Coping with Financial Difficulties Using Management Accounting

This assignment examines the role of management accounting in helping companies overcome financial difficulties. It highlights key performance indicators (KPIs), benchmarking, and financial governance as crucial tools for improving financial performance. The assignment emphasizes that effective management accounting practices enable organizations to make informed decisions, allocate resources efficiently, and ultimately achieve long-term financial stability.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................2
TASK 1............................................................................................................................................3
P1 Various management accounting system..........................................................................3
P2 Various method for management accounting reporting....................................................6
TASK 2............................................................................................................................................9
P3 Income statement and difference between marginal and absorption costing....................9
TASK 3..........................................................................................................................................13
P4 Merit and demerit of many kind of planning tools which is used in budgetary control. 13
TASK 4..........................................................................................................................................17
P5 Adopting management accounting system for responding financial troubles................17
CONCLUSION..............................................................................................................................18

Report
From: Management accounting officer
To: General Manager
Subject: To write a report to General Manager which is going to cover both management
accounting as well as management accounting system with distinguish costing techniques and
reporting to enable firm implement them.
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INTRODUCTION
Management is an essential component in every business activity through which all goals
and targets get ascertain in an effective manner. Organisation have to relate their management
with accounting process so that they become able to make business operations feasible in nature
and control all sort of cost as well properly (Cokins, 2013). Management accounting define as a
process through which managers of a company make appropriate record of all kind of expenses
which are taking place while manufacturing their products and minimise all risk factor as well
which arise in short term context. This project is based on Unicorn grocery which is one of a
finest association of retail industry. Managers have to keep proper records and analyse books of
accounting in every quarterly, weekly and monthly basis and prepare reports as well so that
unnecessary cost get minimise and control. This report is going to describe difference amongst
marginal as well as absorption costing. Along with this, by using various tools of management
accounting system firm can easily face issues regarding finance and solve them immediately.
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TASK 1
P1 Various management accounting system
In past times, it was easy to do a business for an individual as they need to determine
manufacturer of item and then sell it at marketplace. As time passes, this procedure get complex
because of implementation of new or unique tools and methods in business (Lavia López and
Hiebl, 2014). In recent era, it is required for an enterprise to comprehend significance of
management accounting as this will assist them to manage firm and their activities effectively
and efficiently. Therefore, it is like a process where an employer try to determine as well as
examine both type of data i.e. financial and other is non financial. As a result, company can
utilize their resources in an appropriate manner because this is most essential for them. This will
provide assistance to an enterprise as it helps to arrange finance adequately. It is essential to
avoid clashes; thus, they can attain their coveted targets within limited period of time.
Definition: Costing is considered as a most important aspect of management accounting as with
help of there many tools an organisation can easily decrease their entire production cost. This can
provide influence to revenues in a direct way. To acquire best outcome within relevant time
duration, manager has to take judgements appropriately. To increase interaction at distinctive
level, superior can use system of management accounting. As a result, they can opt best option
for their firm. By utilizing this, employer can comprehend entire policies which are formulated
by regulatory bodies (Weikart and Williams, 2014). Extrinsic surrounding can affect company
positively or negatively. When manager is recording and examining information as well as data,
they never take external environment into under consideration. To neglect issues which are
related to short term, superior needs to manage cash adequately as this can provide impact to
their objectives.
Apart from various pros, there are many cons are there which is connected to
management accounting. Entire judgements which is taken by utilisation of many techniques is
always depend of both sort of accounts i.e. cost and financial. If wrong decision is taken then it
leads to huge losses. Small companies are not able to use this accounting system as this contains
lots of fund. As arguments of many individuals, management accounting only assists key holders
of firm instead of stakeholders. Therefore, there are various requirements of system of
management accounting which is mentioned as beneath:
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4
Management
Accounting
system
Inventory
Management
System
Cost
Accounting
System
Job
Costing Price
Optimisation

Inventory management system: Inventory management system is a helpful element or a
system through which every business become able to manage their stock by making appropriate
information about them. This support in managing and controlling the cost and minimise wastage
and elimination risk.
It will be difficult for a firm to determine exact inventory which will be kept by them into
their storage (Fullerton, Kennedy and Widener, 2014). If they are storing more items then
carrying cost will get enhanced. But if they have less stocks then they will not be able to fulfil
requirements of their users.
Example: It is must for Unicorn grocery to decrease their wastage; thus, they can maintain their
profits in an effective manner. As per present era, manager of firm can use distinctive kind of
software to keep up their accounts adequately. This will consume less period of time. Along with
this, some manual methodologies can be utilized by them which takes less fund. Overall details
related to goods movement is fundamental for them while company is applying this system.
Another example of inventory management system is TESCO they are the leading retail store
and manage all their material information properly. This enables them in facilitate their demand
and supply properly along with that they also become able to eliminate risk of wastage of their
offerings for customers that they have 21.92 days inventory as compared to Unicorn grocery they
maintain only 5 days inventory in their consideration.
Cost accounting system: Another major source for enhancing profitability of business is
cost accounting system. It is a framework which used by a firm to estimate the cost of their
products for profitable analysis, inventory valuation and cost control. It is a critical and different
thing but, management have to work on this factor properly.
With assistance of this, superior of firm can easily decrease their production cost effectively.
This will cater success as well as growth to association because if they reduce their cost then
organisation can easily improve their revenues. Records which are associated with stock and in
additional entire output is considered as a fundamental aspect of management accounting system.
Example: Unicorn Grocery can apply cost accounting system in their consent effectively through
which they become able to maximise their profitability. Thus, their managers have to work
effectively on this consent and critically examine all such cost which will lead to incur on their
project.
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TESCO applied cost accounting system properly as their managers have good and effective
working skills. Through this, they become able to enhance their profit margin and generate more
and more revenue as well.
Job costing: It is a method of recording cost of manufacturing job rather than process.
With this, managers keep the track of each cost for the jobs maintaining data which is more often
related with business.
In recent era, this approach is much famous as it aids to determine revenues which are provided
by each occupation. With help of this method, manager can find out cost which can be incurred
by a single job. If Unicorn grocery is utilizing this methodology then, this will be easy for them
to determine profits which they gained through a particular job. Along with this, many
information related to distinctive company's operations is required to apply this tool (Maiyaki,
2011).
Example: According to TESCO their managers estimated their job costing value for production
is around 40% but its actual value determines at 32% which is close but Unicorn grocery
managers estimated the production cost around 50%. Small business association do not get
increase their production cost at such level and thus, their actual value remains at 15% which is
very low. Hence, managers need to make more focus on this consent so that they are going to
maximise their profitability.
P2 Various method for management accounting reporting
Employer needs to formulate various kinds of report to present plan to higher authority;
therefore, they can use some techniques which are described as below:
Inventory control reporting: Inventory controlling reporting described as a report which
is helpful in preparing and maintaining proper records of inventory. This enables them in
increase their profit margin as well as maximise the chances for gaining market opportunities.
There are major issues arise in business due to overstocking and under stocking but for
controlling this fact, inventory controlling system get uses.
Fundamental aim of assignment is to determine those issues which are associated with
management of stock. As Unicorn grocery is include in small association; thus they will face
problems related to overstocking as this will occur high expenditures. But if there is under
stocking then they can lose their clients because they can purchase products from another place.
To solve this kind of issues they can utilize method of management accounting system, for
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example EOQ, with help of this, manager can find out exact amount of item which they can keep
there in storage. As a result, it will decrease their carrying cost (Burritt, Schaltegger and
Zvezdov, 2011).
Example: Unicorn grocery maintain only 5 days inventory but their stock get finished in 7 – 8
days. This affect their working and operations which is not appropriate in nature and thus
chances of customer satisfaction get reduce. On the other hand the estimated number of days for
inventory in TESCO is 21 days which is appropriate.
Budget reporting: Budget is an essential factor for every business which support in
making things correct and appropriate in nature. Budgeting report is a report which frame by
managers of a company by estimating expenses and investment of prior year in advance. The
major aim of preparing budget report is to maximise the profitability of business through
allocating each and every resources properly.
Primarily target of present assignment is to record as well as analyse their income as well as
expenses. This assists to cover entire division; thus, employer always want to prepare this. If
each unit has a thought about their budget then, they can spend fund accordingly. This helps
reduce wastage and clashes amongst all departments. Along with this, they will accomplish their
work within provided period of time. Spending plan will aid firm to find out their actual position
at marketplace (Financial Reporting Center, 2017).
Example: Unicorn grocery prepare their budget report properly in which managers utilise their
skills in an appropriate manner. Under that department managers priorly identify all risk factor
and implement the projected investment properly as well. £21 lakh is a initial investment for
them which enables them in bringing new changes and expansion in other localities.
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Illustration 1: Financial reporting
(Source: Financial Reporting Center, 2017 )
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TASK 2
P3 Income statement and difference between marginal and absorption costing
Most fundamental aspect of management accounting is costing. With assistance of this,
an association can easily decrease their cost which is related to their business; as a result, this
helps to improve their revenues. Therefore, marginal as well as absorption costing can be
described as beneath:
Marginal costing: This kind of expense occur when an organisation is do production of
additional product (Renz, 2016). This can be classified into two segments, one is manufacturing
and another is non – manufacturing cost. Three types of expenditures are going to consider in
this assignment, such as labour, material and in addition overhead. Apart from production, it
likewise concentrates on some extra expending, for example: period cost. When firm is adopting
this costing method then, they have to consider that closing stock need to be treated in similar
year. It will reduce revenues of firm which is gained by them. Most essential part of this method
is know as Break even examination as it represents that entire variable cost is covered. Along
with this, association is at stage where they are facing circumstance of no profit or no loss.
Additionally, work in progress need to be taken into under consideration in this sort of costing.
Absorption costing: When a company is using this method into their business then, they
have to considered some expenditures such as labour, material, overheads and so on. Association
need to be include closing stock while they are using this methodology; as, this helps them to
gain more profits (Aminbakhsh, Gunduz and Sonmez, 2013). If products are not sell out in same
year then, firm will ignore their fixed expenses. Absorption costing covers entire areas which is
associated with production procedure. This is the main reason why it is known as full costing.
Hence, there are some difference amongst marginal and absorption costing which is
stated as beneath:
Basis Marginal Costing Absorption Costing
Level of inventory If closing stock of firm is
minimum then, this will show
maximum revenues.
Closing stock can provide
influence to level of profit of
an association.
Cost As per this method, fixed
expenses never include into
If an organisation is using this
method then, they have to
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this. consider fixed expenditure.
Measurement When manager measure profit
then they consider contribution
margin, but applied expenses
eliminate from this.
To examine net revenues,
gross margin need to be taken
into under consideration.
Along with this, applied
overhead is also include in
this.
Profitability If sale is doing at individual
level then, profits will
maximise.
Whereas, at time of individual
sale, less revenues are
determined.
Calculation as per Absorption costing.
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
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Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less Expenses
Variable sales expenditure
Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
0
11200
(1600)
600
700
600
(100)
21000
(9600)
11400
(1800)
9600
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
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Sales value
Less: Variable costs
Opening stock
Manufacturing
Closing stock
Contribution
Less Fixed costs
Variable Production expenses
Administration cost expenditure
Selling cost
Net Profit
0
9100
(1300)
2000
1300
600
21000
(7800)
13200
3900
9300
If company is adopting method of absorption costing then they will gain maximum
profits. With assistance of marginal costing they earned £9300 which is minimum as compare to
absorption. Fundamental reason behind this is how they are treating closing inventory. Primarily,
it is required for firm to comprise those cost which is occurred on recent items. If organisation
sell items in next year then they have to include them in upcoming period. Apart from this, the
other reason behind all of this is how they are treating fixed expenditure (Parker, 2012). As per
marginal costing, fixed expenses is not include with each unit; it always add at the end.
Therefore, as indicated by above mentioned income statement it has been comprehended that
Unicorn Grocery need to utilize absorption costing because with aid of this they gain £9600.
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TASK 3
P4 Merit and demerit of many kind of planning tools which is used in budgetary control
Budgetary control will provide stability to company as it is made for a particular period
of time, basically for a year. With assistance of this, manager can reduce there many sort of
confusions which are present in firm. Employer formulate a budget plan for their enterprise as
they think that it provide support to them to moving in a single direction. But many time,
manager of company will get confused because of distinctive plans of their rivals. Then, there
strategy take them back into their path to achieve their desired objectives i.e. long as well as
short term (Delafrooz and Paim, 2011). Along with this, it is essential for people of firm to keep
up an appropriate communication; as a result, this will aid them to resolve clashes within limited
period of time. By making adequate coordination amongst all departments, an organisation will
attain best outcomes.
Illustration 2: Budgetary control
(Source: What is Budgetary control?, 2017)
Apart from many advantages, there are several demerits of budgetary control which never
be neglected by an organisation. Budget is always based on estimation and it decreases its
reliability (Nemet, Baker and Jenni, 2013). As future is not certain; hence, manager do not waste
their time on preparation of budget. They have to focus on quick as well as fast judgements.
Inflexibility is considered as a major problem which can be face by staff members who are going
to apply plan in business process.
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Therefore, there are some famous tools of planning which can be utilized by manager of
Unicorn grocery to enhance entire performance. This is described as below:
Master Budget: While making this kind of planning, company is consider as a single
aspect. Entire divisions as well as areas are included in this sort of planning. Along with this, if
an employer is developing this type of budget then, they have to take overall data and
information. Employer give responsibility to each staff members; as, this represents in depth
estimation. In this methodology, manager estimate all incomes which they are going to gain and
in addition expenses are also determined into this.
Merits: With aid of this method, confusion can be minimized amongst two divisions or
employer because responsibility to each individual is allotted under this plan.
Company can reduce their clashes by utilizing this method; as there is proper
communication between everyone (Ahmad and Mohamed, 2012).
As duty and responsibility is assigned to every people; hence, there is no need of
argument.
Synchronization is consider as a major benefit at the time of preparation of
master budget.
Employees can make high efforts to achieve long haul targets which they can
accomplished within limited time span.
Demerits: As this approach is so expansive; thus, it will be difficult for manager to arrange
adequate fund (Langevin and Mendoza, 2013).
Unicorn grocery is a small enterprise and it is not easy for them to afford this
type of expenses; as, they only have limited money which need to be utilized by
them effectively as well as efficiently.
If there is no flexibility in their planning then, this can influence their long term
planning. As if there is any alteration then this can provide impact to overall
association.
Cash flow Budget: For any type of firm cash is considered as an important factor. Every
transaction which is associated with liquid assets is always taken into under consideration in cash
flow budget. Hence, this will concentrate on deals of monetary (Higgins, 2012).
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Merits: With aid of this budget plan, company can reduce their wastage which is
associated with cash. Some firm never think it as an issue but, if there is
insufficiency of cash then this will close business.
If manager has an idea regarding hazards which are connected with cash then, it
is required for them to formulate an effective strategy. Hence, they can cover
their problems. As a result, uncertainty can be eliminated.
Through this method, employer will know about that they have proper assets or
not and in addition they can pay their all debts within limited time span
(Qian,Burritt and Monroe, 2011).
An organisation formulate this type of budget to reduce their cash risk.
Demerits: This is much difficult for an enterprise to determine actual requirement of cash
as it can be varied as per time. Because extrinsic elements can provide effect to
operational activities of firm either directly or indirectly.
Many times manager developed plan with help of previous data and this is not
right because need of cash will fluctuate as per time.
Operating Budget: This type of budget is fundamentally prepared for two areas, one is
manufacturing and another is administration. With help of this planning, income and expenses
can be estimated effectively (What is Budgetary control?, 2017). Along with this, it plays an
eminent role to find out success as well as failure of firm as this method concentrate to earn
profits appropriately.
Merits: The major pros of using this methodology is that, it aids to decrease wastages
because it reveals those aspects where an employer can save their fund.
By preparing operating budget, manager will expand their business in new
market in an effective and efficient manner.
Demerits: To develop this planning, there is requirement of lots of fund. This will provide
lot of load on monetary source of firm.
With help of this technique, company can formulate short term plan for their
business.
It will make too much confusions amongst many division; as a result, it leads to
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clashes (Ekbatani and Sangeladji, 2011).
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TASK 4
P5 Adopting management accounting system for responding financial troubles
In recent time, technology is accountable for those modifications which are occurred in
modern accounting. Along with this, system of management accounting is not only focus on unit
of finance, but also it is important for entire association. Fundamental aim of administrative
department is to eliminate wastage; therefore, they can control over cost or expenditure in an
effective way. As a result, they can easily enlarge their business and by utilizing various tools
and methods they can find out financing sources (Lambert and Sponem, 2012).
There is an organisation named Vectair holding is utilizing traditional accounting method
in their business and Unicorn grocery is using lean accounting method. Hence, there are some
difference amongst both associations, which is mentioned as beneath:
Unicorn Grocery Vectair Holding
This firm is utilizing lean accounting method
and it is considered as a modern approach. It
basically concentrates on two facets, one is
stop company to fund leakages and other is
stop them to repeat same kind of mistake again
and again.
This organisation is using traditional method
and this covers only some particular areas,
such as finance.
Employer can take judgements in minimum
time span as they get proper data within less
time. This enables them to take benefits from
their rivals.
As flow of data and information is not fast;
hence, there will be delay to take decisions
quickly.
It is much expensive as well as complex
methodology.
There is no much complexity; thus, it is easy to
utilize. Along with this, utilization of this
method is not expensive so that firm can easily
save their money in high range.
Organisation is using latest techniques and
software.
Employer is utilizing old tools; therefore, firm
do many work with help of people (Hirth,
2013).
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Unicorn grocery faces various sort of problems which are associated with financial
difficulties. This will occur as there are lots of alterations in globalisation as well as technology.
There are some methods which are connected with system of management accounting and can be
utilized by company to cope from many issues.
Key performance indicators: With assistance of this tool, manager can examine
effectiveness of their business which is linked with their targets. If KPI is maximum then,
employer has to evaluate entire performance of company. But if it is less then they can
concentrate on some units only. As a result, this can decrease gap amongst division of finance
and their execution. Association can create SMART targets; hence, they can decide some
particular objectives such as debt amount which can raise with help of market. There financial
data needs to be measurable; thus, past as well as present information can be compared. It is
required for them to set financial goals as this helps to eliminate additional burden. Apart from
this, it is fundamental for an employer to decide an adequate period of time to achieve coveted
targets in an effective way.
Bench marking: It is necessary for firm to decide some performance standards which
must be taken after by them. As a result, they can use resources in a proper way and entire work
will complete as per set standard. This will help to enhance their financial stability and in
addition they can resolve many troubles, for example: cash flow issues.
Financial governance: There are many firms which neglect their shareholders which can
put them into major problem. Therefore, with aid of this, they can easily face finance related
issues adequately. It is required for a manager to consider each worker's interest while taking
decisions as this will reduce issues as well as disputes. To achieve long term targets an effective
governance is required (Gaizauskas and Martinavicius, 2013).
CONCLUSION
From above mentioned assignment it has been comprehended that if an organisation
wants to reduce their wastage then, they have to use management accounting system. This will
assist them to get maximum revenues. Along with this, if company make an adequate plan for
their business then, they can easily accomplish desired objectives within limited period of time.
Judgement amongst selecting marginal as well as absorption costing is always depend on
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business nature. To solve various kind of financial issues manager can use management
accounting system effectively and efficiently.
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