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The Implication of Management Accounting

University: Stratford College London

  • Unit No: 5
  • Level: Undergraduate/College
  • Pages 10 / Words 2500
  • Paper Type: Assignment
  • Course Code: H/508/0489
  • Downloads: 2

INTRODUCTION

Accounting is the language of a business. It includes financial and management accounting. Management accounting deals with interpretation of financial and statistical data for making organizational decisions. In the present report, an analysis of the use and implication of management accounting, its different systems, and reporting on an organization will be done.

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TASK 1

P1. Management Accounting and different types of management accounting systems

Management Accounting

This is the branch of accounting that assists a manager in making decisions, design appropriate business strategies. This is a process that includes planning, making policies for the organization. This provides managers with necessary and requisite information as and when required.

Management accounting includes cost accounting and financial accounting. The process of management accounting is carried on to provide information to outsiders who have an interest in the business operations of an organization (Otley, 2016). They use this information to evaluate the financial position of the business.

Different types of management accounting systems:

Cost Accounting System:

This system deals with maximization of organisation profit by controlling and reducing the cost of products and operations. The managers take appropriate measures to control cost incurred on production of goods to increase profit margin on products.

Job Costing System:

The cost of each job conducted in business is recorded separately to evaluate actual expenses incurred on that particular job. This assist management of the organisation to quote a rational price for product without compromising profit margins required to be earned.

Price Optimisation System:

To select the best price which gives the business a profit and at the same time is acceptable by consumers? This is a process of setting up price of a product, which the consumers are willing to pay (Management Accounting Application, 2018). An optimal price is necessary for both consumer acclimatisation and business profit, so it is needed to be fixed after proper analysis and evaluation of cost and market.

Inventory management system:

A proper record of goods and inventory is maintained from the stage of its manufacturing to stage of its sale. Monitoring of inventory is done so that the actual consumption and production is known (Fullerton and et.al., 2014). This assists the production department to forecast the requirements of material for production, work in progress and already finished goods.

M1. Benefits of management accounting systems

Benefits of cost accounting system

  • Take into considerationnon-profitable activities.
  • Guides in reduction of cost of a product
  • Helps in maximisation of profits
  • Attains the target profits and revenues of the business

Benefits of job costing system

  • Ascertain cost associated with each particular job.
  • Profits earned by a particular job can be ascertained.
  • Comparison can be done with previous performance of job.
  • Past job records help in setting up estimates for current period of a particular job.

Benefits of inventory management system

  • Determination of actual requirement of material for production
  • An efficient inventory management leads to a decision of what to order and when.
  • Protect the blockage of working capital by providing necessary information related to production.
  • Avoidance of waste of capital on slow moving goods as production can be designed accordingly

Benefits of price optimization system

  • helps in achievement of organisational objective of profit maximisation
  • A price is set which is acceptable by consumer Nad he is willing to pay.
  • Leads to consumer satisfaction without any loss of profits
  • Provides information for solving problems related to price optimisation process

P2. Different methods used for management accounting reporting

Cost report:

Thing which effect a business is the cost related to its business operations. It can be related to production, administration selling or any other operation's (Chiarini, and Vagnoni, 2015). To correctly determine the cost related to a product as well as with business operation is necessary to know the expense if the business and can be compared with revenues to determine profits.

Project report:

This is a report which presents the status of a single or more than one project undertaken by a business. The information in report is related to the funds allocated and used on a project, the level of completion of the projects, the implementation and success of completed projects.

Budget:

These are prepared to forecast profits, revenues, and cost and expects of a business. These are prepared with the help of past financial records for a future period.

Activity report:

The day-to-day activities executed in an organisation, a report is prepared in that respect. An insight is taken into actual performance and level of deviation is calculated from proposed performance.

Performance report:

The performance of each activity, job and employee performance is also evaluated in this report. Each and every activity undertaken in an origination is evaluated.

D1. Integration of management accounting system and management accounting reporting

Management accounting system keeps an internal check on the organisation, its business activities and other operations. The tools and techniques of management accounting system are use to every activity carried out and take decision regarding each activity (Saeidi, and et.al., 2018). This system follows rules of overall evaluation and taking measures to enhance the performance. The systems involve both cost and management accounting so each cost can be evaluated; also overall financial position is taken into consideration. Therefore, it can be stated that it focuses on both individual processes and overall performance of organisation.

As far as management reporting is concerned, it is related to presenting performance of business activities in particular formats and reports that represents separate evaluation of each activity.

The integration between management accounting system and management accounting reporting can be stated as one is related with performance evaluation through various tools and techniques and other is related with presentation of such evaluation by using different reports such as budgetary, cost project report. Therefore, it is clear that both are related to each other and can be applied together for better performance evaluation and analysis.

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TASK 2

P3. Preparation of income statements using absorption and marginal costing methods 300

Calculation of cost per unit of Radiators using appropriate techniques of cost analysis:

Per unit cost of the radiator under Marginal Costing Method

Labour Variance for Fans

Labour Houser Variance= 3400-3000 = 400 Hours

Labour Cost Variance= 17680-15000= 2680£

Material Variance for Packaging Boxes

Material Cost Variance = (9.5-5)* 1000= 4500£

Actual Cost of Production per Unit= 20900/2200= 9.5

D2. interpretation of data of various business income statements and variances

In marginal costing fixed overhead are treated as period cost and fixed cost is incurred regardless there is production or not. Under absorption costing, manufacturing overhead via considered as cost of product i.e. as a variable cost only. This cost will vary with change in the sales. At 10000 units of sales profits under both the method of costing is same as sales and production units are same.

With drop down in sales units to 5000, the profit under absorption costing is 10000 but under marginal costing, there is a loss of 10000. Therefore, this can be interpreted that when sale is less than the production profit under absorption costing method is more than the profits under marginal costing method. Get the best assignment help at the best price.

P4. Planning tools used for budgetary control and their advantages and disadvantages

Budgetary control system compared actual expenses incurred and revenues generated with budgeted and forecasted cost and incomes (Yamaswari and et.al., 2016). This deviation of actual from budgeted is calculated and verified. Then planning tools are applied to take corrective measures to eradicate such deviation. The planning tolls used are Zero based, incremental, activity based budgeting.

Advantages of Zero based budgeting:

  • Activities which are inefficient and obsolete can be identifies and discontinued.
  • An efficient and effective allocation of resources
  • Cost behavioural pattern knowledge and understanding can be enhanced.

Disadvantages of Zero based budgeting

  • Long-term goals are determined by focusing on short term benefits.
  • This budgeting does not require any managerial skills.
  • Managers’ fells neglected without any participation.

Advantages of incremental budgeting

  • A continuous funding is received by departments without any detailed analysis.
  • For a small change, an impact can be seen.
  • An easy method with do not involve complex calculations.

Disadvantages of incremental budgeting

  • a method with no innovation as old figures are taken and new budgets is prepared with some increments and changes.
  • No risk is taken which leads to a conservative mode of business operation.
  • No connection with the real world and market conditions

Advantages of activity based budgeting

  • Each and every cost driver is evaluated separately with all the activities.
  • An improvement in relationship of consume and organisation.
  • Saving in cost and expenses by identification and removal of unnecessary activities.

Disadvantages of activity based budgeting

  • A deep knowledge and understanding of each activity is required which is complex and complicated.
  • Long terms goals are ignored due to focus on short-term goals.
  • Increase in cost as budget preparation requires trained employees and experts.

M3. Application of planning tools for preparing and forecasting budgets

Planning tools helps in determination of future performances in terms of present value. The actual status of project is presented by these tools with respect to their profitability (Man, and RĂVŞ, 2017). These tools are net present value, internal rate of return and accounted rate of return.

Net present value: the profitability is calculated by calculation of future cash flow in present value terms. The initial investment is compared with present value of future cash inflows, if its value is more than the project is acceptable.

Accounted rate of return: this is a capital budgeting tool used for generation of income from potential investment with estimated future cash flows.

Internal rate of Return: this is a discounted rate which makes t net present value of all cash flow from a project equal to Zero. A project with a high IRR than its cost of capital is a profitable project. IRR can be compared with the rates prevailing in securities market.

P5. Adaption of management accounting systems to respond to financial problems

Identification of financial issues: for solving a problem be it financial or non financial, first its identification is necessary. The financial in an organisation can be identified with the comparison of budgets with actual performance of organisation the achievement and deviation from the targets can be found out (Plank, 2018). The issues can also be identified from key performance indicator for both financial and non-financial aspects. Other techniques for this is see the benchmark set for performances and calculation of variances to see the extent of variation from budgets.

Financial governances: it is tool to represent overall financial structure of an organisation to its managers. This is a set of regulation to be adapted in business operations. A business must use financial governance for monitoring of financial strategies. The business should define a set of regulation of financial governance which can be used to eradicate and prevent financial problems.

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Skills and efficiency of managers: the management of an organisation always hire effective and efficient managerial personnel. An efficient managerial accountant has the understanding and skills which can be applied in such a situation and prevent or avoid the problems. The problem which can be prevented are misappropriation of resources, inefficient allocation of working capital (de Ridder and et.al., 2018). People with effective managerial skills prevent certain problems before occurrence and solve the problems with full efficiency.

Effective strategies and systems: after identification of a financial problem to resolve, proper formulation and development of strategies is an essential part. Strategies and systems must be developed for effective reporting and a complete disclosure of financial statement to the management; so that the problems can be avoided in the future. Strategies can be strictness in following rules and regulation formed under financial governance. Making each and everyone responsible with for one or another activity.

M4. Management accounting leads the organisation to sustainable success

Management Accounting guides an organisation in many ways to attain sustainable success:

  • Application of tools and techniques in planning for availability of natural resources, lifestyle costing, and carbon foot printing that assist in decision making.
  • For building value in long term, identify and responds to social and environmental trend.
  • Determination of sustainability issues and evaluating them as how and when this could affect the organisation
  • Information on sustainability is presented through reports, which inform the effects of investment appraisal and strategic planning, pricing and budgeting decision.

D3. Use of planning tools for solving financial problems

Use of budgets for planning and controlling: with the preparation of different types of operational and capital budgets, one can forecast and prevent a problem.

Pricing tool:

with the pricing technique, an organisation can understand how competitors are determining their prices on demand while considering demand and supply.

System of costing:

costing systems such as normal, actual and standard costing assist the business to arrive at the best system of costing (Hof and et.al., 2017). An optimal price helps in reduction of competition and increase in number of satisfactory consumers.

Strategic planning:

application of SWOT, PESTLE, Porters five force model, balanced scorecard, an organisation can analyse financial position it stands at, this analysis also assist in forecasting future problems so that measures can be taken to prevent such problems.

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CONCLUSION

The above report suggested that management accounting is an integral part of an organisation, which cannot be separated. Management accounting reporting and management accounting systems both go hand in hand. The decision taken with management accounting forecast the future of an organisation and ensures its long-term survival and sustainable success

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