Management Accounting: Analysis and Recommendations

This article provides an analysis of management accounting practices and offers recommendations for improvement. It covers topics such as monthly control reports, performance analysis, and decision-making.

Management Accounting
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Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part A...............................................................................................................................................3
(i). Prepare the monthly control report:......................................................................................3
(ii). Report on Amana’s performance during the year 2020:......................................................4
Provide recommendations to Amana’s CEO on areas of improvement:....................................6
Part B...............................................................................................................................................7
Analysis of Mr Amana’s decision to go online:..........................................................................7
CONCLUSION..............................................................................................................................10
References......................................................................................................................................11
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INTRODUCTION
Management accounting practices used to communicate a plan of action to the rest of the
company. It represents the operational viability and continuity of different parts of a strategy in
its early stages. Afterward, it addresses the success of the proposals and the positions of various
parties in bringing them into effect. For decision-making, managerial accounting should not limit
itself to quantitative data. It considers qualitative knowledge that cannot be quantified in contexts
of money. Industry trends and strength of analysis including development are only a few
instances of qualitative data which a company may gather through special surveys
(Abdusalomova, 2019). The study covers different aspects of managerial accounting in two
sections: Part A and Part B. The first part covers preparation of monthly control report consisting
of original budget, flexed budget and actual outcomes along with variances. Further, this part
covers thorough analysis of business’s performance based on above budgets along with key
recommendations. The second part comprises discussion based on case study while covering
analysis of business as to support decision to go online on Amazon along with key advices
relating to this matter.
MAIN BODY
Part A
(i). Prepare the monthly control report:
Particulars Original
Budget
Flexed
Budget
Actual
Figures
Variance
Units 100000 80000 80000
Selling price 25 25 20
Sales 2500000 2000000 1600000 -400000
Variable costs:
Materials 250000 200000 280000 80000
Labour 400000 320000 440000 120000
Overhead 150000 120000 120000 0
Contribution 1700000 1360000 760000 -600000
Fixed overheads:
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Warehouse Rental 200000 160000 170000 10000
Insurance 100000 80000 100000 20000
Fulltime warehouse supervisor
salary
50000 40000 35000 -5000
Profit 1350000 1080000 455000 -625000
Working Note: Calculation of fixed overheads:
Fixed Overheads: Flexed Budget
Warehouse Rental 200000 / 100000 * 80000 = 160000
Insurance 100000 / 100000 * 80000 = 80000
Fulltime warehouse supervisor
salary
50000 / 100000 * 80000 = 40000
(ii). Report on Amana’s performance during the year 2020:
Amana’s Performance Report:
Income Statement
Particulars Amount
Sales 1600000 100.00%
Variable cost:
Materials 280000 17.50%
Labour 440000 27.50%
Overhead 120000 7.50%
Total Variable Costs 840000 52.50%
Contribution 760000 47.50%
Fixed Overheads:
Warehouse Rental 170000 10.63%
Insurance 100000 6.25%
Fulltime warehouse supervisor 35000 2.19%
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salary
Total Fixed Costs 305000 19.06%
Net Profit 455000 28.44%
Amana Ltd has reported sales amounting 16,00,000 while the budgeted sales are 2500000
and sales estimated as per flexed budget is 20,00,000. Here is Adverse variance in sales is due to
lower sales price and lower units sold as compare to budgeted sales. This adverse variance in
sales shows that organisation is inefficient to generating sales.
Material costs actually incurred by business is 280000, while budgeted material costs are
250000 and material cost as per flexed budget is 200000. There is adverse variance in material
cost of 80000. This adverse variance in material costs shows inefficiency in production process
in terms of usage of raw materials (Ameen, Ahmed and Abd Hafez, 2018).
Actually incurred labour cost of business is 440000 while budgeted figure of labour cost
is 400000 and flexed budget based on actual outputs shows labour cost of 320000. In case of
Labour costs, there is adverse variance of 120000. This unfavourable variance in labour cost
indicates that labours are mismanaged and business is inefficient in controlling labour costs.
Other production overheads of business actually incurred is 120000 while originally
budgeted figure of other variable overheads is 150000. Here flexed budget shows same figure of
overheads as of actual. Thus, there is no variance in other variable overheads.
Company has reported contribution of 760000 which is around 47.50% of sales. While
business’s originally budgeted figure of contribution is 1700000 and contribution figure as per
flexed budget is 1360000. Thus, here is adverse variance in contribution which reflects that
business is inefficient to match actual contribution in comparison of budgeted contribution. This
also exhibits that business has not utilised production capacity to provide sufficient budgeted
contribution figure (Rikhardsson and Yigitbasioglu, 2018).
Fixed overheads of business includes Rent of warehouse, Insurance cost and Fulltime
warehouse supervisor salary. There is also variance in fixed overheads which impacted actual net
profit figure of business in comparison to budgeted net profit figure.
Budgeted Warehouse rental of business is 200,000 for 100,000 units while actual
warehouse rental allocated for 80000 units in flexed budget is 160000. But company has actually
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incurred warehouse rental of 170000, therefore there is adverse variance of 10000. This reflects
that business has over absorbed the warehouse rental.
Insurances costs actually incurred by business is 100000 at 80000 units’ capacity while
company has estimated 100000 insurance cost at 100000 units’ capacity. Thus, in comparison to
the flexed budget there is adverse variance of 20000 which indicates that organisation has over
absorbed the insurance costs.
Budgeted figure of Fulltime warehouse supervisor salary is 50000 while actually paid
salary is 35000 which is also lower than the figure computed in flexed budget. So, there is
favourable variance of -5000. This indicates that business is efficient to optimise supervisor
salary (Allain, Lemaire and Lux, 2021).
Company’s actual net profit reported is 455000 while company originally budgeted net
profit of 1350000. Based on actual capacity utilised flexed budget shows net profit of 1080000.
Thus there is adverse variance of 625000 in net profit. This shows that company is inefficient to
generate profitability as compare to budget net profit benchmark.
Provide recommendations to Amana’s CEO on areas of improvement:
Based on above analysis following are certain key recommendations for improving business
areas, as follows:
The first priority of company should be increase sales units as well as it is recommended to
company to increase their selling price where practicable. Company should extend the business
through searching for new opportunities or seeking ways to boost revenue.
Company should need to launch new products to grow business, increase marketing efforts, or
enhance customer services to increase revenue. As company is manufacturer, this might mean
improving productivity to keep up with demand. Changing prices, terms, or payment terms may
boost demand for products. Evaluate what business rivals are doing as well as own profitability
to see how company should lower costs. If business can't lower the price, enhancing an offer
with favorable terms can also sway customers (Abdusalomova, 2020). Company should
determine the one is most or least cost-effective. Company should reduce the amount of
money spend on products that don't pay back, and put more money into the ones that do.
Prioritize reducing variable costs like material and labour wages before focusing on
business's fixed costs such as rent and other fixed costs. Companies should not cut expenses to
shore-up a struggling company and afterwards stop tracking it until their short-term targets have
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been reached. Still keep tracking of the company's finances and search for ways to save money.
The most compelling approach to cut overall costs is to pinch pennies as much as
possible. Company should learn to be frugal about business expenses. However, as a company
expands, it's easier to lose tracking of expenses. Also note that in order for business to be
successful, it must have a thrifty attitude in order to maximise profits (Zyznarska-Dworczak,
2018).
Part B
Analysis of Mr Amana’s decision to go online:
Amana has found that many of his rivals now market their products online to consumers in
the United Kingdom, Europe, and United States. He has considered closing divisions in
Brighton, the Birmingham city centre, including Manchester city centre in attempt to streamline
company operations and shift 50% of revenues online, while making, such decision several
considerations must be considered:
Costs Amount
Cost of setting up delivery network £150,000
Cost of upgrading current website to handle
large volume of sales
£50,000
Salary of a fulltime IT programmer £35,000
Total Cost £235000
From the market research this has been analysed that there would be guaranteed sales of
100,000 units yearly.
Factors to be considered if business alternatively sell its products directly on the Amazon:
 Amazon fulfilment fees = £50,000
 Guaranteed sales = 65,000 units on Amazon annually
 Lack of control over pricing and return policy
Analysis of both these option indicates that total cost in case company sell their products
online through their own online-shop is 235000 and this alterative will provide guaranteed sales
of 100000. On other hand, if company sell their product through Amazon this this will cost to
company 50000 with a disadvantage of lack of control over pricing as well as returning policy.
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For better comparison of both such alternatives, let consider the standard sale price £10 per unit
and compute the net estimated profit figure:
Case 1: In case company sell their products through own online-shop:
Particulars Amount
Sales (100000 *10) 1000000
Less: Costs
Cost of setting up delivery
network
150000
Cost of upgrading current
website
50000
Salary of a fulltime IT
programmer
35000
Total Costs 235000
Profit 765000
Case 2: In case company sell their products through Amazon:
Particulars Amounts
Sales (100000 *10) 1000000
Less: Costs
Amazon fulfilment fees 50000
Total Costs 50000
Profit 950000
Comparative analysis of both these cases shows that profit in case 1 if corporation sell
their products through their own online shop, estimated profit would be 765000 while in second
case if company sell their products through Amazon platform, expected profit would be 600000
which is lower than first alternative. Another notable aspect here is that in case of sell of
products through there is lack of control over return policy and pricing. Thus, comparative
analysis shows that company should go for selling their products through own online-shop
platform (Pelz, 2019).
Another recommendation here is to go for both, but company should gradually move to
their own online-shop website as company’s products become popular. Rented sites, such as
Amazon, are usually very famous and have a broad user base that is ready to link. Consider
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Social media as examples of platforms. Each one has millions of subscribers, and business can
instantly reach them by using the app. When it comes to establishing a digital identity, this is
extremely helpful (Hariyati, Tjahjadi and Soewarno, 2019).
Rather, business must gradually develop it through various marketing strategies. To do
so, you'll need both timing and efforts. As a result, amazon platform is by far best option if
business just getting started and want to hit a large pool of prospective customers or audiences
quickly. However, by utilizing amazon platform will provide business with access to vast
number of users, this will also limit their contact with those customers to inside the platform.
Remember Amazon: it deliberately conceals the contact details of someone who has
bought product so that business can only contact customers via Amazon (Pelz, 2019).
The amazon platform needs much less of time to manage and maintain. The framework
and resources business need to build stunning and well-designed shops or websites are already in
existence on Amazon. These platforms' architecture for helping you develop business presence is
not only quick to use, but it's also the product of thorough R&D and users research so it's fine.
Using amazon platform, on the other hand, needs business to do all of architecture and
configuration itself. This diverts time and attention away from key facets of business.
Although some techniques have rendered it simpler than ever before to build well-designed
ecommerce platform business would always need to recruit a skilled employee to customize site
and handle possible bugs, making them inconvenient to employ if one don't have budget. Using
amazon platform is a helpful way to proceed if business has small team without budget or
resources to run own platform. While amazon platform is simple to set-up and utilize. they are
limited in their versatility. If business use their delivery service (that means they handle their
stock), they have full control over warehouses where items are stored in (Bedford and Speklé,
2018).
Although this is usually not a problem, Amazon will sometimes transfer business inventory from
warehouses to warehouse without business's consent, rendering their goods unsellable while
being in transit. As result, when selling on Amazon, business must still keep a check
on inventory and ensure that their product doesn't face inadequacy of inventory owing to
Amazon's stocks control. Similar problems occur for Platform in terms of personalized styling,
Amazon in terms of architecture and design, but almost every other site in any manner.
Business would have the independence and versatility to do whatever they want whether run
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their own stock or layout of business own website. Though customization can require additional
time and effort own platform is much more flexible than Amazon alternative. Since it's your
page, you have full power of everything from the text to the interface to the location of icon.
Business will have power of more than just the show and be able to pick how, whenever, and
where they present their items. Unlike Amazon, the business's own website is entirely dedicated
to business. Customers would be less distracted if business use their own website the go-to spot
for them to order from them. Since the web visitor can only be introduced to your goods, there
are no options like others viewed this and today's offer (Cescon, Costantini and Grassetti, 2019).
Based on overall analysis this has been recommended to respective company that it
should first prefer own website but use of Amazon’s platform will help to grow business more in
long term. Thus, business should adopt both alternatives as practicable. But quantitative analysis
shows that business should go for setup their own-online shop.
CONCLUSION
From the study this has been articulated that management accounting is crucial aspect which
covers all the key aspects of business like accounting, finance, management etc. MA helps to
define each operational and managerial task of business. This provide an assistive framework for
business executives to take effective decisions. As in given case study, MA approach helped in
analysis of decision of business to go for their own online shop or use amazon website.
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References
Books and Journal:
Abdusalomova, N., 2019. PROBLEMS OF MANAGEMENT ACCOUNTING AND WAYS TO
SOLVE THEM. International Finance and Accounting, 2019(3), p.2.
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management, 2(1), p.02.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems, 29, pp.37-58.
Allain, E., Lemaire, C. and Lux, G., 2021. Managers' subtle resistance to neoliberal reforms
through and by means of management accounting. Accounting, Auditing &
Accountability Journal.
Abdusalomova, N., 2020. Principles of ties of internal control and management accounting
systems at the enterprises of black metallurgy. Архив научных исследований, (2).
Zyznarska-Dworczak, B., 2018. The development perspectives of sustainable management
accounting in central and Eastern European countries. Sustainability, 10(5), p.1445.
Pelz, M., 2019. Can management accounting Be helpful for young and small companies?
Systematic review of a paradox. International Journal of Management
Reviews, 21(2), pp.256-274.
Bedford, D.S. and Speklé, R.F., 2018. Construct validity in survey-based management
accounting and control research. Journal of Management Accounting
Research, 30(2), pp.23-58.
Cescon, F., Costantini, A. and Grassetti, L., 2019. Strategic choices and strategic management
accounting in large manufacturing firms. Journal of Management and
Governance, 23(3), pp.605-636.
Hariyati, H., Tjahjadi, B. and Soewarno, N., 2019. The mediating effect of intellectual capital,
management accounting information systems, internal process performance, and
customer performance. International Journal of Productivity and Performance
Management.
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