Contents INTRODUCTION...........................................................................................................................1 MAIN BODY..................................................................................................................................1 P1.Explainmanagementaccountingandtheessentialrequirementsofmanagement accounting system........................................................................................................................1 P2. Different method used for management accounting reporting..............................................2 P3 Calculation of marginal and absorption costing.....................................................................4 P4. Advantages and disadvantages of different types of planning tools used in budgetary control..........................................................................................................................................6 P5 Effectiveness of different management accounting system to respond to financial problems .....................................................................................................................................................7 CONCLUSION................................................................................................................................9 REFERENCES..............................................................................................................................11
INTRODUCTION Management accounting can be defined as process of presenting financial information of company and measuring performance of enterprise. It supports business in formulating adequate policies in order to manage day to day operations significantly (Oboh and Ajibolade, 2017). Firms have to implement correct system and have to follow internationally accepted principles in order to prepare or manage reports well. That assists in maximising profit of organisation to great extent. Present study is based on A &R Cambridge Ltd (Arcam); it is the British manufacturer that manufactures hi—fi equipment’s such as Blu- ray player, rCube etc. Current assignment will explaindifferenttypesofmanagementaccountingsystem.Furthermore,itwillcalculate marginal and absorption cost. Study will illustrate advantage and disadvantage of different types ofplanningtoolsinbudgetarycontrol.Inaddition,reportwillexplaineffectivenessof management accounting system in order to deal with financial problems of business. MAIN BODY P1. Explain management accounting and the essential requirements of management accounting system Management accounting basically means the provision of the financial data a giving advice to the company. Also the institute of cost and management accounting London has given the definition of management accounting as it is the process or application of the knowledge which is professional that is required as the skill in the preparation of accounting information in such a way that it can support management in the process of formulation of policies, rules and regulations in the planning and control of the operations of the undertakings. Management accounting is also the process that involves techniques and concepts which can be used by A&R Cambridge Ltd efficient planning related to the business (Luft, 2016). It also assists the organization in choosing among the best alternatives and also control the business actions through evaluation and interpretation of performances. A&R Cambridge Ltd can makes use of management accounting g system for internal purposes, that can also assist them in managing business operations effectively. This process can also help the firm in making the internal decisions and achieving the business objectives. Essential requirements of management accounting system There are various types of management accounting system and each one of them have essential requirements. A&R Cambridge Ltd. Needs to adhere to it. It includes the following: 1
Cost accounting system- Cost accounting system is basically a framework that can be occupied by A&R Cambridge Ltd. In calculating the exact cost of their products and services for the analysis of profitability, inventory valuation and cost controlling. Essential Requirements- The essential requirement for the cost accounting system used by the business is that the procedure must be simple and practical and capable enough to meet out the needs and demands of the business carried out by the A&R Cambridge Ltd. The accounting system must be flexible enough so that it can be changed by the company according to the time and situation. The system must be framed in such a way that it can give facts and figures that can be important for evaluating the performance of firm by comparing it with the past figures. Inventory management system- An inventory management system in an organization can be defined as the integration of technology (hardware and software) that can assist A&R Cambridge Ltd. in planning and controlling the inventory stock of the company. It is a process and method that can be used by the businesses to monitor and maintain the goods and services that is kept by the company. This process makes sure that the assets, raw materials and finished products are ready to be sent to the vendors or end consumers. Essential Requirements- The essential requirement for inventory management system is that the cooperation from various departments is required to manage this software. A&R Cambridge Ltd. by installing this software have the advantage of transferring the products to the place easily where it is being required. Transfer management also assist organization in tracking inventory when it is being moved from one place to another. It also facilitates the overall transfer process. Job Costing system- Job cost system can be defined as the system that can be used by A&R Cambridge Ltd. for calculating manufacturing cost. The firm can also assign and accumulate it. This method is basically used by the organization when the various goods which is delivered by company is different from each other and has the different significant cost. Essential Requirements-The essential requirement for the Job Costing system is that A&R Cambridge Ltd. must have the effective production system. Company requires proper methods of absorption related to overheads. This costing system can also help the organization in creating a difference between the profitable and unprofitable jobs. P2. Different method used for management accounting reporting Management accounting reporting is the internal report that can be prepared by the A&R Ltd. for internal users. This report assists firm in making decisions related to the budgeting. Management 2
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accounting reporting can also guide the enterprise for taking judgements related to the decision of incentives given to the employees of the company. It helps in providing all the information related to finance to the managers which helps them in making decisions. The report can be prepared on weekly, quarterly and monthly basis according to the need of information. The report need to be understandable with good presentation. Management accounting report can help A&R Cambridge Ltd. in cutting costs and renegotiate with the vendors and the suppliers. This report also provides the summarised version of all the information related to the cash inflow and outflows. It also helps the managers of the A&R ltd. the potential to have the idea of cost prices of the goods versus the selling price. The different methods of management accounting reports are: Budget Report- Budget management accounting reports are on the most important and crucial report that needs to be prepared by A&R Cambridge Ltd. This reports can support company in measuring their performance and is been prepared whole for the small businesses and department wise for the large organization. This report is summarised version of the sources of revenue and expenditures. The firm needs to achieve its goals and objectives while staying in budget set up by them. It also helps company in growing. The budgeting report can help firm in recognizing the unforeseen circumstances. Account receivable aging report- Account receivables aging report is the type of report that can assist A&R Cambridge Ltd. in listing the invoices of the unpaid consumers and credit memos which are unused by date ranges. With the help of accounting software system, the aging reports can be generated by the organization. The accounting receivable aging report can also assist firm in calculating the future potential risk. This can be used to derive the allowance for future. It can also be used by A&R Cambridge Ltd. to derive the historical percentage of invoice dollar amounts (Schaltegger,Etxeberria and Ortas, 2017). It presents the consumers who are not able to pay their liability, that can assist the organization in smooth functioning. With the help of the accountreceivableagingreportmanagercanalsofindouttheproblemrelatedtothe management of the company. Cost managerial accounting report- Cost managerial accounting report can be used by A&R Cambridge Ltd. to calculate the cost of goods that is been manufactured by them. This calculation can include raw material cost, overhead labour and any added costs which is been taken into account. This report help manger in comparing different lines within the company to 3
analyse the scope of improvement or to offer bonuses and incentives to departments that are performing at its best. This can assist A&R Cambridge Ltd. in increasing the efficiency of the employees which directly enhances the productivity. Performance report- Performance report can have developed by the A&R Cambridge Ltd. so that the performance of the company can be easily be reviewed. These reports can help the managers of the company in making the strategic decision that can assist them in the future growth. These report help the firm in analysing the performance of various employees in the firm. The incentives, salary and bonus given to the workers in the A&R Cambridge Ltd. can be given on the basis of their performance. The role of the performance report is most important in the company that can help the managers of the firm in keeping the accurate measure towards the goals of the firm. Job cost report It is another management accounting reporting method, it provides necessary and crucial information about existing financial performance of business through current status of job. This reporthasseveralcategoriessuchaslabourcost,liquidateddamages,fieldoverhead, subcontractor cost etc (Gunarathne, N. and et.al., 2016). Through this reporting method A &R Cambridge Ltd can map out its workflow process and can ensure account payable invoice. This is helpful in enhancing transparency of each job and analysing cost of each job. One of the major advantage of using this reporting tool is that it raises financial confidence of company as it is beneficial in maintaining credibility of business and forecasting results in most effective manner. P3 Calculation of marginal and absorption costing There are several ways of viewing cost. These are explained and illustrated as below: Marginal costing It is the technique in which company charges variable cost to unit cost. If cost of production gets change then it would affect the net profit of business unit. It is highly depended upon the production expenses that includes labour, material etc. Fixed cost remain constant in marginal costing system that means changes in output or production unit will not affect profit at all. Profit of business can be determined as per the contribution margin (Brandau and et.al., 2017). It is simple process and it is helpful in controlling over cost. 4
One of the major benefit of applying marginal costing system is that it is informative thus, easy to understand. When company prepare profit and loss accounting by using marginal costing tool then changes in stock level do not impact on P&L account. Itisbeneficialinminimisingbalanceleftissuesinoverheadcontrolaccounts (Schaltegger, 2018). Income statement using Marginal costing Sales revenue 8000 0 Cost of sale Direct material22000 direct labor13000 variable (overhead of production)9000 Admin expenses4500 total variable cost48500 Contribution 3150 0 Fixed cost Production overhead7000 distribution5000 total fixed cost12000 Net profit 1950 0 Interpretation:From the above income statement it is analysed that sales income of A &R Cambridge Ltd is 80000 Pound and total variable cost of business is 48500. Contribution = sales revenue- total variable cost which is 31500. Net profit of business is 19500 Absorption costing It is another kind of costing technique in which all kind of production costs are being involved. It is the oldest tool that is applied by A &R Cambridge Ltd as well for calculating the cost of operations. If output is same then cost per unit would be same but if there is changes in level of output, then per unit cost would be differ (Merchant and White, 2017). Use of absorption costing technique supports A &R Cambridge Ltd in presenting more realistic cost. Generally accepted accounting principles (GAAP) has accepted this method of costing, the major reason of acceptance is that there is no issue of undervalued stock because 5
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variable and fixed both expenses ae calculated for calculating the net profit (Rickards and Ritsert, 2018). Income statement using absorption costing Sales revenue 8000 0 Cost of sale Direct material22000 direct labor13000 variable (over head of production)9000 Fixed production cost7000 total variable cost51000 Gross profit 2900 0 distribution and administration cost variable4500 fixed5000 9500 Net profit 1950 0 Interpretation: from the above data it is found that gross profit of business is 29000 and net profit is same which is 19500. It can be interpreted that there is difference in contribution and gross profit. Marginal costing technique only adds variable expenses thus, gross profit or contribution is generally high in this techniques whereas in absorption method fixed and variable both expenses are included thus, net profit gets reduced. A &R Cambridge Ltd should implement marginal costing method in order to generate high profit in business. P4. Advantages and disadvantages of different types of planning tools used in budgetary control. The planning tools can be utilised by the A&R Cambridge Ltd, so that they can plan for preparing future budget of their company. The tools can help in keeping the proper measurement of cash inflow and the outflow. By preparing efficient budget can help the company in effectively performing the financial functions. The various types of planning tools are following: Fixed budget-A fixed budget when prepared by the A&R Ltd. is that budget which does not change even when the firm faces increase and decrease in the sales. Advantages 6
Cash budget can assist the A&R Cambridge Ltd. company in avoiding the bad debts as it makes them realise the actual cash position of the firm. This budget is also known as static budget. This budget does not change for the specific period of time and remains fixed. This budget remains fixed even when the activity level changes. It cannot be modified as per the actual figures and values given (Sands and Lee, 2015). Disadvantages The fixed budget remains fixed even when the actual volumes changes, this can be one disadvantage for the company. Operating budget- Operating budget is also known as the annual budget. This budget can support A&R Cambridge Ltd. in estimating the cost, expense and price of the goods the company is been manufacturing. Standard costing:Standard costingis an accounting system used by some manufacturers to identify the differences or variances between firm. Variance analysis:Variance analysisis the quantitative investigation of the difference between actual and planned behaviour. Advantages It also helps the company in estimating about the cost and utilization of resources which will be required for developing the goods and services of A&R Cambridge Ltd. Operation budget also keeps the record of maintain operations, salaries and incentives of the employees. This budget can help the A&R Cambridge Ltd. in the growth aspects of company (Advantages and Disadvantages of Planning tools, 2013). Operating budget can help the A&R Cambridge Ltd. in planning for the day to day operations of business. Disadvantages The one disadvantage of operational budget is that the data kept in it can sometimes may not be reliable or accurate. 7
Cash budget- This type of budget can be prepared by the A&R Cambridge Ltd. to measure the cash inflows and the outflows. It can help the manager of the organization in realising if they have sufficient amount of cash or liquidity position or not. NPV-(NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time Advantages This budget can help the company in knowing about the estimates cash position in the future (Oboh and Ajibolade, 2017). The budget helps in forecasting the amount of cash which will be required by A&R Ltd. in the future. The cash budget can assist the firm in growing and maintaining their liquidity position. It supports the company in taking the production, sales, marketing related decisions related to the availability of cash. It helps the company in measuring the performance level of the firm an also supports in cutting down the costs. Also the budget changes with the situation of the business. Disadvantages Cash budget is not flexible and cannot be changed with time. P5 Effectiveness of different management accounting system to respond to financial problems Management accounting is considered as one of the effective application that aids the businessinanalysingfinancialproblemsandtakingrightactiontoresolvesuchissues (Schaltegger,EtxeberriaandOrtas,2017).Differentmanagementaccountingsystemsare explained as below: Variance analyses It is considered as most commonly used tool that helps in comparing actual outcome and financial forecasted behaviour. Each firm aims to generate fix amount of return and accordingly it plans various activities. Variance analyses aids the business in analysing difference between expected behaviour in finance and actual return. For example, if A &R Cambridge Ltd faces issue of over cost or over budget then through variance analyses it can find the rout cause of this problem and can take immediate action to control over expenses (Hiebl and Mayrleitner, 2017). By measuring the results of variance firm can control over cost and can improve its operational efficiency to great extent. As A &R Cambridge Ltd is planning to make changes in its structure 8
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for that it would have to spend certain amount but it is expecting to get high return after this restructuring. Variance analyses will help business in analysing unnecessary cost and by this way manager of A &R Cambridge Ltd can take action to minimise wastage and can solve the problem of over budget. For example: of A &R Cambridge Ltd wants to generate 10% more revenue as compare to last year through restructuring then manager of business can take assistance of variance analyses and can track budget (Endenich,Trapp and Brandau, 2017).If any kind of deviation occur between actual and expected return then firm can make changes in material, labour and overhead expenses so that it can meet with its objective and can fulfil its financial goal. Key performance indicator (KPIs) It is another type of management accounting system which is used by business to measure the progress of business unit.KPIs is helpful in monitoring progress and analysing whether firm has met with its objective or not. A &R Cambridge Ltd can take support of financial KPIs and on the bases of income statement and balance sheet enterprise can examine changes in sales growth (Sands and Lee, 2015). For example: if sales of the company are getting down then by looking at annual report of company and other competitors A &R Cambridge Ltd can identify rout cause of declining sales and can take necessary action to enhance sales revenues of organisation. For example: if operating cash outflow is increasing continuously then company has to pay attention on routine operating expenses. Through KPIs enterprise can analyses whether capital investment is accurate or not. This may help in resolving the issue of high cash outflow as compare to inflow. By this way business can be able to generate more profit and would be able to gain competitive advantage as well (Jack, 2015). Benchmarking It is the type of management accounting system that compares business practices against industry standards. Cost, quality, time can be measured by using this technique. For example, if A &R Cambridge Ltd is facing issue of high cost per unit then through benchmarking this issue can be respond by business. By this way firm would be able to analyses total production of business and process use in production (Ali and Zhang, 2015). This will help in analysing issue in production and firm will be able to take action to minimise various unnecessary cost. By this way total cost of production can be minimised that will aid in minimising per unit cost of product. Financial benchmarking allows company to emphases on income, payments and other 9
expenditures.This aids in examining existing financial practices of organisation. A &R Cambridge Ltd would be able to minimise wastage and raise income of the firm. Activity based costing (ABC) It is the type of accounting method that shows relationship between cost, manufactured products and overhead activities. It is very difficult for A &R Cambridge Ltd to assign cost like salaries etc. in production process (Agrawal, 2018). In such condition enterprise fails to estimate actual cost of production. That sometimes create issue in preparing accurate budget. But through ABC method A &R Cambridge Ltd would be able to align all its expenses and would be able to know actual overhead expenses. By this way issue of over budget can be minimised ad enterprise would be able to control over cost as well (Rahman and Ramli, 2016). . Balance score card It is effective management accounting system that emphases on performance metric, it considersseveralelements:financial,customer,growthperspectives.Progresscanhave measured by using this technique (Luft, 2016). For example, if A &R Cambridge Ltd wants to minimise its time of production then it is essential to take support of balance score card that would help in minimising manufacturing time and would support in raising production capacity of business to great extent. CONCLUSION From the above study it can be concluded that management accounting is effective system that helps business in forecasting future business environment and preparing budget in appropriate manner It is beneficial in minimising issue of over budget and helps in controlling over cost as well. Variance analyses, Key performance indicators are most essential tools that allow organisation to analyses financial problems and take necessary actions to respond to such kind of problems. Budget, performance, sales reports are several reporting systems that supports organisation in monitoring progress of business and aligning business activities accordingly. Zero based budgeting, variance analyses etc. are some planning tools that give positive result to the company and supports in making effective plan and controlling over cost as well. Job costing method aids in analysing profit earned by organisation from each job. 10
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