Management Accounting

Management
Accounting
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INTRODUCTION
Management accounting is also known as managerial accounting and could be described as
a procedure of providing the managers with financial information and resources when making
decisions (Akbar, 2010). Management accounting is used primarily by the organisation's
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management department, and that is the only thing that makes it distinct from financial
accounting. This assignment based on UCK Furniture which is UK based company.
This report includes the various topics such as demonstration of management accounting
system and it include the range of techniques to produce income statement by using appropriate
methods. In addition, it also covers the use of planning tools in management accounting and the
way organizations used to respond their financial problems.
MAIN BODY
PART 1
Section 1
1.1 Explain management accounting and present the essential requirements of different types of
management accounting systems
According to the Institute of Cost and Management Accounting, application of
professional skills in order to manage accounting information in that way which provide useful
information (Callahan, Stetz and Brooks, 2011). By using management accounting, managers
able to formulate policies and build plan to control entire operational activity of organization.
UCK Furniture follow the range of management accounting systems that is essentially required
to maximise their overall productivity and profitability are as follow:
Inventory management system: It is a primarily a discipline which specifies the structure
and positioning of stocked products. It is important to immediately follow the standard and
scheduled course of production and stock of materials at various locations within a facility or
within several locations of a supply network. It is a computer-based system used to monitor
inventory rates, purchases, deliveries, and orders (Hopper and Bui, 2016). This system is used in
the manufacturing sector in some situations to produce a work order, bill of materials, and other
supplies relevant to the product. It is essentially required by UCK Furniture to reduce inventory
over-storage and under-stocking problems.
Job costing system: It is a method of determining the costs they spend to a particular job
that is associated with company. This term is commonly used in the construction industry, which
refers to the distribution of costs at a corporation for specific building projects. Most of the
organizations used this accounting system to set separate cost for each job that is essentially
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required to minimise the production cost which further helps in maximising productivity as well
as profitability of UCK Furniture company.
Price optimisation: This system used to seeking the perfect spot pricing or price
maximization against consumer willingness to pay. Business up and down the supply chain, both
in B2B and B2C environments, rightly devote a considerable amount of time to market
management and ensure that their goods are delivered efficiently at the right price while still
making decent profits. It is essential for UCK Furniture to meet their consumer expectation
through fulfilling business objectives.
Above mention management accounting systems helps UCK Furniture to manage their
financial information which required by top management to take further decisions or build
strategies for the development of the business (Lavia López and Hiebl, 2014). It is used to
maximise productivity or profitability through improving overall performance of business
operations.
1.2 Explain different methods used for management accounting reporting
Performance report: This report is produced to assess a company's performance as a
whole and at the end of a year, for each employee. In large organizations even various
departments’ performance reports are produced. These success analyses are used by managers to
make important business decisions about the organisation's future. People are often rewarded for
their contribution to the company, and are laid off or treated as needed under performers.
Managers of UCK Furniture use this report to evaluate their overall organizational or employees
performance and further build strategies accordingly to improve the outcomes.
Cost managerial accounting report: Managerial accounting measures the prices of the
manufactured products. All the prices of raw materials, overheads, wages and any other prices
are taken into account. The sums are divided by the quantities generated. Managers of UCK
Furniture get the opportunity to understand products ' purchase prices against their value for sale.
Through these reports, profit margins are calculated and tracked, due to have a good picture of
all the costs involved in the development or procurement of the posts. Production loss, daily
labour costs and operating expenses are all part of cost accounting reports for managers. They
have a clear view of all costs, which is important for better source of information optimisation in
all departments.
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1.3 Benefits of management accounting systems
Systems Benefits
Inventory Management Tracking and finding the movement of inventories within an
organization is often useful for the company. It will also help
administrators make full use of inventories.
Job Costing System This is mainly useful in ensuring transparency and effective
distribution of various costs to different systems for businesses.
Price Optimisation System To production managers, this is useful in finding the most
competitive prices to goods or products as well as for assessing
the cost of manufactured and sold goods. This framework
provides the basis on which to establish pricing strategies.
1.4 Critically evaluate that how accounting systems and reporting integrated with each other or
provide business success:
It has been critically evaluated that financial reporting is very essential for the
organizations because it helps the management to make strategies and it is important in various
aspects (Leitner, 2013). For the purpose of tax which required by the regulation and reporting
provide an indication of the firm's financial stability and creditworthiness to investors, creditors
and other companies. The importance of financial statements and reports also extends to
stakeholders. Shares in a company or are an activist investor who holds a large equity stake, then
it is important to provide full disclosure of all assets, liabilities, cash usage, sales and related
business costs.
Section 2
2.1 Calculate costs using relevant cost analysis methods to draw up an income statement using
marginal and absorption costs.
Produce cost card by using marginal or absorption costing:
Cost card using marginal costing:
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Cost card using absorption costing:
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Describe possible merits and demerits of the both methods:
Marginal costing:
 Advantage: This method is used to determine overall costs and the impact of variable
costs on the amount of output. Throughout the basis of uncertainty, all costs are divided
between fixed costs and variable expenses. The expenses are split into fixed expenditures,
and variable costs. Benefit is calculated, as normal. The payment is made as it excludes
the overall cost from the income. This contributes to income as the investment deducts
operating costs.
 Disadvantage: The separation of costs into fixed and variable components is of
considerable technical complexity. The linear relation between outputs and variable
expenses at varying operating levels may not be true. Therefore, neither fixed costs
remain unchanged, nor variable costs change compared to level of operation
Absorption costing:
 Advantage: In cases where the production is made to have future sales or seasonal sales
as opposed to marginal costing it shows the correct measure of income (Modell, 2014).
This requires both accrual and matching rules to be adhered to that include costs balanced
with revenue for a defined period. This allows managers to be more responsible for the
services and equipment they supply to their branches due to proper allocation including
overhead distribution of fixed costs
 Disadvantage: Absorption costs are not very useful when taking management decisions
such as finding the correct product mix, how and when to import or manufacture, whether
or not to accept an export request, preferring alternatives, the minimum price to be set
during a crisis, the quantity of goods to be sold to gain the necessary profit etc.
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2.2 Apply a range of management accounting technique to produce financial reporting
documents
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2.3 Produce financial report and interpret the data which accurately apply in the business
According to the above income statement and cost cards prepared using marginal and
absorption costs, it was analyzed that net profits under marginal costing are £ 75000 and £ 64500
respectively for January and February, while net profit amounts are £ 77000 and £ 63500
respectively during Jan and Feb by absorption method. There is a disparity in net profit estimates
due to accumulation of fixed costs above or under.
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(A)
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(B)
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PART 2
3.1 Explain the purpose of budget and produce different types of budget along with its
advantages or disadvantages
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Purpose of Budget: There are mainly three purpose of budgeting which encourages
organization to produce budget and estimate their activity cost accordingly. All are mentioned
below:
Projection of income and expenses: Budgeting is a vital aspect of the strategic cycle for
enterprises. Company owners and managers must be able to determine whether or not a business
is making a profit (Senftlechner and Hiebl, 2015). Purpose of the budgeting is essentially to
provide Managers of UCK furniture tries to estimate revenue and expenditure and therefore
productivity at the time of developing business plan. It helps in estimating how the company will
work financially if certain policies, events, plan is carried out.
Used for decision making process: Main purpose of budgeting is to have a financial
structure for the decision-making process i.e. something that we have prepared for or not is the
proposed direction action. Expenditure needs to be closely managed when running a company
responsibly. Once the marketing budget has been completely invested, the decision on "will they
spend money on ads" would probably be "no"
Monitor business performance: Budgeting is intended to allow the actual business
performance to be calculated against the company performance prediction, i.e. the business that
lives up to our expectations.
Due to above mention budgeting purpose, UCK furniture produce budget and take all the
advantages which they can or manage their spending patter.
Types of budgets:
Cash budget: A cash budget is a projection of the cash flows over a given period of time for
a company. A budget is used to determine if there is enough cash in the company to function.
Companies use revenue and production estimates to construct a cash budget, along with
projections on expected expenses and collections of receivables accounts. A cash budget is
required to determine whether a firm will have sufficient financial to continue its operations.
Flexible budget: A Flexible Budget is a plan that shifts or bends with volume or activity
changes (Soin and Collier, 2013). A flexible budget is more sophisticated and practical than a
static budget. The static budget figures remain unchanged from the amounts set at the time of
planning and approval of the static budget.
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4.1 Compare the Performance of organizations by using following three measures
Financial problems: It's a type of a problem that's connected to lack of resources or
assets. Because of these challenges, companies face many other issues such as financial crises
and unable to run business activities and operations. Below are some of the issues which UCK
Furniture faces below:
Spend more than income: It's a sort of problem that happens when a business spent more
money but receives less relative to that. Because of this firm face the problem of shortage of
money.
Unequal cash flow: This is some kind of problem that does not suit the cash flow of the
company. Finally, cash inflow and outflow will balance but financial problems arise in the
absence of it.
Techniques:
Benchmarking: It is the method of comparing the performance of a organization in
terms of products, services or operations against those of another company that is perceived to be
the best in the business. Benchmarking is about finding internal opportunities for change and
further implement in the business strategies to achieve organizational goals & objectives.
Key Performance Indicator (KPI): KPI is a measured metric showing how efficiently
a company meets main business goals. Organizations adopt KPIs to measure their success in
reaching goals. Picking the right one depends on your company, and which part of the business
you want to track (Ward, 2012). Each division can use various forms of KPI to assess
performance based on common business goals and targets. Figure out what kinds of main
performance metrics are important to your department, sector or position. Managers of UCK
Furniture’s identify relevant KPIs and take actions accordingly.
Financial governance: It is sort of a system related to the processing, tracking and
management of financial transactions. This plays an important part in evaluating the financial
issues. Ultimately, it acts as a control tool to recognize the company's financial issue.
4.2 Comparison of organizations and evaluate that how they adopt management accounting
system to respond their financial issues:
Basis UCK Furniture UCK Woodwork
Financial problem This division of UCK group face
the financial issue regarding
They are faced with an uneven
cash flow problem. This results in
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expenses are more than earnings. a huge financial dilemma.
Management
accounting system
In order to resolve this issue,
company follow the cost
accounting system and estimate
each unity cost and after that
build strategies accordingly.
This company adopt inventory
management system to track their
stock and make sure to order raw
material accordingly.
Technique Company should follow
benchmarking technique to
evaluate financial performance.
They need to adopt key
performance indicator technique
to measure that which aspect
affect the most and focus on ot
accordingly.
Notes:
* Due to absence of information relating to net assets, capital employed has been assumed as net
assets.
4.3 Evaluate the use of planning tool in management accounting to minimise financial problems:
Budgetary control applies to the mechanism by which managers contrast budgetary targets
with actual results, then evaluate and aim to minimize differences between forecasts and actual
earnings. It helps to fix problems which cause differences between actual figures and estimated
values (Wickramasinghe and Alawattage, 2012). Financial ratio analysis is also another very
important accounting management method. Main financial ratios are such as current ratio, acid
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test ratio, equity ratio, asset turnover ratio, leverage coverage ratio, etc., are measured and
evaluated to evaluate the business performance and to decide the corrective steps to be taken to
correct negative ratios. Also every planning technique used in management accounting allows
financial results to be improved and financial issues reduced in order to achieve success. In
addition, project estimation, evaluation, costing methods, ratio analysis help in management
accounting minimise financial problems and get success.
CONCLUSION
From the above discussion it has been concluded that management accounting is very
essential for the organization where they follow various techniques to manage company’s
financial information. Management accounting systems helps managers to make effective
decisions by using relevant outcomes and these informational mentioned in the reports which
prepared by the management for future references.
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REFERENCES
Books & Journals
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