Management Accounting: Types, Benefits, and Planning Tools

This document provides an overview of management accounting, its essential requirements, and different types of management accounting systems. It explains the benefits of various management accounting systems and their application within Dell. The document also discusses the advantages and disadvantages of different planning tools used for budgetary control. Additionally, it calculates the cost per unit under both absorption costing and marginal costing and explains how they are used to prepare the income statement.

MANAGEMENT ACCOUNTING
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INTRODUCTION
Management accounting is a combination of several processes such as accounting,
finance and management of business skills and techniques which are also crucial in terms of
adding value to the organization (Hopper and Bui, 2016). The information presented in the
accounts have many implications on the organization which are being stated in the present
research study. Thus, the present research study has been made on Dell which has several
hardware products for the computer system and which uses different management accounting
system for the purpose of managing all business aspects. Therefore, in this respect discussion has
been made included regarding absorption and marginal cost which aids the business to manage
diverse aspects of the accounting procedure. Furthermore, researcher has also stated advantages
and disadvantages of types of planning that is used for budgetary control.
TASK 1
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems
Management accounting can be defined as the process of preparing management reports
in order to get financial and non-financial information required by managers to take day to day
short term decisions. Management accounting reports consist of company's available cash,
revenues, sales, accounts payable and receivable etc (Messner, Becker, Schäffer and Binder,
2016).
The main aim of any business entity is to maximize its profit capacity and such objective
can be attained through adopting specific financial planning. Dell has been emphasizing on
management accounting procedure for the purpose of identifying, analysing, recording and
presenting financial information to the management. This is useful to the internal management as
that aids in undertaking proper decisions for the business.
Management accounting is very much different from financial accounting because it
gives reports about company's internal investors or stakeholders (Nasseri, Yazdifar and Askarany,
2016). In simple words we can say it is the application which provides useful information for
management.
Management accounting includes different kind of reports which are used to analyse
company's information. Some of which are:
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Cost Reports: Management accounting calculates costs of item produced. This is done
by taking all the cost of raw material, labour, overhead and all the additional cost get included in
the report.
Budget Reports: Budget reports lists all the sources of revenues and expenses. In this
company tries to achieve al its goals and objective with the budget defined in formerly.
Performance Reports: Performance report compares expenditures with respect to
revenues. This report is calculated every year and it helps manager to calculate future demand
and production as well as cost increase (Otley and Emmanuel, 2013).
Moreover, it can also be said that management accounting process aids Dell to plan and
budget the things so that resource capability can be maintained accordingly. With the help of
management accounting, it is vital for Dell to plan and control the operations so that further
decisions can be made. Dell is using such procedure because that aids the business entity to focus
on inventory management which can also assist in releasing the dead stock.
Importance of management accounting essential
• Identification, analysis and communication metrics in cost accounting: The three
basic elements of accounting helps management to find out the most efficient use of
capital resources, measuring the cost controls and communicating the information
throughout the organisation (Renz, 2016). The accumulated cost reports are drafted and
are discussed with the managers and external users. After getting all the information the
about the cost the management reallocate the capital; to improve efficiencies and to
reduce costs.
• To identify the appropriate national economic measures for analysis: These reports
provides economic productivity via standard measures known as gross domestic product.
The relevant financial data is identified and analysed regarding cash flow and profit and
loss statements and then communicated with the decision makers.
• To simplify financial statements: Management accounting provides technical reports
with simple interpretations which helps in taking different managerial decisions (Hopper
and Bui, 2016).
• For taking business critical decisions: Management accounting is necessary for taking
critical decision of any organisation because it provides it takes all the data and then
present it in a such a way that a proper analysis about feasibility and reliability can be
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made.
P2 Explain the benefits of various management accounting systems and their application within
Dell
Management accounting reports are essential for the business entities for the purpose of
monitoring and evaluating company’s performance according to different time period. This is
dependent on the type of products which Dell is selling at the market place. Managerial
accounting reports are useful in preparing budgeting reports that aids Dell to ascertain the
performance of business through identifying different control costs (Chiwamit, Modell and
Scapens, 2017). This is also crucial for the purpose of specifying each activity of the business
and how valuable it is in managing the business aspects. Budgeting reports are useful in
investing resources and at the same time, it also helps in calculating actual costs compared with
other business entities.
It is also useful in preparing accounts receivable aging reports that is also termed as a
critical tool to manage cash flow for companies that assist their customers in providing financial
assistance. Such reports needs to be periodically reviewed because that could aid Dell to keep the
collection from the departments through considering previous debts (Dekker, 2016). Apart from
this, job cost reports are also prepared which specifies expenses for a particular project. For
instance- job cost is useful for Dell at the time when the business introduces any new software
package. Furthermore, job cost reports are also utilized for the purpose of analysing expenses of
the project especially when the project is in carried on. This aids the managers to allocate
business resources in the best possible manner.
Therefore, it can be said that Dell can use managerial accounting reports for underpinning
the value of manufacturing processes. The report will include inventory wastage, labour cost per
unit and overhead costs. Thus, with the help of such results, the managers will be able to
assemble all the processes in a single structure so that best performance can be facilitated
accordingly. This can assist Dell to identify which project is suitable for the business entity.
Different methods used for management accounting
1. Financial Planning: Financial planning decides about the financial activities necessary
to accomplish the primary objectives. It consist of both short term and long term financial
objectives of any organisation (Fullerton, Kennedy and Widener, 2014).
2. Analysis of Financial Statements: This analysis is done to determine the importance
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and meaning of financial statements so that a prediction can be made out for the future
earnings. This analysis results in information which helps business executives and
investors.
3. Historical cost Accounting: This accounting deal with the past data so that comparison
can be made out with the standard cost. Eventually this helps for deciding the future
planning and cost control.
4. Standard Costing: Standard costing is necessary to have cost control. It compares the
actual operating condition with the standard one (Hopper and Bui, 2016.).
5. Fund Flow Statement: management accounting uses fund flow statements to determine
the changes in the financial position of an enterprise between two dates.
6. Cash Flow statements: This tool summarises the cash inflows and cash outflows of an
enterprise. It provides cash control for a particular moth or a years.
7. Revaluation Accounting: This method of management accounting provides maintenance
and protection of the capital of an organisation (Lopez-Valeiras, Gomez-Conde and
Naranjo-Gil, 2015).
8. Statistical Techniques: This technique makes the information more relevant and
meaningful that in turn helps in decision making. It provide quality control.
9. Decision making: This method provides help in choosing from the different alternatives
available. The management accounting helps the management through the techniques of
marginal costing, capital budgeting, differential costing to select the best alternative
which can enhance the profit of the business.
TASK 2
P3 Calculate cost per unit under both absorption costing and marginal costing. State difference
between both. Explain how they are used to prepare income statement
Calculation of cost of every unit on the basis of absorption costing:
Absorption costing Amount (in GBP)
Material charges 20
Labour cost 8
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Variable overhead expenses 4
Fixed overhead costs 10
Total cost per unit 42
Calculation of cost of every unit on the basis of marginal costing:
Marginal costing Amount (in GBP)
Material charges 20
Labour charges 8
Variable overhead expenses 4
Total cost per unit 32
The total number of units produced are 50000 and according to that total cost is being
calculated as under:
Absorption cost Marginal costing
42 * 50000 = 2100000 32 * 50000 = 1600000
Income statement using marginal approach of costing:
Particulars Amount (in GBP) Amount (in GBP)
Sales or revenue 2700000
Less: Cost of goods sold (COGS):
Opening inventory 0
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Cost of direct material 1000000
Cost of direct labour 400000
Variable factory overhead charges 200000
Less: Inventory at the end of year -320000 -1280000
Contribution 1420000 GBP
Less: Variable Selling and distribution Expenses 240000
Fixed Selling and distribution Expenses 600000
Fixed factory overhead charges 500000 -1340000
Net Income or profit (loss) 80000 GBP
Income statement using absorption approach of costing:
Particulars Amount (in GBP) Amount (in GBP)
Sales or revenue (40000*67.50) 2700000 GBP
Less: Cost of goods sold (COGS):
Cost of direct material (50000*20) 1000000
Cost of direct labour (50000*8) 400000
Variable overhead charges (50000*4) 200000
Fixed overhead charges (50000*10) 500000
Add: Inventory at the beginning of year 0
Less: Inventory at the end of year -420000 -1680000
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Gross profit or income 1020000 GBP
Less: Non manufacturing costs
Variable Selling and distribution Expenses 240000
Fixed Selling and distribution Expenses 600000 -840000
Net income or profit (loss) 180000 GBP
Thus, on the basis of above discussion, it is clear that absorption cost is better for Dell
since it rightly recognises the importance of including fixed production cost while determining
product cost in a suitable pricing policy. Further, the pricing based on absorption costing also
ensures that all costs are recovered and the pricing is also determined in terms of only variable
costs. However, in this type of costing, it is also crucial for Dell to focus on preparing accurate
reports which includes different costs.
TASK 3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Incremental budgeting is a crucial part of management accounting that includes small
change in the budget and after making changes, a new budget is being formed. This method of
budgeting seems to be effective since it can be easily executed as that does not require any sort
of complex calculation (Messner, 2016). Likewise Dell, the method is used by many companies
for the purpose of building the value of equality among departments. However, on the other hand
it is usually incremental in nature and it also assumes that every subsequent year, company will
require marginal budgets.
Zero- based budgeting is always prepared with a new budget that is being established
with zero. In this type of budget, the business organization do not consider previous year’s
budget while managing the course of business (Messner, Becker, Schäffer and Binder, 2016).
The type of budget is suitable for companies since it helps in efficient allocation of resources and
it does not consider historical numbers. It is also called as a justified method because every item
starts with zero. At the same time, it also improves coordination and communication within the
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departments which aids the employees to manage all their work aspects in prominent manner.
However, on other hand, the method requires efficient and trained employees who have the
knowledge to solve complex tasks.
Variance analysis has been used in the companies for the purpose of explaining the
situation wherein actual result or outcome of any event produces different values as compared to
the planned values (Nasseri, Yazdifar and Askarany, 2016). Variance analysis is an appropriate
tool to assess the performance of managers; however at the same time, it requires proper analysis
because mistakes and omissions cannot be afforded. Contrary to this, variance analysis does not
specify the value of raw information that is applied to decision making process. Thus, it requires
actual amount of business assets in all domains.
A. Calculation of standard cost of PVC sheet
Standard costing is considered as a predefined cost that is being assigned according to
units of materials, labour and other costs of production for a specific time period. It can be
successfully used by the companies in repetitive business operations; hence the approach seems
to be beneficial for business entities. This is representing the value of standard quantity and
standard expenses for 4000 keyboard.
Standard Quantity (SQ) Standard Expenses
1 keyboard 2.5 feet of PVC sheets Cost of per unit 3.60 GBP
4000 keyboard
(2.5 GBP * 4000)
10000 feet of PVC sheets 36000 GBP
(10000 * 3.60 GBP)
Thus, it states the difference between actual results and standard quantity.
Budgeted or Standard data Actual results Difference between standard and actual
10000 feet 11000 feet 1000 feet
36000 GBP 37400 GBP 1400 GBP
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B. Calculation of material price variance
Direct Material Price Variance shows the difference between actual cost (direct material)
and standard cost of purchased quantity. The major part of this calculation is the standard price
that is determined on the basis of usage, scrap levels and quantity purchased. Thus, it can be said
that the method is highly suitable in terms of undertaking appropriate business decisions at Dell.
Material Price Variance (MPV) = (Actual quantity (AQ) * Actual price per unit (AP) ) –
(Actual quantity (AQ) * Standard price per unit (SP) )
MPV = (11000* 3.40) – (11000* 3.60)
= 37400 – 39600
= -2200
Calculation of material quantity variance
In variance analysis, direct material price variance is showed that depicts the difference
between the standard cost and the actual cost of the total quantity. This is calculated on the basis
of material purchased.
Material Quantity Variance (MQV) = (Actual quantity (AQ) * Standard price per unit (SP) ) –
(Standard Quantity (SQ) * Standard Price per unit (SP) )
MQV = (11000 * 3.60) – (10000 * 3.60)
= 39600 – 36000
= 3600
TASK 4
P5 Compare Dell with HP in order to establish how organixtaions are adapting management
accounting system to respond to financial problems
HP and Dell both have adopted management accounting systems for the purpose of
managing financial problems; however both the organizations involve different methods to
identify the same thing. Stating about general context, it can be said that technology has brought
radical changes in Dell which aids the business entity to bring new products and services for the
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end users. Such services are technologically concerned and also aids in enhancing the ratio of
innovation (Otley and Emmanuel, 2013).
Thus, comparing both the companies, it can be said that Dell is engaged in developing,
selling and repairing computers and other products that are technologically concerned. Further,
Dell is also considered as the largest technological corporations in the world that provides quality
associated and effective services to the end users. The company is also suitable for the end users
since it supplies innovative services to the customers which enhances sales and profitability
aspects. Configured systems are also delivered by the business entity in many areas.
However, on the other hand HP is considered as the king in laptop technology as the
brand has highly competent products and services. HP is populous because the business has
variety of hardware and software components that are highly user friendly (Tucker and Lowe,
2014). All sorts of computer products are being provided by HP to different customers which
also enhances the success and growth aspects. The company is also active on online distribution
of computer services; thus it makes the brand more competent among the end users. Similarly,
HP also has consulting services which helps the partners to deliver appropriate products to the
end users.
Nonetheless, it is also identified that both HP and Dell are using variance analysis so as
to determine the budgetary aspects. This also aids the business entities to compute standard and
actual cost as per the products sold to the market place. Such method is also used for the purpose
of planning actual results and effects of the difference between two companies. This is measured
on the basis of comparing the performance aspects of the business entities (Renz, 2016).
Hence, this ensures to adopt suitable decisions for the business entity. Similarly, it is also
analysed that Dell has been focusing on incremental budgeting which holds most important role
in management accounting processes. However, the method ensures to re-calculate the budgetary
aspects in terms of adopting diverse measures for budget management. Thus, according to the
technique the management assumes that all the departments will manage their existing business
operations at current level of expenditure.
However, on the other hand, additions will also be made in the causing reduction in the
budgetary aspects. Therefore, it can be said that an increment budgeting is useful for Dell
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because the allocation of resources is dependent on the previous period (Suomala, Lyly-
Yrjänäinen and Lukka, 2014). This approach seems to be more profitable since it includes actual
costing that exist in the budget about different products and services. Thus, incremental
budgeting brings more changes in the business operations of Dell which has a direct impact on
organizational success aspects.
CONCLUSION
Summing up the entire research study, it can be said that Dell needs to focus on suitable
accounting procedures so that actual value of the business can be encouraged. This is also
effective in terms of undertaking effective business decisions in all domains. Furthermore,
decisions related to budgeting and spending can also be taken accordingly as per the
requirements of the organization.
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