Advantages & Disadvantages of Management Accounting Assignment

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
P1. Explain management accounting and the essential requirements of management
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
explain different types of management accounting system. Furthermore, it will calculate
marginal and absorption cost. Study will illustrate advantage and disadvantage of different types
of planning tools in budgetary control. In addition, report will explain effectiveness of
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:
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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
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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
account receivable aging report manager can also find out the problem related to the
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
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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
report has several categories such as labour cost, liquidated damages, field overhead,
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.
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 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.
 It is beneficial in minimising balance left issues in overhead control accounts
(Schaltegger, 2018).
Income statement using Marginal costing
Sales revenue
8000
0
Cost of sale
Direct material 22000
direct labor 13000
variable (overhead of production) 9000
Admin expenses 4500
total variable cost 48500
Contribution
3150
0
Fixed cost
Production overhead 7000
distribution 5000
total fixed cost 12000
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
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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 material 22000
direct labor 13000
variable (over head of production) 9000
Fixed production cost 7000
total variable cost 51000
Gross profit
2900
0
distribution and administration cost
variable 4500
fixed 5000
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
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 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 costing is an accounting system used by some manufacturers to
identify the differences or variances between firm.
Variance analysis: Variance analysis is 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.
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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
business in analysing financial problems and taking right action to resolve such issues
(Schaltegger, Etxeberria and Ortas, 2017). Different management accounting systems are
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
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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
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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
considers several elements: financial, customer, growth perspectives. Progress can have
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.
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Online
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