Applications of Management Accounting Systems: PDF

Management
Accounting Systems and
its Applications

INTRODUCTION
A system and a process for using professional skills, knowledge in order to managing all
the financial activities and development effective strategies and plans for improving overall
financial position of company is known as management accounting system (Boiral, O., 2016.).
KEF Ltd. is a medium sized manufacturing business unit. The study includes a report made by
junior accountant of the company which has a brief description of MA and its system including
MA reporting. It shows various MA techniques in context to preparing the profitability statement
of the company. In addition, it also shows description of a numerous planning tools to be used by
a company for preparing more beneficial plans for the company. At the end of assignment, the
report shows adoption of different MA systems by companies for facing problems relating to
financial activities.
TASK 1
Management accounting system, its requirements and different types of system of management
accounting (MA)
MA
"MA is that branch of accounting of a company which concerns with the preparation of
various statements with a view to provide various information regarding activities relating to
accounting and financial transactions made by company by using professional skills and
knowledge (Boučková, 2015). In addition, this system of accounting also includes development
of effective plans for the organisation so as to improve financial performance of business in the
competitive market."
Kinds of MA system
These are some types of MA system that can be adopted by managers of the company in
order to develop an effective management of financial performance of the company. Essential
MA systems are as under:
 Cost accounting system: That system which is adopted by a financial manager and
management accountant in order to monitor overall cost incurred by a company and
developing effective strategies and plans in order to develop cost efficiency in business. It
is required to be adopted by the KEF Ltd. due to following reasons:
▪ This system is mostly required by a manufacturing concern as it helps for
determining cost involved in firm's each stage of production.
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▪ It is required to determine the appropriate price of a product.
▪ It is essential for spreading of total cost in several departments of the KEF Ltd.
Application: CA system is required to be used by all the companies as being cost
effective helps in business in improving its profitability and efficiency of working.
 Job costing system: That system which is being adopted by those business units which
manufactures customised products and services for different customers (Chenhall and
Moers,2015). Essential requirement of job costing systems are as under:
▪ To identify total expenses of company for manufacturing its of product or
services.
▪ For setting the most appropriate price of all customised product by adding
sufficient amount of profit in it.
▪ To provide a detailed information about different costs incurred by the company
on different stages of the production.
Application: Job costing system is generally adopted by only those concerns that
manufactures customised product or services.
 Inventory control system: Inventory management is a type of MA system that enables
managers in monitoring movement of each stock within and outside of the business
organisation. It is required by those companies that keeps inventory within the firm for
either further processing or for selling purpose. It essential requirements are:
▪ To monitor movement of inventory of a business.
▪ To control wastage of inventories.
▪ To check the maximum amount of stock needed by a business unit during a
specific time period.
Application: Inventory control system is adopted adopted by the manaufacturing units as
they need to maintain a range of inventory with them (Dekker, , 2016). In addition they also
require to maintain record of movement of stock held by them.
 Price optimisation system: This system concerns with setting up the most appropriate
price of the goods and service provided by a company to its customers. This system helps
the management accountant in evaluating the maximum price which the customer will
pay for the product easily and the minimum price that needs to be set by the firm in order
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to generate profits. In this order, the managers become able to set the most appropriate
price of the product or service. Its requirements for KEF Ltd. are as under:
▪ To generate the appropriate profits from the sale of product or services.
▪ For deciding the most economical price of product.
▪ To attract maximum customers towards the product or services by setting best
price.
Application: Price optimisation system is needed to be used by those business
organisations that are engaged in either production of any product or services or distribution of
various products manufactured by other companies.
Therefore, it is analysed that these several MA system are essentially required by
numerous business concerns (Hopper and Bui, 2016.).
Management accounting reporting:
It is that process of preparing several reports containing summary of all the financial
transactions firm so as to maintain record of each activities and helping the managers for their
performance of managerial functions in more effective way.
Following methods are being used for developing MA reporting:
Cost report:
Cost reports includes each information regarding cost incurred by the business
organisation. These report provides detailed information regarding various costs incurred at
different stages of business such as material, labour, commission, etc.
Benefits: Benefits of preparation of cost reports are as under:
 It would help in determining cost of each department of the KEF Ltd.
 It will help the managers in identifying areas in of wastage.
 It enables managers in determining total cost of production of a single unit by KEF Ltd.
Inventory reports:
Those reports that includes in depth information regarding movement of stock in the
company. Being a manufacturing concern, the KEF Ltd. needs to analyse use of inventory in
various stages of manufacture.
Benefits: benefits of preparation of inventory reports to KEF Ltd, are as under:
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 It helps in determining minimum amount of stock needed by company within a specific
period.
 These reports are required fir maintaining record of each movement of stock within the
business.
 Through this report, managers can become able to detect wastage of inventory at various
stages of production (Kaplan and Atkinson, 2015).
 Through inventory reports, the managers of KEF Ltd. will be able to develop effective
plan for elimination of wastage.
Performance reports:
The performance reports made by a business units contains information regarding overall
performance of the organisation. Preparation of this report can help the managers of KEF Ltd. in
analysis of performance of various departments of the company including their own
performance. In this order, these reports are needed to be used by the business so as to determine
the efficiency of the company.
Benefits: Essential benefits of performance report to KEF Ltd. are as under:
 Through this report a KEF Ltd. can easily determine the improvement or decline in the
efficiency of overall company's performance (ACCOUNTING REPORTS. 2018.).
 These reports can enable the managers in detecting inefficiencies in various departments
of the business of KEF Ltd.
 It improves ability of the managers in determination of performance of the business at a
certain level of production.
Budgetary reports:
These reports are the most importance element of the MA reporting system. These are
formulated by the managers for the purpose of setting short term goals through which company
could become able to achieve its actual goals and improve its efficiency and profitability as well.
(Maas, Schaltegger and Crutzen, 2016). In this order, these reports helps the managers in
ensuring effective achievement of goals and objectives of company.
Benefits: Benefits of budgetary reports are as under:
 It helps in setting short term goals for the business.
 By the use of budgetary reports managers become capable to identify the need of various
resources in company in near future.
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 It can help the managers of the KEF Ltd. in maintaining sufficient amount of funds and
other resources when they are needed by the company.
 It improves the strength of business in responding various uncertainty that may arise in
near future.
In this regard, it can be seen that the MA reporting is an essential part of the MA. It
enables managers in completing their managerial functions in more effective way. In addition, It
also helps them in ensuring development of effective plans for the company's financial growth.
Critical evaluation of MA system and its reporting:
Adoption of an effective MA system within the business organisation can help KEF Ltd.
in improving the overall financial management in firm. It helps in improving the management
their monitoring and controlling over various departments and activities of the company. In
addition, by adopting appropriate management accounting reporting and preparing all the
required management accounting reports, the managers become able to analyse the overall
financial activities in an effective way (Otley, 2016). further, it also helps them in maintaining
proper record of all the financial records of KEF Ltd. Whereas, if the KEF Ltd. adopts MA
systems and management accounting reporting, it will increase their workings. In addition, it will
also require a huge time and cost of the company. Although, these costs can be recovered by the
KEF Ltd. if it adopts all the systems and reports in an effective way.
Therefore, it can be analysed both MA system and its reporting is essentially needed by
the KEF Ltd. It will improve the internal controlling system of business and improving the
efficiency of the business as well. Further, as the cost and time incurred by the business would be
effectively recovered by the company, it should adopt them within its business.
TASK 2
Calculating cost and preparing profitability statements through marginal and absorption cost
techniques.
Calculation of cost of production per unit
Marginal costing
Direct material 20
Direct labour 12
Variable production overhead 8
Per unit production cost 40
Absorption costing
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Particulars Amount
Direct material 20
Direct labour 12
Variable production overhead 8
Production overhead (120000/20000) 6
production cost per unit 46
calculation of total production cost
marginal costing
Particulars Amount
production Units 19000 units
cost of production per unit 40
Total cost of production (19000/40) 760000
Absorption costing
Particulars Amount
production Units 19000 units
production cost per unit 46
Total cost of production (19000/46) 874000
Calculation of cost of sales for the month of June
Marginal costing
Absorption costing
Particulars units
per unit
cost Amount
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Opening stock 2000 46 92000
Add: purchases 19000 46 874000
Less: closing stock 3000 46 138000
Cost of sales 828000
Preparating budgeted profit and loss statement for month of June
Marginal costing
Particulars Unit
Per unit
cost Amount Amount
Sales 16000 60 0 960000
Less: cogs
Opening stock
Add: purchases 18000 40 720000
Less: closing stock 2000 40 80000 640000
Contribution 320000
Less: fixed 120000
Net profit 200000
Absorption costing
Particulars Unit
Per unit
cost Amount Amount
Sales 16000 60 960000
Less: cogs
Opening stock
Add: purchases 18000 46 828000
Less: closing stock 2000 46 92000 736000
Net profit 224000
Preparation of actual profit and loss statement for the month of June
Marginal costing
Particulars Unit
Per unit
cost Amount Amount
Sales 16000 60 960000
Less: cogs
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Opening stock 2000 40 80000
Add: purchases 19000 40 760000
Less: closing stock 3000 40 120000 720000
Contribution 240000
Less: fixed 120000
Net profit 120000
Absorption costing
Particulars Unit
Per unit
cost Amount Amount
Sales 16000 60 960000
Less: cogs
Opening stock 2000 46 92000
Add: purchases 19000 46 874000
Less: closing stock 3000 46 138000 828000
Net profit 132000
Advising company for using other costing techniques
Apart from marginal and absorption techniques, Activity based budgeting is another
technique that can be used by the company for preparation of various financial statements of the
company and determining production cost of the company as well (Quattrone, 2016). In this
method, overall cost incurred by the company is being assigned to various activities and
departments of the company so that cost of product manufactured by the KEF Ltd. can be
determined in more effective way.
TASK 3
Budgetary control system:
This system is a process of analysing actual performance of business unit and comparing
with set goals and objectives. It includes preparation of various budgets showing future needs of
the company in order to perform its functions effectively for achieving set objectives of
company.
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Planning tools of budgetary control
Numerous planning tools are being used by managers for formulation of budgets for the
company in an effective way. All planning tools used by the managers for performing their
budgetary control systems are as under:
 Cash budgets: Cash budgets refers to those budgets that includes details about various
areas that would result in movement of cash within the business organisation due to
performance of various business operations. cash budget of KEF Ltd. can help its
managers in determining need of cash and cash equivalents by the company in the near
future. Along with it, it also enables then in identifying all sources from which they can
generate funds for meeting requirement of cash and cash equivalents.
Benefits:
▪ It helps in predetermination of need of cash..
▪ It improves ability of KEF Ltd. in repayment of debts
Limitations
▪ It limits the power of company in spending its cash.
▪ Estimation of cash is the most typical task and contains huge uncertainties as well.
 Zero based budgets: Those budgets that are being formulated by managers by avoiding
the actual performance of the company (Schaltegger, Burritt and Petersen, 2017). While
preparing these budgets, managers starts with the zero. They evaluates the goals and
objectives of the company and prepared budgets for achieving them effectively.
Benefits:
▪ It results in achievement of goals and objectives more efficiently.
▪ It contains a huge accuracy in the budgeted incomes and expenses.
Limitations:
 It enhances workings of the managers of KEF Ltd.
 It may attract manipulation of various activities by the managers.
 Operating budgets: Those budgets that are being prepared for estimation of overall
operations of the company are known as operational budgets. These budgets provide
information regarding several areas where the KEF Ltd. would require to expend its
resources and need of various financial resources by the business in its near future in
order to meet its debts (Renz, 2016).
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Benefits
▪ It improves debt meeting ability of the business.
▪ It helps managers in long term planning for the company
Limitations
▪ It results in development of rigidity in all the operating activities of the company.
▪ It fails to provide accurate results if the company performs any operation beyond
its budgeted activities.
In this order, it can be analysed that different planning tools available in the MA system
that helps the managers in improving their planning procedures and formulate more effective
plans and strategies for the business in such a way so that the overall financial position of the
company could be improved (Spraakman and et.al., 2015).
TASK 4
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P5 Adapting financial tool to resolve problems related to finance
Balanced scorecard : Balance scorecard used to transfer the organization mission and
vision into the actual outcomes. Balance scorecard help in monitoring the activities and
profitability of the KEF limited and provide various solution to improve their performance to
benefit the organization. It focuses on both financial and non financial objectives of organization.
It supports to improve the ability and knowledge of employees (Tan, Zhang, and Khodaverdi,
2017). By using this technique KEF limited company minimize the wastage of the organization
which ultimately increases their productivity and profitability. It balances the financial measures
with the performance measure and the objectives of the organization. KEF limited company set
the target and compare the performance with the target.
KPI's : Organization use the KPI system to measure the performance and the various
ways to achieve its organization objective (Parmenter, 2015). Through the key performance
indicators Tesco evaluate the financial position of t eh organization via different tools like cash
flow statement, balance sheet and income statement.
KEF limited company also use the KPI tool to evaluate the financial position of t he
company in market and identify the valuable measures to improve their performance. Through
the KPI tool KEF limited company regulate the revenue of the organization and control their
expenses to achieve the target of the company.
Variance analysis : It helps the organization to identify the variances in comparison the
actual and standard behaviour of the organization. It is used to measure the actual performance
and evaluate that how much the result vary from the expected outcomes. KRF limited company
use the variance analysis tool in their organization to estimate the budget and compare the
expected budget with the actual budget. To identify the difference KED limited company is
efficiently manage t heir expenses and work for generating more revenue.
Morrison also use the variance analysis tool to measure the wealth of the company and
also evaluate budget of organization. To adopting variance analysis in the organization they can
easily identify the gap in the organization and different measures to fill this gap like by reducing
the expenses, improving the quality of product etc.
Benchmarking : Benchmarking is the method used to measure the functioning of goods
and services in compare to the same king of business. Tesco set a Benchmark to evaluate the
performance. They compare the value of the product in the market with benchmark and evaluate
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the reasons behind the differences in the comparison. It helps the organization to focus on the
particular area rather than to evaluating the whole process. Tesco compare the performance of
the product and services with the other brand in the market and evaluate their strategies to
improve the performance of their product. It is applied to the organization at different level, so
they can easily identify the differences.
CONCLUSION
By analysing the following report, it can be identified that MA system is essential part of
management, it helps in improving the efficiency of managers in developing plans, policies and
formulating strategy for business firm for purpose of improving organization's financial position
in the competitive market. It also emphasis that company can used various technique for
preparing the financial statements. There are Different planning tools that support the
management team in formulating their effective plans for the company. In addition, there are
different MA systems that can be adopted by company in order to resolve various problems of
organization related to finance effectively.
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