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Concept of Management Accounting | Types & Benefits

1224 Downloads1 I Published: 03 Dec ,2019

Introduction

Management accounting is also called as managerial accounting or cost accounting. It is the procedure of analysing business cost and operations for designing internal financial records, reports and accounts which will help manager in decision making process for accomplishing their goals and objectives. In simple term it can be said that, management accounting is use for internal decision making of organisation. Financial and non-financial both kind of information utilise for making report as well as there is no specific time duration for preparing and using managerial reports. An organisation can use respective report when they required without any restrictions. Apart from this, management accounting system is differ from financial accounting because it help only in internal aspects of business. In this report, Capricorn Wealth management Company is selected which was established in 2008 and its office is at Hammersmith London, United Kingdom. Respective organisation provide wealth and financial advice to their clients and offer several financial products and services, loans, mortgage products and so on.

This report will going to discuss about the concept of management accounting along with types and benefits. Moreover, going to focus on several accounting techniques as well as managerial reports with their advantages and disadvantage. In the end, ways will be discussed which utilise for overcoming from financial issues by effective implementation of several accounting techniques.

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Task 1

P1. Management accounting and its different types of system.

Management accounting is type of accounting system which provide assistance in management of organisations internal parts. It is helpful in making managerial report that is required within association for designing their important policies and also in making internal decisions. Along with this, for an organisation it is not mandatory to maintain respective accounting system it is totally depended on requirement. There are several types of accounting system explanation of these are as follows :-

  • Price optimisation system – It is an system which provide framework to organisation for identifying price of goods and services which is suitable for both company and their customer's. With the assistance of price optimisation system reaction of customer's at different price level has been analysed. Generallymain motive of this accounting system is to provide factors that will assist is setting price. Capricorn Wealth Management Limited utilise respective system for setting price of goods and services which is advantageous for company as well as their customers.
  • Cost accounting system –It is an accounting system which is helpful in determining the cost of products including all the cost such as fixed as well as variable. Capricorn Wealth Management Limited organisation utilise cost accounting system for checking out the cost of several financial goods or services. Thus, it will assist in focusing on those services and products which are beneficial for organisation.
  • Inventory management system – It is one of the most important accounting system within the organisation because it is related to tracking status of goods as well as services. With the assistance of inventory management system association is able to identify availability of products and services. Capricorn Wealth Management Limited implement respective accounting system with the motive of tracking their product and services. For instance, Company want to check clarification of mortgage loan's then in this process inventory management system help in checking.
  • Job costing system – It is the system which involve the procedure of accumulating information related to the cost of production. Job costing system is suitable for the companies who are offering variety of products and services. Capricorn Wealth Management Limited is an firm which serving several financial services and products so for them it is necessary to make estimation of each individual unit cost. Thus, respective system help in analysing the cost of different financial goods and services along with customer reaction at various price level.

P2. Explain different method of management accounting reporting.

There are several types of accounting report which is necessary for company but management accounting have their play important role in relation of internal management of business. This will assist manager of Capricorn Wealth Management Limited in taking important decision and also framing strategies. Management accounting report involve both monetary as well as non-monetary informations. Respective organisation prepare several type of reports are as follows :-

  • Budget report – It is an internal report which is not share with outsiders and budget report assist in comparing estimated with actual performance. Along with this, it also aids in designing future policies as well as strategies for association. Moreover, budget estimate income and expenses for specific time period and respective firm will follow this in accomplishing their goals and objectives.
  • Cost managerial accounting report –It is an accounting report which provide framework for checking profit and loss from several activities. Cost managerial accounting report assist in calculating all the expenditure before selling of product and after that compare with the income from selling. Thus, if expenses are more then income it will be loss for company whereas, expenses are less then income it will be profit. Although, Capricorn Wealth Management Limited utilise cost managerial accounting report with the motive of analysing profit and loss as well as also for making future policies.
  • Performance report –In simple term it can be said that, performance report is that which utilise for measuring the performance of something. In relation of management accounting, performance report simply means judgement the performance of staff members well as organisation for accomplishing predetermined goals. It decrease the level of complexity for deciding which personnel is eligible for rewards and who don't. Capricorn Wealth Management Limited apply this report in their working for analysing performance of company as well as their employees. Moreover, it will assist manager of respective firm in checking the performance of each and every individual activity.

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M1. Evaluation of benefits of various management accounting systems.

Advantages of Job costing system -

  • Job costing provide an basis for estimating cost of similar job that will be taken in future.
  • It provide detail analysis the cost of material, overhead and labour for every job as and when needed.

Advantages of cost accounting system -

  • Cost accounting system assist in finding out the reason behind high cost in the procedure of goods and services offering.
  • Through this organisation can make cost estimate of products and services which offering by them.

Advantages of price optimisation system -

  • It provide framework through which company can analyse reaction of customers at different price level.
  • Price optimisation system assist organisation in identifying the level of price that will be beneficial for company as well as customer both.

Advantages of inventory management system -

  • This management system is beneficial in tracking status of several goods and services.
  • Inventory management system assist in saving time and cost.

D1 Management accounting system and management accounting reporting are integrated with organisation process.

The integration of management accounting reporting with accounting system is too crucial in the context of organisational process. It is this because both have a typical link with each other. Like if a company wants to prepare some managerial reports then it is important to have data from the management accounting systems. In the absence of this companies can't make reports and can't take futuristic decisions. Capricorn Wealth Management Limited prepares different management reports with the help of different accounting techniques and tools. This minimise complexity in preparation of accounting reports.

Task 2

P3 .Appropriate techniques of cost analysis to prepare an income statement

Absorption costing –It is the method which calculate cost of manufacturing by including both fixed as well as variable cost. This is needed for external financial reporting and for income tax also.

Marginal costing –It is the cost of one additional unit of output and concept of marginal cost is use for determining the optimum production quantity for association, where it cost less amount in production of additional unit.

Income statement by using absorption costing method:

Particular

Amount

Sales (25*10000)

Less- Cost of good sold

 

Gross profit

Less- Selling and manufacturing overhead

 

Net profit

 

 

250000

140000

 

110000

60000

 

50000

 

 

Working Notes*

Calculation of sales(25*10000) - 250000

Calculation of cost of good sold - 140000

(Direct material+ Direct labour+ Variable manufacturing overhead+ Fixed manufacturing overhead: 50000+30000+20000+40000)

Calculation of selling and manufacturing expenses - 60000

(Variable selling and manufacturing overhead+ Fixed selling and manufacturing overhead : 30000+30000)

Income statement by using marginal costing method:

Particular

Amount

Sales

Less: Marginal cost of sales

 

Contribution

Less: Fixed cost

Net income

250000

130000

 

120000

70000

50000

Working Notes*-

Calculation of marginal cost of sales - 130000

(Direct material+ Direct labour+ Variable manufacturing overhead+ Variable selling and administration expenses: 50000+30000+20000+30000)

Calculation of fixed cost - 70000

(Fixed manufacturing overhead+ Fixed selling and administration expenses: 40000+30000)

Interpretation- After going through the above numerical, it has been identified that in both of the costing method organisation is getting equal net income. Thus, in the absorption method net income is of 50000 whereas, same in marginal costing also.

Income statement by absorption costing method (When 5000 units sold)

Particular

Amount

Sales (5000*25)

Less- Cost of good sold:

Direct material- 50000

Direct labour- 30000

Variable manufacturing overhead- 20000

Fixed manufacturing overhead- 40000

Gross loss

Less- Selling and manufacturing overhead

Fixed selling and manufacturing overhead- 30000

Variable selling and manufacturing overhead-30000

 

Net loss

125000

140000

 

 

 

 

(15000)

60000

 

 

 

(75000)

Income statement by marginal costing method( When 5000 units sold)

Particular

Amount

Sales(25*5000)

Less- Marginal cost of sales:

Direct material- 50000

Direct labour- 30000

Variable manufacturing overhead- 20000

Variable selling and administration expenses- 30000

Contribution

Less- Fixed cost:

Fixed manufacturing overhead- 40000

Fixed selling and administration expenses- 30000

Net loss

125000

130000

 

 

 

 

(5000)

70000

 

 

(75000)

Interpretation-After going through the above given number, it has been examine that company is getting loss from both of the costing method. Thus, by using absorption method, net loss is 75000 and in marginal costing also same loss is occurring i.e., 75000.

Financial reporting document with labour and material variances:

 

Budgeted

Actual

Variance

Units

1000

1100

100(F)

Hours

3000

3400

400(A)

Units per hour

3

3.09

0.09(F)

       

Labour

15000

17680

2680(A)

Labour rate per unit

15

16.07

1.07(A)

Labour rate per hour

5

5.2

0.2(A)

 

 

Actual

Units

1000

Material used Kg

2200

Actual Material cost

20900

Material cost per kg

9.5

Material cost per unit

20.9

   

Budgeted material cost per unit of the product

2kg at £10/kg

Budgeted material cost per kg ( £ 10/2)

5

Budgeted Material cost

11000

   

Variance (Actual- budgeted)

9900(A)

M2. Management accounting techniques and financial reporting documents.

Management accounting techniques are necessary to create the financial reports and statements. Companies need to prepare financial documents like balance sheet, p&l etc. with the use of accounting techniques and tools. This is why, because accounting tools provide financial informations which are required to prepare financial reports. Capricorn Wealth Management Limited prepares financial statements with the help of different accounting tools and methods because financial data which is needed for making financial statements becomes available from management accounting tools.

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D2. Financial reports which applies to interpret many business activities

Financial reports reflects all the business activities in way which is easy to understand. With the use of financial statements like p&l, balance sheet, company can check about the financial position. These financial reports are linked up with the business activities because all the information in these reports comes from the business activities. Basically, financial reports shows the business activities in a financial form. Purpose of preparing of these reports is to evaluation of company and as well as to show external parties like shareholders. Capricorn Wealth Management Limited prepares many financial reports like p&l, income statements to check the effectiveness of the business activities.

Task 3

P4. Advantages and disadvantages of different types of planning tools used for budgetary control

Budgetary control is regarded as tool or techniques which is used in helping formulation of future financial performance and analysing goals through past budgets. Such technique is used by manager in order to control and monitor financial operations and cost of accounting period. The controls plays an effective role to organisation as it aid senior level manager for managing and operating performance of operations in effective manner which leads to chances of making maximum profits. These tools helps in providing estimation for incomes and expenses to firm for financial period and financial position in competitive world. The manager of Capricorn Wealth Management Limited should considers different factors for setting non financial and financial targets in order to coordinate and control various financial activities among multiple departments. There are different kinds of planning tools used for budgetary control along with advantage and disadvantage which are described below:

Flexible Budget- It is techniques that assist in making various changes in budgets which can be occurred at time. Such budget is used by all types of organisations as budgetary control. This planning measure helps in estimation of expenses and revenues that is based on current outputs. Such budgets are used for evaluating success and failure areas in operations of past performance during financial year. The manager of Capricorn Wealth Management Limited should prepare budget for all types of operations that varies from each other or variable in nature. When there is change in any activity then such changes can be adopted easily. There are some advantage and disadvantages of flexible budgetary control which are given below:

Advantages- The advantage of flexible budget are as follows:

  • These budgets helps in providing accurate and authenticate outcomes as it covers different types of activities separately.
  • This budgetary control helps in bringing coordination among different activities in Capricorn Wealth Management Limited.

Disadvantages- The disadvantages of flexible budgets are given below:

  • This budget does not remain fix during particular period of time which create difficulty for manager of Capricorn Wealth Management Limited to understand it in better and effective way.
  • There are many variables included in flexible budget which is very difficulty for administering and formulation in order to get outcomes.

Contingency Planning- It is used by manager for managing different types of risk which is associated with unexpected or sudden situations arising while performing operations in business. This is type of tools or techniques which aid in establishing different plans and strategies for overcoming issues which can arise at work place. This planning can helps manager of Capricorn Wealth Management Limited for formulating various back up plans, schedules and strategies for eliminating hurdles that can incurred on performing daily operations. It also helps in reducing unfavourable situations that can arise in organisations. The advantages and disadvantages of budgetary control are discussed below:

Advantages-The advantages of contingency planning are described below:

  • This assist in taking and addressing corrective actions for unexpected problems which can arise in Capricorn Wealth Management Limited.
  • This planning can provide benefits to Capricorn Wealth Management Limited by minimizing chances of risks, failure, losses by formulation of effective back up plans and strategies.

Disadvantages- Contingency planning has following disadvantages which are given below:

  • This planning involve huge cost and time taking process is also large for organisation as manager need to be updated as per changing situations which can arise in business.
  • While formulating different backup plans for organisation in contingency and emergency situation which leads in creating conflict among various ideas of manager for dealing in respective situations or areas.

Forecasting Tools- This is a technique that helps in prediction of future through analysing present and past circumstances and budgets of enterprise. It is tool that is used for anticipating future plans and outcomes that is based on past information or available in organisation. The manager of Capricorn Wealth Management Limited can use such techniques for estimating and guiding need and requirement of future by analysing financial statements, going through past records, informations and calculating various types of ratios. This planning budgetary control carry both advantage and disadvantages which are given below:

Advantages- The advantages carried by forecasting tools are as follows:

  • This techniques can provide benefits to manager of Capricorn Wealth Management Limited in formulation of better future plans through consideration of valuable financial information.
  • Such tool helps Capricorn Wealth Management Limited by keeping their clients and consumers happy through providing of assumptions based on estimation of budgetary report.

Disadvantages- Forecasting tools has following disadvantages which are given below:

  • The collected information by manager of Capricorn Wealth Management Limited from various departments may not be appropriate or suitable for making proper plans, programmes and strategies for future course of actions.
  • This manager of Capricorn Wealth Management Limited faces difficulty in predicting accurate data and information for future course of actions and formulating plans and strategies.

M3. Usage of different planning tools for preparing and forecasting budgets.

Budgetary control helps in describing transparent picture of any business through proper use of available techniques and tools that assists in preparation and formulating of future financial goals and performance through proper analyses of past budgets. These tools help and control activities of Capricorn Wealth Management Limited for making better plan in order to achieve results and financial position for future periods of time by proper analysis of present as well as past budgets. There are various types of planning tools for preparation and forecasting budgets such as Contingency planning, Flexible budgets and forecasting tools. Here, Contingency planning is used for formulating different back up plans, strategies and schedules to removes hurdles in daily performing operations and reduction of unfavourable situations arise in the enterprise. Flexible budgets are used for preparation of different budgets for operations that are variable in nature. Similarly, Forecasting tools are used to provide proper guidance to the managers for estimating future need and requirement through analysing financial statements, calculating the ratios the past financial information or available historical data. All tools helps in describing planning tool for preparation and forecasting budgetary activities that helps in making profitability and financial positions in competitive environment.

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Task 4

P5. Organisations are adapting management accounting systems to respond to financial problems. 

Financial problems:Financial problems are the financial pressure which an organisation suffers to meet its basic requirements. There are variousfinancial issues or difficulties which directly affects the profitability or operational efficiency of any organization. At the same time various strategies are formulated to overcome those situations for efficient achievement of efficiency along with profits. The Capricorn Wealth Management Limited makes various provisions to deal with its financial problems. Some of its financial problems are as follows:

  • Problem of cash flow:Such a problem arises when an organisation does not have the required cash to pay its liabilities. The main reasons for such problems are low profits or more losses. The Capricorn Wealth management Limited faces such problem as more capital expenditure is done to promote its brand as well as are not able to pay back their debt to creditors. Many expenditures are done by the organization such as paying taxes to the governments, incentives and remuneration payment to the employees and many more.
  • Risk management:A very important factor for sustaining in the competitive environment is management of the uncertain risks involved in the performance of various organisational activities. All organisations formulates various strategies to manage and eliminate the risks associated in the operations. Risky situation leads to financial uncertainty or instability in performance management. The Capricorn Wealth management Limited formulates various strategies and actions to manage the risk but fails at some situations.
  • Money management:Money management is a technique of tracking, budgeting, spending and saving the available monetary resources within the organisation. It helps in managing the available resources in various different activities to achieve maximum profit. The Capricorn Wealth management Limited formulates various provisions for efficiently management of the money in different departments in the organization.
  • Working capital:Working capital is the money available with the organization to manage its day to day operations to meet its financial liabilities. In the shortage of such capital, various problems are faced by the organizations. In other words, it means excess of liabilities over assets. The Capricorn Wealth management Limited may faces such short term debts problems of lack of working capital which affects its daily operations.

Financial governance:Financial governance defines the ways an organisation collects, manages, monitors and controls the financial information. Good financial governance helps in management of the challenges as well as looking for the future. It is the responsibility of higher managers to control the accuracy of the organizational financial statements.

Management accounting approach:Management accounting approaches defines the use of accounting techniques which helps in resolving problems in an organization. Such approach provides appropriate information to managers and employees for the efficient utilization of available organizational resources. The Capricorn Wealth management Limited resolve its financial issues by using the appropriate management approach. Description of various approaches are given below:

  • KPI:Key Performance Indicator is used to measure the performance of an organisation by comparing with the other organizations for the purpose of effectively achieving their short term as well as long term goals. Effective KPI leads to focus towards the business processes and functions. Management sees such approach as most important tool for measuring progress for meeting strategic goals and performance targets. KPI technique benefits an organisation to set and compare their standard in order to measure the progress, goal and performance of organisation.
  • Benchmarking:Benchmarking is a technique used by an organisation to measure its performance with its various competitors. The organisation makes comparison on the basis of same measure, strategy, programme as well as quality with different organisation to determine the requirements in changes or improvement. Such approach is done to identify the opportunities for improvement as well as wants to reduce or close the gap with the competitors along with monitoring the performance on daily basis. The selected approach focuses on clearly defining, measuring and interpreting the individual as well as organizational performances towards the objectives.

Comparison between Capricorn Wealth management Limited and Brightstar Financial Limited.

Basis of Difference

Capricorn Wealth Management

Brightstar Financial Limited

Problem

The main problem faced by Capricorn Wealth Management is poor or ineffective money management. Company's revenue are running short in comparison to expenses. Such financial problems are negatively affecting the working of the organisation. Thus, selected organisation is facing various issue regarding insufficient money or lack of working capital to pay the expenses of company as well as poor money management.

The problem faced by Brightstar Financial Limited is risk management and problem of cash flow. The selected organization fails to analyse and formulate strategies to minimize the uncertain risk.

Approach

The organization needs to overcome its problems. For such they needs to apply approach of Key Performance Indicator for making the comparison and setting effective strategies against its competitors in order to manage its working capital and money management.

Management of Brightstar Financial Limited applies approach of benchmarking in order to prepare the reports related to risk management as well as formulating strategies to manage its working capital to reduce the competition with various competitors.

M4. Management accounting in response to financial problems can lead organisation to sustainable success.

Management accounting approaches such as benchmarking and key performance indicators plays crucial role in Capricorn Wealth Management Limited and Brightstar Financial Limited to achieve sustainable success by formulating various strategies which helps in reducing all the financial issues which leads them towards sustainable success. The Capricorn Wealth Management Limited apply approach of key performance indicators to compare the activities, performances with the competitors or same industry to reduce the hurdles towards success. Brightstar Financial Limited applies approach of benchmarking in order to identify the opportunities for improvement as well as reducing or closing the gap with the competitors along with monitoring the performance on daily basis.

D3.Various planning tools to resolve financial problems.

Planning helps in formulating strategies in advance for the future for maintaining smooth functioning of the operations in any organisation. The Capricorn Wealth Management Limited and Brightstar Financial Limited faces various problems because of unexpected situations. The management of the Capricorn Wealth Management Limited uses various planning tools such as contingency planning, flexible budgets and forecasting tools to predict and forecast various unexpected hurdles in order to enhance the efficiency and improving profitability to resolve its financial problems effectively as well as efficiently.

Conclusion

From the above discussion it has been concluded that, management accounting play important in the organisation within decision making process and also in accomplishing goals as well as objectives of business. There are several type of system involved which is beneficial for company such as accounting system, job costing, price optimisation and inventory management. Apart from this, there are several form of reports such as performance report, budget report, cost managerial accounting and so on which utilise by the chosen company for management of accounting. Moreover, for cost analysing to preparing income statement absorption and marginal techniques is applied by the Capricorn Wealth Management Limited. Along with this, several approaches like KPI as well as benchmarking utilise by the company for resolving financial issues in order to gaining sustainable success.

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