Managing to account is an activity of making decisions and plans on the basis of financial data recorded under the financial statements of an organization. You are assumed as a Management accounting officer in an SME engaged in either manufacturing, retail, hospitality, the retail sector with not having more than 50 employees and an annual turnover of less than £500,000. For this, you are required to produce a report containing answers to the following questions:
- Explanation of management accounting system and its importance in the context of R.L. Maynard.
- Application of different management accounting techniques.
- Demonstrate planning tools used in management accounting.
- Make a comparison between two similar organizations and how they respond to financial issues.
Management Accounting refers to process of preparing of reports and accounts that provides timely financial information to managers and helps them in taking day-to-day decisions. This report discusses about different types of Management Accounting Systems. It discuss how management reports are integrated with management systems. Further, The advantages and disadvantages of using different types of Planning Tools for budgetary control and the application of different tools for planning, preparing and analysing budget. R.L. Maynard is a Small and Medium-Sized Enterprise established in 1973. It is engaged in property construction and development business for past 45 years.
A) Management Accounting and requirements of different types of management accounting systems
Management accounting refers to presentation of accounting information that provides accurate and timely financial and statistical information, which is required by managers to make short-term decisions. It differs from financial accounting, which produces annual reports external parties or stakeholders. Whereas Management Accounting generates monthly or weekly reports that is used by organisation for their internal users like; department heads, CEO. The report presented by management accounting includes details of Cash held by company, Sales revenue or income generated by firm, current status of firm such as Account Payable and Receivable etc.
Importances of different types of Management Accounting Systems are as follows:
Cost Accounting Systems:
It refers to framework used by companies to estimate cost associated with their products in order to perform profitability analysis, inventory valuation and cost control. It is crucial aspect as estimating accurate cost of raw materials which go through production stages and slowly turned down into finished products. Cost Accounting system helps R.L. Maynard to know which products are profitable in construction purpose. It helps company in preparing financial report by estimating closing value of materials, inventory, work-in-progress and finished goods (Ax and Greve, 2017).
Inventory Management Systems:
It refers to combination of technology, procedures and process, which look over maintenance of stock or inventory held by company. This helps R.L. Maynard to enhance their transparency. Company can achieve better reporting and forecasting capabilities, which reduces the storage cost of inventory held by R.L. Maynard.
In this system, manufacturing cost is assigned to each individual product or different batches of products. It is a useful tool for R.L. Maynard as it is engaged in property construction business as each building developed by firm is unique and it helps the company as job cost report direct materials and labour which utilised and manufacturing overhead assigned to each job (Bromwich and Scapens, 2016).
It is a mathematical analysis used by company to predict how consumers will react to different prices for product/services of company when offered through different channels. This help company to predict the revenue and margin outcome for their products.
Types of management accounting reports and the importance of such reports to management
The management accounting reports help managers in preparing appropriate management reports, which help company to forecast current situation for making cr The use of Absorption costing is beneficial for Company. This can be interpret from the Income statement produced. It identifies importance of fixed cost involved in production of each unit. The pricing based on absorption costing ensures that all cost is recovered. Absorption costing takes into account the cost of production and not just direct cost unlike variable costing. The absorption costing shows less fluctuations in Net profits in case of constant sales.
Marginal costing helps determining and controlling cost of production. It prevents arbitrary allocation of fixed cost which helps management to concentrate on achieving and maintaining a uniform cost. As fixed overheads are not charged to cost of production each units produced have standard cost assign to it. itical business decision.
These reports are as follows:
Accounts Receivable or Ageing Report:
These reports are used to facilitate in managing account for those companies who are engaged in extending the credits to their consumers. It helps to review and monitor the status of the receivables, open credits, finance charges and credit refunds (Chiwamit, Modell and Scapens, 2017)
It has been formulated to set out the plan for evaluating company performance by making evaluation of departmental performance and control costs. These are financial goals based on estimates and future projections. These budget reports are used to provide incentives to employees and motivate them to achieve goals and objectives of R.L. Maynard.
It includes summary of items belonging to a company. Inventory Report provides a comprehensive account of stock or supply of various items. These reports contain per unit overhead costs, wastage concerned with inventory and labour cost, which provides manager of R.L. Maynard to see opportunities of improvement that can be utilised by their employees.
It refers to detailed statement that measures results of different activities in terms of its success for a given time period. They are generally prepared annually but if a company want it can make performance report monthly or weekly as per their requirement.
Job Cost Report:
The report listed job costs that is incurred on each project. It is concerned with identifying expenses, cost and profitability related to particular job. Job cost report evaluates cost even when a project is in progress so that unprofitable or wastage areas can be eliminated and project can be made more workable (Fullerton and et. al., 2014).
C) Benefits of different management accounting systems
Advantages of different management accounting system are as follows:
Cost accounting systems
- Cost accounting system helps R.L. Maynard to eliminate losses and inefficiencies by fixing standard for tasks. Company can take necessary steps in order to eliminate those activities, which generates little or no benefits to company.
- It provides information upon which estimates and tenders are based. Thus, it is an essential tool for R.L. Maynard as company is engaged in Construction business and information provided by cost accounting can be very useful for them.
- Cost accounting system helps in generating more profits to organisation as unprofitable activities are eliminated (Hall, 2016).
- Costs of labour are easy to control and monitor through this accounting system as R.L. Maynard can utilise cost accounting system to estimate efficiency and productivity.
Inventory management systems
- The effective inventory system helps in raising operating performance, which leads to more productivity.
- It protects R.L. Maynard against variations in raw material and delivery time.
- Inventory management system helps to minimise losses that occur due to obsolescence, deterioration, damage, etc as R.L. Maynard is engaged in property construction as it needs to keep their building materials safe from getting damaged.
- Revenue generated from each job is known separately in this system.
- It helps managers of R.L. Maynard to estimate cost of job on basis of past records and actual cost of previous job can be compared with those records.
- Ineffective work can be identified with specific job and responsibilities for it can be fixed over individuals.
- This system helps company to realise reaction of customer for different price beforehand and thus, it can evaluate price that their clients are ready to pay for their work.
- It helps company drive customers to their services and increases their margin growth.
D) Management accounting systems and management accounting reporting are integrated
Management Accounting system are interlinked to management reports. These systems help managers with required information to prepare reports.
R.L. Maynard uses these management accounting systems that are as follows:
Cost accounting systems:
It is a management accounting system that aims to capture a company’s cost of production by assessing the cost of their products for purpose of inventory evaluation, cost control and profitability analysis. They provide required information to manager on whether to make or buy a product in open market. R.L. Maynard is an active company that deals in property construction thus it is important for managers of company to decide whether construction materials can be manufactured within an organisation itself or it needs to buy the raw materials. Managers can used the information to make Purchase Report for different materials (Saeidi, and et. al., 2018).
Further, information generated by cost accounting system helps managers to formulate cost reports. However, at times information generated by these reports are insufficient as past performances are recorded in cost reports. And this is utilised by managers to take decisions for future activities. Moreover, cost is ascertained on basis of utilization of capacity. If capacity is partly generated then cost may not be true.
Inventory management systems:
It refers to using combination of technology and process of moving parts and products of company from their warehouses to different locations of company. Data provided by Inventory Management System helps Managers of R.L. Maynard to formulate Inventory Report showing the needs of different raw materials and other equipments required for construction project. Moreover, the information provided by this system helps to formulate adequate report showing how much stock of particular material is left in the warehouse of company. This helps to minimise capital investments on inventory. It provides scientific basis for planning of inventory needs and help in maintaining reasonable safety stock at time of crisis.
However, managers cannot entirely depend upon the inventory management system as it only reduces business risk and not eliminate it. The process of inventory management is quite complex and time consuming. Company needs to install Inventory management software, which may result in additional cost.
This is a system used to assign manufacturing or job cost to each product while keeping track on expense monitoring. Data received through job costing system helps Manager to create Job Cost Report. This report includes cost related to each job that helps Manager of R.L. Maynard to calculate profit margin for each job. Job Costing System helps to calculate indirect cost such as manufacturing overhead. This help manager to transfer a complex calculation process into simple operations which further help them in faster preparation of Management Report.
The demerit of job costing is that accurate report is not obtained due to large number of jobs are executed at time in job costing. Managers are not able to formulate adequate report. Further, comparison of job costs become meaningless for company at time of Inflation in economy (What are the advantages of Job Costing?, 2018).
It helps to create that price which consumers are willing to pay for products/services of a company. This helps company to formulate Sales Report for assessing the sale target and budget. The system helps to set different prices for multiple products used by companies while constructing a building. More over, this help to evaluate competitors’ strategies and pricing which is used by them.
Drawbacks of Price Optimisation System that demands may not fluctuate at different price levels. It is a complicated process and time consuming which affects in preperation of Management Report.
A) Absorption costing and marginal costing methods.
Absorption costing is a cost accounting method for valuing inventory. In this method, inventory is valued by assigning all fixed and variable manufacturing costs to product. The finished unit in inventory will include direct materials, labour and both variable and fixed manufacturing overhead. Due to this reason Absorption costing is all termed as full costing method. It is required by Accounting Standards to create an inventory valuation. The key cost assigned to products in absorption costing are Direct Materials, Labour, Fixed manufacturing overhead and variable manufacturing Overhead (Wagenhofer, 2016).
Marginal Costing is the accounting principles in which variable cost is charged on units of cost and fixed costs of particular period is written off in full against the aggregate contribution. In simple words, Marginal Costing refers to additional cost involved in producing an extra unit of output.
B) Break-even Calculations:
C) Significance of Task 2.
The use of Absorption costing is beneficial for Company. This can be interpret from the Income statement produced. It identifies importance of fixed cost involved in production of each unit. The pricing based on absorption costing ensures that all cost is recovered. Absorption costing takes into account the cost of production and not just direct cost unlike variable costing. The absorption costing shows less fluctuations in Net profits in case of constant sales.
Marginal costing helps determining and controlling cost of production. It prevents arbitrary allocation of fixed cost which helps management to concentrate on achieving and maintaining a uniform cost. As fixed overheads are not charged to cost of production each units produced have standard cost assign to it.
D) Produce financial report.
It provides specific details of producing and selling a single product. In the above case, it has applied two methods i.e. Absorption and Marginal Costing. By considering Absorption costing production variable is not considered so the cost of production represented by 9400 per unit. Where as, in marginal costing along with all the variables it given outcome of 3200 which gives production cost as 9600. By evaluating Income statement, Absorption cost has given more profit margins i.e. by 200 pounds. This means this costing method should be applied in the Company.
In above case, break Even point analysis, new product has been introduced in the market whose selling price per unit is 40 and variable is 13. This shows contribution of 27 per unit and altering adjustment of fixed cost is also used. The extracting number of products, which are sold The use of Absorption costing is beneficial for Company. This can be interpret from the Income statement produced. It identifies importance of fixed cost involved in production of each unit. The pricing based on absorption costing ensures that all cost is recovered. Absorption costing takes into account the cost of production and not just direct cost unlike variable costing. The absorption costing shows less fluctuations in Net profits in case of constant sales.
Marginal costing helps determining and controlling cost of production. It prevents arbitrary allocation of fixed cost which helps management to concentrate on achieving and maintaining a uniform cost. As fixed overheads are not charged to cost of production each units produced have standard cost assign to it. As break even, is 222 whose sales revenue is 8888.89. In same series desired profits are about 10000 there is a requirement for selling 592.60 products. If you are seeking assignment help Malaysia please contact our experts.
A) Advantages and disadvantages of different types of planning tools for budgetary control
Activity based budgetingIt refers to planning system under which costs are related with activities and budgeted expenditure is then compiled depending upon the expected activity level. This perspective is very different from traditional budgeting system. An ABB system permits high degree of refinement in cost planning, focuses attention on the volume, and types of activities occurring within an organization. Benefits of using this system to reduce the activity levels required to generate revenue, which in turn improve profit (Van der Stede, 2016).
All sorts of activities are eliminated by activity-based budgeting.
The activity-based budgeting method evaluates each and every cost drive of unnecessary activities.
Activity-based budgeting requires a more sound understanding.
It is complex in use.
This refers to method of budgeting, which starts from zero. In Zero-based budgeting, budgets are prepared with fresh data. As the name suggests, it starts from zero or clean slate. In other words, New budget is not linked with figures of previous budget but it is prepared on the basis of new estimates, analysis and latest data.
It is different from Traditional Budgeting where all the expenses of new period are calculated on basis of actual expenses that are to be incurred and not on incremental basis that involves increasing of the expenses incurred in the previous year.
“Zero Based Budgeting can be defined as a method of budgeting whereby all activities are revalue whenever each time a budget is set” .
- Allocation of resources according to the priories.
- Justification of each activity.
- It helps in efficient allocation of resources as it do not take historical numbers and look at actual figures.
- Zero Based Budgeting help in improving coordination and communication within the department and motivates employees by involving them in decision making.
- Expensive methods and it may require the involvement of large employees as budget is made from scratch. Further, many departments in the organisation may not have adequate time and human resource to make this budget.
- Short term benefits and explaining every line item and every cost is a difficult task which requires trained managers to formulate zero based Budgeting.
- Zero Based Budgeting is very time consuming activity for a company in compare to incremental budgeting which is far easy .
Incremental budgetingIn this method, budget is prepared by using a previous budget or actual performance as a basis and incremental amounts added for a new budget period. Resources are allocated on basis of allocation from the previous period. Moreover, it encourages ' spending up to the budget ' to ensure reasonable allocation next period. Incremental budgeting is an essential part of management accounting system. It is based on hypothesis of making a small change to the existing budget for arriving at the new budget.
- The budget is stable and a change is gradual .
- The system is relatively simple and easy to understand.
- No incentive to reduce cost.
- No incentive for developing new ideas.
B)Planning tools for preparing, forecasting and analysing budgets.
The Management or Planning Tools assist managers of R.L. Maynard in effective preparation and forecasting of Budget.
These tools are as follows:
Management by Objectives:
This tool helps in improving performance of an organisation by clearing defining objectives agreed by the management and employees. This process involves participation of both managers as well employees that helps to formulate proper and effective budget (Senftlechner and Hiebl, 2015).
The term SMART stands for Specific Measurable, Achievable Relevant and Time bound. As objectives of company is designed on basis of SMART criteria helps the manager in preparing and analysing budget. Manager provides incentives to employees by rewarding them when they meet goals of company. Further, it helps to review the budget and analyse what are the loopholes for effective performance.
It refers to review performance level of an organisation when compared to their competitors in particular industry. R.L. Maynard uses this planning tool to review their budget and evaluate their performance with their rivalries. Further, Company can adopt Internal Benchmarking to compare performance of different departments within organisation.
C) Role of management accounting systems in reducing financial problems
Management accounting system is an effective tool in minimising financial problems faced by R.L. Maynard in the following ways:
- It helps in reducing various kinds of wastage and production defectives. This will help in reducing duplication of efforts and improve efficiency of finance departments.
- Financial issues can be resolved as management accounting uses proper planning, organising, co-ordination and control of business activities.
- Various tools and techniques of Management Accounting provides reliability and authenticity in conducting business function.
- It helps in controlling cost of production (Otley, 2016)
- Tools used within management accounting system are reliable. Thus, it helps in improving financial performance of R.L. Maynard.
D) How Management Accounting System respond to Financial Problems.
- Benchmarking: It is used in measuring performance and progress of one business with other businesses in the same industry. Benchmarking is used for evaluating financial analysis and compares the results to excess the R.L. Maynard overall efficiency and productivity. It is an effective tool to analyse the financial performance with the help of financial statement and financial ratios. This statement is used to calculate different financial ratios like current ratio profit, margin revenue ratio etc. This financial ratio helps in comparing financial performance of R.L. Maynard.
- Financial governance: It refers to set of certain rules and regulations in company to ensure better functioning. A good reporting capability of a company is an important part to regulate financial governance like auditing, internal control, financial control. The better management of all the financial process and transparency in accounting practises is core of financial governance of any company. Financial governance in an organisation helps to solve credit crises, cost deduction and to gain the trust of stakeholders. To ensure good financial governance, R.L. Maynard needs to keep updated data on the basis of company's regulations, conduct internal and external auditing.
- Key performance indicators: Every organisation sets its core business objectives. Key performance indicators act as a measurable value to see how effectively a company is working to achieve its business objectives. KPI can be used at any level of organisation to evaluate the performance in reaching selected targets. It depends upon R.L. Maynard to consider which activities of company as Key performance Indicators .For instance Key performance Indicators for R.L. Maynard is Client satisfaction, Actual Working Days vs Available working Days, etc. Company can use these Key Performance Indicators to evaluate and resolve financial problems. There are different types ofsoftware to create, manage and analyse the data collected from KPI. This software allows business to analyse the data from KPI from different departments of organisation(Otley, 2016)
- Benchmarking: The term benchmarking refers to evaluating performance of company with their competitors. It helps company to resolve their financial issues as R.L. Maynard can use internal benchmarking to evaluate loopholes. This will help company to estimate its financial crisis and take required amount of actions to reduce down or to eliminate these problems.
- SMART: The objectives based on criteria of SMART tool are specific and measurable. If R.L. Maynard prepares its financial goals using SMART criteria then it would be able to resolve its financial issues. This will help to reduce duplication of efforts and to focus on important areas.
- Variance analysis: It is the process to analyse differences between expected or planned cost with actual cost. This planning tool helps R.L. Maynard to keep control on its operational performance. Further, it helps in cost deduction and control. Variance is the mathematical term that shows differences between standard cost and actual cost (Nitzl, 2016)
E) How Planning tools help in resolving financial problems
The report concludes that Management accounting is an essential tool that helps in planning and coordinating activities of the organization. There are different management systems like Cost Accounting, Job Costing, and Price Optimisation System that helps in evaluating the best price for products/services of any organization. Further, the report shows how tools and techniques of management could help in reducing the financial problems of a company.