This project has two-part in which the following questions will be asked.
- Demonstrate the concept of management accounting systems.
- Use the range of management accounting techniques.
- Explain the use of tools of planning in management accounting.
- Compare the ways in which an organisation can use management accounting in context to financial issues.
Management of information related to financial and non-financial transactions, events and assumptions are considered as management accounting. It is a part of strategic planning and decision making process (Abdelmoneim Mohamed and Jones, 2014). This report focuses upon marginal costing, absorption costing, closing stock and profit figures. It mainly focuses upon essentialness of various type of planning tools used in budgetary control process. Use of management accounting in resolving the monetary conflicts and emphasising the sustainability of business is evaluated in this report.
Evaluation of change in total cost by producing extra unit is considered as marginal cost. A cost that helps to determine the cost of incremental production change due to increase by producing each extra unit. Marginal costing considered very effective while calculating break even analysis and variability of cost in various sections. Marginal costing helps in dividing the changes in cost or incremental cost among the increased units. Material cost, labour cost and direct expenses cost are the main elements in marginal costing.
It is one of the essential method of compiling the cost that remain associated with the process of production units. This costing method mainly help in valuation of inventories with in organisational context (Absorption costing, 2018). The additional cost is analysed subject to analyse the marginal cost proportionate to production. Ingestion costing implies that the majority of the assembling costs are consumed by the units delivered. As it were, the expense of a completed unit in stock will incorporate direct materials, coordinate work, and both variable and fixed assembling overhead. Fixed overheads cost is considered as absorbed rate while calculating cost.
Why are the closing stock and profit figures different?
There are two elective procedures for the valuation of stock as marginal costing and absorption costing. Simply factor costs are charged to movement, however the fixed cost is restricted from it and are charged to profit and mishap speak to the period. In marginal costing, minor cost is controlled by bifurcating fixed cost and variable cost. It it reckoned that profit form marginal and absorption costing are counted different. There are some assumptions made in terms of calculating profitability form absorption and marginal costing. Main reason of getting different results in terms of profitability form absorption and marginal costing changing value of opening and closing stock. This also help in consolidating the changes with appropriate management and approach and magnitude of opening stock. The management process of managing the sections are analysed with absorbed rate and appropriate products.
Conversely, Absorption costing or similarly called full costing, is a costing methodology in which all costs, paying little respect to whether fixed or variable are devoured by the total units conveyed (Bovens,Goodin and Schillemans, 2014). It is mainly used for declaring purposes, i.e. for cash related and evaluate uncovering. There are various who say irrelevant costing is better, while others lean toward digestion costing. Thusly, one should know the refinement between minor costing and maintenance costing to reach at goals, about which one to be supported over the other. There are various differences considered essential for mentioning the points for better change and development.
Uniform costing: this is one of the form of costing system that helps in analysing the principles and standard accounting practise. This helps in analysing the accounting procedures for better aspect
Process costing: This costing method is based upon different manufacturing and production sections. There is a individual manufacturing cost is evaluated of individual processes. It helps in managing the process costing for better change and development.
Purpose of marginal cost
Main purpose of marginal costing is to evaluate the per unit’s production cost incurred during the year. Marginal costing helps in correlating the cost information and helps in better strategic planning and strategic planning process.
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P4 Advantages and disadvantages of diverse kind of planning tools used in budgetary control
Budgetary control alludes to how well directors use spending plans to screen and control expenses and tasks in a given accounting period. It is considered as a spending plan of dispersing assets by qualitative (Nielsen, Mitchell and Nørreklit, 2015). It seems to be one of the effective system of management control under which actual profit and spending are taken into account with proper planned income and expenses. Thus, company can looks in case specific planning are being followed and those plans are required to be modified in respect to attain maximum profit. Budgetary control would be balancing of techniques that can provide overall stability for an organisation in respect to real profit and utility stick intently to their money related planning.
Subsequently budgets are prepared for the purpose of estimating the future cost and risk those are going to be incurred within an organisation. It has been seen that budgets are not only a means of control but would also assist the manager in performing other operations within an organization. This would help in overall planning or pointing deviation from the estimated results. Various type of budgets is used in organisational context such as;
Fixed budget is a type of budget that does not change due to change in sales volume and variable expenses. A fixed budget plan is a spending that does not change or flex when arrangements or some other activity additions or decreases. It is in like manner suggested as a static spending plan. most associations experience extensive assortments from their ordinary activity levels over the period fused by a money related arrangement, the totals in the financial recompense are presumably going to isolate from genuine results (Lavia López and Hiebl, 2014). Associations that are static, execute a comparable sort of trades can exceptionally benefit by a settled spending plan.
Advantages of fixed budget: A fixed budget plan enables a business to gauge both here and now and long haul spending plans. The fixed budgeting plan dispenses a set measure of cash towards fundamentals, for example, overhead expenses. Any cash left over toward the month's end or some other period you survey settled spending plan is viewebudgetary control definitiond as benefit. It
Disadvantage of fixed budget: There are type of adjustments are analysed in term of managing the breached equipment’s. Fixed spending makes benefit estimation less demanding, since you apportion a similar measure of cash towards necessities all the time. The fluctuation rate remains same in both the perspectives in terms of managing the sections with different cost aspects that reduce the credibility of business. Benefit estimation turns out to be more troublesome if the financial backing always varies (Messner, 2016).
A flexible budget is one of the valuable budget for an organisation that keep on changing with volume or activities performed during the period of time. It is more sophisticated and crucial other than static budget. It is considered as flex because variable rate per unit of units instead of one fixed value. Thus, it is more useful for increasing the efficiency of the business for longer period of time (Siverbo, 2014). At the end of the day, an adaptable spending utilizes overall value for the production that tend to increase overall profitability for an organisation and make plan in such a way that always assist in generating maximum return in near future. It is designed to change in relation to the level of activity actually attained. A flexible budget is one that takes account of a range of possible volumes. It is sometimes referred to as a multi-volume budget.
Advantages of flexible budget: Flexible spending plan empower an association to anticipate its execution and pay levels at a given scope of offers levels and movement levels. Flexible budgeting plans empower more exact evaluation of administrative and authoritative performance. It very well may be seen the effect of changes in deals and generation levels on income, costs and at last salary.
Disadvantage of flexible budget: Accurate is the important element to address the requirements of forming flexible budget that may lead organisation towards serious concerns. Flexible spending demonstrates differences between spending plans yet it doesn't intricate the detail or the principle reasons of the fluctuations which could be secured.
An incremental budget plan is a financial plan arranged utilizing a past period's financial plan or genuine execution as a premise with incremental sums included for the new spending time frame. This kind of spending stays straightforward in typical course of business (Strauss, Kristandl and Quinn, 2015). However, it isn't by and large prescribed by most experts because of its irregularity. One of the most serious issues with this kind of planning is that it regularly drives offices to spend more cash.
Advantages of incremental budget: Managers can work their specialities on a reliable premise. The financial backing is steady and change is slow. The framework is moderately easy to work and straightforward. It easy to see the growth more vastly as the production gets increase during the time. Co-appointment between spending plans is simpler to accomplish.
Disadvantage of incremental budget: Assumes exercises and strategies for working will proceed similarly. No motivating force for growing new thoughts. The financial backing may wind up outdated and never again identify with the dimension of action or sort of work being completed. No motivating forces to lessen costs. Urges spending up to the financial plan so the monetary allowance is kept up one year from now. The need for assets may have changed since the financial plans were set initially.
Zero based budget
This is one of the type of budget that mainly starts with zero base. Budget basically not remain related with previous budgets and analytical aspects (Tappura and et. al., 2015). This budget helps in consolidating the cost aspects with zero based budgeting and plans for combining the business expenses at starting level. This strategy mainly helps in dividing the changes in various form such as business goals, prioritization of funds and analysing the business process.
Advantages of zero based budget: It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department. ZBB permits top-level vital objectives to be actualized into the planning procedure by binds them to particular practical regions of the organisation. where expenses can be first gathered and afterwards estimated against past outcomes and current desires.
Disadvantage of zero based budget: Explaining every line item and every cost is a difficult task and requires training the managers. The budgeting process may sometime become rigid and thus an organisation cannot be able to react to those unforeseen opportunities or threats. Zero-based budgeting is a very time-intensive exercise for a company or a government-funded entity to do every year as against incremental budgeting which is a far easier method.
Variance analysis is the investigation of deviations of real conduct versus estimated or arranged conduct in planning or administration accounting (Zaleha Abdul Rasid, Ruhana Isa and Khairuzzaman Wan Ismail, 2014). Difference investigation is generally connected with a producer's item costs. It investigation projects and elements to distinguish the reasons for the contrasts between a manufacturer's. It is a method that helps to analyse the differences between the actual cost and standard cost and try to correlate the difference in respect of saving unconditional cost.
Advantages of variance analysis
It is one of the essential tool that helps in analysing the differences between the projected and expected figures. It is a type of annual budget exercise that helps in assessing the responsibilities and liabilities for better change and development.
Disadvantage of variance analysis
There is lack of certainty found while calculating the variances between the actual and standard results. It only presents the variations and difference but do not presents the main reason of differences between standard and actual figures.
P5 Analyse how organisations are adapting management accounting system to respond financial problems
There are type of financial issues remain associated with management and operation in organisations. These issues may be related to the management of cash, incorporating the changes with in different organisational aspects, determining the adequate financial sources or management of investment planning. Legal challenges, policy change, changes in economic rate, expansion plans and cash flow management are the main financial challenges faced by organisations. These challenges can be identified in the following ways such as;
Financial governance incorporates how organizations track money related exchanges, oversee execution and consistency, activities, and control information and revelations. Financial administration suggests the manner in which an organization gathers, oversees, screens and controls budgetary data. Financial Governance assists CFOs in their tasks to assemble controls along the nearby cycle, accomplish chance balanced knowledge with brought together money related detailing and consistence examination, and upgrade the convenience and nature of monetary announcing.
Benchmarking is the standard method for contrasting one item with another. With innovation specifically, it remains against contending items is frequently the best way to get a target proportion of value. In order to analyses the financial position of the company it is crucial to determine to other firms in respects to deal with an organization's competitiveness. This seems to be a well organise procedures for making comparison of a firms overall performance certain criteria and business processes to get competitive advantages over other.
It stand for Key performance indicators that are mainly used to success and failure of the processes that are used by the organizations. It also helps to evaluate that company is going to attain profits or face losses. It is mainly used by Tesco and Apple to resolve the problem of sudden expenses that may occur due to improper planning. It guides business entities to formulate appropriate strategies that may help to deal with unplanned expenses. Some of them are leads and lag indicators that are used in respective manner to resolve the queries.
Without the use of an organised, MIS Tesco had unorganised departments regarding management reporting. Due to this, problem, cost of maintain and organising department was increasing rapidly. By implementing benchmarking tool, this financial issue would be highlighted in general meeting.
The problem faced by the company is to decide the cost of product and services. By using financial KPI, this issue be able to critically access by quality managers during evaluation.
IVIS Group implemented a new system to handle their online system management and marketing programme, the Sonetto Channel Information System (SCIS) (Xie and Allen, 2013).
To resolve the above financial problem apple used the activity based costing method under cost accounting system. This ABC helps the management to get the necessary information required for its decision making and planning (Sun, H. and et. al., 2010).
Tesco is using MIS management accounting system. The managers to manage and control the information across the channels used a new application “Sonetto Retail Suite”.
Activity based costing system is used by Apple to set appropriate prices for the products.
Tesco's communication between the departments was irregular, but after the implementation of the SCIM communication system was organised.
The main problem faced by the company minimizing its cost of production after the implementation of this cost system it helped the company to analyse data and use it resources more efficiently.
M4 Evaluation of effectiveness of management accounting in terms of leading organisation to sustainable success
Management accounting is being considering a tool of overcoming the financial challenges and variations of better control and management. This also helps in consolidating the changes with various sources and aspects (Tappura, and et. al., 2015). In order to accomplish high rate of return for an organisation in the coming time the manger is required to make use of effective management accounting system. This will help them to control their implications as well as additional costs those are going to be incurred during production process.
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The above report summarises the concept of marginal, absorption costing concept and how these helps to correlate the cost. It is evaluated that various type of planning tools helps in budgetary control process to make decision making process more effective and smooth. Effectiveness of management accounting system in terms of resolving financial issues are also correlated with in organisational context.
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