Management accounting is a core function while managing an organisation, which includes various systems and techniques to prepare managerial reports and other documents so that it can reflect a true and fair managerial and financial position of an organisation which helps investors and other related parties to access accurate management reports and records. Rowlinson Knitwear is a retail clothing company that deals in personalised knitwear, which uses cost analyses techniques like marginal and absorption costing to prepare their income statement and uses planning tools for the preparation of the budgets which are the future estimates of their expenses and profits.
This project focuses on management accounting and its tools and techniques which help an organisation like Rowlinson Knitwear in the preparation of their managerial accounts and reports for an efficient decision-making process.
P1 Management accounting and need of various types of accounting systems
Management accounting refers to the process of preparing management accounting documents and reports and extract the information from those reports to analyse, interpret and represent the information in an understandable form. Management accounting is different from financial accounting as it has a wider scope, it controls all management issues including financial issues.
Rowlinson knitwear is a clothing retailer company based in United Kingdom which deals in personalised knitwear, Rowlinson is the leading manufacturer in United Kingdom which uses management accounting systems to improve their decision making process. For an effective management organisations uses various management accounting systems and they are:
Types of various management accounting systems and their requirements in an organisation
Management accounting systems are the methods of recording and analysing which an organisational manager to understand true and fair position of the organisation, these systems are:
- Price optimisation systems – Price optimisation system is a management accounting technique which helps an organisation to allocate different prices to their different produced products and analyse the reaction of the customers, so that effective pricing strategy can be developed. Rowlinson Knitwear delivers personalised school wear due to which they have different prices for their various products due to which they uses price optimisation system to satisfy all their customers and at the same time can earn reasonable profits.
- Activity based costing – Activity based costing or system is a process of determination of costs involved in an activity performed by the organisation. For example, in case of Rowlinson knitwear they determine the costs of their various activities like manufacturing, packaging etc. by activity based costing as it delivers accurate and reliable results which can be trusted for preparing of financial and managerial reports.
- Inventory management system – Inventory management system is a process of managing and controlling the issues related to inventory stocked in an organisation. Rowlinson Knitwear is a retail store in United Kingdom and delivers number of clothes every year due to which they requires an efficient inventory management system and this management accounting system provides a framework to manage and control their inventories including raw material and goods engaged in work in progress so that their organisational objectives like customer satisfaction and profit maximisation can be achieved.
- Cost accounting system – Cost accounting system is a method which helps an organisation to determine all their costs involved in an organisation so that they can estimate their profitability, here Rowlinson Knitwear also uses cost accounting system to estimate all the costs which can be included in their processes so that a clear profit can be ascertained.
- Job costing – Job costing system is a process of determining the cost involved in an specific job, job costing helps an organisation to determine costs for various job this system is appropriate for the organisations where there is production of customised products like Rowlinson Knitwear which deals in personalised products.
- Product costing – Product costing system is a method of determining all the costs involved in an product which is manufactured by an organisation including all direct and indirect costs like direct material, direct labour, other variable and fixed manufacturing expenses. Here, Rowlinson Knitwear has also adapted cost accounting system to determine costs of their products so that they can allocate the prices and ascertain the profitability.
P2 Methods used for management accounting reporting
Management accounting reports are the managerial documents which reflect the true and fair picture of an organisation's financial position, preparation of these management accounting reports are a crucial task to perform as it requires high skills. There are many reports which can be prepared like financial and costing reports but unlike management accounting report they cant present an exact reflection of the organisation's financial and managerial position.
Rowlinson knitwear has hired a team of professionals who look after their managerial accounts and reports to make sure that investors and other parties can access accurate reports and other managerial documents.
Types of management accounting reports
Management accounting report is an organisational management document which is prepared by the managers for the third parties so that they can access a true and fair picture of the organisation, few of those management accounting reports are:
- Financial reports – Usually financial reports are included in financial accounting but to acknowledge an accurate management position of an organisation its important for the managers to include financial report while preparing managerial accounting report as it reflect figures and exact numbers of the organisation's profitability, costs etc. Financial reports of an organisation mainly includes trading account, profit and loss statement and balance sheet. Rowlinson Knitwear prepares their financial report by including their profit and loss statement which shows all revenues and expenditures of the organisation and balance sheet which is the evidence of the assets and liabilities.
- Cash flow report – Cash flow statement or report includes all cash transactions of the organisation which affects an organisation's performance. It includes all inflow and outflow cash transaction occurred from operating, investing and financing activities, Rowlinson Knitwear prepares cash flow statement for short periods which can be beneficial for them to access monthly estimates of expenses and which can update easily.
- Sales report – Sales report includes sales done in an financial year which can help an organisation analysing what sources are more profitable and identifies those salespeople who generates most income. Rowlinson Knitwear prepare their sales report by determining all sales made in an year, and analyses which distribution channel is generating more revenue that is retail distribution channel or wholesale distribution channel.
P4 Advantages and disadvantages of various planning tools used for budgetary control
Budgetary control is a technique of management control which compares budgeted estimates from actual outcomes, budgetary control involves preparation of various budgets like sales budget, cash budget, fixed budget, flexible budget etc., which helps an organisation to make profit.
Cash budget – Cash budget is the estimation of cash position of the organisation, where all expenses are revenues are recorded which are likely to be incurred or gained in future.
Sales budget – Sales budget is the primary budget which is prepared before any budget to estimate all future sales according to the demand and trend analyses of past few years.
Planning tools used in budgetary control are the techniques which are kept in mind while preparation of any budget, these tools are forecasting, scenario and contingency tools which helps an organisation to make more reliable and accurate budgets. Planning tools has its own advantages and disadvantages which are listed below:
Forecasting - Forecasting is a planning tool that projects future events and conditions, it helps management to ascertain the uncertainties of the future by considering past experiences and trend analysis.
- Advantages: Forecasting is the process of ascertaining future events which helps an organisation to achieve their objective of customer satisfaction as they predict customers' requirements and demands, forecasting also helps in reducing staffing costs by predicting how many employees are needed to do a specific job.
- Disadvantages: Forecasting is based on past events, which can not give an accurate true and fair projection of future events, forecasting involves trend analyses which is not a proof or evidence of reliable projections.
Contingency – Contingency is a planning tool which enables an organisation to be prepared for future uncertainties and emergencies, contingency planning includes advance decision making about the financial resources and inventory management. Contingency planning includes answering the questions about what is going to happen, how management is going to deal with it and what steps should be taken to deal with such emergencies.
- Advantages: Contingency plan acts as a back up plan which is activated when there is any emergency situations which reduces loss. Contingency plan activates when there is a disaster situation and prevents panic of managers and helps in getting clear plan to follow, it allows managers to focus on recovery instead of panicking. Contingency plan includes steps for prevention which minimises the damages likely to occur in emergencies.
- Disadvantages: Contingency plan is a back up plan for future emergencies, but if none of the emergency situations occur than all the money and resources used in preparation of contingency plan is resultant to be wasted.
Scenario – Scenario is a planning tool where manager develops all possible scenarios which may can occur in near future, this plan captures all possibilities by identifying trends and possible uncertainties.
- Advantages: Scenario is a planning tool which improves the quality of decision making process, due to scenario planning organisation can efficiently use available resources. It allows manager to look forward and reduce the risk involved managerial activities, scenario planning focuses on group efforts which also increases the quality of communication.
- Disadvantages: Primary purpose of scenario planning is effective decision making which requires high skilled staff due to which it becomes difficult for small scale businesses to involve such high costs and ample of time in the process of planning. For the companies which has less possible scenario, its waste of time, money and resources to involve in the process of planning.
M3 Applications of planning tools of budgetary control
Planning tools of budgetary control like forecasting, contingency and scenario helps an organisation to prepare various budgetary reports like cash flow statement and various budgets.
Cash flow statement – Cash flow statement is an accounting document which shows all inflow and outflow cash transaction so that net cash available can be ascertained in the organisation along cash available for operating, investing and financing activities.
Budgeting – Budgeting is a process of preparing budgets which can give an estimate of various functions like sales, productions etc. Budgets are the estimates for future profitability and cost which can be incurred.
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P5 Comparison on how organisations are adapting management accounting systems
Management accounting systems are methods or techniques which are used to prepare management accounting reports and serve reliable and accurate data which can be further utilised by managers for decision making process. Organisations like Rowlinson and Unicorn grocery limited has adapted management accounting systems like price optimisation system and inventory management system to increase the credibility of their businesses and to tackle the financial issues present in their organisation. Financial issues from which these organisations tackle are discussed below:
- Regulations and compliance – Every company is required to be registered and for that they have to fulfil all the requirements of registration, all documents are necessarily to be compiled along with following of all regulations fixed by authorities. Rules and regulations are different for every kind of organisation depending on its nature, and changes in these rules makes it difficult for organisations to cope up with these changes.
- Legal issues – Legal issues like changing laws and legislations about businesses makes it difficult for the organisations like Unicorn grocery and Rowlinson to manage their finance, rigidity in financial laws of united Kingdom and fixed governmental policies are the major issues faced by the organisation while managing their finances.
- Financial management – In an organisation which has diversity in its activities, its difficult to manage all the financial activities. Companies like Unicorn groceries and Rowlinson has adapted cash flow management accounting system and activity based cost system to manage their all financial activities, these management accounting techniques helps in tackle all financial issues occur in the course of business.
- Uncertain future – Every business faces problems while predicting financial future events, but with the help of managerial accounting systems like budgetary control and forecasting analyses this problems can be minimised, Unicorn groceries has hired a team of professional who are experts in forecasting future through analysing past events and market trends.
- Technology – According to today's scenario technology is rapidly changing for the betterment of the world, but due to this continuous change in technology, business organisations face serious finance issues. Companies like Unicorn groceries are small scale businesses and its difficult for them to change their technological tools frequently as they do not have such budgets for their machineries.
- Maintaining reputation – Building a brand image and maintaining reputation in the market is becoming a challenge for the organisation especially for Rowlinson where there is huge number of competitors present in the market, due to these problems Rowlinson has adapted contingency and scenario planning tools to manage all the financial issues which occur due to building an reputation in the market.
Unicorn groceries limited
Unicorn groceries limited is a retail groceries company which uses process costing to determine costs involved in particular department or process.
Whereas Rowlinson Knitwear is a retail clothing company which uses job order costing for determining the cost of particular units.
Unicorn groceries deals in delivering multiple groceries and other product and to manage all those activities, they have adapted inventory management system.
Rowlinson Knitwear is a retail clothing company, and every product's price determination is a crucial task to perform, and to tackle this problem, managers of this company uses price optimisation system to determine and evaluate the prices.
M4 How management accounting can lead organisations to sustainable success
Management accounting is a process of preparing managerial accounting documents and reports to serve valuable information about organisation's true position. Management accounting involves various methods and techniques which can help an organisation to achieve sustainable success despite of all financial issues as management accounting systems has techniques like cash flow analyses and marginal costing which helps in determining all costs of an organisation which can solve financial issues.
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D3 How accounting planning tools lead an organisation to sustainable success
Planning tools like forecasting planning and scenario planning helps an organisation to estimate all possible scenarios for future which can lead an company to build an effective prevention plan for all the future uncertainties and emergencies. These planning tools are base for preparation of budgets and cash flow statements which are considered as almost accurate estimates for future costs and revenues.
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