Management Accounting Systems and Financial Troubles

This assignment delves into the world of management accounting systems and their significance in overcoming financial challenges. It explores various aspects such as inventory management, cost accounting, price optimisation, job costing, KPIs, financial governance, and benchmarking. The report highlights how these concepts can help organisations navigate through financial hurdles and achieve success.

MANAGEMENT ACCOUNTING

Report
From: Management Accounting Officer
To: General Manager
Subject: To write a report to GM covering management accounting reporting and its various
systems together with various cost accounting techniques and planning tools. Their
implementation can assist in attaining organisational objectivities.

Table of Contents
INTRODUCTION ..........................................................................................................................1
LO1 Demonstrate an understanding of management accounting systems......................................2
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems to the chosen scenario giving examples............................2
P2 Explain different methods used for management accounting reporting that can also be used
for the chosen scenario...........................................................................................................5
LO 2 Apply a range of management accounting techniques...........................................................7
P3 Difference between income statement made through marginal and absorption costing...7
LO 3 Explain the use of planning tools used in management accounting....................................11
P4 Explain the advantages and disadvantages of different types of planning tools that can be
used for budgetary control for the chosen scenario. ............................................................11
LO 4 Compare ways in which organisations could use management accounting to respond to
financial problems..........................................................................................................................13
P5 Use of management accounting system for resolving financial problems......................13
CONCLUSION ...........................................................................................................................15
REFERENCES..............................................................................................................................16
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INTRODUCTION
The process of making managerial report and analysing various kind of data ,that is
present in the company, is knows management accounting. It is basically use for both long and
short term decision making (Ahmad and Mohamed Zabri, 2012). Earlier enterprises could solve
most of their problems by concentrating on their financial performance but now they consider
different elements like competition in the market, globalisation etc., in order to cope up with
various type of troubles. Management accounting help in forecasting the future, it play
significant role in making judgement relating to buying or selling. By using its tools, manager
can determine the rate of return on any investment. Unicorn grocery is a small firm who is
operating in retail industry. They have a store in Manchester. This project will talk about various
kind management accounting systems like Job costing, price optimisation etc. Some methods of
reporting will also become part of this assignment. Reports shows the past performance and
current position of a company. In this file, net profit will be calculation by making income
statement. Both, marginal and absorption costing will be used for ascertain this figure. The
advantages and demerits of the planning tools will be explained under this project.
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LO1 Demonstrate an understanding of management accounting systems
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems to the chosen scenario giving examples
Most of the enterprises face trouble at the time of making significant decision like the
right areas to invest money of the organisation. By using financial accounting, they cannot find
profitability of an investment (Aminbakhsh, Gunduz and Sonmez, 2013). This form of accounts
mainly aim at communicating the current position of the company. Management accounting help
in various significant organisational function, they identity the most suitable source of finance so
a firm can reduce the burden of debt. Their also support manager at the time of taking tuff calls
like where raise funds from public or from any financial institution. The importance of
management accounting is increasing because it do not only solve issues relating to finance, it
also help in improving overall performance of a company.
Every enterprise make some strategies so they can attain organisational objectives, the
role management accounting is significant in the whole process. It provide great assistance to a
corporation in formulation and implementing plans. Many managers argue the most of the issues
in a company happen because of miscommunication managerial accounts remove the confusion
by speeding up the process of communication. If also minimise the wastage of information. The
modern tools and techniques of management accounting are capable of fighting the challenges
that is present by swifty changing business environment (Burritt, Schaltegger and Zvezdov,
2011). Some systems of management accounting are as follows:
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Inventory management system – The issues relating to overstocking and under-stocking
of goods increases when a small company try to expand their business. Managers understand that
they cannot predict the exact number of a commodity which is sold by the company at their
stores. Inventory management system help them in ascertaining the right quantity of various
items. No organisation want to send their customers empty handed, they fail to provide them
essential goods because of the under-stocking. This management accounting procedure help an
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Management
Accounting
system
Inventory
management
System
Cost
Accounting System
Price
Optimisation
Job Costing

enterprises in creating a proper balance between demand and supply different products. If also
minimises the wastages and reduce carrying and ordering cost. Earlier managers has to do this
work manually but now can use sofa-tares for accomplishing this task in an effective way.
Price optimisation – Decision a price which is suitable for both an enterprise and their
customers is very difficult. Sometime buyer refuse the buy a product on the ground that it is too
expensive. But at the same time, in the views of company, the rates are economical (Chen,
Weikart and Williams, 2014). A reverse situation can also take place where consumer are ready
to pay more money for an item but corporation did not understand the buying patter of
customers. This basically result in huge and unnecessary loss. Price optimisation play key role at
the time of making call regarding ''what should be the price of a product''. This system assist in
increasing the number of permanent buyers.
Job costing – Some jobs in a company has high significance, because they generate more
revenue, while other are not very important for an enterprise. Every job is analysed on the
individual basis, this help an organisation in reducing their cost and it also support managers in
easily focusing on the work which is generate more profit for the corporation. Material, labour
and overhead are three types of cost that is involved in this management accounting system.
Cost accounting system – This is general approach and it has wide reach. It concentrate in
reducing the expenses by identifying the areas in the production system where company is doing
unnecessary expenditure. Profit can be increased by either enhancing sale or reducing total cost
of operation.
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P2 Explain different methods used for management accounting reporting that can also be used
for the chosen scenario
Report is basically the observation and investigation of company's performance.
Reporting tell the top level; management about the set targets and and actual results. It also
shows the areas where an enterprise can improve their performance. Some methods of
management accounting reporting are as follows:
Account receivable reporting – This report is made for maintaining a good relation with
debtors. Unicorn grocery is operating at small level and they understand that in order to make
permanent customer they have to provide credit facility to their customers. It provide them
competitive advantages on their competitors (Cokins, 2013). A/C receivable report contain the
details about people who owe money to the company. It also reveal the time period for which
they are holding the sum. Some organisation like to keep the records on the basis of time while
other prefer the amount that is due on the customers. This report assist in decreasing the amount
of bad debts. This can be considered as one of the prime reason behind formation of this report.
By taking assistance from this report, cited firm can tighten the rules for the debtors who are not
paying their debts in allotted time.
Account payable reporting – Keeping good connection with suppliers is crucial for the
success of the business because they are significant shareholder of the enterprise. Account
payable report is made for determining the amounts which company has paid to their suppliers.
Maintaining a record help an organisation in minimising their expenses. Manager can found the
extra amount which they have to pay to their supplier, in the name of interest, because they fail
to make payment in time (Delafrooz and Paim, 2011).
Budget reporting – Every firm make budget so they can invest their resources in proper
way. Budget report is made by using previous year data. It shows all the planned and actual
expenses & income. If a company is running their business at a large level then they has to focus
on performance of different departments but a small firm like Unicorn grocery can make this
budget for determining the performance of their employees. This importance of budget report has
increase in past several years because it shows the right the direction to a company. If a company
has clear plans in their budget then they can remove the issues of conflicts. Budget report of past
year can be used for making next years budget, it will increase the accuracy of the budget.
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Inventory control reporting – Managing inventory is a significant task for any retail
company. This report reveal the mistakes which a company has committed at the time of
ordering the good (Ekbatani and Sangeladji, 2011). An organisation can reduce cost of their
business if they order right quantity of good in right time. Significant techniques like EOQ is
used at the time of making this report. This report can help in ascertaining the right quantity of
the good which a company should keep in their stores. Unicorn grocery is small firm, facing
trouble of overstocking and low supply of some commodities can make a huge impact on their
business. By using this report, they can make effective plan for future events.
Performance reporting – This type of report focuses on performance of various divisions
of a company. But Unicorn grocery do not any major division so they can make this report for
analysing the performance of every employees who is working in this organisation. If a worker is
giving better then expected results then company can give him or her more responsibilities and
incentives in next year. Other kind of reporting only focus on a particular task but performance
reporting cover whole organisation. A report is basically the observation made by managers. If
they are used for in effective way then commit can stop committing same mistakes which they
are doing from many years.
Job costing reporting – This report is made for analysing the profitability of a job. It
shows that which job is help company in earning more revenue while which jobs are only
increasing the cost of business and does not contributing much in the profit. Most of the
companies make this report for decreasing the unwanted expenses (Foster, Hart and Lewis,
2011).
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LO 2 Apply a range of management accounting techniques
P3 Difference between income statement made through marginal and absorption costing
Management accounting is used in improving the performance a company so they can
achieve their goals and move forward towards their mission. By reducing the expenditure done
by the corporation cited firm can enhance their net profit. Costing basically focus in finding and
minimising the wastage. Below are explanation of marginal and absorption costing along with
their difference:
Marginal costing – Every corporation want to increase their production. Whenever they
produce an extra unit, they have to spend some more money. This extra amount is known by the
name of marginal costing. This approach is completely different from tradition. The
differentiation in the fixed and variable cost is the core this form of costing. Other approaches
always include fixed cost in the cost of the product but in marginal costing, fixed cost is ignored.
According to this accounting technique, fixed expenditure should be recover in a period of time
instead of allocating the burden of fixed cost on every unit produced in the factory (Fullerton,
Kennedy and Widener, 2014). One should always keep in mind the assumption which are present
in this approach. The first is that all the unit produced by the company are sold in the market,
second is that the selling price of goods remain same at all the levels of activities.
Absorption costing – It is a old method where both fixed and variable cost is considered
at the time of determining the price of a product. If some goods remain unsold then the
expenditure incurred on them in treated in next year. Direct labour, material and manufacturing
overheads are included in this form of costing. The allocation of fixed cost is done on every unit
that is made by the company. Some may find this approach an old management accounting
technique but it does not mean that it is useless. In reality, it shows correct amount of net profit
that is registered by a an enterprise.
Comparison between marginal and absorption costing
Basis Marginal costing Absorption costing
Level of Inventory Closing stock affect net profit
under marginal costing.
Closing stock does not affect
the level of profit.
Assumption It is assumed that all the
manufactured units are sold by
This of assumption is not
present under absorption
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the end of the year. costing.
Treatment of fixed cost Fixed cost is neglected at the
time of finding the cost of an
item.
Fixed cost become part of final
cost of the product.
Valuation of inventory The amount of inventory is
calculated by considering only
variable cost.
Both fixed and variable cost is
taken in account for
determining the value of the
inventory.
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
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
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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
Above income statement shows that cited enterprise should use absorption costing in
their organisation because it will deliver them more net profit. They will earn 9300 pounds from
absorption costing but they can get 9600 pounds if they will go for absorption costing. Treatment
of most of the variables is same in both approach but the main difference in occurring due to the
factor of fixed cost (Higgins, 2012). In absorption costing, fixed cost is divide and then allotted
on every produced product but in other approach (marginal), complete fixed cost is subtracted.
Besides this reason, there is another prime cause behind this variation i.e. closing stock. In
absorption costing, the expenses done of the production of the closing stock unit is treated in
next year, this reduce the pressure on net profit, but this approach is not followed in marginal
costing. Expenditure done by unsold stock is also subtracted from contribution, it reduces the
amount of net profit.
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LO 3 Explain the use of planning tools used in management accounting
P4 Explain the advantages and disadvantages of different types of planning tools that can be used
for budgetary control for the chosen scenario.
Budgetary control is related to checking whether the decided plans of followed according
to the expectation managers. Every organisation estimate the income which they may earn in
next years, they also determine the expenses that is going in happen in upcoming time. Every
division make their own targets, budgetary control assure that the goals set by two departments
do not come in path of each other work. It assist in decreasing the number of conflicts that can
happen among various division. Unicorn grocery is do not have many division but they have
different small teams. Budgetary control can assure optimum use of the various kind if resources
that are present in the company (Hirth, 2013). Planning tools are essential for assuring the budget
is prepared and used in effective manner. Every technique of planning has its own merits and
demerits, if an organisation think that disadvantages of a tool will not hamper their growth then
they should use it other wise they can go with any other suitable option. Some of the planning
tools are as followed:
Master budget – As discussed above, every team set their own aim. Master budget make
sure that all the goals set by various departments should be channelised in one direct. In this
budget, funds of allotted to each and every team of the enterprise, the expenditure which they
permitted to do is also set in this budget. Master budget always focus on long term goals, it
concentrate on company has a whole. Doing this kind of planning is not an easy task because it
involves lot of data and time also.
Advantages – Master budget provide the detail about the funds that is provided to
different team in an enterprise. This reduces the conflicts in various wings and teams. It also
removes the confusion which some manager may have in their mind. Master budget has
capability to synchronise the objectives of different divisions (Lambert and Sponem, 2012). It
play an important role in proceeding towards the vision of the company.
Disadvantages – The process of making master budget is lengthy and complicated. It
takes lot of significant time and it does not promise success to the managers. Making changes in
master budget is next to impossible, this rigidity can be considered as the another demerit of this
planning tool. An organisation has to spend huge sum if they want to make this budget, a small
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firm like Unicorn grocery may not want to spend lot of money on preparing master budget
because they if things do not go according to their planning then their financial condition may
get severely hamper.
Cash budget – The significance of liquid asset in regularly increasing because they
provide strength to financial position of a company. Cash budget contain estimation relating to
the money which is going to enter in the organisation and the cash which corporation may pay to
various stakeholders. Cash is prime asset and if it is managed in a better manner then it can
provide some extra edge to a firm over its competitor.
Advantages – If this budget is used in appropriate manner then it will the amount of bad
debts of an organisation can go down (Langevin and Mendoza, 2013). If a company knows that
how much cash they need for a specific period of time then they can they can run their business
operations in the smooth way.
Disadvantages – Some managers often argue that estimation of the exact cash needed in
the business is not possible. Cash budget is made by taking figures from old data, if this data is
not correct then the plans made for upcoming year may become irrelevant and company may
face different problems for managing their cash in an effective way.
Operating budget – This budget focuses on income and expenditure relating to
operation activity that is main revenue producing tasks. The two areas of focus in this form of
budget is production and administration.
Advantages – The unnecessary wastage of resources can checked by forming this budget,.
It helps managers in identifying the weakness of the organisation, if they remove those
weaknesses then they can attain better results. Expansion of business can also be done by
utilising this planning tool.
Disadvantages – Operation budget puts financial burden on the enterprise. It only focuses
on operational activities, an organisation can have other source of income but this burden clearly
ignore them. Manager can easily make variation in operational budget. It sometime confuses
workers and they fail to understand actual plan (Maiyaki, 2011). It make a negative impact on
their performance.
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LO 4 Compare ways in which organisations could use management
accounting to respond to financial problems
P5 Use of management accounting system for resolving financial problems
Conduction business successfully is not an easy task because it involve different of kind
of financial troubles. Unicorn grocery should also faced many problems like other corporations.
Their are number of factors which can become the main reason behind the financial problems.
Below is the comparison between Vectair holding and Unicorn grocery. The prior one is making
managing their business by using traditional approach while the later one has adopt lean
accounting. Financial problems can become the reason behind failure of a business. These kind
of troubles is generally related to less amount of cash in the company, high debt burden, etc.
Unicorn Grocery Vectair holding
This organisation is successful finding the
ways of minimising the wastage of resources.
Lean accounting is assisting them in checking
the repetitive mistakes.
They are working on traditional approach, it is
easy to use but it covers limited areas.
Fast decision can be taken by using this
approach, the information flow is less time in
this method and this assist manager in making
decision without getting delayed (Renz, 2016).
Slow flow of information can be create
problem for the manager in this approach and
they have to wait for a long time before getting
essential information.
Modern accounting methods like lean
accounting is complicated and expensive also.
Traditional approach is easy and anyone can
understand its concepts in short period of time.
Unicorn grocery is using latest soft-wares for
accomplishing their tasks.
Most of the time, the managers of vectair
holding use old technology. Sometime they
have to do some work manually.
KPI – Key performance indicators shows weather the company is proceeding towards
their goals in an effective way (Moser, 2012). Setting SMART goals is very important, if a
company will have specific target like increase profit by 10% then they can easily attain their
long term goals. Most of the organisations face financial troubles because they set general aims
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like enhance sale. This create confusion in the mind of employees because they do not have any
fix target. The goals set by managers must be measurable, if an enterprise cannot measure them
then they will fail to deicide whether they have attained success or failure. It is significant to set
attainable and realistic targets, if a company like Unicorn grocery will set an aim like dethrone
Tesco from the position of top player of the industry. They do not have resources for these kind
of unrealistic and unattainable target and if they will try to achieve them then they will definitely
get fail. This will result in reduced moral of the workers and they will also not take the target
serious because they know that goals are unrealistic. Targets of a company should be bounded by
the time. Every firm should set a time limit in which they want to attain their aim. The prime
cause of setting time limit is assuring positive pressure on the employees of the corporation
(Parker, 2012). This approach can help managers of an enterprise in setting SMART financial
goals and it will also help an organisation in coping up with various financial issues.
Benchmarking – Whenever a company lower their yardstick below the standard of the
industry then they put themselves in different kind of financial troubles. For example, if most of
the companies are making a provision of 5% of revenue on the sales for the bad debts and then
cited firm should also adopt this rate or more then this. If they will keep their standards equal or
above then the industry's benchmark then they can easily save themselves from various
problems.
Financial governance – When an organisation is operating in a business environment,
then they cannot only think about their own benefits. Financial governance is related to
conducting business activities in a fair manner keeping in mind the needs of stakeholders. If a
company will follow all the regulation that is made by the government and other authorities then
they can easily face financial hurdles (Qian, Burritt and Monroe, 2011). This will also make a
fine impact on their goodwill and provide strength to the financial position of the company. If
stakeholder of an enterprise are satisfied with them then the problems relating to finance will
automatically get minimise.
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CONCLUSION
From the above report, it can be concluded that management accounting systems are
essential for good performance of a company. They do not only cover financial issues, they focus
on complete organisational performance. An organisation has different option for management
accounting reporting. These reports shows the observation of the manager and the shortcoming
of the enterprises along with the function which they can performed in effective manner. The key
difference between marginal and absorption costing happened because of the figure of closing
stock. Planning tools help a company in decreasing the fear of uncertainty. KPI, financial
governance and benchmarking are some of the best approaches for resolving financial trouble.
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REFERENCES
Books and Journals
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