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Management Accounting System and Its Types – Pavestone Company

University: Western University

  • Unit No: 7
  • Level: Post Graduate/University
  • Pages: 19 / Words 4806
  • Paper Type: Assignment
  • Course Code: 2104AFE
  • Downloads: 276
Question :

This Assessment covers following questions:

  • Generate an understanding of management accounting systems in the context of Pavestone company.
  • Make application of a range of management accounting methods.
  • Pavestone is a stone and concrete manufacturer and supplier company. Discuss the use of planning tools used in management accounting.
  • Make comparison in a way in which organisations could use management accounting to respond to financial problems.  
Answer :
Organization Selected : Pavestone Company

INTRODUCTION

Management accounting refers to the preparation of management and operational reports, that provide accurate information to the stakeholders and managers. It helps to improve the efficiency of the decision-making ability of managers. It helps internal as well as external stakeholders to get insider information about the company (Management Accounting, 2018). These reports consist of various information such as cash and cash equivalents information, sales, profits, etc. The main objective to prepare management reports is to analyze the actual performance of the company. It helps to forecast the future and make various decisions. It is used to look at the events that happen in and out of the organization.

Pavestone is a stone and concrete manufacturer and supplier company. It is mainly based in US. The managers of the company use management accounting to administrate operational activities of the company. This project report consists various topics that are management accounting and its reports, various costing techniques, planning tools used in budgetary control and various financial problems that an organisation have to face. Different type of techniques that are used to resolve financial problems, are also discussed in this report.

TASK 1

P1 Management accounting system and its types

Management accounting is the process of formulating various reports that helps the management in strategic decision making. It is a function that is used to analyse costs and appropriate selling price for the products. It provide accurate informations that is helpful while planning for future and forming various strategies to achieve organisational goals (Al-Mawali, Zainuddin and Nasir Kader Ali, 2012). The managers of Pavestone use management accounting system to analyse customer demand, setting appropriate prices, keep a track record of customers and their outstanding demands etc. To maintain above information management of Pavestone use different management accounting systems, that are as follows:

Cost accounting system:It is a system that is used by organisations to estimate the manufacturing cost involved in their production. It provides accurate cost information that helps the management to control running operations of the company. It is a process that include various steps such as recording, classifying, summarizing, allocating and examining cost associated in the production. Management of Pavestone use cost accounting system to analyse accurate cost of their products. It helps them to know that products are profitable or not. The information gathered form cost accounting system is mainly used in financial accounting system to analyse financial strength of the company, but the main function of cost accounting system is to facilitate the management's decisions. It is very helpful for the company because it provides actual information related to costs (Chiu, Teoh and Tian, 2012).

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Price optimisation system: This system is mainly used to determine customers reaction toward prices changing strategies of the company. It helps the management to find the perfect price for the products that can acquire more and more customers and increase profitability of the company. Pavestone use price optimisation system to match the price level to the customer's perception toward products. The main objective of the management is to provide products to customers at a satisfactory price. This system is also used by the managers of Pavestone to find out the balance between values and profits. It is very profitable for the company because it help to set appropriate price for the products that is affordable for the customers.

Inventory management system: It is mainly used to get the direct information of the inventory, that is in the warehouses or in transit or sold. Effective management system help the company to easily meet customer's demand and fulfil the demand within a short time period. This system is used in Pavestone for various purposes such as for purchase planning, gather information of inventory etc. It also help the managers to track inventories through the entire supply chain of business operations. It is very helpful for the company because it provides actual status of the inventory and help the managers to pre plan the purchase of goods before the warehouses goes empty (Eierle and Schultze, 2013).

Job costing system: It is a system that is used to assign manufacturing cost to the products or bulk of products. This system is only used by those manufacturing companies who are manufacturing different kinds of products. It also help to record cost of various jobs that different from each other. Pavestone's management authority use this system to analyse various costs such as direct material, labour and overheads of different jobs. It is an expenditure monitoring system that is used to determine manufacturing cost of each job. It also help the managers to keep a record to various expenses. It is very beneficial for the company because it provides detailed information of various jobs and cost involved in those jobs.

P2 management accounting reporting and its methods

Management accounting reports are the tools that are used to analyse business position and market image of the company. These reports are used by the managers to plan, regulate and control the business execution process of the company. Managers analyse these reports and then make strategic decision that help to reach the organisational goals (Granlund and Lukka, 2017). Management of Pavestone prepare various management accounting reports to analyse performance of the running business, market trends, customer demand and inventories of the company. These reports help the managers to meet objectives of individuals as well as organisation. Various management accounting reports are explained below:

Budget reports: These reports are generated to measure company's performance. Managers prepare budget reports to analyse the productivity of the organisation. Budgets reports are mainly based on past data and current market trends. A manager plan for every activity of the company with the help of these reports. In Pavestone these reports are generated to evaluate the expenses that are involved in the manufacturing process of its products. These reports show the monetary resources of the company that helps to provide benefits and incentives to the employees. Budget reports are very helpful for the managers of Pavestone because it help to cut the cost of the company and negotiate terms with the suppliers (Morden, 2016).

Performance reports:These reports are mainly used to analyse performance of the individuals as well as the organisations. It shows the actual position of the company and also provide idea of such fields where improvement is required. Managers of Pavestone generate performance reports to make strategic decision for the company. These reports also help the management of Pavestone to examine employee's performance and award them for their work and commitments to the company. The main objective to generate these reports is measure the strategies that are implemented by the managers of Pavestone. These reports are very advantageous for the company because it offer deep insight into the working of the company (Ittner, 2014).

Account receivables reports:If a company is relaying heavily on extending credit, then these reports are helpful for it. These reports help the managers to identify the payment defaulter client of the company and issues with the collection process of the company. These reports are generated in Pavestone to keep a record of such clients who are not able to pay the amount at the time of sales but agrees to pay the amount after a certain date. It also help the managers to identify actual owed amount of various clients. If there is significant number of customers who are not able to pay their amount on due date, than the managers should try to tighten the credit policies to reduce the risk of bad debts (Lääts and Haldma, 2012).

Inventory and manufacturing reports:These reports are used to get the exact information of inventory and manufacturing process. It consist information of material waste and labour cost. In small companies like Pavestone these reports are prepared to keep track record of different assembly lines. These reports help the company to reduce the waste in manufacturing process by analysing actual cost of manufacturing process and also help to get the exact information of inventory. It is very helpful for Pavestone because this reports can show the current status of inventory and manufacturing process.

M1 Benefits of management accounting systems

Management accounting system

Benefits

Cost accounting system

  • It helps to control material, labour and overhead cost.
  • It is used to measure the efficiency of the business policies.

Price optimisation system

  • It assist to collect proximate financial benefits.
  • It is helpful while forming pricing strategies.

Inventory management system

  • It helps the management to track the inventory.
  • It provide assistance to the managers in purchase planning with valuable informations.

Job costing system

  • It is used to identify profitable contracts which will help to increase profitability.
  • It provide access to the expenses involved in each job.

D1 Management accounting system and its reports are integrated with organisational processes

Management accounting system and its reporting are used within Pavestone, to analyse various functions of the company which include performance measurement, market analysis, cost controlling, price setting, inventory management etc. Various management accounting system help to evaluate cost effectiveness, customer's demand, inventory waste, profitability and productivity. Management account reports help to gather various business related informations such as performance of individuals as well as organisation, owed amount by customers, manufacturing waste, inventory location, expenses involved in each product. It also help the managers to set goals and make strategies to achieve those goals.

TASK 2

P3 Calculation of cost using an appropriate technique

Cost: It is an amount that has to be paid by the buyer to the seller for a purchase. It is a type of expenditure which includes labour, material and overheads. Cost is a monetary measure of a product. Setting right cost will lead the organisation towards success. It is an amount which is required to a company to produce product (Mussnig, 2013). Pavestone which is a supplier and manufacturer company of concrete, has to set a cost that can attract the customers and increase profits for the enterprise. A customer who is willing to buy a product will always try to find out the cost involved in that product.

Marginal costing: It is a costing technique which is used to determine the additional cost of extra units of production, the additional cost is called marginal cost. It is variable cost but consist a few portion of fixed cost. Pavestone use marginal costing system to determine the additive cost of the production.

Calculation of net profit by using marginal costing method:

Particulars

Amount

Sales revenue = (selling price * no. of goods sold = 55 * 600)

33000

Marginal Cost of goods sold:

9600

Production = (units produced * marginal cost per unit = 800 * 16)

12800

closing stock = (closing stock units * marginal cost per unit = 200 * 16)

3200

Contribution

23400

Fixed cost ( 3200+1200+1500 )

5900

Net profit

17500

Absorption costing: This costing technique is used to assure that the cost involved in the manufacturing process of the units, are absorbed from the sales of same units. It includes both fixed and variable costs such as direct material, labour and overheads (Myers, 2013).

Computation of net income by using absorption costing method:

Particulars

Amount

Sales = (selling price * no. of units sold = 55 * 600)

33000

Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600)

14025

Gross profit

18975

Selling & Administrative expenses = (variable sales overhead * actual sales + selling and administrative cost = 1 * 600 + 2700)

3300

Net profit/ operating income

15675

Break-Even analysis:This is an approach which is used to analyse the equilibrium point where total revenues and expenses of organisations become equal. It is a point whch shows that the market price of the product is equal to its original price. This mainly helps the managers to analyse how much production of sales is required to generate minimum profit (Namakonzi, and Inanga, 2014).

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a. Total number of product sold

Particulars

Amount

Sales per unit

40

Variable costs VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

b. Calculation of break even point in accordance to sales revenue

Particulars

Amount

Sales per unit

40

Variable costs VC = DM + DL

28

Contribution

12

Fixed costs

6000

Profit volume ratio PVR = Contribution / sales * 100

30.00%

BEP in sales

20000

c. Calculation for getting desire profit of 10,000

Particulars

Amount

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

Margin of safety:The difference of actual sales and break even sales is calles margin of safety. It is a point where the company is in no profit and no loss state. It is mainly used to reduce the circumstances and problems related to shortage of minimum stock level and production level (Qian, Burritt and Chen, 2015).

d. The margin of safety, if 800 products are sold

Particulars

Amount

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

M2 Various types of accounting techniques

Standard, marginal and historical costing are few techniques that are adopted by Pavestone to calculate operating incomes. These techniques are explained below:

Standard costing: It is a estimated cost of performing an operational activity of producing goods. This technique is used by Pavestone to determine difference of actual cost and budgeted cost.

Marginal costing: It is a technique which is used by various companies to determine the additional cost of extra unit of production. This technique is used by Pavestone to analyse decrement or increment of cost with extra production.

Historical costing: This techniques is used to measure original value of the asset. In this technique assets are evaluated on their purchase price (Schuster, 2015).

D2 Data interpretation

From the above calculation, it is cleared that marginal costing technique is more profitable for Pavestone as compare to absorption costing method. Marginal costing technique shows £17500 as net profits and absorption costing techniques shows £15675 as net profit. When break even point is calculated, the total numbers of units sold are 500 and total BEP sales is £20000. If the Pavestone is willing to generate a minimum profit of £10000 then it has to sale 1333.33 units. When 800 units are sold by the company, then margin of safety is 37.5

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TASK 3

P4 Budgetary control and advantages and disadvantages of planning tools used in budgetary control

Budgetary control: It is a system of regulating costs which includes the formulation of budgets, coordination with various departments, distribution of responsibilities and comparison of actual budgets with forecasted to enhance the profitability of the company. It refers to the ability of the managers, how well they utilize the monetary resources of the company. It is used by Pavestone to regulate the operational activities of the company. Budgetary control include various factors such as establishing a plan, analyse the performance, comparison of actual performance with forecasted, calculation of variances etc. (Storey, 2014). Various planning tools are used in budgetary control, these tools are explained below:

Forecasting tools: These tools are mainly used by various companies to predict future that is based on present and past data. Pavestone use these tools to analyse risk and uncertainty before it occurs. It provides the estimation of customer demand for products in future. It helps the management to cope with the uncertainty of the future.

  • Advantages: It provides valuable information to the management that helps in strategic decision making. It also aware the management about future uncertainty or risk.
  • Disadvantages:As it is based on past data, so it is not possible to accurately predict the future. Making a decision on wrong forecasted event will affect the management process and production process of company.

Contingency tools: It is basically related to unfavourable events that might occur in future. These tools help the management of Pavestone to determine the possible negative event that might happen but it is not sure that it will happen.

  • Advantages:It helps the managers to be ready to face the possible risk. It estimates the uncertainty that reduce the waste of production.
  • Disadvantages:It is very complex, so it is not easy to implement. The cost involved in the implementation process of this tool is very high, thus small companies like Pavestone are not able to invest money for this purpose.

Scenario tools: These tools are used to determine the effectiveness of strategies, execution of plans, results of decisions. The managers of Pavestone use this tool to make strategic decisions and long term plans that help to improve the productivity and organisation's profitability. This tool is used to evaluate a range of scenarios which has possibility to occur in future.

  • Advantages: It helps to gather the information of implemented strategies. It also help to make appropriate decisions to improve the work quality of the employees.
  • Disadvantages:It requires high skills and high cost to implement, and Pavestone is not able to bear high cost. This tool is uncertain and subjected to risk.

M3 Uses and applications of planning tools for preparing and forecasting budgets

Pavestone is a supplier and manufacturing company and it uses various types of planning tools to prepare budgets. These planning tools are forecasting, contingency and scenario. These planning tools help the managers to forecast budget and determine the future risk. These tools provide various informations like possible future events, risk or uncertainty etc. to the managers. This also help to determine future conditions, that an organisation have to face. These tools are also used to forecast the customer demand so that the organisation can easily meet their demand. Planning tools are also beneficial in dealing with uncertain events.

TASK 4

P5: Responses of management accounting system to deal with financial problems

Financial problems is state where shortage of money cause an issue for business activities. Now a days many small company faces hard financial time which impact on its working. Lack of budgeting, improper money management, low profits, due bills etc. are the financial problems that various companies are facing. Pavestone is a small size company and wants to expand in future but it faces various financial issues such as lack of funding, large number of creditors, excess of expenses. For resolving these issues company adopt three techniques such as Key Performance Indicators, Benchmarking and financial governance. These tools are explained below:

Key Performance Indicators: This techniques is used to analyse company's current performance and financial position with other company under similar industry. Pavestone uses this tool to resolve it financial issue i.e. excess of spending on its expenses. Company finds KPI as a key success indicators for resolving this issue. Company uses two key performance indicators such as leading and lagging KPI for improving its performance in order to reduce expenses. Type of KPI are explained below:

  • Leading KPI:In this type of key performance indicator manager estimate future events, evaluate market trends and helps in decision making. Pavestone use leading KPI in measuring inputs which are hard to measure but easily influenced. With the help this tool company estimate expenses spending and forecast sales in order to generate revenue. It also control it excess of expenses with the use of this tool (ter Bogt and Scapens, 2014).
  • Lagging KPI:This technique is used as output oriented that are easy to measure but difficult to improve or implement. Lagging KPI tool focus on success or failure of its activities.

Benchmarking: Now a days every organisation is adopting the practice of measuring their performance with their competitor. It is a continuous process where company seek improvement of their practices with help of measuring value cost, quality and time value. Pavestone use benchmarking for resolving its financial problem i.e. large number of creditors. Company wants to set credit policies standards that are already followed by other successful competitors. By this practice Pavestone improve its performance and recover the amount due (Van Dooren, Bouckaert and Halligan, 2015).

Financial governance: In this tool management collect, manage, control and direct financial data that is useful in operations. These are important for small size company like Pavestone adopt this tool for responding financial issue related to lack of funding. Management manage company's performance by recording financial transaction, managing performance and controlling information that are used in operations. Company use these information in making correct details which attract more investors. By this funding problem resolved.

Pavestone

Airdri

  • Company use KPI tool for resolving issue related to excess of spending.
  • Financial governance tool helps in collecting more and more funds for the company.
  • Benchmarking technique helps to reducing number of creditors.
  • It use Benchmarking for setting performance standards.
  • Company use KPI techniques for improving its employees efficiency.
  • It use finance governance tool for evaluating its financial data.

M4 Responding financial problems management accounting can lead organisation to sustainable success

A company always have to deal various type of problems and financial problems are also part of those problems. Pavestone also have to face them and have to deal with the same. The managers use three techniques to deal with financial problems that are improper money management system, lack of budgeting and extra spending on expenses. These techniques are KPI, benchmarking and financial governance. These techniques help the managers to overcome financial issues. Financial governance help the managers to maintain financial information in a proper way. Benchmarking is used to meet the targets of the company. KPI is used to evaluate performance of the company and improve productivity of the company. These techniques help the managers to form strategies to resolve financial problems.

D3 Planning tools respond appropriately to resolve financial problems

Planning tools help to reduce the risk of uncertainty in business. The managers of Pavestone use various planning tools. These tools are forecasting, contingency and scenario. These tools are mainly used in budgetary control but these tools also help to deal financial problems. Forecasting tools are used to predict future conditions and effectiveness of implemented strategies. Contingency tools are used to determine unfavourable events such as lack of financial resources. So it can help to resolve the issue of less monetary resources and many other financial problems. Scenarios tools help to form long term strategies that will help to reduce production waste and improve profitability of the organisation.

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CONCLUSION

Management accounting system and its reports help a manager to get effective information of the company. It also provide various informations to the internal and external stakeholders. Management reports are prepared to improve productivity of the products and enhance the profitability. These reports provide information of customer demand, business performance, market trends, owed amount of various clients and waste in manufacturing process. Management accounting systems are used to gather various business informations such as cost reduction, appropriate prices, expenses involved in various jobs. Managers use various costing techniques to evaluate profits of the company. Different planning tools such as scenario, contingency and forecasting are used in budgetary control to determine risks and uncertainty that might occur. Company also have to face various financial problems and the managers use three techniques to overcome these problems. These techniques are KPI, benchmarking and financial governance.

REFERENCES

  • Al-Mawali, H., Zainuddin, Y. and Nasir Kader Ali, N., 2012. Customer accounting information usage and organizational performance. Business Strategy Series. 13(5). pp.215-223.
  • Chiu, P. C., Teoh, S. H. and Tian, F., 2012. Board interlocks and earnings management contagion. The Accounting Review. 88(3). pp.915-944.
  • Eierle, B. and Schultze, W., 2013. The role of management as a user of accounting information: implications for standard setting.
  • Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting. 45. pp.63-80.
  • Ittner, C. D., 2014. Strengthening causal inferences in positivist field studies. Accounting, Organizations and Society. 39(7). pp.545-549.
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