Management Accounting Assignemnt | A. Reyrolle & company

Management Accounting

INTRODUCTION
Management accounting is the procedure of recording, analysing, sorting, managing
activity of company via different accounting tools and take the efficient decisions to promote the
production of company and employees performance. It helps company to solve various problem
by evaluating the financial data. A. Reyrolle & company is a British engineering company which
is the one of the largest employers company on Tyneside. The aim of the company is to produce
the scientific instrument.
The study represents the role of MA in the company and the requirement of accounting to
resolve financial problem. It helps to explain the various technique used by the organization to
report the financial data like cost report, budget, job costing etc. which helps to present income
and expenditure of company by adopting the abnormal and marginal cost. Report explains the
various benefits and limitations of accounting system tools for controlling the budget. It also
highlights the MA system role to suggest solution for various problem related to the finance such
as variation in sales, revenue, decreasing profit etc.
LO 1
P1 MA and the need of MA system
Management accounting : MA is the procedure of using monetary information to
making the decisions for the company for effective and efficient management (Maas,
Schaltegger, and Crutzen, 2016). It supports managers decision to make policy, strategies, plans
to run the business organization. It is used by the internal users such as employee's, owner and
managers.
Requirement of MA systems
The focus of MA system is to give the information to the external and internal user such
as customer, employees, managers, owner, creditors, shareholders etc. MA system requires
taking the financial statement and evaluate the data via various reports like inventory
management report, job costing report, cost report etc. MA system support the decision of the
organisation take the effective and efficient measures by using the various accounting system.
(Cooper, Ezzamel, and Qu, 2017).
Inventory management system: This system lays focus on using software for managing
inventory level, order the inventory, billing the raw material etc. It is required by the A. Reyrolle
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& company to manage their organization scientific tool and order the quantity when it demanded
in the market (Chenhall, and Moers, 2015). Management of inventory level in organisation help
to reduce the maintenance cost of the inventory in their warehouses. It also supports the
organization to take the effective measures regarding the order level and order the quantity which
they require.
Job costing system : In job costing report the work of task is divided indifferent job and
each job is evaluate on the basis of its importance to the organization. It is used to track the
financial effectiveness and efficiency in the organization. A. Reyrolle & company use the job
costing reporting method to focus on the activity which is highly required by the company. It
helps to monitor and control the different jobs or activities which generate higher profit rather
than to wasting time on less required activities.
Price optimisation system : It is an effective reporting method used by the company to
estimate the price of goods. It helps them to meet their goal and objective by increasing their
profit and revenue of the company. A. Reyrolle & company require the price optimization
system to measure the price of each activity to accomplish the project of providing scientific tool
to the customer (Thomas, 2016).
Cost accounting system : It is used by the firm to record and track production activity by
using the perpetual inventory system. It is required by the company to analyse the profitability,
efficiency and valuation of inventory level in the organization. The estimation of cost of the
product also help to prepare the budget of organisation or firm which measures the activity of the
firm by balancing its performance to the previous month performance. It includes the various
costing method such as job order costing, process costing, traditional costing, activity based
costing etc. (Collis and Hussey, 2017). The use of process costing is to estimate the
manufacturing expenses of process separately, so they can evaluate the cost required by each
process and control the process separately. It also helps the company to manage the tome and
cost by focusing on the individual process rather than to whole process.
P2. Different methods defined under the MA reporting.
This term is defines as a process related with preparation of internal statement by
considering all the monetary as well as arithmetical info aiding in the process of decision making
of company's management. It helps company in providing better understanding of current
business operations and assist in making day to day decision for the improvement of commercial
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areas and objects. There are several methods of preparing managerial report that can be used by
A. Reyrolle & Company:
1. Performance Report – The presentation is measured as one of the greatest significant
for every commercial organization which helps in conducting functions related to
monitoring, controlling and reviewing performance level of its operations, processes. It
further assists in monitoring performance of employees and team as a whole as involved
in carrying on a particular business activity. Furthermore, such report provides a base to
A. Reyrolle & Company in strategic decisions for future growth and success of both.
Such delivers a bottomless vision around the employed processes, concepts and
techniques relevant for smooth business activities (Maas, Schaltegger and Crutzen,
2016). By keeping track, it helps in determining whether company is performing
effectively as per the strategies and plans made on the way to the achievement of
commercial areas and if any changes required.
2. Cost Managerial Accounting Report – It determines cost amount incurred for carrying
on production function of the company. At the time of computing cost amount it takes
into account all the expenses related to raw material, overhead, labour and others issues.
It helps the management of A. Reyrolle & Company in making proper realization of the
cost price as well as of selling prices being charged for their products and services for
estimating amount of profit or loss going to happen in the near upcoming after such
business transaction.
3. Budget Report – It elaborates budgetary targets as made by company for making proper
and effective distribution of available occupational as well as monetary capitals. By
framing financial plans it helps A. Reyrolle & Company in projecting future business
expenses and revenue amount. It helps company in making comparison if actual
outcomes with the estimation made for determining variances if any. Further it provides
details about amount of money required to be spent on carrying on any future business
operations. Thus, A. Reyrolle & Company by formulating budgetary plans and strategies
can make more profit and improves its performance. It provides better understanding to
management in making effective use of limited resources. By the assistance of financial
plan report, assessment can be made of own performance level by evaluating whether
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budget made is required to have any changes thereby determining unproductive business
areas incurring charge incidentals.
4. Account Receivable Aging Report – Such report is best for commercial organizations
that deeply rely on spreading praise amenities and services. It helps in determining the
amount which is due or going to be received in an average time period in lieu of credit
sales made to its customers. It is helpful to company especially in conducting its business
operations by gaining of raw material etc. on the credit basis. It further provides details
regarding list of defaulters which are making default in respect of the non-payment of
money (Novas, Alves and Sousa, 2017). A. Reyrolle & Company can evaluate all the
issues which is coming in the money collection process of the company. For overcoming
this default risk, it is required for company to formulate and implement strict policies and
plans in context of business operation carried on credit basis.
This system provides assistance in form of functions such as managing, controlling and
evaluation of all the business operations thereby suggesting any modification required for
making improvement therein. A. Reyrolle & Company by using this system can get benefits in
ways such as:
Management Accounting
System
Benefits
Cost Accounting System AA Reyrolle & Company by designing
financial plan can make contrast of real with
predictable one. Also, it helps in assessing the
most cost incurring part of business department
which is unproductive and unnecessary.
It helps in determining the cost associated with
operational activities, its efficiencies.
Inventory Management System It provides support to company in identifying and
minimizing all the cost related expenses which are
associated with the business operations (King and
Clarkson, 2015).
It helps in making proper valuation and
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management of inventory level which can bring
improvement in performance among its customer
and market and increase profitability.
By this scheme the stock out condition can be
avoided and management can have proper
inventory level.
Job Costing System It helps in assessing cost which has been assigned
per job or business activity for making effective
decision related to business process.
This scheme of management accounting helps in
observing, following level of performance of all the
individual employees as well as of the team for
making changes related to cost control, improving
business efficiency and productivity.
Elaborating integration of management accounting system and report
Management accounting system & report is used by company to evaluate performance by
taking different measures and using the various report to improve the effectiveness and
efficiency of the company. A. Reyrolle & company use the MA system to make the report for
gathering information regarding the company. The gathered information is evaluated by the
internal user such as managers, employees and owner to provide the efficient information to the
external users such as customer, creditors, client, government and stakeholders. MA report helps
to record all transaction regarding its sales, revenue, profit and expenses for the different purpose
such as to control the cost, managing the activities, deliver the products on time and improve the
performance according to the requirement and demand of the customer.
LO 2
P3 Use of different costing technique to prepare the income statements
MA techniques and tools : Organization use the MA tools and techniques to calculate
the cost of the company task. It supports them to control the cost of the production and ascertain
the area where the changes are required. There are different kinds of tools which help them to
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present the income and expenditure of the company in proper format and as=certain the net loss
and profit in particular year (Scoccia and et.al., 2018).
Marginal costing : It is the method of calculating the cost by changing in per unit of
output. It is used by the company to determine the optimum use of resources and quantity of the
products manufactured by the company. It also helps to manage the product price when the
customer demanded the minimum price of the product with the higher quality.
Absorption costing system : In this method only fluctuating cost is assign to the
inventory of the organization. It includes the various cost like material expenses, employment
cost, fixed and variable overhead related to manufacturing activity etc. it is required for different
kinds of reporting such as income tax and external financial report (What is absorption costing?,
2019). The major variation in these to costing method is fixed cost. Marginal cost exclude the
fixed cost in its calculation but absorption cost method use the fixed cost in the calculation of
cost per unit and preparation of income statement.
Annex A
Calculation for the period 1
Basis Value in £
Total Production
Dining table 5000
chair 20000
SP of the material
Dining table 590
chair 90
DM
Dining table 215
chair 20
Total labour
Dining table 90
chair 30
Total production O/H (variable)
Dining table 25
chair 5
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Total fixed cost of the material 410000
Unit sales
Dining table 4350
chairs 16000
Total production cost of the material
Dining table 330
chair 55
Per unit fixed cost 16.4
Cost of production
Dining table 346.4
chair 71.4
Preparation of income statements by marginal cost
Basis Description Value in £
Total generated
income(Revenue)
Dining table 2566500
chair 1440000
4006500 4006500
Subtract
Material 935250
Dining table 320000
chair 1255250 1255250
Labour 391500
Dining table 480000
chair 871500 871500
production O/H (variable) 108750
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Dining table 80000
chair 188750 188750
2315500 2315500
Subtract closing inventory 214500
Dining table 220000
chair 434500 434500
Contribution 1256500
Subtract Fixed costs 410000
Total Net gain 846500
Preparation of income statement by using absorption cost
Basis Description Value in £
Total generated revenue 2566500
Dining table 1440000
chair 4006500
Subtract 4006500
Material 935250
Table 320000
chair 1255250 1255250
Labour 391500
Dining table 480000
chair 871500 871500
production O/H
(variable)
Dining table 108750
chair 80000
188750 188750 2315500
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Subtract total Fixed
costs 410000
Subtract closing
inventory 410000
Dining table 225160
chair 285600 510760
510760
Total net gain 770240
Interpretation : It can be concluded from the calculation that by using marginal cost
the company generates the 846500 profit and by using the absorption cost the company is able to
generate the 770240 profit. It can be analysed that the company generate higher profit by using
the marginal costing method. The cause of generating the greater profit is that marginal costing
method exclude the fixed cost in preparation of income statement While the other method,
absorption cost includes the variable cost, fixed cost and overhead cost. It can also be interpreted
that absorption cost is the better method in compare to the marginal cost because it presents the
true position of the company by considering all the cost.
Calculation of the data for the 2 period
Basis Value in £
Total Production
Dining table 5200
chair 22000
SP of the produced material
Dining table 590
chair 90
Total DM
Dining table 215
chair 20
Total DL
Dining table 90
chair 30
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Total O/H (variable)
Dining table 25
chair 5
Fixed cost of the production 482000
Production sales unit
Dining table 1700
chairs 19100
Total cost of production
Dining table 330
chair 55
Per unit fixed cost 17.72
production cost (fixed)
Dining table 347.7
chair 72.7
Opening inventory + total purchases – sales =
closing inventory
Dining table
650
4000
Opening inventory
Dining table 4150
chair 6900
Preparation of income statement by using marginal costing method
Basis Description Value in £
Total generated revenue
Dining table 1003000
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chair 1719000
2722000 2722000
subtract
Total DM
Dining table 365500
chair 382000
747500
Total labour
Dining table 153000
chair 573000 726000
production O/H
(variable)
Dining table 42500
chair 95500 138000 1611500
Subtract : closing
inventory
Dining table 1369500
chair 379500 1749000 1749000
Contribution -638500
Subtract : Fixed cots 482000 482000
Net profit/loss -1120500
Income statement (absorption cost)
Basis Description Value in £
Total revenue
Dining table 1003000
chair 1719000
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2722000 2722000
Subtract
Total DM
Dining table 365500
chair 382000
747500
Total labour
Dining table 153000
chair 573000 726000
Variable production
O/H
Dining table 42500
chair 95500 138000
1611500 1611500
Subtract : Fixed costs 482000 482000
Subtract : closing
inventory
Dining table 1443040
chair 501772
1944813 1944813
Net loss/gain -1316313
Interpretation : It can be concluded from the above example of income statement that it
can finalize that in the second period company suffer losses in using both method. By using the
marginal method, it suffers from the loss of -1120500 loss while using the absorption cost
method the loss of the company is -1316313. It can be concluded that by using the abortion Cost,
Company suffers from the higher loss because company is not able to produce the larger unit of
output.
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Annex B
Option 1 Option 2 Option 3
Basis £70 per units
(500 units)
£63 per units
(650 units)
£80 per unit (800
Units )
Revenue 35000 40950 64000
Subtract :
Variable Cost
14200 14200 14200
Material
(variability
100%)
12000
Labour
(8000*25%)
2000
Cost of sales
(2000*10%)
200
Contribution 20800 26750 49800
Subtract : FC 14800 14800 14800
Labour
(8000*75%)
6000
COS (2000*90%) 1800
Other associated
expenses
7000
Profit 6000 11950 35000
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Basis Option 1 Option 2 Option 3
Total sale price 70 63 80
Associated VC 28.4 21.84 17.75
Contribution (product price
– variable cost)
41.6 41.16 62.25
BEP (sales) = Fixed Costs/
contribution
355.77 359.57 237.75
Interpretation: BEP is used to present the sales amount either in the form of quantity or
units which is required by the firm to cover the expenses of production activity (Break-Even
Analysis – Definition, Formula & Examples, 2018). From the above calculation it can be
concluded that the option 3 is the best profitable plan for the company because in the 3 plan the
company sale 800 unit @ of 80 and the BEP of the 3 option is also minimum. The BEP of the 3
option is 237.75.
LO 3
P4 Different advantages and disadvantages of planning tools in the organisation
Financial planning: The aim of the financial planning is to prepare the financial plan by
the different accounting tools to measure the productivity of the firm. It helps the organization to
achieve its objective and goal by efficient planning (Arend and et.al., 2017).
Benefits
 It supports the firm to accomplish the target and goal within the proper time and cost. It helps to plan the usage of finance in different activity by expecting the cost of different
activities of the company.
Disadvantages
 It requires skilled manager with high quality knowledge to estimating the cost of the
activity and future changes for financial planning.
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 It also requires the long time period to plan the finance and the wrong financial planning
affect the entire functioning of the company or its profitability.
Budgeting : It is the process of estimating the cost and activity done by the company at given
time period. It helps the company to compare the performance and provides a framework to
complete the task or project according to the specified activities in the budget.
Benefits
 It provides the different measures to estimate the future income and losses and achieve
the goal within the proper cost and time. It also provides a comparison the one actual cost to the budgeted cost. The favourable
outcomes present the good position of the company but the unfavourable outcomes
reflect that the company has to focus on the budget and solve the variances.
Disadvantages
 It is based on the estimation of the past performance or the expectation of the future event
or trend. It does show the accurate performance.
 It also requires the experience manager to prepare budget for the company who can
evaluate each aspect and ascertain the cost after the evaluation (Hardin, and McCool,
2015).
 The disadvantage of budgeting is that in only taken the monetary outcomes. The non-
monetary outcomes are neglected in budgeting.
MA report : the role of MA system is to prepare the MA report to help the manager in DM
process. They use the various king of report like budget report, job costing report etc.
Benefits
 It highlights the strength and weaknesses of the various operating and financial activities
and help to control the activities by timely regulating them (Kerzner, 2019).
 It supports the decision of the manager and enforce them in organization for the effective
and efficient performance. The various tools and technique used by the company make the customer and employee
more reliable on the presented data and performance.
Disadvantages
 The inaccuracy and manipulation of the data by the management affect the entire
business of the organization.
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 The preparation of accounting reports uses high resource and fund which can be
affordable by the large organization not for the small scale business.
 It only provides data in the report. The decision on the behalf of data require highly
skilled and experience manager.
Application of planning tools
The various planning tools helps the firm to estimate and forecast the budget for particular
accounting period. They provide the various data like sale of the company, total generated
revenue and profit, expenses etc. of the previous year and detail of the all future events which
may affect the business profitability and productivity. The financial accounting tool help the
organization to find the sources of finance for the company to complete the project. It is easy to
forecast the budget of the firm by estimating the required finance for different activities like to
purchase raw material, paying wages, bills etc. The MA report support firm to ascertain the cost
of the activity by analyse each job.
Annex C
Calculation of NPV and Payback period
NPV : It is used to determine the current value of the cash flow generated in future which is
created by the project. It also includes the initial investment of the project. It is used by the
company to estimate that which project is benefited to the company.
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Interpretation: it can be concluded that the NPV of the project X is 416.65 and project
Y is –817.35 which represent that NP project X is acceptable by the company because it gives
the positive NPV, and they have to avoid the project Y because it gives the negative NPV.
Payback period :
Year Project X Project Y
Discounted
value of
project X
Cumulative
cash inflows
of project X
Discounted
Value
project Y
Cumulative
cash inflows
of project Y
1 2500 1500 2232.140 2232.14 1339.29 1339.29
2 1000 2000 797.190 3029.33 1594.39 2933.68
3 1000 2500 711.780 3741.11 1779.45 4713.13
4 500 1000 317.760 4058.87 635.52 5348.65
5 1500 1000 851.140 4910.01 567.43 5916.08
6 1000 2500 506.630 5416.64 1266.58 7182.66
Calculation of payback period :
Formula: time to recover the initial investment + (initial investment – unrecoverable
cost)/inflow of the particular year
payback period (Project X) = 6+(5000-4910.01)/1000
= 6.09 year
payback period (Project Y) = 6+(8000-5916.08)/1500
= 9.94
Interpretation: From the following table it can be interpreted that project X is more beneficial
to the company in compare to the project Y because it takes less time to recover the initial
investment in compare to the project Y.
LO 4
P5. Different management accounting systems types for resolving financial problems.
Is defined as business concept which supports management of company in preparation of
improved and effective business tactics, approaches and controlling all the existing business as
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well as economic capitals of the company. For justifying any monetary problems being faced by
A. Reyrolle & Company. Using of various management accounting tools can be helpful:-
Benchmarking – Is a business method which measures and compares all the business processes,
operations, procedures, products etc. against those business operations of companies which is
considered as best one. It reviews actual performance against standard set as benchmark by the
company for bringing improvement in its overall business performance. It helps A. Reyrolle &
Company. In framing budget and financial performance related plan, strategies by understanding
standards used by the most profit making company. It helps company in evaluating their
performance level by improving their overall business as well as employee’s performance.
Performance metrics can be used for assessing success of Reyrolle & Company section on the
separate basis. It helps Reyrolle & Company in location presentation boards by identifying all its
strengths and weaknesses which can bring development in Reyrolle & Company for making
future profit. It can help in overcoming issue of low profit and cash balance which has been
occurred due to use of outdated business techniques and concepts.
Balanced scorecard – By using this technique, every company can achieve its business
goals in an easy manner by making simple comparison of performance measures. It basically
considers four attributes which are there in the Reyrolle & Company named as business growth,
processes of commercial, clienteles and economics. A. Reyrolle & Company can measure aspect
affecting overall commercial enactment and suggests changes accordingly. All the qualities
counting learning and development assistances in decisive manner of using information in its
fullest means for seeking competitive advantage. Instead, business process can evaluate issues
faced by tracking delays in the production function of A. Reyrolle & Company (Mirgorodskaya
and et.al., 2017). By understanding financial data and information it helps in improving decision
making process and financial performances related to sales, income, expenditures etc. By
imparting proper training and workshop to employees related to use of financial models,
company can resolve its issue of non-liquidity.
Key performance indicator – It helps in monitoring and tracking the success, growth and
progress level which has been achieved by the company’s employees against attainment of
business goals and objectives. This KPI tool assesses the business operations of A. Reyrolle &
Company. Thereby helps the management in taking mandatory and necessary corrective
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measures for the betterment of business performance level. It is best to use in case when
performance are not in line with expectation of company. Company can make use of these
indicator at multiple levels related to business operations on daily basis for evaluating success.
Financial governance – It defines the model of business or way which help company in
gathering, observing, evaluating and regulatory all the available financial information and
resources. A. Reyrolle & Company can control interior data for ensuring proper flow of work,
keep tracks of collected data by determining all the business as well as financial risk associated
with it. It also ensures proper compliance of the applicable laws, policies, regulations &
provisions. Financial governance is meant to be very essential tool which is used for resolving
any business problem with help of making plans, budgets and predicting the future growth
correctly. By using such method it can assist company in handling business operations which are
incurring huge cost expenses. If financial governance of A. Reyrolle & Company is not good and
inefficient then it can lead to delay in discovering all the frauds, errors and omission made at the
time of preparation of financials (Chenhall and Moers, 2015). It is also required to make relevant
disclosures of material nature which can impact decision making process, non-compliance can
result in decrease in the performance level.
By using key performance indicator A. Reyrolle & Company can overcome its financial
problem related to the poor inventory management function caused by lack of cash flow. This
tool can assist in process of inventory valuation & evaluating current inventory level with
company thereby controlling cost. It also helps in determining reorder time for minimizing
commercial loss that can ascends outstanding to standard out condition. Reyrolle & Company
will majority focus on better planning of all activities so that different type of objectives could be
achieved.
On the other hand, Hitli Gb has been using benchmarking tool for improving its financial
issue of low profitability and liquidity situation which can be arises due to use of lack of better
improved business processes, procedures resulting in low productivity and customer satisfaction
level.
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CONCLUSION
It can be summarized that management accounting is based on preparation of managerial
report assisting decision-making process of the company’s management. It has defined that by
using effective management accounting system A. Reyrolle & Company can use its available
resources properly for raising profit margin and improving performance level. Further, it has
provided income statement and cost analysis report of A. Reyrolle & Company along with its
interpretations. And at last for resolving financial issue key performance indicator is considered
as the best tool for A. Reyrolle & Company as it determines weak indicators and tries to bring
improvement in it.
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