Management Accounting and Agency Theory

The provided assignment details discuss various aspects of management accounting, including its relationship with agency theory, collaborative performance management in interfirm relationships, and environmental management accounting practices. The document also includes references to several research papers and articles on the topic, as well as illustrations of marginal costing statements and absorption costing statements.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
Management accounting and its importance in decision-making procedure.........................1
Types of management accounting reporting methods............................................................3
Income statement using absorption and marginal costing methods.......................................5
Section 2...........................................................................................................................................7
Planning tools for budgetary control......................................................................................7
Management accounting system to respond financial issues...............................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is important for businesses in order to make effective decisions
regarding different operational activities. The report will cover importance of management
accounting and procedure of decision making. Management accounting reports to provide
financial and non-financial information that will be discussed in this report. Absorption and
marginal costing method to calculate the net profit amount will be covered here as well. Also,
budgetary control and management of resources in the budget will be highlighted. Finally, the
report will analyse the techniques used to respond financial issues within Nero Ltd.
SECTION 1
Management accounting and its importance in decision-making procedure
Management accounting: Management accounting is important for Hakim group in order to
make decisions regarding different operational activities effectively. Management accounting
reports provide useful information which can be financial or non-financial to make decisions
effective. Management accounting is also used by managers to evaluate the cost of business
operations and resources in order to prepare financial reports which will be internal or external.
This will help the business to control and manage strategies and plan for various organisational
operations (Bedford, 2015). It is also known as the cost and managerial accounting.
Accounting system
It can be said that accounting system provides useful information regarding business
activities which help to facilitate various resources within Hakim effectively. Such information
provides data to meet the demands and requirement of business management to make long term
decision-making effective. Accounting system includes the cost of operations, products and
services as well as data.
Cost accounting system
Cost accounting system will help managers to determine the cost of business resources,
products and services and cost of units of various departments. This will provide information
from which managers are able to control costs of resources under the budget effectively. This
will also help to make strategies and plans to control and manage operational activities
(Boučková, 2015). For an example, the cost system is applied on manufacturers, retailers, sole
proprietorships and government departments.
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 Cost accounting system helps officers to determine the cost of products and services
offered by Hakim group.
 The system also helps in evaluating the selling price of product and service.
Inventory management system
Inventory refers to products and services, business resources, raw materials, work in
progress and finished goods. Inventory management system will help managers to control the
inventory levels. This will also help to evaluate stock availability and quantity or quality of stock
to be managed in order to drive effectiveness of operational activities. Inventory cost refers to
carry out the cost of facilitate, capital, utilities, taxes and insurance. For an example, Hakim
group is able to determine the quantity of stock, cost of transportation and shortage against raw
materials, work in progress and finished goods.
 Inventory management system protects against uncertainties and also, shortage of raw
material.
 The system supports strategic plans and policies as well as help in taking advantage of
economic scale effectively.
Job costing system
It can be said that it is a process of cost recording and accumulation. It will help
managers in Hakim group to identify group of people in which the cost can be managed and
collected effectively (Dekker, Ding and Groot, 2016). For an example, the system is useful
where the production is One-Off towards products and services and undertaken for a special
requirement of a consumer. In addition to this, a short period of time is measured by the firm in
order to complete order provided by customers.
 Job costing system helps officers to control the cost make planning accordingly and
finally to take decisions.
 It also helps to calculate or determine the selling price of a product and evaluate profit
and loss.
Price optimising system
Price optimising system is a process in which product and service price is changed
according to the customer sensitivity effectively. This will help to increase the production and
profitability by knowing the sensitivity of consumers to make changes in prices. It is normally
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based on feedbacks given by customers in order to make relevant changes in the price of
products and services offered by firm in market in order to achieve client’s sensitivity.
 It will help to keep retention of customers to increase profitability.
 It will also help to determine the level of profitability based on existing customers.
Types of management accounting reporting methods
Management accounting reports
There are various kinds of management accounting presented here by which effective
development can be executed in the firm effectively. With the assistance of these management
accounting different kinds of method are available for the manager for Hakim group to control
over whelming costing in the production plant effectively and generate more profitability in the
industry in sufficient form. Management accounting is the most necessary part for each
organisation in order to manage all financial activities and decision-making process in the
industry (Dutta, Lawson and Marcinko, 2015). In case of Hakim business, there are various kinds
of management accounting reporting methods that are being used by its business manager in the
firm for proper management of financial resources in the corporation in appropriate manner.
Management accounting reporting presented here by the business manager can control and
manager the organisation’s performance in sufficient manner in order to sustain in the market
and gain more profitability in the business in proper form. Moreover, these reporting is prepared
by its manager in frequent basis on quarterly basis, monthly basis and weakly basis as well.
Budget reporting
This is also one of the vital types of reporting in business in order to control and manage
Hakim Group Company’s performance . Proper budget reporting in the firm helps company’s
manager in assessment of their performance . In case of large manufacturing companies , budget
reporting is used by wide rage in effective manner in order to monitor and manger their
departmental performance and also assist the corporation manager in respect to control costing
sufficiently (Fuzi, Habidin and Effendy, 2016). This is based on previous year’s financial
performance. In case of preparation of this type of budgeting, manager of company needs to
make use of previous financial data and estimate about to future financial gain performance of
entity in appropriate form. This budget reporting is mostly used for increasing and improving
financial performance of the corporation in industry . This budget reporting also could be used
for the manager and owner of the company in order to relevant furnishing of incentives to their
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employees in the country in effective form with the help of budget reporting, some of the funds
budgeted might be given out up as bonus to employees for meeting particular financial goals .
Account receivable
The account receivable is also an effective reporting system of management accounting
which can be used by Hakim group. This reporting system could be used for business manager
in order to control cash flow for companies that extend credit to their customers. This report also
helps the business manager n respect to break down customer’s balance which have been owned
by them for long term in the business environment effectively (Greger, Wolf and Krcmar, 2015).
This is mostly used by the company’ 30 days and 60 days or more. Accounting receivable
reporting could be utilised by manager in order to figure out the issues in the organisation’s
collection process and effective resolving them in the business effectively. Periodically
assessment of the accounts receivable ageing also keeps the collections department from
overlooking old debts effectively. With the assistance of accounting receivable manager of the
company can over look at its cash flows in effective manner and also with the help of
management accounting tools, effective performance of Hakim group business in the industry
in effective form and also control the costing of various business function in sufficient manner.
Job costing reporting
This is also a useful management accounting reporting system in the business in order to
control cost in the industry in relevant manner. Job costing is the business system process from
which manager of Hakim group business can control the costing on a particular project within
the business in relevant way. This is compared to estimate revenues to actual business
performance in the industry in effective manner, so that manager of the company can easily find
out the effectiveness of the business performance and their each job profitability at the workplace
(Hornhren, Foster and Datar, 2014). Moreover, with the assistance of job costing reporting in the
business, the manager of the company can recognise those areas in the firm which has higher
earnings in the business effectively. By the job costing system, manager of Hakim group can
evaluate the costing expenses on particular project in the industry in relevant ways, so that
manager of the enterprise can correct some its sections of waste before the costs escalate. With
the help of job costing, manager of the business estimate costing in its specific project and
calculate costs of each job which is being done in manufacturing plant in Hakim organisation,
this can assist the business manager in controlling costing on each job within the firm effectively.
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Income statement using absorption and marginal costing methods
Illustration 1: Quarter 1
Illustration 2: Quarter 2
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Illustration 3: Marginal costing statement
Illustration 4: Absorption costing statement
It can be said that both marginal and absorption costing methods are showing two
different net profits for the firm. Marginal costing method is showing 14,400 and absorption is
showing 9,600 effectively. The process for determining the net income is slightly different for
both methods. The marginal costing system takes only variable expenses in order to calculate the
net profit amount and absorption costing method included both variable and fixed expenses to
calculate net profit and cost of products and services offered by firm in the market towards
customers effectively. It is very important to understand the expenses which are divided in three
parts such as variable, fixed and semi-variable expenses effectively and efficiently. For an
example, salary paid to managers and employees working in the firm is fixed expense
(Kuznetsova and Kuznetsov, 2014). In addition to this, those are variable expenses which
changes consistently according to the demands and requirements such as raw materials and
machineries. In respect to this, semi-variable expenses are those in which some part of the
expenses remain same and come changes accordingly and effectively.
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It can be said that all expenses are necessary to calculate net profit amount for Hakim
group. It is very difficult to find out which method is crucial for the firm in order to calculate net
profit amount but in this case both methods are important that all the expenses should be taken
by managers to calculate net profit. Both are crucial and have their own importance in the firm in
different conditions. In marginal costing system, fixed expenses are not even directly connected
with production of services and products in the firm. The method also help managers to evaluate
level of profitability which will help towards production process of products and services.
Absorption is also important that it takes all the expenses in the calculation which will help to
determine extra expenses within firm (Ratnatunga, Tse and Wahyuni, 2015). This will help
managers to reduce waste expenses which leads towards innovation and profitability. Thus, it
can be said that both absorption and marginal costing system is crucial for firm in order to
calculate the net profit amount effectively and efficiently. It will help to maintain the proper
evaluation of expenses which will help manager to make their decision-making more effective
and efficient towards financial issues. This will improve and develop effectiveness of operational
activities which lead organisation to achieve its targets and objectives.
Section 2
Planning tools for budgetary control
Budgetary control refers to the plan and strategies managed by manager in order to
control the cost of operational activities and various resources effectively. Budget should be
managed for resources, units, financial and non-financial departments. This will help to make an
effective cooperation with resources to determine standards required to manage whole firm and
system (Sharma and Kelly, 2015). Budgetary control also help to reduce costs of various
employees activities and performance.
Financial budget
Financial budget will help to describe Nero Ltd expectations in order to improve and
develop cash revenues which helps to make strategies and plans for future uncertainties
effectively. Cash can be generated from sale of assets, sales revenue, loans, insurance of stock,
such activities.
Cash budget: It can be said that cash budget is a forecast of cash receipts. Cash budgeting is
crucial for Nero Ltd in order to control incoming and outgoing cash activities which will be in
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time period of monthly or weekly. This will help to determine availability of cash within
business.
Capital expenditure budget: It is also a financial budget in which business focus on new plant,
land and machineries effectively. This will be acquired by long term securities and bonds. Large
investment is associated with capital expenditure.
Balance sheet budget: This will help to increase balance sheet effectiveness if the budget is
meeting its requirements. This will also help officers to serve the controlling which ensures that
the budget is meshed properly.
OPERATING BUDGET
Sales and revenue budget: It is mainly focused on income which is received by business from
operational activities. It will also help to determine financial position of firm.
Expense budget: Anticipated expenses are determined by expenses budget in a specific time
period effectively (Soheilirad and Sofian, 2016). It will help managers in Nero Ltd to identify
and prepare for future expenses as well.
Project budget: Difference between expenses and sales is determined by project budgeting. In
addition to this, if the anticipated profits are low then there must be some strategies and plans
formulated by management to increase sales and revenues.
FIXED AND VARIABLE BUDGET
Fixed cost: Fixed expenses are described by fixed cost the best example for this is salary paid to
managers and employees effectively. Some certain things can be occurred in operational
activities as well.
Variable cost: Variable cost is all depended on operational activities scope in Nero Ltd. Raw
material purchased by firm is the best example of variable cost effectively.
ADVANTAGES AND DISADVANTAGES OF BUDGETARY CONTROL
ADVANTAGES DISADVANTAGES
Budgetary control coordinates with different
departmental activities in Nero Ltd.
Issues are created if used mechanically and
rigidly.
Budgetary control help to convert plans and
strategies into action.
Lac of participation will demotivate workers in
firm.
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Develop effective communication between
workplace and employees.
Enhance competition for politics and resources
as well.
Budgetary control justify and clarify all the
aspects to improve the resource's allocation.
Budgetary control consumes time and may
change the flexibility towards strategies and
plans effectively.
Average rate of return: It is a proportionate return on capital which is invested in projects
without any consideration of time and value of money effectively. Average rate of return is based
on cash inflow, average or accounting return over capital analysing.
Advantages:
 It is a easy way to measure profit over total revenues in term of considering the
profitability or cash inflows of the period.
 This will also help to compare two or more than two projects and analyse effective return
gained from them.
Disadvantages:
 It is very difficult for the professionals in Nero Ltd to analyse the return on investments
capital and profitability with ROI and ARR concept (Speklé and Verbeeten, 2014).
 The outcomes are also not so effective and appropriate while analysing the fair rate of
return is also difficult.
Incremental budgeting: An incremental budget is a budget prepared by using previous period
budget or actual performances as a basis with incremental amount added for the new budget
periods.
Advantage:
 Simplicity of incremental budgeting, being based on either recent financial results or a
recent budget that can be readily verified and Funding stability as well.
Disadvantage:
 The main disadvantage is that it does not encourage and motivate innovations within
business.
 Professionals can be accustomed to spending the same amount of money annually simply
for the purpose for funds allocation.
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Management accounting system to respond financial issues
Financial issues: It can be said that any business become successful when al the problems and
challenges are solved which can be financial or non-financial effectively. Financial issues in
business reduce the revenues and capital that a measurement and solution is required by firm in
order to respond financial problems effectively.
Production and profitability: Increasing cost of raw materials, products and services and other
activities which consumes cost. The cost reducing the profitability and also Increasing cost for
the firm can also reduce the chances of finding opportunities, which may be a disadvantage for
Nero Ltd effectively.
Funding: Funding is necessary for every business in order to expand business operational
activities effectively. Lack of funding can be a cause for business in terms of financial problems.
This will prevent them to purchase machineries (Subramaniam and Watson, 2016). Raw
materials and also to pay the taxes.
Debts: Debts are harmful for business and also showed in liabilities in balance sheet. Too many
debts such as credit card expenses, loans, interests and debtors raise the financial problems
effectively. This will also prevent bank to provide loans for business activities and also affect the
revenues and cash within business.
Budgeting problems: Financial management should be effective in order to reduce budgetary
issues within firm. Businesses usually spend more money as expenses on unnecessary resources
which reduce profitability and innovation at lower level. This can also cause perception of
inequality which decrease the flexibility of strategies and plans.
Poor financial management: Financial management has a significant impact on business
resources that managers should manage and control financial activities within Nero Ltd in order
to increase revenues and sales. Underestimating competitors, no proper research are some
example of poor financial management. Output per member and employees of the firm also
affected by the poor financial management which increase the negative perception in employees.
TECHNIQUES TO RESPOND FINANCIAL-ISSUES IN BUSINESS
Key performance indicator KPI: KPI is crucial because it helps manager to measure values in
order to demonstrate how the firm is working to accomplish its objectives and goals effectively.
This will also provides an idea from which the managers are able to assist targets to become
successful in future. This will reduce the impact of financial problems within Nero Ltd.
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Decision making: Management accounting officer should make strategies and plans in order to
make effective decision-making regarding business operational activities. Cost of resources,
financial activities and operations should be managed under the budget in order to reduce the
financial issues effectively. This will help to increase revenues and reduce extra expenses as
well.
Benchmarking: It is a process in which the firm compares present data to the any other
successful business in order to measure the position of firm in market effectively (Vladychyn,
2017). This will also help by providing suggestions to managers which will help to meet
financial goals and objectives.
Selective nature of manager: Managers should collect information and data which is useful for
the firm in order to reduce financial problems within business effectively and efficiently. This
will help manager by providing relevant and useful information to make their decision-making
more effective towards financial issues.
Think beyond: Managers should think beyond towards business activities and operations. This
will help to determine future uncertainties and will increase opportunities for firm effectively.
This will provide idea for managers to respond financial issues and lead towards profitability.
Beyond thinking of manager will provide future opportunities identification in order to achieve
them effectively.
Just-in-time method: Just-in-time is also a effective method from which the firm is able to
respond it s financial issues effectively. It is a inventory strategy in which the efficiency of
business is increased by removing waste expenses from goods and services in order to reduce the
cost of inventory (Weygandt, Kimmel and Kieso, 2015). This methods required process to
forecast demand accurately and effectively.
Thus, it can be said that management accounting techniques will help to respond financial
issues within Nero Ltd and will increase profitability and production. This will also provide
information from which the waste expenses can be removed from operational activities.
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CONCLUSION
It can be concluded from the above report that management accounting is important for
firm in order to to evaluate cost of business operations and resources in order to prepare financial
reports which will be internal or external. Management accounting reports will also help
managers by providing financial and non-financial information which helps to make effective
decision-making regarding various operational activities effectively. Absorption and marginal
costing method will also help to determine net profit amount from which the firm is able to
reduce waste expenses to increase profitability and production. Budget management is important
for the firm in order to manage the cost of business operational activities and products and
services. Management techniques will also help to respond financial problems within Nero Ltd
from which profitability and production can be increased effectively.
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REFERENCES
Books and Journals
Bedford, D.S., 2015. Management control systems across different modes of innovation:
Implications for firm performance. Management Accounting Research 28 pp.12-30.
Boučková, M., 2015. Management accounting and agency theory. Procedia Economics and
Finance 25 pp.5-13.
Dekker, H.C., Ding, R. and Groot, T., 2016. Collaborative performance management in interfirm
relationships. Journal of Management Accounting Research 28(3) pp.25-48.
Dutta, S.K., Lawson, R.A. and Marcinko, D., 2015. A Conceptual Foundation for Management
Accounting Information to Support Sustainability Strategies.
Fuzi, N.M., Habidin, N.F. and Effendy, S., 2016. Environmental Management Accounting
Practices and Environmental Performance for Malaysian Manufacturing
Industry. International Journal of Academic Research in Business and Social
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Greger, V., Wolf, P. and Krcmar, H., 2015. Perception of Benefits Achieved by IT Management
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Hornhren, C., Foster, J. and Datar, S., 2014. Management accounting: Translated from
English. St. Petersburg.
Kuznetsova, S. and Kuznetsov, A., 2014. The Information Perspective of Management
Accounting in Ukraine: The Synergistic Approach and Arrow's Impossibility Theorem.
Ratnatunga, J., Tse, M.S. and Wahyuni, D., 2015. Societal Role Expectations of Management
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control systems in the age of sustainability. International Journal of Critical
Accounting 7(3) pp.289-303.
Soheilirad, S. and Sofian, S., 2016. A proposed model of the mediating effect of strategic
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and firm performance. International Journal of Research–Granthaalayah 4(1) pp.231-239.
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Speklé, R.F. and Verbeeten, F.H., 2014. The use of performance measurement systems in the
public sector: Effects on performance. Management Accounting Research 25(2) pp.131-
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Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Managerial accounting. Wiley.
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