Types of Management Accounting Systems

SCENARIO 1

Section A – Understanding Management Accounting Systems

a) Differences between Management & Financial accounting.

Management accounting

The accounting is also called managerial accounting. It is an accounting used by the managers for helping the management of organisation in formulating the policies and procedures, forecasting, in planning & controlling routine business operations carried out by the organisation(Cokins and Dybvig, 2018). Management accounting captures both qualitative and quantitative information. Management accounting is not limited over providing the costs or financial informations only. It is also used in extracting the material and relevant informations from cost and financial accounting for setting goals, budgeting, decision making and like activities.

Financial accounting

The accounting system deals with preparation of the financial statements for outside parties like shareholders, creditors, suppliers, investors etc. It is purest accounting form having proper record of every transaction and reporting the financial data for providing the material and relevant information for users. It is based over various assumptions, conventions, principles like materiality, going concern accrual, consistency etc.

Key differences between the accounting methods.

• MA keeps record and reports about both financial & non financial informations of enterprise. FA deals only with keeping track records of all financial information related to an entity.
• Financial accounting information is used by both internal management as well as external parties, where the management accounting information is only relevant for internal management of company.
• Management accounting is for internal use of enterprise therefore very confidential, where financial accounting is prepared for public use.
• Management accounting prepared reports considering monetary as well as non monetary information like number of staff, raw material consumption and sale etc. On the other hand financial accounting deals only with monetary information in its reports.
• Management accounting is focused over providing information for helping the management in performance evaluation and decision making for future. Financial accounting is focused over providing information to the users about functioning of company.
• Financial accounting is done over specific periods where management accounting as per the requirement of management.
• Financial reports are prepared after the transactions or events are occurred where the management accounting is done at both times prior for preparing budgets and after the production to analyse the performance and variations.

b) Cost Accounting Systems

Cost accounting deals with examining the cost structure followed in business. This is done by collecting the information of costs which are incurred by activities and operations of company, to assign the selected over products & services. This also evaluates the efficiency of cost operations it is focused mainly over identifying the areas where companies could earn or lose money. This helps them in effective decision making for generation of future profits. Cost accounting is important for the business enterprise in proper allocation of its cost and resources in the activities of companies. It involves preparation of budgets for the different operations of entity and comparing the actual output for measuring the variances so that the corrective measures can be taken by company. It involves different costing techniques like standard costing, direct costing, marginal costing and absorption costing.

Direct Costing 

Direct costing means specialized kind of the cost analysis which uses the variable costs for making the decisions(Cokins and Dybvig, 2018). The costing do not consider the fixed costs as they are assumed as associated with period in which it is incurred. Direct costing is used mainly for the short term decision making. It is an analysis of the incremental costs. It is used mainly as an analysis tool. Direct costing do not involve allocating overheads that are not productive or irrelevant for the enterprise in decision making.

Standard Costing

Standard costing can be known as practice for substituting expected costs for actual costs in accounting records. Difference between the actual and budgeted are shown by recording the variances. The approach can be referred as simplified alternative for cost cost layering system, like LIFO & FIFO where historical cost information are maintained. Standard costing includes creation of expected costs for the defined activities in an organisation. Standard costing is used as it provides results within short period of time.

c) Inventory management systems

Inventory management is combination of processes, technology and the procedures which are used to oversee maintenance and monitoring of the products, these products could be assets, supplies , raw materials or finished products. Inventory management is used for tracking the movements in products in the processes. The management systems is used for checking rawa materials & finished goods quantities, so that entities can produce the goods accordingly. It is also defined as process of storing, ordering and of using the inventory of company. Companies having complex manufacturing process and supply chains it is difficult to balance risks related to inventory gluts & shortages. For achieving these balance, entities have come up with two of the major inventory management methods that are materials requirement planning and just in time. It is essential for the businesses to have an effective management of inventory. Firms should have inventory management software that keeps record of every movement of goods within or outside of organisation. This will help the management in making informed business decisions.

FIFO – The inventory management where the inventory purchased at first will be sold at first by the manufacturing units.

LIFO – To put value over the inventory the method deals with selling at first the inventory which is purchased at last.

AVCO – The method deals with computing cost by dividing the total costs with number of units.

d) Job Costing Systems

Job costing refers to the costing method which is applied by industries for measuring production in completed jobs(Bromwich and Scapens, 2016). In job costing costs are compiled for job or the work order. Production is made on the orders of customers and not for stock. Job costing can be defined as method for recording cost of manufacturing job, instead of process. Using the job costing system managers can keep record of costs related to every job, and to maintain the data relevant for operations of business. IT is an accounting methodology used for tracking the cost of creating product. Certain projects like construction, requires performance of different operations, the methodology is used by accountants for tracing the expenses of every job. Job costing provides space for the inclusion of costs of direct materials, direct labour & the overhead. Cost of jobs stays in work in progress till the duration of job. Job is completed, they are transferred toi the accounts of finished goods.

e) Benefits of Management Accounting Systems

Cost Accounting System

Advantages & Disadvantages of Costs accounting

Advantages

• Improvised and new production methods are followed in the cost accounting systems which helps in reducing the costs.
• It helps the enterprise in identifying the reasons of increase or decrease in profits. It helps in taking remedial actions for maintaining and improving the profitability of company.
• The cost information also helps the enterprise in making their buy or sell decision.
• It helps in controlling the costs of operation within the business.

Disadvantages

• Decision are taken on past information for the future activities, as costs are appreciated every year.
• Costs are ascertained on the basis of full capacity utilization. Costs may vary with the capacity.

Inventory Management System

Advantages and disadvantages of Inventory management system.

Advantages

• Inventory management systems helps in keeping record of every movement of goods within organisation.
• This helps in making accurate inventory orders.
• It helps company in maintaining centralized record for every asset & item in control of organisation(Modugno and Di Carlo, 2019).
• Efficiency in inventory management systems raises the operational performance leading to more productiveness.
• Good inventory management system helps in saving time and money for company.

Disadvantages

• The cost of inventory management is high and this increases the costs of company.
• Ineffective inventory management may lay gap between the production inventory requirements.
• Ineffective management may cause the company in increased carrying cost of company.

Job Costing System

Advantages and Disadvantages of Job Costing system.

Advantages

• Costs could be ascertained over ant stage of job completion which helps in controlling the costs by taking corrective measures.
• Profits and expenses of every job could be identified separately(Marota and et.al., 2017).
• On job completion the cost elements , selling, profits, prices could be compared by company with future estimated to control the costs, so that profits could be maximized.
• Estimates could be made by the manager over the past records. Defectives and spoilage arising from jobs could be identified easily, therefore costs could be controlled.

Disadvantages

• Jobs have no standardisation in job costing, therefore closes supervision is required.
• Costs cannot be controlled as steps of control could be taken after the expenses have been incurred in job costing.
• Ascertaining accurate costs informations are not obtained as large number of jobs are executed in the job costing.

Section B : Methods used in management accounting reporting

a) Different management accounting reports

Report is the process of presenting the business functions to check the profitability of the business. These reports helps the management in analysing the effectiveness level from several activities.

There are various types of management accounting reports that could be prepared by Excite Entertainment ltd.

Budget Reports

These management accounting reports are prepared in measuring the performance of company and it may generated for departments, specific activities or for the business(McInnis, 2018). Every company prepared budget for understanding the business scheme. Budget refers to an estimate about the costs and revenues. It is made on the basis of previous estimates, assessing previous experiences. Objective of company is to control the cost and achieve its goals and objectives. Budget reports guides the managers in proper allocation of the resources, cutting costs and using the resources in the best possible manner. Budgets are prepared by every business for controlling the costs and achieving the desired targets with available resources.

Cost Managerial Reports

Management accounting is used for computing costs of the articles which are manufactured. It takes into account labour, overhead, material costs and all the other costs. The reports of cost management offers summary of these informations. Report provides managers capacity of realizing costs prices of the items against their selling prices. Margins of profits are monitors and estimated by these reports as it provides more clear pictures of costs of procurement or production of the articles. Labour costs per hour, inventory waste and the overheads cost are part of the cost managerial accounting report. It provides the management with exact understanding related to all the expenses being incurred, for better resource optimisation.

Performance Reports

Companies prepare performance reports for reviewing performance of company as whole for every employee and for whole enterprise. Performance reports for different departments are also generated by some organisations(Cristea, 2017). These reports are used by the managers in making important strategic decisions for the future performance of organisation. Individuals are awarded for the commitments to organisation and under-performers are dealt according using these reports. The reports provide for the performance in carrying out given activity or business. The performance of the company is analysed using theses reports. The areas where the improvement are required may be made using these reports.

b) Information made available to the users should be relevant, accurate and reliable to the user.

The management accounting information is used for making the business decisions. The information provided should be accurate, relevant and reliable. Management makes estimates in management accounting for various activities and budgeting processes. If the information provided is not accurate, wrong estimates will be made which will be made by the management for future activities. Allocation of resources over different process activities and departments will not be accurate(Bottomley and Bosman, 2018). Inaccuracy of resource allocation will increase the cost of production. The actual areas where the improvements are required to made will not be identified. This is essential for the business enterprise that the management is provided with information that is accurate and reliable. Controlling the cost would not be possible in absence of reliable information. The strategic decisions for the process improvements and cost reduction are essential. The overall performance of the company will be affected if the future budgets and estimates are made on irrelevant or inaccurate information. Timely information should be provided the managers so that review of the budgetary reports and other activities could be made and corrective actions can be taken on time.

c) Evaluating management accounting systems and reports to be integrated in Excite Entertainment Ltd operational process.

Management Accounting Systems

Management Accounting Reports

SCENARIO 2

Comparison of profit or loss under different cost accounting techniques.

Marginal Costing

It is defined as costing technique where the variable costs are only charged to the cost of product. The costing techniques do not takes into account fixed cost as it is treated as period costs. It is used by managers in making decisions and only variable costs are considered.

Benefits

• It facilitates comparison and cost control(Wild, 2017).
• It is helpful in making the pricing decisions over the product life cycle.
• It helps in defraying profitability and break-even chart effectively.

Drawbacks

• Segregation of variable and fixed cost is difficult.
• The technique do not consider fixed cost for cost of product.

Calculation of cost per unit

Absorption Costing

The costing technique is used by company for identifying the cost of product. The technique considers both variable as well as fixed cost incurred for manufacturing the product. It provides more accurate and reliable information as all the cost are covered for the calculation of product cost(Nakajima and Tobita, 2019). Excite limited is using this approach for getting more accurate and reliable resources.

Benefits

• It provides management with realistic results.
• It helps in tracking the profitability of products in appropriate manner

Drawbacks

• It do not provides for improving the operational efficiency.
• It do not allow comparison of costs for different product lines.

Assessment of cost per unit

Profitability statement

SCENARIO 3

Part A

Comparing and contrasting planning tools used in management accounting.

Planning tools helps the company in price approximation for producing the products.

Cash Budget

Cash budgets are prepared based on estimating the cash flows for the business over specific time periods. The budgets are prepared by the organisations for assessing that sufficient cash is available with company for carrying out its operations. It helps the Excite Ltd in allocating sufficient fund to different business activities for manufacturing the product so that process is not hampered due to liquidity issues.

Operational Budget

Operational budgets consists of expenses and revenues over given time period. It is used by the organisations for planning its operations(Mirzaey, Jamshidi and Hojatpour, 2017). The budget is prepared prior to the reporting period as the plan or goal which the business aims to achieve. It helps Excite limited in planning the budget goals to be achieved within given period.

Zero Based Budgeting

The budgeting method, where all the expenses related to cost should be justified for every period. The budgeting techniques starts from taking zero as base. Each function in organisation is used for analysing the cost and its requirements. Excite ltd uses zero based budgeting in some of its activities starting from zero without considering the previous budgets.

Part B

Comparing the ways in which financial problems can be dealt and can be prevented.

Calculation of BEP

Firm need to sale 4000 units of the product so that entire cost can be covered.

Units need to be sold to achieve target profit

For achieve the profit of £90000 company needs to sell 5300 units valued at £50 per unit. It is assumed that firm produce the leisure products used in manufacturing plants. Cost of each product is assumed £50.

It is advised to the sales team that it can give discount to the customers and by doing so sales of the product can be increased. It is also advised to the production team that it must evaluate production related operations and by doing so unproductive activities must be eliminated so that cost can be reduced and profit can be increased.

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CONCLUSION

Management accounting is a critical part of business organisation. Every organisation has to deal with the concepts and techniques of management accounting. Business organisation are using the different management accounting systems for increasing their efficiency. The planning tools helps the organisation in making effective use of the resources. With the use of management accounting organisations are achieving their goals and objectives.

You can also check out:-

Role of Management Accounting in Sainsbury

Annual and Corporate Structure of Wesfarmers Ltd

REFERENCES

Books and Journals

• Mirzaey, M., Jamshidi, M.B. and Hojatpour, Y., 2017. Applications of artificial neural networks in information system of management accounting. International Journal of Mechatronics, Electrical and Computer Technology.7. pp.3523-3530.
• Nakajima, M. and Tobita, K., 2019. Reconstruction of the Management Accounting System based on Material Flow Cost Accounting (MFCA) and Throughput Accounting (TA): Expansion of the Concept of Opportunity Cost. Kansai University Review of Business and Commerce.(18).pp.35-49.

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