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Unit 2 Management Accounting Level 5

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INTRODUCTION

Every kind of organisation whether small or large in nature required to record their transactions to analyse the current performance of their employees. This will provides the opportunity in development of new strategies which directs the employees for accomplishment of desired objectives. Management accounting is important concept which helps in formulation of different kind of accounts and reports for improvement of understanding between the different departments. It refers to the process of measuring, analysing, interpreting and communication of information in achievement of organisational goals. Such different kind of reports provides financial and statistical information which enhance decision making power of management for operation of day to day functions (Arroyo, 2012). It assists the manager of organisation in planning, organising, monitoring and controlling. Tech(UK) Ltd. Producing special charger for mobile telephone and other gadgets for retail outlets in UK.

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In the present report explain about, concept of management accounting, distinguish between management and financial accounting, importance ascertained by manager from management accounting information as decision making tool, different types of management accounting systems, various kind of managerial accounting reports and their importance and application of the costing techniques like marginal and absorption for the purpose of preparation of income statement. Also, define about different kind of budgets and its advantages and disadvantages, budget preparation process along with different pricing and costing system, importance of such budgets to manager and application of the principles of management accounting to respond financial problems.

TASK 1

P1 Concept of management accounting and its essential requirement

Difference between management and financial accounting

Management Accounting

Financial Accounting

Broad concept contains the provisions of managerial and cost accounting

Narrow concept in comparison to management accounting and only includes the provisions which helps in preparation of financial statements

The different kind of accounts and reports are used by the internal parties to enhance decision making

These accounts are used by the external stakeholder to gain the information about organisation

Its perspective is future oriented

It includes the evaluation of past information of organisation

This includes the preparation of different reports which depicts the performance of every department

It helps to analyse the overall financial position of organisation

It helps in preparation of operational budgets according to need of different departments

This will assists in preparation of financial budgets only.

Examples of using this accounting is to determine accountability that can be more meaningful to the business management team and other corporate finance departments.

These are mostly used for evaluation of companies performances. Examples of this are suppliers, banks, customers and investors.

Management Accounting: It is important concept which helps in recording of the transactions of organisation of the basis of the performance of every department. This will includes the use of various cost accounting principles in development of different kind of accounts and reports like job costing, inventory management, cost accounting etc. The main purpose behind the application of the principles of management accounting is to improve decision making of internal parties and attains the support of employees in performance of different tasks and accomplishment of objectives within stipulated period of time.

Importance of management accoutring to manager of organisation as decision making tool

As management accounting assists in performance of different kind of functions within the organisation. Therefore large numbers of importance are associated with their different kind of managerial and costing tools which are used by the manager of Tech(UK)Ltd. Are defined below:

  • Effective distribution of resources: Management accounting system helps in preparation of different kind of reports like inventory management, Accounts receivable, budgeting etc. It helps in assessment of the need of different departments to perform their functions. It improves decision making regarding allocation of resources in most optimum manner (Boyns and Edwards, 2013).
  • Assessment of risk: The main perspective behind the application of the management accounting principles within the organisation is formulation of future strategies on the basis of the evaluation of their past performance. It improves the insight of manager to effectively identify the risks and make solutions for its removal.
  • Appraisal of the actual performance: Formulation of different kind of reports according to the performance of various departments helps in preparation of budgets which contains the standards which are need to adhere by the employees in performance of their functions. One the basis of the deviations which are arise in actual results performance of employees are measures and effective actions are taken to overcome from such issues and attains their standards.
  • Presentation of financial position: There are many accounts which provide the opportunity to understand about the financial performance and position of organisation in market. This will contributes in improvement of their brand image which has direct impact upon their profit earning capacity (Herzig and et. al. 2012).

Various kind management accounting systems

The three different kind of accounting systems are adopted in Tech(UK)Ltd. All these systems have their different roles and importance o for organisation. This can be understood from the points which describe their provisions and roles mentioned below:

Cost accounting system: It is important of organisation to estimate their costs in future for ascertaining the information regarding their profitability, inventory cost and controlling of expenses. It assists the manager of organisation as per such approaches which help in maximisation of their profits. It includes the process of costing of product in different styles defined below:

  • Actual costing: Here all the ingredients which are used in production process at actual cost.
  • Standard costing: This will provide the targeted cost which is needed to achieve.
  • Normal costing: Here the costs are assorted on the basis of predetermined manufacturing overhead rate.

Examples: it is more appropriate for an activities management companies, a niche furniture producers of manufacture of very high cost air surveillances system. Coffee roaster which after retaining at wider order of material.

Job costing: One of the important system need to implement all manufacturing units to track the expenses. This will be useful in providence of cost to each individual product which is manufactured by organisation. So, the provisions of this system are more important for organisation which produces multi products. The costs are charges upon two different aspects which are named as direct material and fixed and variable overheads.

Example: It must track cost of material that are mainly helpful for Scrapped during the course of job. It is mostly useful for construction companies.

Inventory management system: The main role of this system is that it helps to organise the assets and stock of organisation in effective manner. As it provides opportunity to attain maximum results for utilisation of their resources at full capacity. The different kind of tools which provides their supporting in such management work is defined below:

  • FIFO: Here inventories are record as they used in organisation. It helps in valuation of closing stock.
  • LIFO: Here, such inventory is recognised which is oldest in organisation whether used later.
  • AVCO: It provides the opportunity regarding ascertaining the average cost to take better decisions.

Examples: Raw material such as wood to make various products. Unfinished cake in a product producing business. Tangible items that a business holds and ultimately available for sales.

P2 Different types of managerial reports and its importance

Different management accounting reports

There are different kind of reports prepared by the management of Tech(UK)Ltd. To interpret the results and performance of their different departments(Otley and Emmanuel, 2013). The main purpose of these supports improves the coordination and communication which helps bring understanding among employees. The function of such different report is defined below:

  • Accounts Receivable report: The main function of this report is to provide the information regarding outstanding amounts from their debtors along with their time period. It is the duty of the management is to segmentation of invoices on the basis of time period they are unpaid. It helps to assess the effectiveness of their exist credit policies and if there is need to tighten their policies then bring changes according to requirements. It helps to recover their outstanding amounts.
  • Budgeting reports: One of the effective report which is used regarding appraisal of performance of departments in comparison to standards which are set while preparing such budgets. It provides the opportunity regarding determination of issues and application of innovative technique which to improve their performances. It also helps in designing of incentive reports according to such appraisal of performance.
  • Job cost report: This report is used to assess the profits which are going to earn in future after deduction of estimated cost and expenses. This will provides the information regarding which part of project which consist higher amount of profits. So, it helps to frame the strategies according to that and provide more efforts to such activities.

Importance of management accounting reports

  • Increased financial returns: Budgeting report provides direction through providence of standards to employees that accomplish their targets and earn large number of income. This will prove as motivating factor which improves their passion towards their work.
  • Reduction in loss: Analysis of the past information on the basis of such reports helps to identify the mistakes and provides opportunity to reduce their future risks through application of appropriate solution (Parker, 2012).

M1

Benefits of management accounting systems:

Cost accounting system

  • To ascertain the amount of profitability
  • Helps in reduction in amount of expenses
  • Makes better future plans
  • Measurement of the efficiency of actual processes

Job costing system

  • It helps to track their expenses
  • Helps in reduction in the amount of repetition of work

D1

Type of reporting

Integration with organisational process

Accounts receivable report

It helps in collection of their outstanding amounts from debtors and maintenance of liquidity

Job cost report

Provides opportunity in identification of most profitable projects and reduction of cost to reduction in amount of efforts from such wasteful processes

TASK 2

P3 Application of absorption and marginal costing method for preparation of income statement

Cost: It is the amount which is paid by organisation in manufacturing of the product. There are many which also takes the part of total cost of products which includes material, labour, opportunity foregone, risk and time.

Marginal costing: This method of costing considered only variable cost. It helps in assessing the change in cost if there is change in production of units.

Absorption costing: It contributes to build effective long term decisions. This method includes both fixed and variable costs (Vasile and Man, 2012).

  • Income statement on the basis of Marginal costing method:

Working 1: Calculate variable production cost £

Direct material cost 8

Direct labour cost 5

Variable production O/h 2

Variable production cost 15

Working 2: Calculate value of inventory and production

Opening inventory Production Closing inventory

Nil 2000*15 = 30000 500*15 = 7500

Net profit using marginal costing

£Amount

£ Amount

Sales value

Less: Variable costs

Stock at the begining

Cost of production

Stock at the closing

Variable sales overheads

Contribution

Less: Fixed costs:

Fixed Production overheads

Fixed Selling overheads

 

 

 

NIL

30000

(7500)

 

 

 

15000

10000

 

52500

 

 

 

(22500)

(7875)

22125

 

 

(25000)

 

Net loss

 

-2875

Income statement on the basis of Absorption costing method

Selling Price per unit

£35

Unit costs

 

Direct materials cost

£8

Direct Labour cost

£5

Variable Production overhead

£2

Variable sales overhead

£5.25

Budgeted production during the year is 3000 units

 

Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000

Selling cost: under this budgeted cost is £10,000and Actual cost is £7875

Absorption costing working notes

Working Note 1: Calculate full production cost

Direct material £8

Direct labour £5

Variable cost £2

Fixed cost £5

Total £20

Working Note 2: calculate value of inventory and production

Opening inventory Production Closing inventory

0 2,000*20 = £40,000 500*20 = £10,000

Working Note 3: under/ over absorbed fixed production overhead

Actual fixed production: £15000

Fixed overhead: £10000

Total £5000 (under absorbed)

Net profit using absorption costings

£Amount

£Amount

 

Sales value

Less: Cost of Sales:

Opening stock

Cost of production

Closing stock

(Under)/Over absorbed fixed prod. O/h

Gross Profit

Less: Selling Expenses

Variable sales expenditure

Fixed selling expenditure

 

 

 

NIL

40000

(10000)

 

 

 

7875

10000

 

52500

 

 

 

(30000)

(5000)

17500

 

 

17875

 

 

Net loss

 

-375

 

M2

It is the obligation upon the manager is to adopt approach which helps in improvement of their profitability. Such approaches also help in attainment of sustainability in their business operations. The two techniques are used improve their business performances. Conservatism technique helps in reduction of their unnecessary expenses and on the other hand materiality technique helps to manage their available resources in more optimum manner.

D2

Through use of marginal costing method loss of 2875 is observed whether from the use of absorption costing method loss is attained of the amount of 375. This difference occur because involvement of fixed cost in absorption costing method.

Reconciliation statements

Amount

Profit under absorption

-375

Closing stock 500*5

2500

Profit under marginal

2125

According to the above calculation, it has been found that profit generated from marginal costing is 2125 from their total sales. This differences are arises because of fixed cost adjustments.

TASK 3

P4: Merits and demerits of using various types of budgets and their significant

Planning is an important part for every business, they need to make use of data in order to manage and control resources of an organisation in effective manner. This will assists TECH UK to attain their set objectives by using appropriate budgets. Budgets is known as future estimation of total costs and expenditure they are going to invested on the production of specific products and services are recorded effectively. The primary motive of every project managers is to make use data in accordance to attain future aims and objectives. It has been seen that there are various types of budgets that are essential for an organisation to record their important data during the period of time. Some of them are discussed underneath:

Master budget: According to this particular budget which is known as combination of all types of budgets those are prepared by an organisation at the time of manufacturing process. This budget is consists of essential financial statements such as income statement, balance sheet, cash forecast and financial planning. This help and organisation to perform all kinds of internal or external activities in accurate manner (Cadez and Guilding, 2012).

Advantage: The main benefits of using this budget are to assist manager to prepare only one report that consists of all data regarding growth and financial performance of Tech UK.

Disadvantage: The main limitation of using these types of budgets is that it is more costly and time consuming of the company.

Cash flow budget: According to this types of budget which is prepared by an organisation to analyse total cash flow incurred by the company during an accounting period of time. The main sources of data collection are taken from various activities such as investing, operating and financing.

Advantage: Total cash goes out of the business can easily be determine by managers during the period of time. It will make simple to account managers to make use of data in systematic manner so that they can determine total cash inflows during the time.

Disadvantage: In case of total recovery time get completed it is more difficult to calculate total cash generate by the company during the time.

Operating budget: It is known as total all those report which is being prepared by using all essential data regarding total costs and expenditure Tech UK at the time of production process. It can be prepared on regular or continuous basis (What is Budgetary control? 2017). This will assist and organisation to control necessary implications that are affecting overall profitability at the same point of time.

Advantage: It assists company to analyse their total sales, operation and raw material budgets which is being prepared during the period of time. It is more reliable in case they are preparing for longer terms.

Disadvantage: It is more time consumer as regular data is needed to be collected in continuous basis which is tougher task for production managers (Fullerton, Kennedy and Widener, 2013).

Rolling budget: It is continually updated to include a new budget period as the most budget period as the most recent completion of time frame. This involves the incremental growth of current budgets.

Advantages: They are always a budget which tends for various months in order to increase productivity of an organisation.

Disadvantages: The net worth of extra costs and rate of charges in business is not continuously analysed by the departments.

Budgeting process

  • Collecting necessary estimation: This consists of total prediction regarding various aspects such as sales, production point, expected costs and available resources for every concern business enterprises. On the basis of those prediction management use to make appropriate decision during that particular period of time.
  • Communicating with the department: In this, budgets are presented in front of the department and managers which would provide data regarding their goals and aims by using resources in appropriate manner.
  • Coordinating estimates: Under this, budget committee has responsibility to analyse the plans and check all essential resources must be allocated in desire manner as per their essential requirements.
  • Implementing budget plan: It is utmost important planning which is being provided to each department and operations of an organization would be conducted as per the set plans and policies.
  • Reviews of budget progress: These seems to be final stage in formulation of budgets which is use to analyse data by collecting necessary aspects from the managers as well as the employees.

Different types of pricing system:

There are various types of pricing methods that are needed to be followed by the production managers in their production of goods and services during an accounting period of time. some of them are discussed underneath:

  • Price skimming: According to this particular method which is being used to set the price of new products and services. In this method, company use to set price higher in the initial stage and reduce in case the market gets stable. In coming time, prices decrease after competition gets completed.
  • Economy pricing: As per this method, company use to set price lower as for their various products that are produced. This wills assists and organisation to attain or attract more customers toward them (Luft and Shields, 2010).

Various types of costing method:

  • Direct costing: It is applicable techniques which are associated with costs are depending on wide production level. This consists of direct material, lobor and overhead costs.
  • Standard costing: It consists of all essential process which is set by company to make comparison outcomes with the actual one.

Significance of using planning and control tools

  • It has been seen that budgets use to provide right direction to employees and company in order to perform their role in effective manner.
  • Budgeting provides maximum opportunities regarding reduction of unproductively activities and proper allocation of resources.
  • It is use to make appropriate decision and planning for their operations in accordance to attain objectives in more effectively.

M3: Evaluation of planning tools

It is essential for an organisation to make use of appropriate planning tools so that chances of getting more effective outcomes can be enhanced in more effective manner. Some of them are forecasting tools that assist a Tech UK to estimate about total costs and expenditure a company is going too incurred in near future time. Whereas scenario tools is utmost important planning tools that can help an organisation to increase their overall performance as well as to deal with any kind of situation arises during the time. While contingency tools is use to estimate total risks that are present in an organisation. All the above tools and techniques which are discussed are having importance at large scale.

D3: Critical analysis of financial issues

It has been determine that in an organisation there are various types of financial issues those are arise in Tech UK. It will make huge impacts on the overall performance as well as efficiency during the period of time (Morales and Lambert, 2013). The financial issues can be restricting company to reach at their set destination by using resources in effective manner. Some of them are related with productivity level which can get hamper because of insufficient supply of funds to manufacture products at the right time. Some of them are associated with product and services quality which is being offered to the customers. All these types of issues can get resolved by using appropriate tools and techniques. Such as balance scorecard approaches. Key performance indicators and benchmarking are crucial financial tools.

TASK 4

P5: Balance scorecard approach

According to the mentioned case study which is based on TECH UK LTD. It is associated with production of special chargers for various retail outlet in various destinations in UK. It has been analyse that from there financial statements the organisation attain net loss of 1.5 million during the time. Management accounting used to guide wide number of tools and techniques that assists managers to overcome all kind of financial issues that are present in an organization. This has been observed that company has appointed a auditors that provide valuable recommendation to make use of balance scorecard approaches in accordance to resolve financial issues. To accurately respond in respect to financial problems they need to make analyse of certain aspects.

Balance scorecard method: According to this particular planning tools which is used by administration to assists in examine and making changes in internal operations of business and make focus to attain better outcomes in coming time. By the help of this, management need to collect continuous reviews and feedbacks about use of this particular techniques to deal with any kind of financial issues (Quinn, 2014). All the data which is being gather by the company is essential for managers to increase the decision making future. This particular aspect can assist the cited company to overcome all financial issues that are arises in Tech UK. Some of them are:

Providing more emphasis on important aspects for an organisation.

  • Develop planning to guide employees
  • Establishing future aims and objectives (Vaivio and Sirén, 2010).

There are various types of perspective which are needed to be followed in case of balance scorecard method. Few of them are:

  • Financial: It has been seen that optimal utilisation of resources can lead to increase overall financial performance of the company.
  • Customer and stakeholder: It is essential for an organisation to make proper satisfaction of customers by fulfilling basic needs and demand of customers through providing valuable products which is of best quality.
  • Internal process: Under this process, effective measures can be done as internal level to get more positive outcomes for the company.
  • Organisation capacity or learning aspects: Assessment of organisational growth by addressing infrastructure, technology and culture aspects for making modification in overall performance of an organisation is needed to be done ( Tucker and Lowe, 2014).

IMDA Tech is a well known company which uses this particular approach of just in time to overcome all these essential issues those are present in an organisation.

Just in time: It is an effective inventory control method which is helpful for an organisation in order to deliver products in right quantity as per the actual demand of the customers. It assists company to make efficient role to reduce overall wastage that are done at internal department. This will assist management to forecast regarding the demand which is accurately contributing to make improvement in the overall profitability and growth for the company in coming time (Van der Stede, 2011).

M4: Analysis of financial issues arises in an organisation

Finance is an essential aspect for every business organisation. Without having specific amount of funds a company cannot be able to make plan for their products effectively. But at the same time there are certain demerits that are present in an organization those are affecting overall productivity as well as financial position of the company. The major role of financial managers is to make search of all those issues effectively and control all impacts before their occurrence. Some financial issue are related with productivity level which are associated with the company at internal department. While are some of them are related with budgeting techniques. All these can be resolve by using appropriate methods. Such as key performance indicators which are held responsible for analysing past outcomes with the present time performance. Whereas financial governance is set by government rules and regulations that are made for the purpose of operating business more effective in longer course of time.

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CONCLUSION

From the above project report, it has been concluded that management is always trying to make use of best accounting techniques which can assist them to resolve plenty of finance related problems. For this purpose, they are using accounting system and reporting. By the help of costing method they are able to analyse total net profit they are going to earn with the able resources can easily be analyse in effective manner. With the help of merit and demerit of using budget they can plan their future projects more effectively and earn maximum growth in coming time. All the analysis is done to get more valuable growth and stability in respect to earn maximum return in coming time. This seems too done by reducing all financial problems those are present in an organisation to get better sustainable future.

You may also like to read: Methods For Interval Estimators Of Medians

REFERENCES

  • Arroyo, P., 2012. Management accounting change and sustainability: an institutional approach. Journal of Accounting & Organizational Change. 8(3). pp.286-309.
  • Boyns, T. and Edwards, J.R., 2013. A history of management accounting: The British experience(Vol. 12). Routledge.
  • Herzig and et. al. 2012. Environmental management accounting: case studies of South-East Asian Companies. Routledge.
  • Otley, D and Emmanuel, K. M. C., 2013. Readings in accounting for management control. Springer.
  • Parker, L.D., 2012. Qualitative management accounting research: Assessing deliverables and relevance. Critical perspectives on accounting. 23(1). pp.54-70.
  • Vasile, E. and Man, M., 2012. Current dimension of environmental management accounting. Procedia-Social and Behavioral Sciences. 62. pp.566-570.
  • Cadez, S and Guilding, C., 2012. Strategy, strategic management accounting and performance: a configurational analysis. Industrial Management & Data Systems. 112(3). pp.484-501.
  • Fullerton, R.R., Kennedy, F.A and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society. 38(1). pp.50-71.
  • Luft, J and Shields, M.D., 2010. Psychology models of management accounting. Foundations and Trends® in Accounting. 4(3–4). pp.199-345.
  • Morales, J and Lambert, C., 2013. Dirty work and the construction of identity. An ethnographic study of management accounting practices. Accounting, Organizations and Society. 38(3). pp.228-244.
  • Quinn, M., 2014. Stability and change in management accounting over time—A century or so of evidence from Guinness. Management Accounting Research. 25(1). pp.76-92.
  • Vaivio, J and Sirén, A., 2010. Insights into method triangulation and “paradigms” in interpretive management accounting research. Management Accounting Research. 21.(2). pp.130-141.
  • Tucker, B and D. Lowe, A., 2014. Practitioners are from Mars; academics are from Venus? An investigation of the research-practice gap in management accounting. Accounting, Auditing & Accountability Journal. 27(3). pp.394-425.
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