Unit 5: Management Accounting London School of Science and Technology

Task 1

P1. Management accounting and requirement of different type of management accounting system

Management accounting: Management accounting is the accounting information that is used by management i.e. financial or non-financial to make the decision. Management accounting is the process of preparing the management reports of Dell for better planning of the management. Management decides based on management accounting (Gurski, F., Rethmann, J. and Yilmaz, E., 2017). The functional area of management accounting is not limited to provide cost information it also provides budgeting and helps to set the goals.

Difference between financial accounting and management accounting

Different system of management accounting: Management accounting system focus on tracking cost associated with the production of goods and services in a company. A few of the most common system include:

1. Cost accounting system: Cost accounting system also refers to a product costing system is a framework worked by firms to estimate the cost of their product for profitability analysis, inventory valuation, and cost control. Estimating accurate cost of a product is critical for profitable operations. A firm must know which product are profitable and which are not and this can be ascertained by only when it is estimated the correct cost of production. Inventory valuation methods or cost accumulation methods are known as cost accounting system in accounting literature.

2. Job ordering: It is a cost accounting system that accumulates manufacturing costs separately for each job. It is appropriate for firms that are engaged in the production of unique products and special orders. For ex, it is the cost accounting system most appropriate for an event management company, a niche furniture producer, producer of a very high-cost surveillance system. Job order costing or job costing is a system for assigning manufacturing costs to individual products, or batch of products. generally, it is used only when product manufacturing are sufficiently different from each other.

3. Contract costing: Contract costing is the costing method applied to determine the cost of construction work performed as per customer satisfaction. Contract costing also called terminal costing as it terminates with discharge of contracts. The construction work is undertaken at the site allotted by the clients. The contract sites vary and always outside either premises belonging to the clients. A separate codes number is allotted to each site where several contract works are undertaken. A contract account is maintained for each contract work are undertaken.

4. Price Optimisation: It is mathematical programs that calculate how demand varies at different price levels, then combine the data with information on cost and inventory level to recommend price that will improve profits. The modeling allows the any to use pricing as a powerful profit lever, which often is underdeveloped. It can be used to tailor pricing for the customer segment by simulating how the targeted customers will respond to price changes with data-driven scenarios. Price optimization starts with the segmentation of customers. A seller then estimates how a customer will respond to different prices offered through different channels.

5. Process costing: A process costing is an accounting methodology that traces and accumulates direct costing and allocates the rect cost of the facturing process. Cost are assigned to product usually in large batches which might include in whole months unit production. Eventually, the has to be allocated to the individual units of production. It assigns the average cost to each unit and is opposite extreme of job costing which attempts to measure the individual cost of production of each unit.

P2. Different methods used for management accounting reporting:

Accounting reports are a crucial part of making sure to have a complete picture of business performance. A comprehensive accounting report should be produced every quarter to give a holistic work business finance. While there are many kinds of reports that are valuable for protecting a business leader. This type of accounting report that helps to analyze the performance of the business is, so several kinds of managerial accounting reports need to be developed are:

There are several different kinds of managerial accounting reports that needs to be developed are:

1. Budget reports: It is the most fundamental report in managerial accounting. It helps a business owner to understand and control costs across the enterprises, whether it is a unified organization or has several departments. By evaluating expenses in the prior period, it became possible to estimate the budget for the following year and find a place to cut cost. A budget is an internal reporting used by management to compare the estimated budget projection with actual performance numbers achieved during a period. In other words budget reporting is designed to compare how close the budgeted performance was with actual performance. Since budgets are financial goals based on estimated and future projection, they are often inaccurate and can differ from largely from actual financial performance of the company. It is used to compare both set of data. For ex, budget reports typically follow the same formatting as an income statement. Sales and revenues are listed first followed of cost of goods sold, selling expenses, general and administrative expenses, other expenses and finally net operating income numbers.

2. Accounts receivable aging reports: This type of reports is crucial for any business. It provide a credibility or credit balance according to age. Typically including separate categories from items that are 30, 60, 90 days late. This can help adjust credit policies to align them with consumer repayment capabilities. Accounts receivable aging reports are periodic reports that categories the company's account receivable according to the length of time an invoice has been outstanding. It is used to tracking the financial health of companies customers. If an account receivable aging demonstrates that companies receivable are collected much slower then normal, this is a warning sign that business may be slowing down or that the company is tracking great credit risk in its sales practices.

3. Job Cost reporting: It provides a side by side view of total cost accrued in a single project. This report help leader to evaluate the profitability of specific type of jobs and optimize their operations by focusing on the job that are typically the most profitable overall. To apply job costing in a manufacturing setting involves tracking with jobs uses various types of direct expenses such as direct labor, direct material and then allocating overhead costs, (Indirect labor, warranty costs, quality control, and other overheads cost) to job costing. A job profitability reports is like an overall profit and loss statement for the firm but is specific to each job number. Job costing may assess all cost involved in a construction job or in the manufacturing of goods done in discrete batches. These costs are recorded in ledger account throughout the life of job or batch and are then summarised in trial balance before preparing the job cost or batch manufacturing cost.

4. Inventory and Manufacturing Reports: Companies that provide a physical product, especially those in manufacturing wit law fault tolerance, find their report very valuable. They help centralized data on inventory cost, labour and other forms of overhead involved in the production process, providing raw data to optimize assembly or machining. Production inventory refers to level of material and suppliers on hand of use in manufacturing production. It is bit different from work in progress, which is the value of goods in the middle of the production process and finished goods inventory which is value of production to customers. It is a list of goods, part of the material required to perform the manufacturing process in stock and available for use. To be fully effective this list should be continually updated so that it matches current and projected production needed.

P3

Marginal costing method- It is the type of costing under which there is an incremented and decremented of an opportunity cost if there is a production of an extra unit in the production department. Therefore, for the calculation purpose under this method only variable cost of expenses are taken into consideration (Gaver, Gaver and Austin, 1995). The main reason behind this is that it is fixed expenses are already absorbed by the company when it produced and for the calculation purpose only variable expenses are taken into an account to determine the net profit. Under this, marginal costing includes all variable expenses such as material and labor cost sum of fixed costs that include selling and administration expenses.

Absorption costing method- It is the type of costing under which all the manufacturing expenses are to be taken into consideration as they are as absorbed by producing units in a factory. Thereafter, at the time of ascertaining the net profit is that the variable and fixed expenses are to be taken. Regarding this, there absorption costing method is also called a full absorption costing method. It can be described in other words it can be described in which it also takes direct labor, direct cost and all type of manufacturing cost which are involved in the finished goods.

Interpretation

From the above table in which there are data and figures that the sales revenue is taken that is 270000 and after that at the time of ascertaining the cost of goods sold it will take all variable expenses such as selling and administration expenses, direct material, direct labor. Thus, there is a summing up all such expenses to determine the cost of goods sold. Thereafter, to calculate the net profit of a Dell Company there is a needs to deducting all the variable expenses from the gross profit that is 1020000 Beside this, the Dell company adopts the absorption costing method in which at the time of calculating net profit it takes all the type of expenses.

Thus, whether, it is fixed or variable expenses are taken into consideration at the time of calculating the cost of goods sold that is 21000 It includes all direct expenses, variable and fixed expenses are to be taken. Thereafter, the gross profit is determined by deducting the cost of good sold from the sales revenue that is 270000 Furthermore, for ascertained the net profit all fixed and variable expenses are deducted from the gross profit that is. It has been seen that there is a difference between the net profit of the absorption costing method and marginal costing.

The reason for this is that marginal costing consider only variable expenses and absorption costing considers all fixed and variable expenses. Most the scholar has done investigation under which it has been finding out that absorption costing method is that it is more suitable as it takes all type of cost for the purpose of calculating net profit.

The difference among marginal costing and absorption costing method

5. Marginal costing method is the type of method in which there is an increase or decrease in the opportunity cost if there is a production of extra units. Whereas, the absorption costing method is the type of method in which it produced all types of expenses such as fixed and variable that are taken into consideration at the time of ascertaining the net profit of a company.

6. Marginal costing takes only variable expenses at the time of ascertained the net profit of a company and ignore the fixed expenses. Therefore, at the time of determining the absorption costing it takes both types of expenses such as fixed and variable cost.

7. The difference among the marginal costing and absorption costing is that the net profit of marginal costing is higher than the absorption costing.

8. Marginal costing method can be called as variable costing method whereas in absorption costing method can be known as full costing method.

9. In the marginal costing method, it takes all the variable expenses that are to be considered as product cost and fixed are to be assumed by a company is a periodic cost.

P4 Advantages and disadvantages of budgetary control

Advantages of budgetary control tools: The major strength of budgetary control tools is that it coordinates activities across the department. Budgets translate a strategic plan into action. They specify the resources, revenues, and activities required to carry out the strategies plan for the coming year. The budget provides an excellent record of organizational activities. It improves communication with employees. It improves resource allocation because all request is clarified and justified. It provides a toots for corrective actions through reallocation.

Disadvantages of budgetary control: The major problems occur when budget is applied mechanically and rigidly. It can demotivate employees because of a lack of preparation. If budget is arbitrarily imposed down, employees will not understand the reason for budget expenditure, and will not be committed to them. It can cause a perception of unfairness. A rigid budget structure reduces initiative and innovation at lower level, making it impossible to obtain money for new ideas.

Planning tools used in budgetary control

Zero-based budget: Also called ZBB is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from zero, and every function within organizations analyzed and its need and cost budget is then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

Advantages Of ZBB:

• It is highly useful for non-profit or service organizations.
• Costs may be saved in inefficient operations.
• Since the resources are allocated on cost-benefit terms, there is a better utilization of resources.
• It forces the management executives at all levels for active participation in the budgeting process.
• Disadvantages of ZBB:
• In the case of large-scale business organizations, several decision packages are prepared and it involves more expenses.
• It is a time-consuming process.
• More paperwork is involved in the preparation of ZBB.
• Managers can be threatened by zero-based budgeting.

Incremental budget: An incremental budgeting is a budget prepared using a previous budget or actual performance as a basis with incremental amounts added for the new budget. The allocation of resources is based upon the allocation of the previous period(Ryan, P. and et.al., 2017). This approach is not recommended as it fails to take into accounting changing circumstances. Moreover, it encourages " spending up the budget" to ensure a reasonable allocation in the next period. It leads to a spend it or lose mentality.

Advantages of incremental budget:

• The budget is stable and change is gradual.
• Managers can operate their departments consistently.
• The system is relatively simple to operate and easy to understand.
• Conflicts should be avoided if departments can be seen to be treated similarly.
• Co-ordination between budgets is easier to achieve.
• The impact of change can be seen quickly.

Disadvantages of Incremental Budget:

• Assumes activities and methods of working will continue in the same way.
• No incentive for developing new ideas.
• No incentives to reduce costs.
• Encourages spending up to the budget so that the budget is maintained next year.
• The budget may become out of date and no longer relate to the level of activity or type of work being carried out.
• The priority for resources may have changed since the budgets were set originally.

A. For calculating the standard cost of PVC sheet require to manufacture 4,000 keyboards

PVC sheets/per unit – 2.5 feet
Price per sheet – 3.60 GBP
Total sheets needed 4,000 keyboards = 4,000*2.5 = 10,000 feet
Costs of 100,000 PVC sheets = 10,000*3.60 = 36,000 GBP
Thus, standard costs of 4,000 key boards = 36,000 GBP
Actual costs = 37,400GBP
Difference: standard cost – actual cost
= 36,000 GBP – 37,400 GBP
= 1,400 GBP (Adverse/Unfavorable)

As per result, Dell has given a negative variance of 1400 GBP on produducing 4000 keyboards because targeted cost is brouught down to 36,000 GBP while actual cost is set at 37,400 GBP.

B. Computing the material price and quantity variance
Material price variance (MPV): Actual quantity (standard price – actual price)
= 10,000 feet (3.60 GBP – 3.40 GBP)
= 10,000 feet (0.20 GBP)
= 2,000 (favourable)

Material quantity variance (MQV): Actual price (standard quantity – actual quantity)
= 3.4GBP (10,000 feet – 11,000 feet)
= 3.4GBP (-1,000 feet)
= 3,400 GBP (adverse)

P5

The dell company adopts the management accounting system that is used for responding to financial problems. These are described as follows-

6. Lean accounting: Lean accounting is adopted by dell company under which they used for both types of reasons are positive and negative reasons. The main reason for adopting this type of method is that they effectively finding out the main problems arise in the company regards to financial. Therefore, it helps the company to eliminate the wastage that is arisen through the accounting procedure while managing the cost and control all the financial transactions.

It helps the management to understand the information accurately, timely that is presented most understandable manner. Furthermore, it finding out the wasteful transaction that arises in the workplace and it does not require a complex system. Therefore, lean accounting is adopted by the dell company to find out and measure financial performance in the most desired manner.

7.Job costing system: It is the type of system that is adopted by the Dell company in which there is an all type of information gathered which is associated with the cost for a particular job or particular production. It is used by the company to responding to the financial problem arises in the company through finding out the cost data regard to the customer in which where they are reimbursed cost( Burns and Vaivio, 2001).

Thereafter, this job costing system in which they tracking the cost of material that arises under the costing sheet. Further, the job costing method includes all types of costing such as cost regards to overhead, material, and labor for the particular job of a company. It helps the company to effectively respond to the financial problem by taking all the cost which are on an accurate basis.

8.Transfer pricing: It is the type of pricing in which there is a rule and regulation levied on transferring any kind of products across borders. Thereafter, it includes various goods such as loans, property, gifts and capital goods, etc. Therefore, the price is generally made by adjusting taxes that are governed by the tax authorities. For this reason, they effectively finding out the financial problem in the most desired manner. Further, transfer pricing is included in the company's financial statements that are needed to be strictly monitored under which there is documentation such as a regulator and auditors.

9.Cost accounting: Cost accounting is used by the Dell company in which the main objectives are determined. Under which the input cost of each stage of the cost of production is finding out. Regarding this, it effectively finding out the financial problem by finding out the cost that is arisen through measuring the financial performance of a company.

Conclusion

Summarizing the whole report it has been concluded that the management accounting system is adopted by the dell company under which they can effectively make their day to day business operations in the most effective manner. Thus, management accounting is based upon the futuristic it ignored all historical data.

Further, it is used by the company to distribute the management reports to distributing the internal parties. It has been further analyzed that there is a vast difference among the marginal and absorption costing in which there is a variation of expenses at the time of ascertaining net profit. It has been also analyzed that the Most the scholar was done investigation under which it has been finding out that absorption costing method is that it is more suitable as it takes all type of cost to calculate net profit.

References

• Banerjee, B. and Das, U., 2017. Cost Accounting Standard-Setting in India. The MA Journal.
• Bhimani, A. and et.al., 2013. Introduction to Management Accounting. Pearson Higher Ed.
• Choi, N. G., Kulick, D.B. and Mayer, J., 2009. Financial exploitation of elders: Analysis of risk factors based on county adult protective services data. Journal of Elder Abuse & Neglect.
• Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations, and Society.
• Deegan, C., 2013.Financial accounting theory. McGraw-Hill Education Australia.

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