Table of Contents INTRODUCTION..........................................................................................................................1 TASK 1............................................................................................................................................1 P1 Management accounting and requirement of its systems......................................................1 P2 Management accounting report and its importance...............................................................4 M1 Benefits of different management accounting system and its applications..........................5 D1 Management accounting system and reports is integrated within organisation....................6 TASK2............................................................................................................................................6 P3 Cost analysis with appropriate costing method.....................................................................6 M2 Different types of accounting tools and techniques..............................................................8 D2 Interpret data for a range of business activity.......................................................................8 P4 Types of budget including their advantages and disadvantages...........................................8 M3 Use of planning tools while forecasting and estimating budgets.......................................11 TASK5...........................................................................................................................................12 P5 Management accounting system helps to deal financial problems......................................12 M4 Responding of financial problems......................................................................................13 D3 Planning tools for solving financial issues..........................................................................13 CONCLUSION..............................................................................................................................14 REFERENCES.............................................................................................................................15
INTRODUCTION The practice of preparing and presenting accounting information in report which is useful to make policies that help management to perform and manage day to day business activity is known as management accounting (Management accounting, 2018). It help manager of company toexecuteallitsfunctionwhichincludesplanning,organising,staffing,managingand controlling. Management accounting provide system and report gives detail information about business operation and financial position to internal shareholder of company. In addition, it is also known as cost accounting that is related to identify, measure, analyse, interpret and communicate of useful financial data to manager which help them to attain organisational goal. Manager prepare important reports to analysis and record information related to cost, expenses, stock, business operation and to form budgets. The director of Wentworth company Ltd of UK is considering the adoption of management accounting system so that financial position and performance of employee, company can be improved (DraĹžiÄ Lutilsky and Dragija, 2012.). Main objective of this project report is to analyse the use of management accounting in business entity. In this project report, management accountant trainee discussed the importance and role of management accounting and its various system that help in increasing efficiency of business. They adopt different costing techniques to calculate operating profit for an accounting year. Report also shows advantages and disadvantages of various budgets and applies different approaches to resolve financial problem. TASK 1 P1 Management accounting and requirement of its systems. Management accounting is a process of generating reports that may provide actual information of business to internal stakeholder of an organisation . It is an activity of manager to prepare and maintain reports that shows the financial wealth and performance of company during an year. This practice basically include all fields of accounting which help in revealing information to management about business operation metrics. Management accounting includes the methods and concepts useful for effective planning that help in selection of best alternative business action which further help in judgement and representation of performance of company as well as of workers. In Wentworth company Ltd manager uses this practise to analyse the 1
overall performance of company and make useful strategies to achieve future goal. The main role of management accounting for company is as follows: To help in planning:It assist in planning process as to prepare polices by forecasting about all operation performed within Wentworth. To Assist in organising:It aid in forming budgets so that resources and funds are equally delegates to each department and there is proper utilization. Help in Motivating:It tries to increase the efficiency of employee and motivates them the help in growth of company. To Interpret financial information: management accounting represent the data in an perceivable and non-specialized manner that help manager to explicate financial data and develop courses of action to make effective decision. Distinguish between management and financial accounting. BasisManagement accountingFinancial accounting DefinitionTheprocessinwhich management alter reports that indicate the presentation of an organization. These reports are createdforinternal stakeholders to furnish them in effectiveinformationabout functionalandexecutional activitiesthatareperformed within company. It is the practice of manager to theformulatefinancial statementssuchasincome statement,balancesheetand cash flow statements. ImportanceManagementaccountingis usedtoanalysethathow business firm is performing in economy and figure financial position. It also aid managers to make strategies so that plans aremadeinadvancefor Themainobjectiveofthese statementaretogive necessaryinformationto externalshareholderlike customers,provider, governmentandcapitalist thoseareinterestedin 2
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possible uncertaintycompanytofigureout financial position in the market Wentworth company Ltd with help offinancial accounting they render reports that may reflect financial status for an accounting year. In Wentworth company Ltd manager uses various management accounting system that are discussed below: Cost accounting system: According to this system manager are capable to tracks the flow of cost and expenses continually through the different level of production or figure out total cost involved in business operation within company. In Addition, it is a system to form framework that company use to estimate overall cost of their product so that profitability could be analysed and cost could be controlled. Through cost accounting system management comes to know which product are more profitable than other. Accountant trainee follows cost accounting system to record the exact cost incurred in distribution, sales and supply chain of goods and services. This system, also help them to estimate total cost to be spend on different business operation and if necessary these cost are controlled. Cost accounting system have three costing method such as actual, normal and standard costing. Inventory management system:This system is useful for manager as it help to record a track of their inventory and finished goods within company. Inventories are basically of three type such as unprocessed material, work in progress and goods ready for supply. Stock management system help administration to get the accurate information of raw material, goods in transit to client and finished product in warehouse (Fisher and Krumwiede, 2012). In Wentworth company Ltd, manager with the help of this system keep detail information of total stock available within company. They applies FIFO technique in which stock that are received first are treated first for production. Job costing system:This system refers to identification and measuring of overall cost incurred on individual job to complete different activities in company. Management applies this system to evaluate total cost spent on various job performed according to customer demands. In Wentworth Company Ltd, management use job costing to figure out direct and indirect cost that 3
is involved in producing a product. The main benefit of this system is to get detail information about total cost company spend on their worker for completing a project and they can control these cost if required. Price optimisation system:In this system companies ascertain price of product that will not change their customer, or they should increase cost of goods in a manner that customer temperament to pay. Business firm applies the system of price optimisation that depends on total demand foe its goods and services, level of business rivalry and the total cost incurred on manufacturing of product. In Wentworth company Ltd, management usesthis system to determine the suitable prices that will not effect their customer base and company meets its main objective of maximising net profit margin. Manager uses different data in price optimisation that includes operating cost, inventory, historic price and sales. P2 Management accounting report and its importance. Reports are consider to one of the useful documents for manager as it record all relevant financial information that is further helpful in determining financial position and performance of company. These report are then presented to stockholder and other investor to make effective decision by analysing profitability of business operation. Management accounting report are created to to record necessary information about the business activity of an organisation. In Wentworth company Ltd manager prepare these report to record and measure cost involved in business so that decision and strategies are made in order to control and reduce related expenses that result in increasing profit margin. Basically there are different types of management accounting report that are prepared by manager of company that are described below: Budgets reports:These report represent the estimated output and actual performance or income and expenses of an organisation. Budget report are mainly internal report useful for manager to compare the estimation or budgeted prediction with actual performance achieved in an accounting year. In Addition, this report are planned to analyse about budgeted performance in reference to actual performance. Manager of Wentworth, prepare these report to control and understand the cost of services that help the to estimate future expense and make effective policies. This report alsohelps to analyse the financial health and provide the overview of the activities that are performed by the company (Kuula, Putkiranta and Toivanen, 2012). Managers may supervise earning with the help of budget reports by keeping the perfect content about the activities that are performed. 4
Account receivable reports: According to this report company ascertain the list of customer those have not make payment for a particular purchase. This report represent the list of unpaid bills an invoices or unused credit memos which are arranged in date wise manner. Mainly these report are prepared by companies that provide credit services to their buyer in order to increase sale. These report are useful for manager as the determine exact detail of total amount outstanding for a period and comes to know about the credit policy followed in company. Management of Wentworth Ltd prepare maintain account reports to evaluate total money to be recovered from debtors this help them to calculate revenue for that period. Account receivable report helps to improve the collection process of company. Inventory management report:These reports are prepared by management to record the crucial data related to inventory of business firm. Due this report the demand and supply chain are improved and there is never shortage of stock and finished goods with company. Management of company record and keep detail information about stock available in company to carry its business operation.In Wentworth Ltd, management keeps the particular data about different form of inventory such as raw material, goods in progress and finished goods. Financial reports:Mainly these report are prepared by manager to record the necessary financial transaction so thatthe actual position and financial health can be determine. Manager with the help of this report evaluate total revenue earned and expenditure incurred within an accounting year. In Wentworth Ltd, management maintain financial report to evaluate the position and make certain polices to increase profitability of it business operation that is also. good for stockholder. M1 Benefits of different management accounting system and its applications. SystemBenefits Cost accounting system:ďˇThis system assist managers in evaluating those product that are more profitable to company. ďˇWith the help of this system manager record direct costs which are involved in producing a product. Inventorymanagement system: ďˇThis system help to increase efficiency and profitability of company by maintaining stock. ďˇItgivesthedetailtransparentinformationofstock 5
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available in warehouse and finished good. Job costing system: Price optimization system: ďˇThis system help in ascertaining the overall profitability of individual job that are employeed in production of good (Zainun Tuanmat and Smith, 2011). ďˇThis also gives whole information of direct and indirect cost such as labour andother overheads spend on different jobs with Wentworth Ltd. ďˇWith this system managers determine faithful prices for products and supply the accurate cost that not effect customer. D1 Management accounting system and reports is integrated within organisation. Management accounting report and various system are useful for manager and internal stakeholder as they evaluate and compare the overall performance and financial position of company. These report and system are helpful to ascertain the total income earned and expenses incurred on production process. It also gives necessary information of related cost that is spend by companies on distribution activity, total amount outstanding from debtors, financial health and status of company etc. With the help of account receivable report manager improve the collection process and increase the credit policy of Wentworth Ltd. Inventory management reports assist management to track total stock that is present within company and also improve the supply chain. TASK2 P3 Cost analysis with appropriate costing method. A cost is a monetary value of money which is used to produce something and also to deliver the services. An amount of money that the organisation utilize for the activity or to produce the goods & services (Windolph and Moeller,2012). It does not consider as to make profits. It is the sum of money which is spend to produce the products. Costs are the cash equivalents which is given for an assets. It is a monetary assets which consider all costs which is essential to acquire an asset in a particular place and in order to use. In ACE-ALL company apply different costing method to calculate cost that are described below: 6
Marginal cost:Itis the incremental cost which is obtain for the production of an output unit. It shows that if the production are increasing by a single units than the total cost of products will also change. In an organisation for higher cognitive process marginal costing is essential. The marginal costs and marginal revenue were compared so that the management can decide whether to increase the production or not. It is measured by the formula: Marginal cost = change in the total cost / change in the product output. Absorption cost:Absorption cost is a methodwhich is accounted for fixed overheads and the variable costs to produce the inventory. It accumulates the costs which is associated with the manufacture activity andallocating them to individual units. It gives a much more comprehensive and accurate results at which costs they produce the inventory. A way by which a value of inventory delegate all variable and fixed manufacturing costs to trade goods. For the preparation of financial accounts , absorption costing is essential. In case of invariant production it shows the less adjustment in net profits but sales may fluctuate. Level of sales at 5% decrease in SP ParticularsAmount Original selling price10.6 5% decrease in SP10.07 Level of sales at 10% increase in SP ParticularsAmount Original selling price10.6 10% increase in SP11.66 Break even point before proposals ParticularsAmount Fixed cost220000 Contribution/unit6.4 Break even point34375 Break even point of sales manager's proposal 7
ParticularsAmount Fixed cost220000 Contribution/unit6.2 Break even point 35483.8709 677419 Break even analysis:It is advised to be one of the important point where every cost and expenses required to furnish equal outcome for an organisation. It help ALL-ACE to ascertain point at which product and services are more advantageous or economic in particular period. Management applies this tool to ascertain total number of product selected company is willing to sold where total cost incurred are covered. Break even is a point at which total expenditure are equal to total income within an accounting year. M2Different types of accounting tools and techniques. Management accounting tools and techniques are helpful in evaluating net profit margin and increasing efficiency of an organization. In ALL- ACE, management utilize different costing method to figure out profit such as marginal and absorption cost method. There are important tool such as historical tool and marginal tool used in these techniques.Accounting is a concept in which various accounting statements and report are prepared to determine actual profit for year . In order, to effectively develop accounting report it is important to use accounting tools and techniques. Some of these techniques are mentioned below: Marginal cost:This technique helps in ascertaining the profit that is attained by the company by ascertaining marginal or variable cost. Manager of ALL-ACE applies the method to determine total variable cost involved in production and figure out profit which does not absorbs fixed cost in accounting year. Historical cost:With the help of this technique, financial statements prepared by using historical cost. All assets are recorded in balance sheet on their actual price on which they were purchased in order to ascertain correct amount of depreciation. D2 Interpret data for a range of business activity. From the above calculation, it is observed that BEP for company earlier was 34375 when fixed cost are 220000 at contribution 6.4. After ALL-ACE appoints new sales manager where BEP sales slightly increase up to 35483.87 (approx) on same fixed cost and contribution of 6.2. 8
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TASK 3 P4 Types of budget including their advantages and disadvantages Budget allows to estimate total income and expenditure of whole business for a particular time duration. Budget reports are used extensively for future planning and effectively use the resources. Moreover, it helps to maintain cash flows and identify departures from plans. Budget controlling is crucial for ALL-ACE as it helps in preparing, implementing and proper monitoring of budgets (Wickramasinghe and Alawattage, 2012). There are different types of budget used by company they are as follows: Static Budget:Static budgets are fixed and do not change for the entire period of time frame. Usually, static budget are based on organisation's level of revenue and outcomes. Static budgets are having those data which is gathered and evaluated just before the budget period started. Even though there is change in sales revenue and volume, the static budgets never change and remain constant. In flexible budget, one can do adjustment if any changes occurs in sales and revenue activities. In monopoly situation, static budget is useful as organisation outlook for predictable expense and sales which is not changed throughout the budgeting period. For example, if organisation revenue was found to be $6 million last year and it created a budget accordingly to same revenue figures than the organisation is going to follow up the same even there is possibility of changes in the revenue. Advantages ďˇIt remains constant throughout the budgeting period ďˇThere is no need of inundation in the sales and revenue throughout the accounting period. ďˇIt is easy to follow up and implement. Disadvantages ďˇThere is lack of flexibility, no changes can be made. 9
ďˇNo allocation of additional resources can be implemented for help the underperforming areas. Zero based budgeting:Zero base budgeting involves expenses that justify each new period. It starts from zero-base and each department along with different function are analysed and evaluated for both need as well as costs. Zero based budgeting is a technique which links all the existing planning, budgeting and evaluating process. These budgets helps in identifying effective ideas and methods to utilizes resources to attain maximum benefits. It is defined as a budgeting and planning process that is required by each manager to select best methods to achieve objectives. Advantages ďˇHelps to find out inflated budgets. ďˇIt helps to increase communication among subordinates and enhances decision making. ďˇIt helps to increase moral of staff as it provide them to be responsible in decision making process (Ward, 2012). ďˇIt helps to improve activities by providing efficient allocation of limited resources. Disadvantages ďˇSometimes this method becomes too time- consuming. ďˇTo implement this zero based budgeting it necessary to train and develop managers well. ďˇIt requires managers to give justification about all the expenditures. Rolling Budget:Rolling budgets are also known as progressive budget. As the recent budget duration is completed a new inundation is added in new budget period. Rolling budget allows for to have budget that usually extend to one year in the upcoming future. There will be always a budget for a year in advance. Moreover, figures for the month that is rolled down are dropped out and new figures for next month are added. 10
Advantages ďˇIt provides flexibility in the budgets. ďˇIt allows to be more responsive toward unexpected circumstances and changes. Disadvantages ďˇA new budget is to be prepared again and again. ďˇIt is not preferred in those cases where conditions and circumstances are not changing constantly. Increment budget:At the arrival of new budget, few changes are made in the existing budget which is termed as increment budget. The budget that is used ongoing fiscal year will act as base for working on future coming budgetary allocation (Schaltegger and Csutora, 2012). Advantages ďˇIt is easy to implement and does not involves complex calculations. ďˇIt provides continuity in funding for different departments. Disadvantages ďˇLack of creativity and no cost reduction for managers. ďˇBusinesses works in conservative mode. M3 Use of planning tools while forecasting and estimating budgets. Planning is one of the important activity that help in formation of effective strategies and achievement of organisation goal. With the help of effective planning company prepare budgets that are useful in estimation and comparing of different aspects of business. Budgets are prepared to compare actual performance and expenses for an accounting year. Management of ALL-ACE prepare different budgets such asStatic Budget, Zero based budget, Rolling Budget, Increment budget that are helpful in estimating and comparing actual performance of company and evaluate total expense within an accounting year. 11
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TASK5 P5 Management accounting system helps to deal financial problems Financial problems:It refers to the situation in which company is not having sufficient funds to run its activities. If company is not having sufficient funds than it can affect its market image and performance.As mentioned in the scenario All-Ace Ltd has maintained inventory management system and valued the stocks on FIFO method but now it is willing to use LIFO method. It has been chosen because the company is facing financial problems by using FIFO method, to deal with the same problems it has chosen LIFO method (Monroy, Nasiri, and PelĂĄez, 2014). WhencompanyisusingFIFOmethodthanitiscreatingproblemsasthereare fluctuations in the market and managers are not able to record accurate amount in the books. It has resulted in misstated profits of the organisation. This is the main reason of changing inventory management system. In LIFO system company can manage the goods effectively and it will reduce the possibility of financial errors. It provides detailed and accurate information of actual profits, that are created by the company in current year. When company is willing to attain tax benefits and enhanced cash flow it suits best to the demand. LIFO is selected by the organisation to manage profits accurately and ignore the situation of misstated profits that are creating financial problems for the company. FIFO method:It stands for First in First out, which is used by various companies to sale earlier received stock first. In this system the oldest cost is used for the transaction. It is mainly used for cash flow assumption purpose. There are various advantages and disadvantages of this system, both are discussed below: AdvantagesDisadvantages ďˇIt is easy to operate and understand. ďˇIt is a useful method when company is not having so much transactions and material prices are positively steady. ďˇFIFOreducespossibilitiesof obsolescences and deterioration. ďˇItisawidelyusedapproachthat ďˇWhileusingFIFOmethodcompany cannot match current cost and revenues. ďˇIt may create errors if there are so many transactions in the company. ďˇItoverstatesprofitsatthetimeof inflation 12
enhancesconsistencyand comparability. LIFO method:It stands for Last in First out, in which recently received inventory is used for sales first. In this system products are sold on current market price. There are various advantages and disadvantages of LIFO system, both are discussed below: AdvantagesDisadvantages ďˇItprovidesbettermeasureofactual profitsbycoordinatingmostrecent costs against incumbent revenues. ďˇIt provides tax benefits and improved cashflow(Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-ArbĂłs, 2013). ďˇThismethodisappropriatewhen companyiswillingtomatchits revenues and costs. ďˇIt is the most suitable method when prices are rising in market. ďˇInventory is based on oldest cost hence thismethodunderstatetheinventory figures. ďˇThecompanywhoisusingLIFO methodcaneasilymanipulateits recorded transactions. ďˇCalculationinthismethodbecome complex when rates are continuously fluctuating. Comparison ALL-ACEAIRDRI Management of this company applies LIFO approach to resolve financial issue. As this approach is more helpful to cope up with rising price in market and measure exact amount of profit. LIFO also help tax benefits to the company. Inthiscompany,managerappliesfinance governanceapproachtoovercomefinancial issue. They record, monitor, analyse, compare allrelevantfinancialinformationsothat resources are fully utilize. 13
M4 Responding of financial problems. Financial problem are faced by every organisation due to which company face the deduction in performance and profitability. There are different financial problem that are face by companies such as shortage of fund to run business operation etc. In ALL-ACE faces the financial issue due to FIFO process in which current cost and revenue are not matched. To resolve this problem company applies LIFO technique that gives better criterion of potential profits by subordinating almost new costs against necessary revenues. D3 Planning tools for solving financial issues. Manager of company prepare budgets to evaluate and abstraction of different cost and that increase the efficiency ofALL-ACEduring an accounting year. Through appropriate panning, company can defeat uncertainty and financial problem that may arises in upcoming time. Management applies different accounting budgets likeStatic Budget, Zero based budget, Rolling Budget, Incrementbudgetto overcome financial problems. Aswith the help of estimation about expenses company may control their expenditure and if required control these expenses. CONCLUSION In this project report, it has been concluded that management accounting is useful of internal management as it is a process of collecting and reporting useful financial information. It help to show the actual position and financial wealth in an accounting year. The main objective of this report is to describe the value of management system and report. Manager applies different approaches such as FIFO and LIFO to overcome various financial problems arises within company. 14
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