TASK 13 (a): Difference between management accounting and financial accounting

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Management Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
(a): Difference between management and financial accounting..................................................3
(b): Cost accounting systems.......................................................................................................4
(c): Inventory management systems............................................................................................5
(d): Job costing system................................................................................................................5
(e): Different types of management accounting repots................................................................6
(f): Need of a sound accounting system......................................................................................7
TASK 2............................................................................................................................................7
(a): Number of tickets that must be sold......................................................................................8
(b): Tickets to be sold to acquire profit of 30000........................................................................8
(c): calculation of profit if 8000 tickets are sold..........................................................................8
TASK 3............................................................................................................................................9
(a): Budgeting as a planning and problem-solving tool to deal with financial problems............9
(b): The way in which financial governance can help to prevent financial problems...............11
CONCLUSION..............................................................................................................................13
REFERENCE................................................................................................................................14
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INTRODUCTION
Management accounting is the process of preparing management reports that are mainly
used to analyze organizational performance so that effective decisions can be formulated in order
to establish a good market image. Various management accounting reports are generated by the
managers that are presented to internal stakeholders so that they may determine position of the
company. For every business entity it is very important to analyze actual position of the business
so business information can be used to formulate strategies to attain long term success
(Management accounting, 2018). A leading accountancy firm’ employee is going to write a
reference manual for Ever Joy Enterprises (UK) which a client of the accountancy firm and
providing entertainment and leisure services. This report aims at various aspects of management
accounting such as its systems, reports. Calculation of profits and sales by using appropriate
costing methods, use of planning tools and financial governance in order to respond
appropriately to financial problems have also been discussed under this report.
TASK 1
(a): Difference between management and financial accounting
Management accounting: It is a technique which is used to analyze organizational
performance with the help of management accounting systems and reports that are presented in
front of internal stakeholders. Managers of Ever Joy Enterprises (UK) evaluate all the
information to formulate decisions for the betterment of the organisation.
Financial accounting: It is the process of formulating financial statements that are required to
analyze organizational financial status. Three different statements are generated under financial
accounting that are income statement, balance sheet and cash flow. In Ever Joy Enterprises (UK)
all of them are presented in front of external stakeholders so that they can take appropriate
decisions like investing and others. It is very important for the organizations to conduct financial
accounting every year so that detailed information about the company can be gathered (Amoako,
2013).
Difference between management and financial accounting: There are various
differences between both the accountings and all of them are as follows:
Basis Management accounting Financial accounting
Legal There is no legal requirements for According to law it is very important
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requirements management accounting for the
companies as it is not necessary for
all the companies according to law.
for all the companies to conduct
financial accounting every year.
Format of
presentation
There is not any specific format for
management accounting to record
management information.
There is asset formant for the
organisations to present and record
financial data.
Areas of
coverage
within the
organisation
Management accounting covers only
internal departments of the
organisations.
Financial accounting covers external
area of the organisation in which all
the organisational information
presented in front of potential
investors and stakeholders.
Type of data
used
Historic and predictive data is
recorded in management accounting
reports.
Statistical or historic data is recorded
in financial accounting statements.
Reports or
statements
Different types of management
accounting reports are generated by
companies. These reports are
performance, budget, account
receivables etc.
Three main statements are generated
under financial accounting these are
cash flow, income statements and
balance sheet.
(b): Cost accounting systems
Cost accounting system: This system is used by companies to determine the cost which needs
to be set for the products or services that are sold or rendered by the company to its customers.
This system helps to set appropriate cost so that organizational goals like profit and sales
maximization and customer satisfactions can be achieved (Bennett, Schaltegger and Zvezdov,
2013). This system is used in Ever Joy Enterprises (UK) to set such price to their services that
can be paid by their customer. It is very important for all the organizations to attract customers
by providing them pocket friendly services. There are various kind of techniques that are used
under cost accounting system that are as follows:
 Standard costing: This type of costing is used by companies to analyze difference
between actual and budgeted cost. In Ever Joy Enterprises (UK) this accounting is used to
analyze that organization is able to meet its standards or not.
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 Service costing: This costing system is mainly used in service sector which render
various kinds of services as separate from those which associated with service delivery
sector. Ever Joy Enterprises (UK) is the one who is related with providing all kind of
entertainment and leisure related services to the customers.
Cost accounting system is very beneficial for the organization as it may help to set appropriate
and accurate prices for the services and products that are sold to the customers. Managers of
Ever Joy Enterprises (UK) use this system to attain organizational goals like profit maximization
and customers satisfaction by offering them such services that may attract customers (Bovens,
Goodin and Schillemans, 2014).
(c): Inventory management systems
Inventory management system: This system is mainly used by companies o keep a track
record of all the inventory which is used to provide services to their customers. In Ever Joy
Enterprises (UK) inventory management system is implemented to keep detailed information of
all the equipment that are used to provide leisure and entertainment services to the clients. This
system is very beneficial for the organization as it may help to track the exact location of
inventory. There are three different types of inventory management system that are used by
companies all of them are as follows:
LIFO: Last in first out method is used by those organizations who use recently received
inventory to provide services first to the customers.
FIFO: First in first out method is used by such companies who use earlier received good
or stocks to perform organizational activities.
AVCO: In this methods organizations use inventory on the basis of average cost to
provide services to the customers.
In Ever Joy Enterprises (UK) FIFO method is used by the managers in order to provide good
services to the customers. in this method earlier received equipment is used to render services to
the clients. Main purpose of this method is to use all the resources appropriately (Brewer,
Sorensen and Stout, 2014).
(d): Job costing system
Job costing system: This costing method is use by companies to analyze the cost which is
involved in every job which is performed by the workers who are a part of organization. In
Ever Joy Enterprises (UK) this system is used to assign cost to all the departments of the
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company who are liable to perform separate jobs according to the requirements of
customers or clients. It is used when all the jobs are different from each other. It is very
beneficial for Ever Joy Enterprises (UK) as it can help to allot appropriate costs to the
activities that are performed by organization’s employees.
(e): Different types of management accounting repots
Management accounting reports: In management accounting system various reports are
generated by organizations that are used for the purpose of analyzing organizational
performance. It is very important for the managers to formulate these reports appropriately so
that internal stakeholders can evaluate exact status of the company (JOSHI and et. al., 2011). In
Ever Joy Enterprises (UK) management reports are generated by the managers to analyze
organization’s actual performance and other relevant information which can be used to formulate
effective strategies for the organization that may help to achieve all the long as well as short term
goals. All the management accounting reports are described below:
 Performance reports: Such type of reports are mainly generated to evaluate
performance of whole organization and individuals who are working in the organization.
These reports are created by management of Ever Joy Enterprises (UK) in order to
determine that organization is performing well or not and also analyze that all the
employees are capable to perform allotted tasks or not. It is very beneficial for the
organization as this may help to evaluate accurate performance of each employee so that
incentives and other benefits can be provided to them accordingly.
 Budget reports: Such reports are related to the budget which is set for each department
of company. It helps to set appropriate budgets to all the divisions so that they may
perform all the activities effectively in the budget which is allotted to them. In Ever Joy
Enterprises (UK) budgets reports are generated to assure that all the organizational
activities are performed in budget which was assigned. This report is very beneficial for
Ever Joy Enterprises (UK) as it helps to analyze that all the operations are executed in the
allotted budget or not (Klemstine and Maher, 2014).
 Account receivables reports: These reports are created by the companies to determine
the amount which was owned by all the clients. In Ever Joy Enterprises (UK) managers
generated account receivable reports to analyze that amount which has not yet been paid
by the customers. As Ever Joy Enterprises (UK) organization is providing services on
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credit to clients hence there are various customers who promise to pay the amount a few
times later. All information of such type of clients are recorded in these reports to
facilitate the managers to get idea of actual outstanding amount.
All the above-mentioned reports are very beneficial for all the companies as they may help to
provide various information to the owners, top executives and managers of the company so that
they may formulate strategies for the business and make decisions to attain all the goals.
(f): Need of a sound accounting system
Advantage of sound accounting system: There are various benefits of accounting system
that are used to collect, keep and process financials well as management information that are
used while decisions making and strategies formulation. Major advantage of sound accounting
system is accuracy in which exact and appropriate information is provided to the stakeholders so
that they may take decision that can benefit them in future. Another advantage of a good
accounting system is automation and productivity because in most of the companies are using
digital system are used to record data for the purpose of enhancing transparency and
appropriateness.
Advantage of timely production of accounting information: If the managers of the
companies are having timely accounting and production information than it may help to pass
effective judgement on the organization’s accurate position and performance. It also helps to
formulate decisions for the future period. It is essential for the all organizations to create a
positive image in the mind of stakeholders so that they may invest money in the company.
TASK 2
Cost: It refers to the total amount which is required to be paid by the seller to the buyer.
Ever Joy Entertainment (UK) set appropriate prices to the tickets for its entertainment shows
that’s why it is able to survive in the market. Two different types of costs are as follows:
Fixed cost: It refers to the cost that does not change with the quality of service or the production
of goods. In Ever Joy Entertainment (UK) fixed cost remain unchangeable with the quality of
service which is provided to the customers (Klychova and et. al., 2015).
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Variable cost: This cost changes with the production and its units in manufacturing
companies. As Ever Joy Entertainment (UK) is a service providing company hence variable costs
in this company changes with the quality of service which is provided to the clients.
BEP: When an organization is in such situation when it is not earning profits and not
bearing any losses. In Ever Joy Entertainment (UK) Break even for the company has been
calculated below for the purpose of analysing organisation’s state in the market.
(a): Number of tickets that must be sold
Selling price: 20
Variable cost: 10
Contribution: 10
Fixed cost; 60000
PVR= Contribution/Sales*100
: 10/20*100=50%
BEP ( in amount): Fixed cost / PVR
: 60000/50%= 120000
BEP (in unit): Fixed cost / contribution
: 60000/10
: 6000
(b): Tickets to be sold to acquire profit of 30000
Contribution: Fixed cost + profit
: 60000+3000=90000
Selling price: Contribution /PVR
=90000/50%= 180000
Sales = 180000
Sp: Sales /per units
: 180000/20=9000
(c): calculation of profit if 8000 tickets are sold
Sales (in units): 8000*20=160000
Contribution = sales *PVR
: 160000*50%=80000.
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Desire profit=contribution-fixed cost
= 80000-60000=20000
Interpretation: Profit volume ratio for the company is 50%, BEP in units is 6000
organization have to sale 9000 tickets to get a profit of 30000 and when 8000 units are going
to be sold than profit of 20000 can be acquired by the company.
TASK 3
(a): Budgeting as a planning and problem-solving tool to deal with financial problems
Budget: It can be defined as the estimation of future expenses that may occur in future. Budget is
a financial plan for a specific time period in which monetary resources are allotted to various
departments of the organisation so that they can perform all their operational activities
appropriately. In Ever Joy Entertainment (UK) budgets are formulated by the managers to
execute the business effectively with the help of limited resource. Mostly budgets are created for
a period of 12 months in which specific amount is allotted to different divisions of the company.
It is very important for the companies to perform all the budgets under budget so that business
can be operated successfully (Lavia López and Hiebl, 2014). Various budgets are used by
companies as planning tools such as sales, production and cash budgets. All of the are as follows:
Sales budget: This budget is prepared by the managers to manage all the sales related
activities of the organisation. In Ever Joy Entertainment (UK) sales budgets are formulated by
the managers in order to manage the selling activities in which services are sold or rendered to
the service users. A business uses sales budgets to set department goals and determine earning
and estimate production related requirements. A sales budget can affect operating as well as non-
operating activities because all such type of activities are considered as the part of selling
because wages are paid to the employees of the company who are providing services. Other non-
operating expenses are also added in the cost of service that’s why non-operating activities
considered as the part of this budget. Advantages and disadvantages of such budgets are as
follows:
 Advantage: Major benefit of sales budget is that it helps the organisation to record all the
sales related activities so that a higher profit can be recorded for the company. It also helps
to analyse cost and profit of each service which has been rendered by Ever Joy
Entertainment (UK).
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 Disadvantage: As it is based on estimations and it is not possible to make accurate
predictions about anything hence it may result negatively for the company in short as well as
long term if the estimation is wrong.
Cash budget: All the cash related items are estimated with the help of cash budget. It includes
receipts, payments, expenses, incomes that are going to take place in future. The estimations are
made on the basis of prior year’s information and budgets. In Ever Joy Entertainment (UK) cash
budget is made to analyse the amount which is going to be received and paid in cash by the
company in forth coming period as it is made for future. It can guide the managers to use the
monetary resources appropriately and effectively so that they can be saved for future perspective.
If the organisation is not able to manage cash than company may have to face various problems
that can occur in future (Lim, 2011). Advantages and disadvantages of cash budget are as
follows:
 Advantage: It can help to avoid different types of debts that are required to be paid by the
company in a specific time period. Cash budget is also very beneficial when organisation is
willing to analyse the amount which is going to be received or paid in future so that future
spending can be planned by the company.
 Disadvantage: It requires detailed documentation which is not possible for the companies
because it is not easy to keep detailed documents.
Flexible budget: It can be defined as the budget that changes or adjusted with the changes
in the organisational activities and it changes with the month. As income fluctuates with time and
this budget allows to make changes in the budget with the fluctuations so that an appropriate
budget can be formulated that may provide appropriate business information and its status. It is
generated in Ever Joy Entertainment (UK) to calculate the different level of expenditures for
variable cost and that depends upon actual revenues of the company. Advantages and
disadvantages of flexible budget are as follows:
 Advantages: As it can be modified with the changes of income and expenditure level
hence it can help to provide exact information about the business.
 Disadvantages: It requires continuous monitoring which is not possible for all the
business entities. Some time the adjustments that are made are not recorded appropriately
by the employees to misguide the managers it is also a major disadvantage of flexible
budget.
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All the above discussed planning tools help to deal with financial problems as they may help to
estimate all the critical situations that may take place in future and affect organisation’s
operations. Cash budget help to estimate the total amount of cash which is going to be acquired
by the company in future hence this can help to deal with unexpected expenses as they are going
to be estimated in advance. Sales and flexible budgets also help to respond financial problems
appropriately by estimating the future conditions and formulating strategies (Tessier and Otley,
2012).
(b): The way in which financial governance can help to prevent financial problems
Financial is related to lack of monetary resources which is faced by most the companies
now a days. These problems affect the operational efficiency of the company as they are not
having sufficient funds to execute business operations. Finance is a major requirement for the
organisations so that all the activities can be performed appropriately. If the companies are not
having sufficient funds than it may result negatively for the company and create issues like
decreased efficiency of performing activities. In service industry all the organisations have to
face problems due to market conditions and customers demand. Various financial problems are
faced by Ever Joy Entertainment (UK). These financial problems decreased the effectiveness of
the company and also lead toward failure. It is very important for the organisation to formulate
strategies and use appropriate models so that all the problems can be dealt effectively. Few of the
financial problems are as follows:
Unplanned expenses: These are the expenses that occur suddenly and are not planned by the
managers. In includes the repair of the equipment that are used to render services to the clients.
This problem is faced by Ever Joy Entertainment (UK) and its managers have to spend monetary
resources to deal with all such type of expenses that create a shortage of money for operations
(Van der Stede, 2015).
Improper money management system: When organisation is not able to follow
appropriate principles that are introduced by regulatory authorities for accounting of financial
information than it creates financial problems. It mis guide the managers and they are not bale to
get exact information of finance.
All the above-mentioned issues can be identified with the help of benchmarking and KPI.
Both the techniques are as follows:
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Benchmarking: It is used to compare one company to another so that effective strategies
can be formulated. Benchmarking is used by the managers of Ever Joy Entertainment (UK) to
identify the issue of improper money management system as it organisation can compare its
management system with others and then analyse the issues in its money management system.
KPI: KPI are the key performance indicators that are used to analyse that organisation is
going to attain success or failure in future. It is used by the organisation to identify the issue of
unplanned expenses which is identified with the help of financial KPI. Two types of KPI are as
follows:
 Financial: This KPI is mainly used to reduce possibility of unplanned expenses by
identifying them hence it is used by Ever Joy Entertainment (UK) to identify the issue of
unplanned expenses.
 Non-financial: This type of KPI is mainly concerned with the measurement of success
and failure of activities that are performed by the organisation.
Managers of Ever Joy Entertainment (UK) use financial governance to deal with both the
above-mentioned problems. Financial governance is a technique in which organisations are
directed to follow all the appropriate principles that are related to accounting. It guides managers
of Ever Joy Entertainment (UK) to record all the financial information appropriately so that it
can resolve the financial issues of the company (Zoni, Dossi and Morelli, 2012). As it guides to
record all the data accurately than the problem of improper money management system get
resolved. Unplanned expenses can also be ignored with the help of this technique because when
all the monetary resources recorded appropriately than organisations will have sufficient funds to
deal with all uncertain expenses.
Comparison:
Ever Joy Entertainment (UK) Airdri
Inventory management system is used by the
company to keep a track record of all the
equipment that are used to render services to
the clients.
Inventory management system is used to track
location of the goods while they are in
transportation.
Cost accounting system is used to set
appropriate costs to the services.
Just in time approach is used to reduce the time
which is involved in production process.
Job costing system is used to assign cost to Price optimisation system is used to set price
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each division of the company. of the products according to willingness of
customers.
CONCLUSION
From the above project report, it has been concluded that management accounting is the
process of recoding, monitoring, controlling, evaluating, assessing and determining management
information. All such type of data in used to formulate management accounting reports with the
help of different system. All the formulated reports are presented in front of internal stakeholders
of the organization so that they can formulate strategies for the successful achievement of all
organizational as well as individual’s goals. Various planning tools are also used by the
management to respond all the financial problems that are faced by organization. These tools are
sales, production and cash budgets.
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REFERENCE
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accountability. Oxford University Press.
Brewer, P. C., Sorensen, J. E. and Stout, D. E., 2014. The future of accounting education:
Addressing the competency crisis. Strategic Finance. 96(2). pp.29-38.
JOSHI, P. L. and et. al., 2011. Diffusion of management accounting practices in gulf
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Klemstine, C. F. and Maher, M., 2014. Management Accounting Research (RLE Accounting): A
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breeding. Asian Social Science. 11(11). p.308.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research. 27(1). pp.81-119.
Lim, M., 2011. Full cost accounting in solid waste management: the gap in the literature on
newly industrialised countries. Journal of Applied Management Accounting Research.
9(1). p.21.
Tessier, S. and Otley, D., 2012. A conceptual development of Simons’ Levers of Control
framework. Management Accounting Research. 23(3). pp.171-185.
Van der Stede, W. A., 2015. Management accounting: Where from, where now, where to?.
Journal of Management Accounting Research. 27(1). pp.171-176.
Zoni, L., Dossi, A. and Morelli, M., 2012. Management accounting system (MAS) change: field
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Online
Management accounting. 2018. [Online]. Available through:
< https://cleartax.in/s/management-accounting>
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