Budget Preparation Process

MANAGEMENT ACCOUNTING INTRODUCTION 1 TASK 11 1.1 | | Difference between financial accounting and management accounting 1 1.2 Importance of management accounting as the decision making tool for the managers 2 1.3 Cost accounting systems 2 1.4 Inventory management system3 Importance of cost analysis is done as to improve the profitability of business 4 B) Presenting financial information: 4 TASK 25 Costing methods 5 TASK 37 a) Different kinds of budgets and their advantages:7 b) The budget preparation process containing purpose of price and different

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Difference between financial accounting and management accounting...............................1
1.2 Importance of management accounting as the decision making tool for the managers........2
1.3 Cost accounting systems.......................................................................................................2
1.4 Inventory management system..............................................................................................3
1.5 Job costing system.................................................................................................................4
B) Presenting financial information: ..........................................................................................4
TASK 2............................................................................................................................................5
Costing methods..........................................................................................................................5
TASK 3............................................................................................................................................7
a) Different kinds of budgets and their advantages: ...................................................................7
b) The budget preparation process containing purpose of price and different costing system...8
(c): Importance of budget as a tool for planning and control process.........................................9
TASK 4............................................................................................................................................9
Implications of management accounting system subject to respond financial problems...........9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting is the process of classifying, summarising, analysing, interpreting and
communicating to support the plans of business, control and monitor them for enhancing the
performance of the business. On the other hand, Management accounting is the process of
enhancing the accounting in such a manner that it becomes useful for the managers of the
company. It enables the internal management of the business to conducts the activities more
effectively and efficiently. The most of the management accounting information is financial in
nature but it is interpreted in such as manner that it helps the managers to take decisions on hand.
The name management accounting itself defines that it is the study of managerial aspect
of accounting. The purpose of management accounting is to redesign the accounting information
in such a manner that it becomes helpful for the managers in the policy formation, execution
control and maintaining effectiveness in the accounting (Baldvinsdottir, Mitchell and Nørreklit,
2010).
TASK 1
1.1 Difference between financial accounting and management accounting
There are many significant differences in financial accounting and management
accounting which are defined as follows:
Financial Accounting Management Accounting
Financial accounting is regulated by the law
such as US-GAAP, IFRS and they have certain
pre specified standards. (contents, principles)
Management accounting is also regulated and
they are established by the entrepreneurs but it
does not have standards.
Financial accounting takes the past economic
events and historical data is used in the
financial statements.
The management accounting considers
historical as well as future data and
information for planning the actions of the
organisation.
Financial accounting has reporting obligations
because the statements are regulated by law.
There is no such type of obligations in
management accounting and the operations of
company are decided by themselves.
Financial accounting is done for the financial The management accounting is done acording
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years. to the time horizon decided by the
management.
It is obligatory to compile the financial
statements of the financial year.
There is no such obligation as to compile the
financial statements, it is defined by the
company itself.
Financial accounting information is generally
presented in the financial values.
The Information presented in the management
accounting is generally quantitative.
1.2 Importance of management accounting as the decision making tool for the managers
Management accounting helps the managers in taking effective decisions by providing
necessary information to the managers. The management accounting takes into consideration the
historical data and it is studied to make possible impact on the future decision making. Many
types of management accounting information are used in the decision making which are
discussed as below:
ABC costing: ABC costing is one of the most effective management accounting system
which helps in determining the activities of the company and allocating various direct and
indirect cost with the operations. As the name implicates it helps in prioritising the activities and
functions based on the priorities. The costs are allocated in such a way that it does not effect the
traditional methods of cost allocation does not get affected (Bodie, 2013).
Evaluating Effective information: Proper evaluation and analysis of information and data
is done so that this can lead in proper decision making and strategic planning process. There are
different type of information which is need to determined whose implication can affect the
profitability of business.
Relevant cost analysis: The different cost is determined and analysis is done as to find the
important factors that is associated with reducing the cost and improving the profitability of
business. The relevant information is used in making decisions and strategies.
1.3 Cost accounting systems
Cost accounting systems are prepared to find out the total cost that is incurred in the
overall production activities, manufacturing cost and functional cost. The major purpose of cost
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accounting systems is to minimise the cost of production and increase the profitability of
business. All forms of direct and indirect cost are considered in the cost accounting.
Actual costing: The actual costing system considers the actual cost that are incurred in the
cost accounting format. The costs such as direct cost , overheads cost and other indirect costs
which are linked to the production process are included in this accounting system. Actual
material cost , actual labour cost and actual overheads are included in the actual costing system.
It is calculated as the following formula:
Actual direct cost = Actual cost rate * Actual quantities used
Actual indirect cost = Allocated indirect cost rates * Actual quantities of the cost of
allocation bases
Standard costing: Standard costing is associated with the cost of direct material , cost of
direct labour and manufacturing overhead of manufacturing company. In standard costing, the
costs accountants assign a standard or expected cost for the various costs of production , which
means that the inventories of manufacturers and cost of goods sold will reflect the standards cost
in the beginning and not the actual cost. The manufacturers take the target to incur this much cost
only for the cost of production, although the manufacturers still have to pay the actual cost.
Standard costing as a result will always show a difference between the set standard cost and the
actual cost that is originally incurred and the difference between these costs are called variances
(Chenhall and Smith,2011).
Normal costing: Normal costing measures the cost of manufactured products by using
actual direct material costs, actual labour cost which is based on a pre determined rat. Normal
costing is associated with the analysis of actual material and labour cost in estimating the
overheads cost.
1.4 Inventory management system
The inventory management system is associated with management of level of inventories
in the organisation. It is complex process for the larger organisation to maintain their inventories
but the process is same for all the organisations whether it is big or small. There are many types
of inventory management system which are used by the organisations in order to maintain their
inventories. These systems help the managers and accountants in managing the level of
economic order quantity. The various management accounting techniques which helps in the
effective management of inventories are as follows:
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FIFO: This inventory management technique is called first in first out. According to this
technique the goods which came first in the inventory are supposed to sold first out of the total
goods in the inventory. This method tells that the inventory which is purchased in the beginning
or the goods that were manufactured first are supposed to be sold first. In this process the cost of
older inventory is assigned to cost of goods sold and newer inventory is assigned to the closing
inventory.
LIFO: This inventory management technique is called as last in first out. According to
this inventory management system the inventories which came into the stock last is supposed to
be sold first. This technique tells that that the goods that were purchased last or the goods that
were manufactured in end are supposed to be go out of the inventory firstly. According to this
the cost of newer inventory is assigned to cost of goods sold and cost of older inventory to taken
to the the closing inventory.
Weighted Average method: This method of inventory management considers the cost of
inventories by consolidating the overall cost and using average cost method. The costs of older
and newer inventories are considered and then their average is taken by combining their cost. In
the weighted average cost method cost of goods sold and the ending inventory are assigned the
same values.
1.5 Job costing system
Job costing is an system of accounting which tracks the revenues and costs by Job and
enabling standardized reporting of job profitability. In general this methods helps in recording
the products in group. There are certain types of accounting system that are used by the
organisations for providing information related to particular department or action (Luft and
Shields, 2010).
B) Presenting financial information:
Types of managerial accounting reports are discussed below:
 Performance reports: These reports helps the analysis of the manpower performance and
the organisation's strength. The individual performance is evaluated for a specific
duration of time and period.
 Demand reports: These reports helps in analysing the requirement of inventory and stock
levels for managing the production.
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 Inventory management reports: This report contain information related to the raw
material consumption during the year, WIP products and finished products and analysing
the requirement of the organisation.
 Schedule reports: Timelines are very important element in the organisation for getting the
desired results in the pre determined time.
II. Importance of systematic manner in presenting information:
It is very essential for the company to present the financial information in an effective manner to
make it understandable for investors. This presentation of information in systematic manner not
only assists in maintaining organisational structure but also enhance the profitability. There are
various standards to present the financial information in a pre specified formats that are provided
by various standard setting bodies such as IASB which governs IFRS and FASB which govern
US-GAAP. These formats of presenting financial statements are accepted by all the companies
around the world and are also legally approved (Morales and Lambert, 2013).
TASK 2
Costing methods
Marginal costing: This costing system determines the cost of manufacturing and production on
the basis of variable cost. Some essential aspects are reasoned in analysing sustainability and
profitability of company. Marginal costing helps in making decisions and also helps in managing
the plan for the specific time durations and period.
Calculation of profit by using marginal costing technique
Particulars Amount
Sales 52500
Less: cost of goods sold
Cost of opening inventory
Direct labour 10000
Direct material 16000
Variable production overheads 4000
Less: cost of closing inventory -7500 -22500
Profit before selling and distribution expenses 30000
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Less: selling and distribution expense
variable overheads -7875
Net profit or loss 22125
Less: Fixed cost -25000
Profit/loss -2875
Absorption costing: This costing system helps in analysing cost by considering the overall cost
that is incurred in manufacturing and operations. This method is also called as full costing
method which helps in determining the cost of operations in a effective manner. Overhead costs
are absorbed in this costing method (Nixon and Burns, 2012).
Calculation of profit by using absorption costing technique
Particulars Amount
Sales 52500
Less: cost of goods sold (W/N 1)
Cost of opening inventory
Direct labour 10000
Direct material 16000
Variable production overheads 4000
Fixed overheads 10000
Less: cost of closing inventory -10000 -30000
Profit before deduction fixed overheads and selling and distribution
expenses 22500
Less: under/over absorption -5000
17500
Less: selling and distribution expense
fixed overheads -10000
variable overheads -7875
Net profit or loss -375
Working Notes:
1. Calculation of cost of goods sold under absorption costing technique
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Particulars Details Amount
Cost of opening inventory -
Direct labour (2000* 5) 10000
Direct material (2000*8) 16000
Variable production overheads (2000*2) 4000
Fixed overheads (2000*5) 10000
Less: cost of closing inventory (500*20) -10000
Cost of goods sold 30000
2. Calculation of selling and distribution expenses
Particulars Details Amount
fixed overheads 10000
variable overheads (52500*15%) 7875
Total selling and distribution expenses 17875
3. Calculation of cost of goods sold under marginal costing technique
Particulars Details Amount
Cost of opening inventory -
Direct labour (2000* 5) 10000
Direct material (2000*8) 16000
Variable production overheads (2000*2) 4000
Less: cost of closing inventory (500*15) 7500
Cost of goods sold 22500
TASK 3
a) Different kinds of budgets and their advantages:
There are different types of budgets that are considered in budgetary control process. The
planning tools are also analysed in the budgetary control which makes the control of cost more
effective. The different types of budget and their advantages are discussed below:
Operational budgets: Operational budget enables in determining the cost of operation
that is to incurred in the accounting year. The total of expected revenues and expenditure are
considered in this budget.
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Advantages: operational budgets are controlled easily and is compressed with the help
of operational budgets.
Disadvantages: The information that is used and found in making the operational
budgets lacks accuracy.
Cash Budget: The cash budget is prepared to find out the cash requirements of the company for
the operations so that the activities of the company are executed smoothly and there is no lack of
cash for the production activities. The preparation of cash budget is done with help of cash flow
from operating, financing and investing activities.
Advantages : The main benefit of cash budget is that it tells the total cash inflow and
cash outflow from various activities during a certain time period. There are various aspects to
consider for the analysis of cost.
Disadvantages: Cash budget makes it difficult for the managers to adjust the amount of
cash generated after the preparation of cash budget (Implementation of management accounting
tool in organisation, 2017).
Rolling budget: Rolling budget helps in determining the requirements that is additional in case
on increase in cost or during inflation.
Advantages: Rolling budget helps in determining the changes at the initial level and thus
it becomes supportive for the organisation.
Disadvantages: This budget makes it difficult for accountants and managers to find out
the additional increment that is required in the budget.
Fixed budget: This budget is made for the fixed expenses that are incurred in the organisation
and it remains non flexible for the subsiding years. A financial plan is proposed to change for a
time duration that is specific (Shah, Malik and Malik, 2011).
Advantages: this budget is effective and essential for small businesses.
Disadvantages: This System does not contain the accuracy of unpredictable activities.
Flexible budget: The flexible budget analysis in terms of product and services. Changes can be
easily adopted in the flexible budgets.
Advantages : flexible budgets helps in making cost changes as per seasonal basis and
include other changes on regular basis.
Disadvantages: this budgets makes its difficult for the managers and accountants to
track the costs and expenses of organisation.
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b) The budget preparation process containing purpose of price and different costing system
Budget process is described in the following major steps :
 Preparation and analysis of the assumptions of budget.
 It defines the requirement of funds.
 The cost point analysing and evaluation of cost centre.
 Creation of budget package
 Sustainable forecasting of revenue
 compensation validity and analysing the validation
 Validating the bonus plans analysed in determining the requirement of project
 sustaining the appeal of capital budgeting.
 Updating and modification of budget
 review and issue of budget.
(c): Importance of budget as a tool for planning and control process
There are various types of planning tools which must required to use by an organisation
in order to monitor and control cost in an effective and efficient manner. Such methods of
pricing systems are as follows:
Price skimming: In this type of pricing system, an organisation first decreases the prices
of products and services when comes into market and later on, slowly decreases the prices with
an aim of attracting maximum number of customers.
Cost plus pricing: In this system, the price of products are determined after adding cost
incurred in producing goods and services. Such cost includes direct, labour cost and overhead
charges.
Full cost pricing: Under this system, the price of products and services are determined
after considering direct and indirect cost. This will rises the prices up of products and services.
Economic pricing: In this system, the company has setting up lower prices of products
and service s in order to attain huge customer strength.
TASK 4
Implications of management accounting system subject to respond financial problems
Management accounting is one of the essential aspect which is used in organisation
which helps to determine the effectiveness of organisational structure. It not only assist the
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organisational structure in terms of managing the operations and management of organisation to
make effective plans and strategies but also helps to respond financial problems. Organisations
are adapting management accounting concepts to make organizational structure more smooth
and flexible to deal with financial problems and conflicts.
According to case scenario of TECH UK it is analysed that the organisation is having a
loss of £1.5 million for the current year. It is audited that the organisation need to analyse the
essential aspects in terms of respond and overcome the financial loss for the upcoming year.
Management accounting is one of the important aspect in terms of analysing the performance of
management and organisation. There are type of methods are used and balance card approach is
one of them.
Balance scorecard approach
this is one of the strategic approach which helps to identify the skills and management of
proper structure of organisation. This helps to analyse the strategic performance of and
measurement model which was developed by Robert Kaplan and David Nortin. The main
objective of this method is to clear the vision and mission by analysing the operational actions
and strategic planning. This is one of the essential aspect in terms of analysing the strength of
organisation by strategic planning and management opportunities. This approach is mainly
associated around four major elements which are defined as follows;
Financial perspective: this element helps to analyse the financial perspective which remain
associated with stakeholder and financial backers of a business. it is required to dissect the piece
of the pie and number of clients in hierarchical setting. Data identified with partners, client and
impression of client assumes crucial part.
Customer perspective: it is required to break down the piece of the pie and number of clients in
authoritative setting. Data identified with partners, client and view of client assumes imperative
part.
Internal business processes: this progression deals with the issues and clashing which remain
related with quality and great administrations. Expanded quality and powerful administrations
enhances the interior administration and control.
Learning and growth: this helps to analyse the effectiveness of project and task by analysing
the results (Dillard and Roslender, 2011)..
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CONCLUSION
It has been concluded from the above project report that management accounting play a
profitable role in the success of an organisation as they are held responsible to adopt accounting
systems and adopts various accounting reports in order to make an effective decision for the
betterment of organisation. Different financial tools in order to resolve financial problems are
also required to be considered by the management of an organisation.
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