Table of Contents Table of Contents.............................................................................................................................2 INTRODUCTION...........................................................................................................................1 TASK 1............................................................................................................................................1 1. Explanation of management accounting and essential requirements of its systems...............1 2. Different methods that are used for management accounting reporting..................................2 3. Evaluation of benefits of management accounting systems and their application within the organisation..................................................................................................................................3 4. Critical evaluation of the way in which different systems and reports of management accounting reports are integrated with organisational processes.................................................3 TASK 2............................................................................................................................................4 1. Calculation of production cost per unit, total production cost and total cost of sales for January.........................................................................................................................................4 2. Application of techniques and production of budgeted profit and loss statement for January7 TASK 3............................................................................................................................................7 1. Explanation of different planning tools along with their advantages and disadvantages........7 2. Analyse the use of different planning tools and their applications for preparing and forecasting budgets......................................................................................................................9 TASK 4............................................................................................................................................9 Compare how organisations are adapting management accounting systems to respond to financial problems.......................................................................................................................9 Analysehow,inrespondingtofinancialproblems,managementaccountingcanlead organisations to sustainable success..........................................................................................11 Evaluate how planning tools for management accounting respond appropriately for solving financial problems to lead organisations to sustainable success...............................................11 CONCLUSION..............................................................................................................................12 REFERENCES..............................................................................................................................13
INTRODUCTION Management accounting is a technique which is used in businesses for assessing business performance with the help of internal reports. If the managers will not be able to generate them in systematic manner, then it may result in unattained objectives of business. For all the managers it is very important to be focused with it as it can help them to reach to long as well as short term business goals as it facilitates the process of strategy formulation(Alsharari and Abougamos, 2017). While planning to improve organisational performance it is very important for all the managers to make sure that they are focused with it. Present report is based upon ABC Ltd which is operating business under manufacturing industry and it is a medium sized entity. This report covers various topics that includes management accounting, its systems, approaches and techniques. Apart from this, different types of planning tools along with the way in which businesses can use management accounting to respond financial problems are also discussed in this report. TASK 1 1. Explanation of management accounting and essential requirements of its systems Management accounting could be defined as the technique which is used by businesses for the purpose of generating internal reports and determine performance of the company. It is very important for the businesses to make sure that they are focused with use of it as it will help the management teams to make sure that they are formulating effective strategies. ABC Ltd which is a medium sized enterprise also uses it as it helps the internal stakeholders to get aware of actual situation of business. There are various types of management accounting systems that are used within the organisation. Discussion of all of them is as follows: Inventory management system:It is used by businesses for keeping track record of the inventory which is used for carrying out operational activities in systematic manner. In ABC it is used by managers for assuring that it is having sufficient goods to perform the manufacturing activities of business. It is essentially required for the entity as by using it the management of the company will be aware of that they are having enough inventory or not(Atmoko and Hapsoro, 2017). Cost accounting system:It is a system which is used by businesses for the purpose of analysing costs of all the items that are produced within the year. In ABC Ltd it is used for the 1
purpose of making sure that it gets details of all the manufacturing related costs so that funds could be arranged according to them. The essential requirement of it for the organisation is that it facilitate the business to get information of the cost which may take place in future(Baños Sánchez-Matamoros, 2020). Price optimisation system:Under this type of system optimum price for all the products that are sold by the entities are analysed so that the satisfaction level of all the customers could be met. The managers in ABC are using it for setting appropriate price for all the items that are manufactured by it so that it can attract large number of customers. The main requirement of it for the business is that it can help to determine the best suitable price for the products that can met expectation level of clients. Job costing system:It is used by businesses for the purpose of analysing the cost of each and every job which is performed for the purpose of meeting expectations of clients. In ABC Ltd it is used by managers for making sure that they keep record of all the jobs that are performed on the basis of specifications of clients. The main requirement of it for the business is that it can help the managers to analyse cost of each job which is performed by the entity separately(Boyd and Pitre, 2020). 2. Different methods that are used for management accounting reporting Management accounting reporting is the process of recording internal information in different reports so that the internal stakeholders can determine the position of business. In ABC Ltd the managers are paying attention towards it as it can help to generate detailed reports for the organisation. There are various reports that are generated by the organisation which are described below: Account receivable report:It is used by businesses for recording information of the payment which is due by customers. In ABC Ltd it is used for the purpose of analysing total outstanding amount which will be recovered from the customers in future. It is beneficial for managers as it can help them to determine actual owed amount by the debtors(Daniyar and Ruzanov, 2019). Performancereport:Thisreportisusedinbusinessestorecordinformationof performanceofemployeesandbusinesssothatstrategicdecisionsforfuturecouldbe formulated. In ABC Ltd it is used by the managers to analyse that business is able to meet the desired level of success or not. The main benefit of it for the entity is that it can help to 2
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determine that the employees are performing appropriately so that bonus could be offered to them accordingly. Budget report:It is used in businesses for assigning funding to all the operations for the purpose of proper execution of all of them. With the help of it, managers in ABC try to analyse that the managers are assigning sufficient funds to all the departments according to their requirements or not. It is beneficial for the enterprises because with the help of it the companies will be able to perform operational activities in monetary resources that are assigned to them. 3. Evaluation of benefits of management accounting systems and their application within the organisation There are various types management accounting systems that are used by the managers of ABC Ltd. Discussion of benefits of them along with application are discussed below: Inventory management system:It is used in ABC Ltd by the managers for making sure that they have detailed information of the inventory which is used for performing operations as it is beneficial for execution of all the activities systematically(Datar and Rajan, 2018). Cost accounting system:In ABC Ltd it is used by management team because it is beneficial in determining cost of each and every activity performed by the enterprise. Price optimisation system:Managers of ABC Ltd are using it for assuring that best suitable price for all the products are determined as it is beneficial for meeting expectations of customers. Job order costing system:It is applied in ABC Ltd because it facilitates managers to analyse cost of each and every job performed according to specifications of customers. 4. Critical evaluation of the way in which different systems and reports of management accounting reports are integrated with organisational processes In ABC Ltd the managers are using different types of management accounting reports and systems. All of them are integrated with organisations processes. For example, inventory management system is used by the managers for analysing that the entity is able to keep sufficient goods for performing all the operations in systematic manner. On the other hand, account receivable system is used for analysing the owed amount of different customers. For example, if the managers of the organisation will not be able to analyse actual outstanding amount then this report could be used by them to determine it(Feng and Ho, 2016). 3
TASK 2 1. Calculation of production cost per unit, total production cost and total cost of sales for January Marginal costing:It is a management accounting technique which is used by businesses to determine the cost of additional unit which will be produced in future. If the entities will not be able to pay attention towards analysis of it then it may result in increased cost of all the units that are manufactured(Herasymovych, 2017). In ABC Ltd the managers are using it to analyse the marginal cost and the application of it for the entity could be understood with the help of following calculation: Calculation of cost per unit: Cost per unit Marginal costingCost per unitTotal cost Direct Material10180000 Direct Labour20360000 Variable Production Overhead590000 Total production cost35630000 Income statement under marginal sales900000 Less: Marginal cost of sales Direct Material180000 Direct Labour360000 Variable Production Overhead90000 Closing stock100000 Contribution170000 Less: Fixed production cost100000 Net profit70000 Absorption costing:Under this technique of management accounting the businesses are required to make sure that all the costs that have taken place within the organisation are recovered from the revenues that are generated from selling of those units. With the help of it, the company will be able to maintain the profits(Kumarasinghe and Haleem, 2020). It is also 4
used in ABC Ltd by the managers so that they can analyse that all the costs are recovered from revenues of the same units. The calculation of profit with the help of this technique for the organisation is as follows: Absorption costingCost per unitTotal cost Direct Material10180000 Direct Labour20360000 Variable Production Overhead590000 Fixed production cost6.25112500 Total production cost41.25742500 Income statement under absorption sales900000 Less: Cost of sales Direct Material180000 Direct Labour360000 Variable Production Overhead90000 Fixed production cost112500 Closing stock100000 Gross profit57500 Add: Under absorption cost5000 Net profit52500 When scenario changes: sales price50 Closing stock3000 sold units19000 Production20000 Marginal costing: Cost per unit: Cost per unit Marginal costingCost per unitTotal cost Direct Material10200000 5
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Direct Labour20400000 Variable Production Overhead5100000 Total production cost35700000 Income statement: Income statement under marginal sales1000000 Less: Marginal cost of sales Direct Material200000 Direct Labour400000 Variable Production Overhead100000 Closing stock150000 Contribution150000 Less: Fixed production cost100000 Net profit50000 Absorption costing: Cost per unit: Absorption costingCost per unitTotal cost Direct Material10200000 Direct Labour20400000 Variable Production Overhead5100000 Fixed production cost6.25125000 Total production cost41.25825000 Income statement: Income statement under absorption sales1000000 Less: Cost of sales Direct Material200000 6
Direct Labour400000 Variable Production Overhead100000 Fixed production cost125000 Closing stock150000 Gross profit25000 Add: Under absorption cost2500 Net profit22500 By analysing the above calculations, it has been evaluated that if the entity will use marginal costing then the profits will be high therefore it should be used by the business. If the scenario will be changed then it will reduce the profits so the company should not increase production. 2. Application of techniques and production of budgeted profit and loss statement for January There are various types of techniques which could be used by businesses for the purpose of analysing profits and formulating the income statements. All these techniques are discussed below in context of ABC Ltd: Standard costing:It is used in businesses for the purpose of determining variation between actual and budgeted cost so that the ability of managers to forecast future expenses could be analysed. By using it ABC Ltd will be able to perform all its operational in systematic manner as it will facilitate it to analyse variation between actual and standard costs. Historical costing:Under this technique of management accounting the businesses are required to record all the assets and liabilities in the books on their actual value rather than market value. By using it ABC Ltd will be able to analyse actual performance of business along with its financial stability(Kuurila, 2016). TASK 3 1. Explanation of different planning tools along with their advantages and disadvantages Budget can be said to be the life blood of a business. In simple terms, it is the financial plan developed for an organisation with the motive of making sure that the expenses of an entity do not exceed the funds available with the company. Besides this, budgetary control can be defined as the system whereby the budgets are developed for future course of time and contrasted against 7
the actual performance given by the firm to reach at the variances. Now, it has been recognised that there are several planning tools which are used by ABC Ltd. for carrying out budgetary control(Li, 2018). These are critically discussed and evaluated as follows: Zero based budget Zerobasedbudgetingincontextofmanagementaccountingisconcernedwiththe preparation of budgets from the scratch, i.e., with a zero base. This encompasses re-evaluation of every line item of cash flow statement along with the justification of all the expenses that need to be expended by the department. Advantages:This is helpful in effective and optimal allocation of resources. It drives coordination and communication within the bounds of the company enabling streamlining of the business operations. Further, it eliminates unnecessary or outdated activities. Disadvantages:This is a very time consuming method, consuming time more than in the case of traditional budgeting. For the preparation of zero based budget, extensive training needs to be arranged for the manager of the company, increasing the overall cost. Activity based budget This can be said to be a budgeting method whereby the preparation of budgets is done by making use of Activity based costing after consideration of overhead costs. Advantages:This method of budgeting allows a more effective as well as relevant allocation of overhead costs. Apart from this, it allows a much more effectual control of the overhead costs. Further, this method further enables better management of activities(Mahajan and Deobagkar, 2020). Disadvantages:This method is centred on the phenomenon of change management which can lead to the emergence of resistance. In addition to this, this system works only in an instance whereby the ABC system is up-to-date. Capital budget This method of budgeting circumscribes capital expenditure which is inclusive of extensive outflow and inflow of funds for financing of the investment projects. In other words, it can be said to be a procedure by way of which an organisation takes the decision related to whether or not investment in project should be done. 8
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Advantages:This system provides due assistance in gaining knowledge of the risks and its outcomes. In addition to this, this method enables to take decisions related to investment within a project by taking into due consideration all the essential and necessary factors. Disadvantages:The decisions taken by virtue of this method of budgeting is in long term and thus cannot be reversed in any way. Apart from this, the techniques used to carry out capital budget are assumed and not exist in reality(Nik, Abdullah and Said, 2016). 2. Analyse the use of different planning tools and their applications for preparing and forecasting budgets There are various types of planning tools that are used in ABC Ltd. these are zero based, activity based and capital budget. All of them facilitate the organisation to forecast and prepare budget so that success in future could be attained. With the help of them, managers try to analyse the future incomes and expenses and then formulate decisions to assign budgets to different departments(Shareia, 2016). TASK 4 Comparehoworganisationsareadaptingmanagementaccountingsystemstorespondto financial problems In the business environment, management accounting systems are defined as important aspects which should be consider while running a business as it supports to make the right business decision. While running a business many financial problems arises, where it is important for management to solve them by using best alternatives(Renz, 2016). ABC company is facing different types of financial problem in their business that are as explained: Improper cash flow management:For organisation it is important that prepare the cash flow statement and manage them properly. If organisation is not able to arrange and organise the financial records then a challenge will be occurred as low profitability. ABC Ltd is facing the financial problem due to lack of cash flow management and not recording financial information that needs to be solve. Late payment by clients:The business mainly depends on creditors and debtors who manages the activities by payment and receiving the money. In case if clients has deny and make the payment late then financial problem arises in business. ABC Ltd can face the challenge as customers are making late payment for buying the products. 9
Financial governance:This stating as governmental authority who formulates different regulations and laws that helps to run a business. This is the way of collecting, managing, monitoringandcontrollingthefinancialinformationwhichhelpstorunabusiness effectively in challenging environment. Tools which are used to identify the financial problem KPI:This means key performance indicator which is key measurable value uses to know the financial and non-financial performance. This can be used by ABC Ltd company to identify the gap between different activities and make the right business decision by managing and organising all information. Benchmarking:This tool is related to operation and management which can help to complete the task and attain competitive benefits by comparing with other company. ABC Ltd can use this tool for comparing with other company and formulate planning accordingly that helps to solve the problems(Sekerez, 2017). Comparison of organizations- BasisABCMorrison Financial ProblemThis organisation is facing the financialproblemdueto differenceincashflowsthat reduces profitability. This is larger company that is facing the financial problem due to late payment by customers. Identification of problemKPItoolisusestoidentify problemandusesofcost accountingsystemstatesthe areas where cost have increases so it can be handle properly. Theorganisationisusing Benchmarkingtoolby comparing with other company. By using the price optimisation system it can set retail prices and get the proper records of unpaid customers. Management Accounting System Used Forsolvingthefinancial problemcostaccounting system is uses that can help to maintainproperrecordsof Forsolvingproblemprice optimisation system is uses that helpstosetaffordableprices andreceivethepaymenton 10
transactions.timely. Thus from the above comparison, it has recommended that managers of ABC Ltd. Identify the financial problem by using KPI and Benchmarking tool which helps to formulate the planning and managing the all activities. By using cost accounting the selected organisation can maintain proper records of all income and expenses that will help to solve the cash flow management problem. Analysehow,inrespondingtofinancialproblems,managementaccountingcanlead organisations to sustainable success There are various management accounting systems which are undertaken as the only method in terms of resolving financial issues for the limited period of time. In terms of respective company, there are several issues has identified which are prominently solved with the help of various tools like zero based, activity based and capital based budget. They also tend to face inappropriate cash balance and wastage of raw material at the time of manufacturing of dairyproducts.Theyalsotendtocoquetteprominentstrategiesandfinancialproblems considering the business in terms of solving it. Moreover, these accounting system tends to lead towards the business operations and sustainable success in terms of accomplishing prominent goals and objectives(Shichkov, 2018). In regard of this, the discussed budget is useful for the respective company in terms of solving significant issues. Therefore, management accounting is useful for company in terms of resolvingissuesregardingthefinancialandoperatingissuesthatleadstoinfluencethe productivity and efficiency. In terms of respective company, they tend to consider various strategies in terms of having good performance within the market. It leads to permit company in termsof resolvingtheirfinancialissuesfor enhancingtheeffectiveuse of management accounting in terms of offer better productivity(Smeulders, 2019). Evaluate how planning tools for management accounting respond appropriately for solving financial problems to lead organisations to sustainable success Moreover, by considering the capital budget, the manager of respective company is capable in terms of examining prominent expenses for each and every division to resolve the problems considering the uneven cash flow. Along with this, the prominent factors lead towards 11
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the sustainable success and also want suitable support in terms of accomplishing business goals and objectives. For this, the other planning techniques are useful for the managers in terms of responding for the prominent actions respectively and also tends to leads towards the sustainable success. Therefore, respective company also can opt zero based budgeting in terms of managing their spending that required in terms of cutting cost and tends to increase profitability in terms of selling price prominently. Hence, these budgets are useful in addressing financial challenges and used in terms of achieving better outcomes(Songqin and Jin, 2019). CONCLUSION By undertaking the above discussion, it is identified that management accounting plays an important role in company and also tends to permit managers in terms of managing things for the operational and also tends to consider other business activities. Along with this, various accounting methods which are discussed in report becomes helpful for company in terms of tracking the stock level and also undertake the price of products in terms of setting things by using price optimisation method. Along with this, it also tends to collect effective information considering the accounting system which are recorded in various accounting reports for the managers in terms of making sure for the upcoming strategies on the grounds of it. Besides this, several planning tools are useful in terms of resolving financial issues and also useful in terms of achieving sustainable success. 12
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Songqin, Y. and Jin, H., 2019, May. How to build the management accounting talents training model based on diversified needs. In2019 4th International Conference on Social Sciences and Economic Development (ICSSED 2019). Atlantis Press. Online 14