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Financial Accounting And Managerial Accounting of Sollatek (UK)

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INTRODUCTION

Accounting process relates to recording, classifying, collecting, summarising and interpreting information related financial transactions of business. accounting process is broadly classified in two broad categories that is financial accounting and managerial accounting. Financial accounting process is related with preparation of financial statements of a company such as statement of profit and loss , balance sheet and cash flow statement. Whereas management accounting is accounting which is related with process of preparing managerial reports by utilising financial statements of company by taking into consideration future economic and non economic activities of market. These managerial reports are then used by internal management of company so that they can formulate policies for company according to trends of market and setting of organisational goals( Abdel-Kader, 2011). below project is prepared on “Sollatek (UK)” which is a small scale industry dealing in Software systems. This project report discusses about systems of management accounting and how to develop a understanding of them. Application of certain techniques of management accounting. utilisation of planning tools that are used by managers in management accounting. Comparison of ways in which companies can utilise management accounting reports for responding to financial issues faced by companies.

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TASK 1

P1: Explain management accounting and essential requirements of management accounting reports

Management accounting is process of accounting which relates to preparation of managerial accounting reports which is prepared by accountants of company so that internal management of company can make utilisation of them for purpose of formulation of policies and setting of objectives of company according to trends that are applicable in market. management accounting reports are prepared with use of financial statements of company such as statement of profit and loss, balance sheet and cash flow statement. These reports also takes into consideration future economic and non economic trends of market that will be applicable in economy in future. managerial accounting can also be called as cost accounting which enables managers of company in decision making process that create value of organisation with a effective use of organisation, efficient actions and managing people of company. information of management accounting is:

  • Intended and designed so that it can be used by internal management of company, instead of being used by shareholders , investors and creditors of company.
  • Related with forward looking instead of historical.

Various kinds of management accounting systems and their need in companies:

system of management accounting provides a structure to companies for assisting managers in accurate preparation of reports so that effective decisions can be formulated(Callahan, Stetz, and Brooks, 2011).

  1. Product costing: This costing system of management accounting assist internal management in identification of costs that is incurred in producing products, such that managers of company like Sollatek can make an analysis of expenses related to manufacturing overheads and allocate them in an efficient manner. product costing system is very suitable for small scale companies whose operation activities are simplified in nature and they are able to allocate expenditures of company and determine profitability. This system of management accounting also allows managers in identification of break even point for company.
  2. Cost accounting system: This system of management accounting is done by managers for estimating overall cost that are related to manufacturing process of Sollatek company. This is beneficial for companies as it assists managers in making estimation regarding future costs that may be incurred in production process and thereby also estimates profitability of company. Cost accounting system also assists management in estimating individual cost related to various heads such as Direct labour costs, Direct material cost, cost of inventory etc. This system does not provide as-surety about accurate costs but budgeted cost helps in allocating cost to different overheads.
  3. Job costing: In this costing process internal management of company makes an estimate about costs that are related to production of specific product or cost involved in specific job function. companies like sollatek which is indulge in production of unique products are benefited from this costing process.
  4. Inventory management system: According to this system of management accounting , it assists mangers of company in managing and controlling inventory levels of company so that operation of company does not get hindered because of lack of raw material, this system also focuses on optimum satisfaction of demand of customers. This system of inventory management is effective for companies like Sollatek who have to keep an optimum stock of raw material for efficient supply to manufacturing department as and when they require and supplying it efficiently to wholesalers so that their product is distributed in market according to demands. companies adopt various inventory management systems such as LIFO, FIFO etc. for optimum management of inventory which are discussed below:

LIFO: This system of inventory management implies Last in first Out. According to which those goods are utilised firstly by companies which came last in stock and and good which came later are used afterwards, same is applicable at time of sales. In which COGS represents goods which came later and earlier came goods go to ending inventory(Christ, 2014).

FIFO: This system of inventory management means First in first out and according to this system COGS represents goods which came in earlier and Ending inventory represents goods which came in later.

P2: Methods used in management accounting reports

Reports of management accounting are documents which are used by internal management and these reports provides true and fair view of organisation and its functioning. preparation of these reports are very necessary as they provide managers with relevant informations. reports such as cash flow reports assist managers in knowing about liquidity position of company , budget reports are prepared to provide managers with overview about future operations of company and many more. These all reports are used by Sollatek limited as they are discussed in brief as below:

  • Financial reports: These reports assists managers in knowing financial position of company. These reports allows managers to have a accurate knowledge regarding financial health of company so that they can formulate policies and objectives for company accordingly. Sollatek limited prepares financial report by including statement of profit and loss which tells about revenues and expenditures of firm and includes balance sheet to keep a know about assets and liabilities of company.
  • Cash Flow report: cash flow report is formulated to keep a knowledge and record about cash position of company. These reports keep a track record about total cash inflows and outflows of firm. cash flows about various activities such as operating, investing and financing activities of firm are taken into consideration.
  • Sales report: The sales report for the companies are prepared for the purpose of estimating the amount of sales that will be done in financial year, which can assist the organisation in determining the profitability of the company. Sollatek makes the sales report so that they can analyse which channel of distribution is generating more revenue for the company in an efficient manner(Cokins, 2014).
  • Performance report: These reports are presented by the companies for the purpose of analysing the overall performance of the company and also the performance of each department and the individual employees. The performance reports pre specify the standards for the performances of the employee and various departments. These standards are then used to evaluate the actual performances and helps the managers in finding variations, if any. The managers are then required to take corrective action if the performances does not match the pre set standards.
  • Accounts receivable report: The AR report assists the managers of the company in keeping record about the total debtors of the company. The managers use these report in estimating the total amount that is to be received from the debtors and when the amount is to be received. This reports helps the managers to find out the debts that are doubtful and the debts that is going to be bad. This helps managers in tightening or loosening the credit policies of the company.
  • Inventory management report: This report is prepared to keep a check on the inventories of the company. The inventory report keep a track record of all types of inventory such as raw material, work in progress and finished goods. These reports are essential to be prepared to maintain economic order quantity in the organisation and for providing the customers with the products as and when the demand occurs. Sollatek limited is a manufacturing company so it is very essential for them to maintain the inventory for the proper functioning of the organisation.

M1: Benefits and applications for management accounting systems

Management accounting systems are evolved for simplifying the functioning of the organisations and these systems developed under this are globally applicable. But every organisation adopts different systems of accounting as per the size, nature and scope of the organisation. Benefits and application of the systems are discussed below:

Price optimising systems

This system is applicable for the company's which deals in diverse variety of products, because the system applies where the company produces variety of product and the prices are to be allocated to variety of products.

Inventory management system

According to this system of management, those organisations are benefited which require to keep a lot of stock of goods like manufacturing and wholesale units like Sollatek which is manufacturing unit(Fullerton, Kennedy, and Widener, 2014).

Cost accounting system

This system of management can be applied and adopted in any type of organisations as it assists the companies in making an estimation about the cost involved in the operations.

D1: Critical analysis about the accounting report system

Management accounting reporting deals with providing relevant and understandable information to the internal management of the companies by preparing various necessary managerial reports such as cost accounting report, inventory management report etc. Sollatek limited makes use of these reports for the purpose of effective decision making. The company have hired an professional team for the preparation of these managerial reports so that the information contained in the reports are relevant.

TASK 2

P3: Estimation of cost and net income by preparing profit and loss statement with the use marginal and absorption costing

Cost: This refers to the amount which the companies incurs in the production process and other related activities. Cost involves all the amount which is related with the production of goods starting from the manufacturing process till the time the product is sold to the final consumer. Costs are broadly defined in various categories such as variable cost, fixed cost , marginal cost etc(Kihn, and Ihantola, 2015).

Marginal costing: Marginal cost refers to that cost which is incurred when the producer or the manufacturer decides to produce the additional units of products. The cost per unit of every additional product is called marginal cost of the product. The marginal cost only includes variable cost of production and does not include fixed cost. That is why when the producers use the marginal costing method in the estimation of the profitability, the profits come out to be more.

The marginal costs are used by the companies so that they can estimate how much profit they are making when they are producing additional units of products. It is determined by using under formula:

Sales revenue – Marginal costs (Direct material+Direct labour+Direct overheads+Variable overheads) = Contribution – Fixed costs = Net income or profit

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: As the name implies the absorption costing method absorbs all the cost related to the production process related to the sales for ascertaining the gross profit of the company. The absorption costing method takes into consideration both variable and fixed cost of production. Which is why under the absorption costing method the profitability of the company is low as compared to the marginal costing because it includes fixed cost of production also. The absorption costing is calculated as under:

Sales revenue – cost of goods sold = gross profit – selling and administrative expenses = Net profit and income

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

 

  1. The number of products to be sold to break even

Sales per unit

40

Variable costs VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

 

  1. The break even point in terms of sales revenue

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

 

  1. The number of products that need to be sold to make profit of 10,000

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

Margin of safety – Margin of safety or MOS shows the safety level of the structure, MOS indicate that how many income can fall before a concern can reach at no profit no loss or break even situation(Shields, 2015).

  1. The margin of safety if 800 products are sold

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

M2: Various kinds of management accounting techniques

The techniques of management accounting consists the tools which are used for the determination of profitability of the company by charging various cost such as fixed cost, variable cost, manufacturing and selling etc. Various types of the management accounting tools are discussed as under:

Standard costing: The standard costing process is the procedure for the estimation of future profitability of the company, by the pre determination of the costs related to the production process. The standards costs are set by the managers for comparing it with the actual cost that is incurred during the process of production.

Marginal costing: The marginal cost is that cost which is incurred when the companies produce additional units of products. The cost that is involved in the marginal costing is variable cost, marginal cost does not include fixed cost of production which increases the profitability of the company(Smith, 2017).

D2: Interpreting the data

According to the above data it has been seen that profit that was calculated under marginal costing has come out to be 17500 which is way higher then the profit which is determined under absorption costing that is 15675. This difference has been seen because the marginal costing only includes variable cost and the absorption cost includes both variable as well as fixed cost of production.

From the data it can be seen that interpreted that this organisation produces at least produces 500 units for incurring an situation of no profit and no loss. Margin of safety has been calculated by the company for 37.5

TASK 3

P4: Merits and Demerits of various planning tools used under budgetary control

Budgetary Control is a tool of management control which relates to the preparation of budgets and comparing budgeted estimates with the actual outcomes, the budgetary control process relates with the preparation of various budgets like cash budget, fixed budget, flexible budget etc. which helps an company for generating profits.

Cash budget: Cash budget is prepared to estimate the the cash holding position of the company. The cash budgets also keep a track record of all the cash inflows and outflows of the company from the different activities such as operating, investing and financing.

  • Advantages: This budget assists in the indication of the actual cash [position of the company and also helps the organisation in making an reliable forecast about the future cash position of the company(Stergiou, Ashraf, and Uddin, 2013).
  • Disadvantages: This budget only includes the cash transaction and does not provide any information regarding the Non monetary transactions which makes unfeasible for the company to find the actual profitability or loss of the company.

Operational budget: The operational budgets are prepared by the companies for the purpose of financial planning of the regular operations of the companies such that the company does not face any financial issues or monetary problems in the future in operations of business. Operational budgets are formulated by the companies on monthly, semi annually or quarterly basis. The management uses these budgets for the to compare the performances related to the operations of the company.

  • Advantages: this budgets makes as estimation about the company ability to meet its daily obligations with the operational revenues of the company and to evaluate where the finance of the company should be spend in order to earn maximum return.
  • Disadvantage: The preparation of these budgets requires intensive research and analysis, which leads to consummation of time and it is also an expensive approach.

Sales budget: Sales budget are prepared to fore cast the sales related to the future period it can be annual, semi annual etc. when the company prepares the sales budget it means that the employees have a target to achieve the sales target as shown in the sales budget. This budget is used by the companies in measuring the actual sales with the budgeted sales and finding variations if any and taking actions if the criteria is not met.

  • Advantages : Sales budget enables the managers in planning a sales target and planning accordingly to achieve them which motivates the employees to work towards the set target.
  • Disadvantage: Preparation of sales budget is done on the basis of the analysis of trends and assumptions which makes it less accurate and reliable.

Production budget: The production budget is prepared by the company after the preparation of sales budget. According to the determined sales for the company the production targets are set by the managers. The production budget includes quantity of products to be produced and the cost limits that should be considered in production. The budgets accounts for raw material, machineries and plants , labour etc.

  • Advantages: With the preparation of production budget it enables the company in optimum utilisation of resources such as raw material, labour , plants etc.
  • Disadvantages: The production budget budget is prepared on the basis of the sales forecast which can be differ from the actual sales, which sometimes makes then production budget inappropriate as the products are manufactured keeping in mind the sales of the company(Theriou, and Aggelidis, 2014).

M3: Analysis of using planning tools

Tools of planning of budgetary control like forecasting , contingency and scenario are assists the organisation in preparing various budgetary reports such as budgets and cash flow statement.

Cash flow statement: This is an financial statement which is prepared to analyse the inflows and outflows of the cash transactions so that net cash available in the company are easily ascertained by the company, along with the availability under investing, financing and operational activities.

Budgeting: The process of budgeting is related with the preparation of budgets which provides the estimation various functions like sales productions etc. budgets are basically prepared for the estimations of the cost and profitability of the company.

D3: Evaluation of planning tools

Tools of planning such as forecasting and scenario planning assists the companies in estimation and analysis of all the future scenarios of the business for the future which can help the company in the formulation of effective plan of all the future emergencies and uncertainties. These tools of planning are utilised for the preparation of budgets and cash flow statements which are considered reliable for the estimating future sales , cost and profitability.

TASK 4

P5 Comparison on how organisations are adapting management accounting systems

Management accounting system are tools which are acquired in order to create financial reports and provide reliable information which can be used by managers thus to make important business decisions. Business associations, like – Agmet and Sollatek limited has acquired the concept of management accounting system such as – inventory management and price optimisation system in working processes thus to extend credibility of business as well as control all financial issues which presents within working environment. Following is described certain aspects through which financial issues can be handled, such as -

  • Regulation and compliance – It is essential for companies to be registered and for the same they need to complete terms and conditions of registration. All essential documents are complied with laws associated by authorities. UK government has aligned different laws as per the nature and modify them as per the market changes. Thus, it is quite difficult to tackle environmental changes.
  • Legal issues – Issues such as – variations in laws and legislations can affect working processes of organisations like – Agmet and Sollatek limited in respect of managing its financial laws. UK government has regulated certain implications through which business organisation faced certain complexities and issues(Ward, 2012).
  • Financial management – Due to diverse nature of working activities and functions affect financial position of business entities. In order to cope this issues, firms like – Agmet and Sollatek limited has acquired cash flow management system as well as accounting based cost system thus to accomplish all financial activities in the best possible manner.
  • Technology – In this over dynamic environment, technological advent plays a vital role in smoothing running business activities and operations. But technical changes occurs at fast face and it is quite difficult for management to implement technical processes within working activities. It can affect financial position of the company and frequently changes in manufacturing procedures also hinders volume of production or output level of the company( Wouters, and Kirchberger, 2015).
  • Maintaining reputation – Creating a strong market goodwill and brand value is one of critical task for management because there is a multiple varieties of rivals are available at marketplace which can affect sales and profitability of Agmet and Sollatek limited. In this relation, financial managers have to acquire contingency planning techniques so as to manage all monetary issues which occurs at marketplace.

Agmet limited

Sollatek limited

Agmet Ltd., is manufacturing unit which acquire process costing in order to identify costs or prices which are getting involved to manage specific department.

On the other hand, Sollatek limited is a manufacturing firm job order costing methods so as to find out costs involved in specific units.

This business association deals to provide diverse range of products and other items, for this it has acquired inventory management system.

As the firm deals in clothing sector, thus determining price of every product is one of the critical task for management.

In order to cope this issue, managers adopt price optimisation system for ascertaining prices of products.

M4: Analysis of financial problems

There are various kinds of financial difficulties that are faced by the companies in the in the production of products and providing services to the customers. Many of these problems are related with the formulating of the budgets and cost and profitability that is related with the production process. For approaching such issues the organisations utilises various financial tools which lowers or reduces the impact of such things on the organisation. The examples of tools which are used and adopted in the organisations for overcoming the difficulties include balance card approach, benchmarking , key performance indicator and financial governances etc.

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CONCLUSION

It has been concluded from the above project report that the managerial accounting plays an significant role in the process of decision making and formulation of policies of the organisation as it uses financial statements and future economic conditions of the market. The significance of various reports such as inventory management report, accounts receivable report, job cost report have been discussed here. The importance of marginal and absorption costing in the preparation of income statement and finding net income under both methods are some of the things which have been performed above. Finally, the tools which are used by the company to overcome the financial problems faced by the company.

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REFERENCES

  • Abdel-Kader, M. G. ed., 2011. Review of management accounting research. Springer.
  • Callahan, K. R. , Stetz, G.S. and Brooks, L. M. , 2011. Project Management Accounting, with Website: Budgeting, Tracking, and Reporting Costs and Profitability (Vol. 565). John Wiley & Sons.
  • Christ, K. L. , 2014. Water management accounting and the wine supply chain: Empirical evidence from Australia. The British Accounting Review. 46(4). pp.379-396.
  • Cokins, G. , 2014. Top 7 trends in management accounting, Part 2. Strategic finance. 95(7). pp.41-48.
  • Fullerton, R. R. , Kennedy, F. A. and Widener, S. K. , 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7-8). pp.414-428.
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