Strategic Management Accounting Applications

This assignment delves into the crucial role of strategic management accounting within contemporary businesses. It requires an analysis of how this approach is implemented and applied to inform key decisions. Students are expected to examine real-world examples and demonstrate a thorough understanding of the concepts and their practical implications.

Assignment
Management Accounting
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College Name:
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Table of content
Introduction......................................................................................................................................3
Overview of the company................................................................................................................3
Task 1: a) Functions of management accounting (P1)....................................................................3
i) Definition of management accounting and the differences between the management accounting
and financial accounting..................................................................................................................3
ii) Role of management accounting to create some effective decisions in the organisation...........5
b) Types of management accounting system and the process that should be followed by the
organisations to improve their financial report (P2)........................................................................6
Task 2...............................................................................................................................................7
Presentation of Income Statement for the month of September using absorption costing..............7
Task 3: Preparation of different types of budgets [P4]....................................................................9
i) The advantages and disadvantages of different types of budgets................................................9
ii) The process that should be followed by the Company to prepare such budgets.......................11
iii) The strategies that should be adopt by the Company to set the price......................................11
Task 4: Use of balance scorecard to improve the financial condition of the organization [P5]....12
I) Use of balance scorecard to solve the financial problems.........................................................12
II) Implementation of Balanced scorecard can deliver a range of financial and non financial
performance measures...................................................................................................................12
Conclusion.....................................................................................................................................14
Reference list:................................................................................................................................15
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Introduction
Business organisations do their business activities both in the internal and external environment.
Therefore, organisations have to prepare some strategies to achieve the objectives in both
internal and external environment. Basically, Organisations do their business activities to achieve
two major objectives the first one is profit maximization and the second one is wealth
maximization. Organisations have to conduct a good accounting system in the organisation
culture to achieve the profit maximization objective because financial accounting system has a
direct relationship with the profit of the organizations (Renz, 2016, p.209). As a good accounting
system keep all the records of the cost of activities of the organisation therefore,organisations
have to be depended on the accounting system to get the relevant information about the
expenditure of the organisation. The information provided by the accounting system also help the
organisation to prepare some strategies to reduces the cost of business activities and increase the
generation revenues from the activities. In this way accounting system help the organisations to
increase the differences between the revenue and expenditure to maximize the profit. The main
focus of the following thesis is to interpret the importance of the management accounting system
in the organisations which is a vital part of accounting system.
Overview of the company
The following study also focus on the accounting system of IMDA tech (UK) limited which is a
well known company for manufacturing special chargers of mobiles, telephones and other carry-
on gadgets. Company successfully generates their profit for the last few years but in the annual
meeting some of the department managers had some complaints about the accuracy of the
financial information system of the company. The managers cannot get the detail information
about the financial performance of the company. Company tries to include the management
accounting system in their accounting system to increase the accuracy of the financial
information system in the organisation.
Task 1: a) Functions of management accounting (P1)
i) Definition of management accounting and the differences between the
management accounting and financial accounting
Management accounting system help the organisations by providing some devices that can be
used to take some effective decisions, planning for the business activities, measuring the
performance of different business activities and management, preparing some financial report to
control the cost of the business activities, formulation and implementation of some strategies to
increase the efficiency of the business activities (Otley and Emmanuel, 2013, p.304). As
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management accounting system is a part of the financial accounting system therefore, there are
some major differences between the financial accounting system and management accounting
system. The differences are as follows:
Points of
differences
Management accounting Financial accounting
Users of
accounting
information
Basically, Management accountant
prepare the statements for
providing information to the
internal stakeholders of the
organisation such as managers,
board of directors and employees.
Where financial accounting system prepare
the financial statements for providing
financial information to the external
stakeholders such as Investors, preference
shareholders, financial institutions,
government etc.
Use of law
and Standards
There are no requirements of laws
and standards in the Management
accounting system. Management
accountant can use any format and
standards to prepare the
statements.
The financial accountant has to follow
some specific law and standards such as
international accounting standards to
prepare the financial statements to reveal
the financial performance of the company.
Scope The scope of the management
accounting in the Company is very
narrow because it can be
conducted to measure the
performance of a particular
business activity.
Where the scope of the financial
accounting is very broad because the
financial statements prepared by the
accountant is measure the financial
performance of the entire Company.
Functions The major functions of the
management accounting are to
help the company in decision
making and measure the
performance of a particular
activity.
But the financial accounting prepare
different financial statements such as
Income statement, profit and loss
statement, Balance sheet etc to disclose the
financial status of the company to the
investors for attracting more investments in
the Company.
Schedule to
prepare the
statement
Management accountant can
prepare the statements on the
daily, weekly and monthly basis to
reveal the performance of different
business activities.
But Financial accountant prepare the
income statements, profit and loss
statement quarterly and annually and
prepare the financial statements annually to
reveal the annual financial performance of
the company.
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ii) Role of management accounting to create some effective decisions in the
organisation
Management accounting system plays a vital role to take some effective decisions about the
business activities of the company. Management accounting system provides some important
tools and devices that help to company to create some effective decisions about the business
activities. The important tools and devices provided by the management accounting system are
as follows:
A) Management accounting system helps the Company to prepare some budgets to estimate the
future costs and revenues of a particular business activities by using the past experience and
information of a particular business activities of the Company. The detail information about the
aspects of the business activities in which the company have to expense the resources are
provided in the budgets. Therefore, Company can take some effective decisions about the
allocation of resources in a particular business activity efficiently (Ax and Greve, 2017, p.65).
B) Management accounting system also provides some tools to measure the performance of a
particular business activity. It helps the company to take some important decisions about the
activity based on the performance of the activity. Basically, Management accounting system
measure the performance of the business activity based on the profit generated by the particular
activity therefore, the effectiveness of the performance measurement tools used by the
management accountant is more than the other performance measurement tools.
C) Management accounting system also provide some cost measurements tools that help the
company to take the decisions about the business activity based on the cost consumption of
particular activity. While a business activity consuming higher cost than the estimated cost in the
budget then the accountant can recognize some issues for that the activity consuming higher cost
than the estimated cost. Accountant discusses the issues with the decision makers of the
company than the decision maker takes some effective decisions to solve the issues of the
business activity (Coad et al. 2015, p.155).
D) Management accountant also prepare some statements that help the company to take some
decisions about the products such as set the price of the product, make or buy the relevant raw
materials for the production activity, Export the products in the foreign countries and expand the
business in the other regions or in a foreign countries. Management accountant provide all
relevant information to take some effective decisions about such activities to the company.
E) Management accountant also create a proper management information system in the company
that help the decision makers to access some important information about the performance of
different activities of the company. The appropriate use of such information in the preparation of
decisions increase the effectiveness of the decisions (Keyes, 2016, p.75).
All the above devices, tools and statements help the company not only take the decisions but also
help to prepare some strategies help the company to increase their market share in the industry.
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b) Types of management accounting system and the process that should be
followed by the organisations to improve their financial report (P2)
There are different types of management accounting system that help the company to take the
decisions and measure the performance of the different business activities in the organisation.
The important types of about the management accounting system are as follows:
i) Cost accounting system
Cost accounting system provide some important information to the company about the cost of
production, cost of inventory and provide some effective measures to the company to control the
cost of the production. The important information provided by the cost accounting system not
only control the cost but also help the company to estimate the cost of production which is an
important operation of the company to increase the profit (Shields, 2015, p.130). Cost accounting
system also uses some devices to estimate the cost of production. The devices are as follows:
Activity based costing: In activity based costing system the rate of cost are applied in the
activity according to the usages of such activity.
Process costing: In this system of costing the cost of manufacturing of the products are
accumulated by the process involved in the production activity.
Traditional costing system: Traditional costing system uses a uniform rate for all departments
of a production activity of the company.
ii) System of inventory management: Inventory management system is a computer based
information system that keeps the record of the level of inventory, orders, sales and deliveries.
This system provide all relevant documents such as bill of materials, order invoices and other
production related documents that help the company to take some significant decisions about the
level of raw materials, closing stock of the finished products in the production process.
iii) Job costing system: Job costing system is a process by which company can accumulate the
relevant information about the costs associated with the production activity. Job costing system
generally collects the information about the direct materials, direct wages and overhead to
calculate the cost of production (Manyaeva et al. 2016, p.265).
iv) System of price optimization: Price optimization system help the company to set the price
according to the not only respond of the customers. Management accountant try to set ideal price
that meet the customer's utility maximization objectives and company’s profit maximization
objectives.
The IMDA ltd can adopt all the above system in the organisation to control the cost of the
activities and increase the generation of revenues in the company.
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Task 2
Presentation of Income Statement for the month of September using
absorption costing
Discussion on the concept of absorption costing
The concept of absorption costing and marginal is two different approaches used by companies
or organizations in order to derive the net profit on inventory valuation (Cinquini and Tenucci,
2010, p.228). Both the methods of costing are used with the aim of catering the needs of fixed
overheads in relation to production. In the following section two different management cost
accounting approaches are discussed and calculations have been presented accordingly.
Absorption costing refers to the process of determining the cost of a product in which both fixed
and variable costs with respect to the units of production have been apportioned to the category
of product (DRURY, 2013, p.334). Through this method of costing the expenses that has been
incurred through the process of manufacturing is recovered from sales.
Calculation of Absorption costing and determination of the net income
Amount (£)
Amount
(£)
Sales (1500 x £ 35) 52500
Less: cost of goods sold
Beginning inventory or stock nil
Add: Cost of Goods manufactured (2000 x £
20) 40000
Goods available for sale for the given period 40000
Less: Closing inventory or stock (500 x £ 20) 10000 30000
Gross Profit for the given period 22500
Less: Selling and Administration expenses
Variable 7875
Fixed 10000 17875
Net Profit for the given period 4625
Interpretation:
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From the above income statement of Imda Tech Limited it is inferred that the company produces
2000 units of mobile phone chargers for the month of September whereas the sales of the
business for the same month is 1500 units. The units are sold at a price of £ 35 per unit totalling
the selling to be £ 52500. Further, the cost of production is determined to be £ 20 per unit,
totaling it to be £ 40000. The closing inventory is reduced from the cost of goods sold which
provides the gross profit. Further adjustment with respect to selling and administrative expenses
provides the net income for the month of september implementing absorption costing technique.
Presentation of Income Statement for the month of September using marginal
costing method
Discussion on the concept of marginal costing
Marginal costing refers to the process of determining the cost of producing one additional unit of
a product along with no change taking place in the fixed costs incurred in producing that one
additional unit of the product (Noreen et al. 2011, p.236). The marginal cost identified comprises
of the variable costs such as cost of direct labour, cost incurred on direct material and expenses
and the costs involved in variable overheads with reference to production.
Calculation of Marginal costing and net profit
Amount (£) Amount (£)
Sales (1500 x £ 35) 52500
Less: Variable expenses
Beginning inventory or stock nil
Add: Cost of Goods Manufactured (2000 x £ 15) 30000
Goods available for sale 30000
Less: Closing inventory or stock (500 x £ 10) 5000
Variable cost of goods sold 25000
Add: Variable selling and administrative
expenses 7875 32875
Contribution margin for the given period 19625
Less: Fixed expenses
Fixed production overhead 15000
Fixed selling and distribution overhead 10000 25000
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Net Profit/loss for the given period -5375
Interpretation:
From the above chart it is inferred that the organization appears to incur marginal loss in the
month September. Since fixed costs are considered to be period costs under the concept of
marginal costing therefore it is completely written off for the period and not carried forward.
Task 3: Preparation of different types of budgets [P4]
i) The advantages and disadvantages of different types of budgets
The company can use different types of budgets to estimate the cost of different activities and the
revenue generation from the activities. Budgets help the company to allocate the resources in an
efficient manner in the business activity. The proper allocation of resources helps the company to
minimize the use of the resources and maximize the assets and revenues of the company. IMDA
ltd can prepare the following budgets in the company:
Functional budget: Company prepares the functional budgets to estimate the future cost,
production and sales. Company prepare different types of the functional budgets such as sales
budget to estimate the sales of the company, production budget to estimate the numbers of
products for which the company can generate maximum revenues by using the minimum
resources (Li et al. 2013, p.454). Material budget is to increase the accuracy in the use of raw
materials and minimize the wastage of raw materials in the production process. Labor budget is
to use labor power efficiently and accurately. Apart from all budgets company also prepare some
other functional budgets to estimate the use of resources in different departments of the company
such as administrative budget, selling and distribution budget and cash budget. Company
sometime faces some problem with the implementation of such budgets in the activity. The use
of impractical estimation in the preparation of the budget always create problem for the
employees because higher expectations from the employees always create some additional
pressure for this reason the employees cannot perform their best and the quality of the product
also fall (Hill et al. 2017, p.235).
Master budget: Master budget is an aggregate of all budgets which are prepared in the
company. This budget helps the company to prepare a complete picture of the future financial
status of the company. Master budget is the combinations of all budgets such as sales, operating
profit and expenses, assets and income of the company. The advantages of this budget are to
provide clear information about the mission and vision of the company to the investors for
attracting more investments in the company. However, sometime inaccurate estimation in the
budget cannot provide expected earnings to the investors that decrease the goodwill of the
company in the market.
Operating budget: Operating budget help the company to forecast the future income and
expenditure of the company. Companies use the past experience of production, sales, labor cost
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and other expenses to the operating budgets. This budget can be prepared weekly, monthly,
quarterly or annually in the company. The disadvantages of this budget are ignorance of market
condition in the preparation of such budget (Oriekhova, 2016, p.45).
Cash flow budget: The function of this budget is to provide a clear picture of generation of cash
in the company and outflow of cash from the company. This budget basically focuses on the
sources from which the company can generate cash in future and the aspects in which company
can expense their cash in future. Company can use the account receivables and account payables
as factors to prepare the budgets.
Apart for all the advantages of the budgets the company sometime faces some serious problems
with the budgets:
A) Inaccuracy of the budget always creates some problems for the company. Basically, the
budgets are prepared based on some assumptions which have no relation with the practical
condition of the company. The ignorance of changes in the business environment increase the
accuracy of the budget. Company never achieves their expected earnings with an inaccurate
budget (Ambrosini et al. 2015, P.372).
B) The budgets are prepared by the management of the company therefore, they some ignore the
inclusion of market shift in the budget. However, this is advisable to the company to run the
business according to market to achieve success in long run.
C) The preparation of the budgets always consume a lot of time of the company. The company
can invest the time in the other activity to earn more profit.
D) While the company cannot achieve the result according to the budget then the company
blame the managers for such failure this incident demotivates the managers to provide their best
effort in the company.
ii) The process that should be followed by the Company to prepare such
budgets
Company can use some process to prepare the budget in an efficient manner. The inclusion of
the detriments in the budget increase the efficiency of the budget. The process are as follows:
A) Company has to prepare the budget based on the fiscal target and try to estimate the
expenditure which can comply with the targets.
B) Company also makes some expenditure strategies to prepare such budgets. The appropriate
inclusion of expenditure strategies helps the company to control the cost in the budget.
C) Company has to allocate the resources in the company according to the expenditure strategies
and fiscal target. The proper allocation of resources reduces the wastages of the resources and
increases the revenues of the company (Morden, 2016, p.255).
D) Management can also include some production process, plan and procedures to increase the
efficiency of the production process and performance of the employees.
E) Company also can increase the efficiency of the organisational structure and concentrate on
the achievement of long term objectives of the company while preparing the budget.
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F) Company can share the information about the budget with the employees and try to get some
feedback from them to increase the accuracy of the budget. Company also can motivate the
employees to improve their performance by achieving the target set by the budget (Coe and
Letza, 2014, p. 226).
iii) The strategies that should be adopt by the Company to set the price
Company can use different pricing strategies to set the price of the product. However, the
appropriate pricing strategies for the company are as follows:
Price penetration: Company can set a lower price of their products from the other competitors
in the market to increase the awareness about their products among the customers. Price
penetration is also a part of the marketing strategies of the company. By applying this strategy
company tries to attract more customers to buy the product.
Economy pricing: Company tries to reduce the marketing and production of the products to set
a lower price of the products. As IMDA ltd is a well known company in the mobile accessories
industry in UK they can follow this strategy to increase the demand of the customers for the
products and increase the market share of the products in the industry (DRURY, 2013, p.52).
Psychology pricing: Company can use these techniques to encourage the customer emotionally
to buy the products at a price which was set by the company.
Premium pricing: In this technique company try to set a higher price of their product than the
products of their competitors. By using this technique company tries to prove the superiority of
their products from the products of the competitors.
Task 4: Use of balance scorecard to improve the financial condition of the
organization [P5]
I) Use of balance scorecard to solve the financial problems
IMDA ltd can use the balanced scorecard to solve financial problems. The following measures
provided by the balance scorecard help the company to solve the financial problems:
A) Balanced scorecard helps the company to take some strategic initiatives to solve the financial
problems.
B) Balanced scorecard also provides some creative and innovative ideas to the company to solve
the financial problem.
C) As balance scorecard is a performance measurement tool therefore, it can help the company to
determine the issues that create the financial problem in the company by measuring the financial
performance (Cooper et al. 2017, p.135).
D) Balance scorecard can provide a transparent and comprehensive picture of the financial
problems to the company by providing some relevant information about the problem.
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E) Balance scorecard also provide some relevant results quickly that help the company to solve
the problem quickly.
(a) Explanation on Balance scorecard approach
‘Balanced scorecard’ is identified as one the strategic planning tools used and implemented by
the management of an organization within the framework of the business. The balance scorecard
approach is adopted by entities with the aim of aligning the objectives and strategies of the
organization with the activities or operations performed by the business (Kaplan, 2009, p.1253).
Moreover, with the implementation of the balanced scorecard approach organizations aim at
improving the communication pattern adopted by the entity within and outside the business
organization.
II) Implementation of Balanced scorecard can deliver a range of financial and
non financial performance measures
Figure 1: Balanced scorecard
(Source: Kaplan, 2009, p.1253)
Through the implementation of balanced scorecard approach organizations can undertake the
process of delivering a broad range of both financial and non financial metrics. The financial
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metrics have been identified as the financial measures implemented by the business in order to
track the performance of the entity (Kaplan, 2009, p.1253). Through the financial perspective the
process of identifying certain high level financial metrics in the form of the income statement,
the balance sheet and the cash flow statement was made. The measurement of financial
performance through the establishment of the balance scorecard approach also caters to the
aspect by which organization want to portray itself to the shareholders of the entity.
On the other hand, the non financial metrics developed through the balanced scorecard approach
encompasses the non financial aspects such as customer relationship and satisfaction along with
stakeholder approach, the internal business processes implemented by the entity and the
processes implemented towards value creation and innovation.
Thus, it can be concluded that through the implementation of balance score card which is
popularly viewed as a technique for measuring the performance of a business the organization
Imda Tech Limited can monitor the financial performance of the entity more closely and
undertake the exercise of formulating innovative strategies that can used to improve the system
and processes functioning within the business entity. The traditional approach of balanced
scorecard implemented only the use of key performance indicators (KPI) in the form of financial
metrics that assessed the financial performance of the organization (Kaplan, 2009, p.1253).
However, this approach failed to cater the mission and vision developed by the entity which
resulted in poor formulation of strategies. The modern approach to balance scorecard have
resulted in overcoming the issues that existed previously by encompassing both financial and
non financial performance metrics (Zimmerman and Yahya-Zadeh, 2011, p.258).
Therefore, from the above study it can be concluded that through the implementation of the
balanced scorecard approach the business organization will be able to create increased
shareholder value through the process of effective financial governance.
Conclusion
After the analysis of management accounting throughout the study it is clear that management
accounting plays a vital role to increase the efficiency of different operations of the company.
Management accounting not only help the company to make some effective decisions in the
company but also measure the performance of different operations of the organisations.
Therefore, it is recommended to all the organisations to conduct an appropriate management
accounting system in the accounting system. The process of appropriate conduct of management
accounting system in the organisations also is mentioned in the study.
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