- Provide an explanation of management accounting along with describing the essential requirements of management accounting systems.
- Preparation of income statement for Tech UK limited with the use of absorption and marginal costing methods.
- Explanation of use of budgets in planning and controlling for Tech UK Limited.
- Determine how Tech UK limited can use management accounting to deal with its financial problems.
Management accounting includes all the department of an organisation to manage their income and expenses and to control the whole system to achieve the firm objectives. In this project report we consider the Tech (UK) limited and working in this company as a trainee management accountant (Christ and Burritt, 2017). This company is produce charger for mobile phones and carry on gadgets and this company have retail outlet in UK. In this report we discuss the system of management accounting, and the essential requirements of it. Also discuss the different type of managerial accounting reports. In this report we explain the different the kinds of budgets and their advantages and disadvantages and the main importance of budget as a tool . In this report we also explain the balanced scored approach in reference the Tech (UK) limited.
P1 Explain management accounting and the important requirements of management accounting system?
Difference between management accounting and financial accounting:
Their are some basis which is easily distinguish between both of them. These are:
Financial accounting main aim is to provide the information which is related to finance and it is given to the shareholders and investor of the firm. Where as management accounting main aim is to take the business decision by management (Cooper, Ezzamel and Qu, 2017).
in financial management it is compulsory to consider the regulatory frameworks , and in management accounting there is not important or compulsory for following a regulation framework.
Financial accounting is prepared by Generally accepted accounting principles. And in management accounting there is not to set any standardized principles (Leotta, Rizza and Ruggeri, 2017).
Importance of management accounting information in decision making
Management accounting is the essential part of an organisation. Accounting refers to the base information and provide most information to management to take the decision and to forecast and to interpret this information . Decision making is very important in a management accounting information . Management accounting has main part to provide the reliable information from that the managers take the right decision towards the business to growing fast. It is important to understand the firm financial condition and used to take the right decision . Its effect the long term decision for the firm betterment (Narasimhan, 2017). Their is a relationship between the management accounting information and decision making and it is cover the all the departments which is related to the accounting.
Explain cost accounting system
It is an estimation of cost of the firm for calculating their profitability and inventory valuation. Cost accounting systems includes cash flows assumption, cost accumulation method , input measurement basis. This system is used to evaluate correct cost of products. And the firm should know the which product is profitable and this will be used after calculating the accurate cost of product (Shojaeezand, Mohammad-Khani and Azmi, 2018). Cost accounting system also helps in to calculate the work in progress and finished goods inventory for the purpose of financial statement preparation. Cost accounting system is divided into two main systems these are, Job order costing and process costing . In job order costing in this calculates the manufacturing cost which is separate from each job of the firm. And process costing is calculates the manufacturing cost separate by each process of the firm.
Inventory management system
It is considered as essential tool that supports the organisation in making effective management of inventories. By maintaining records managers can analysis inventories requires to meet with the demand (Wachira, 2017). All transactions are related with purchase of raw material, selling of final products and delivering of goods etc. If Tech (UK) limited manage its inventory well then it would be beneficial for the organization in delivering products to the consumers on time without any failure.
Job costing system:
Job costing can be defined as tool that is used by organizations in order to analysis batches, jobs and unit produces in the firm. It takes into consideration to the variables that has variation in costs at the time of production. Thus, company set prices on the bases of production cost or over the produced goods (Wei and Xima, 2017).
P2 Financial information preparation
Managerial accounting reports
There are various kinds of accounting reports that are essential to be prepared by the organization. All these report help the company in identifying the profit and growth of business unit (
WHAT IS INVENTORY MANAGEMENT?
This information assist in making sound decision for the growth of the firm in the future.
It is the type of report that supports business unit in understanding the cost of each activities and determining the financial resources require for each task. By preparing this report Tech (UK) limited take decision of budget and predetermine the cost for each activity in near future.
Account receivable ageing report
It is another kind of report which is essential to be prepared by Tech (UK) limited. This report helps organization in analysing situation of debtors such as suppliers, distributors etc. This helps in ensuring the amount that are paid by debtors (What is management accounting, 2018). By looking at the status of report manager can identify capabilities of debtors to make payment. This assists in identifying the customers those are not paying payment on time and unused credit memos by date range.
Importance of presenting information in accurate manner
It is very important for the organizations that to present their information in accurate manner. By this way stakeholders, investors can understand the situation of company in effective manner and can make sound decision. If Tech (UK) limited gets failed to present reports in effective manner then investors and other stakeholders may get fail to make their decisions of investment (Shojaeezand, Mohammad-Khani and Azmi, 2018).
P3 Prepare income statement
There are two main methods of preparing income statement. These are absorption and marginal costing methods. Both these tools are helpful in identifying the profit generated by the firm at the end of financial year (Leotta, Rizza and Ruggeri, 2017). Income statement of Tech (UK) limited for the month of September is as following
It is the type of costing method which includes all type of costs such as fixed, variable in order to calculate profit. By this way entity can calculate total cost of production.
Marginal costing method
Marginal costing is used for making internal decisions. In order to calculate the per unit costing company involves fixed cost (Christ and Burritt, 2017).
Interpretation: From the above calculation it is analysed that profit generated through marginal costing method is 13625 and profit generated through absorption costing method is 15625. Thus, it can be interpreted that absorption costing method is considered as profitable and beneficial for the organization. Because by this way Tech (UK) limited can earn more profit. Thus, manager of cited firm has to take support of absorption costing technique in its retail stores by this way it will be able to generate adequate revenues in business unit.
P4 (a) Different kinds of budget
Budget is a financial plan maintained by the manager for a defined period, usually for a year. It is generally inclusive of planned sales volumes, quantity of the resources, expected cost and expenses, assets, liabilities and expected cash flows. Since, it is a sum of money allocated for a particular purpose, it is also inclusive of expected expenditure. There are certain kinds of budgets, which are briefly described below:
It is a set of financial and operating budget prepared for specific accounting period, usually prepared for the next fiscal or calendar year. Operating budget consist of daily operations and are the basis on forecasting. Operating budget is inclusive of sales, production, direct material, direct labour, overhead and administration expenses (Richardson, 2012).
On the other hand, financial budget comprises of budgeted income statement and balance sheet. It helps in gaining budgeted proforma of financial statements of the organization. In other words, it can be stated that financial budget deals with expected assets, liabilities and another stockholder’s equity.
It is the budget of expected cash inflow and outflow during a specific period. It consists of four sections. These are, receipts, disbursement, cash surplus and deficit. It helps in analysing that how much cash will be there with the organization within specific period of time. Further, how much expenses are expected to take place in the near future.
Since, it is static in nature, it helps in analysing the expected capacity level of the organization. It is usually stable for the organizations (Schaltegger and et.al., 2016). As it is based on capacity level, it is determined by management of every department. For instance, fixed budget of production department will be different from that of sales budget.
P4 (b) Budget preparation process
There are various steps that are involved in preparation of budget. These steps are discussed below in detail:
It is important to obtain estimates of sales, production levels, availability of resources and expected cost from each of the units, subunits, divisions and departments in the organization. The departmental heads and managers are responsible for estimating the future requirements in such a manner that it can help in fulfilling the necessities of the organizations. Informal discussion can be made with managers and written detailed reports can be initiated that can then be submitted to budget committee of the organization for approval.
Coordinating with the estimates:
The committee then prepares the evaluation based upon the submission being made by various departments or organizational units in order to assess that whether it has enough potential to serve the requirements of the business or not. Further, its potentiality to fulfil the objectives of the business are also assessed so as analyse that whether in this manner, the resources can be appropriately allocated to the departments or not.
After analysing the overall budget and making adequate changes in it will help in assessing that it has been framed appropriately. The final budget will then be communicated to the departmental managers. After approval of budget plans, adequate resources allocated to them and their budget for fiscal year will then be assessed by the managers and assess that whether there is any requirements of changes or not. Any changes required will then be communicated back to the budget committee. It helps in ensuring that adequate cooperation has been received by the committee with respect to departmental managers.
Implementing the budget plan:
The final budget, after bringing all the changes, will then be communicated to the concerned managers and they can then adopt the same in their operational aspects. With the implementation, various resources are made available to the managers, in the form of raw material, labour facilities and other available resources so as to carry out the budget that has already been prepared.
Reporting interim progress towards budgeted objectives:
It is the full and final stage of budgeting process where the budget is brought into operations by the managers for the upcoming budgeting period. Reports are then prepared based on the outputs and performance of managers are investigated so as to ensure that budget cn then be revised as per the available flaw in the system. Feedback from the managers are gathered regarding budget for the previous year and then improvements are brought in the current year.
P4 (c) Importance of budget for planning and controlling
Budgeting plays a vital role in planning and controlling process. It helps in developing a plan of action for the organization which act as a framework for the organization to assess future estimates related to revenues and cost, anticipation of future events and decrease uncertainty of the events. It helps in increasing the chances of achieving goals and objectives for the company when departments tend to coordinate with the plans. It helps in anticipating the uncertain revenues and expenditure of the organization as well and helps in fulfilling the overall objectives of the organization (Dhaliwal, Salamon and Smith, 2012).
Control is another important process of using feedback on actual performances and results, comparing the same with the actual results as well so that deviations can be measured and corrective actions can be undertaken. It helps in analysing the impact of policies and procedures on functioning of the business which can effectively help in achievements of overall goals and objectives of the business. Hence, it can be stated that budget help in keeping forward all the future activities that are aligned to sole addressing of the business (Fullerton, Kennedy and Widener, 2013).
Planning helps in identifying and receiving the desired outputs for the company by managing overall inputs. Management tend to use planning as a tool to achieve overall business goals by altering current policies and regulations in the best possible manner.
P5 Use of management accounting system in responding financial problems
Case scenario presents that Tech ltd has incurred a loss of £1.5 millions in the concerned financial year. By reviewing overall performance auditors have suggested balance scorecard approach to the management team of business unit. Such strategic management tool measures g performance of the company from several perspectives such as customers, financials, learning & growth and internal process (Leotta, Rizza and Ruggeri, 2017). This metric helps management team in identifying and improving various internal functions or aspects more effectually. Hence, by using such tool management team of Tech ltd would become able to find out deficiencies from both financial as well as non-financial perspective and take corrective measure for improvement.
Key performance indicators:
There are certain key performance indicators, based on which it can be assessed that management accounting system that is being adopted by the organization it contributing adequately in achieving business goals and objectives or not (Renz, 2016). In this scenario, key performance indicators can be revenue, profitability, sales etc.
Quality benchmarking is the other aspect that is related to appropriate implementation of management information system in the organization. Further, comparing the quality of developed product can also help in assessing that whether benchmark quality of the products has been achieved or not. MIS helps in ensuring that products with appropriate quality are produced which can help in achieving overall financial objectives of the organization (Horngren, 2012).
Financial governance is the stringent set of rules and regulations which helps the organization in guiding it to financial processes. MIS ensures that all the policies, rules and regulations are appropriately being fulfilled in such a manner that maximum profitability out of it can be achieved.
By summing up this report, it has been articulated that using management accounting tools Tech Ltd can exert control on cost and thereby maximizes profit level. It can be seen in the report that managerial accounting reports provide deeper insight about departmental performance and thereby help in taking strategic action for improvement. It can be summarized from the evaluation that budgeting tools and techniques aid in financial planning to a great extent. By undertaking budgeting tools and techniques Tech Ltd can exert control on negative results within the suitable time frame. Further, it has assessed from the evaluation that referring both fixed and variable expenses business organization can assess suitable manufacturing cost. Besides this, it can be stated that using balance scorecard tool Tech Ltd can develop suitable strategies as well as policy framework and thereby attain success.
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