , cost of direct labour and manufacturing overhead of manufacturing company. In standard costing, the costs accountants assign a standard or expected cost for the various costs of production , which means that the inventories of manufacturers and cost of goods sold will reflect the standards cost in the beginning and not the actual cost. The manufacturers take the target to incur this much cost only for the cost of production, although the manufacturers still have to pay the actual cost. Standard costing as a result will always show a difference between the set standard cost and the actual cost that is originally incurred and the difference between these costs are called variances (Chenhall and Smith,2011).
Normal costing: Normal costing measures the cost of manufactured products by using actual direct material costs, actual labour cost which is based on a pre determined rat. Normal costing is associated with the analysis of actual material and labour cost in estimating the overheads cost.
UPTO50%
Avail The Benefit Today!
To View this & another 50000+ free
