Management Accounting - Assignment

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1- Management accounting system and their essential requirements..................................1
P2-Methods of management accounting reporting:-..............................................................2
Origin, Role and principles of management accounting .......................................................3
Distinction between management and financial accounting..................................................4
TASK 2...........................................................................................................................................4
P3-Calculate cost and their analysis.......................................................................................4
TASK 3............................................................................................................................................6
P4- Use of planning tools in management accounting...........................................................6
TASK 4............................................................................................................................................8
P5-Management accounting systems response to financial problems...................................8
Characteristics of effective management accountant............................................................9
CONCLUSION..............................................................................................................................10

INTRODUCTION
Management accounting includes studying about the organisation's different areas and
provides financial information to managers. The importance of this aspect is ascertained from the
point that it further aid in better decision making. Transactions recorded with the help of
different management accounting systems on daily basis provides sufficient data for analysing
financial position of an organisation (Management accounting, 2018). The systems which are
used in this process named as Inventory, Price optimisation, Cost control and Job costing.
Effective application of all these systems provides an opportunity to be attained sustainable
growth in market. Thirdway is a small company and prevails under manufacturing sector. The
different kind of products and services in which it indulge includes providence of good quality
furniture, designing services and architecture of office spaces. Another organisation upon which
emphasis is provided in the report is about Conway Ltd. Advice is provided to this organisation
regarding sustainable use of management accounting tool.
This report covers the information about management accounting systems and methods
used for reporting. Different accounting tools are used to analyse the cost and to prepare income
statements. Also, advantages and disadvantages of different type of planning tools is analysed
which are used for the purpose of budgetary control and the ways which are adopted by an
organisation to respond the financial problems.
TASK 1
P1- Management accounting system and their essential requirements
Management Accounting: It is the process of preparing and managing different reports
and systems which provides financial information to the internal management of an organisation.
Valuable information is ascertained from the usage of these systems and reports which further
aid to made day to day and short term decision makings.
Management Accounting systems: These are the systems which prevail in the
organisation and used for the purpose of identifying better statistical and financial information
related to different departments (Cazier and et.al., 2015). The different type of systems which are
internally used within Thirdway to improve the working and overall performance of organisation
is defined below:
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Inventory management- It refers to the process of managing and monitoring the
inventory level of the company. It keeps track of raw material, equipment and other related tools
that are important for the production of goods and services. This system analyses the information
and predict the future need of stocks. Thirdway organisation uses this technique to maintain list
of items and information related to their location in the warehouses and availability in order to
check the flow of items. The essential requirement of this system can be justified from the point
that this will aid in timely deliverance of offerings of an organisation to client according to their
demand (Cheng, Lee and Shevlin, 2015).
Cost accounting- This system refers to the process of calculating the cost of the products
and profits generated on them. This helps in determining the profitability of products. Third way
use this system in controlling the excess expenditure as it analyse the money and efforts that has
been put as compared to the return that can be ascertained from their offerings in future.. The
requirement of this system can be justified from the point that this will aid in measuring the
actual financial performance of an organisation to build the strategies which help to get higher
future returns.
Price optimisation- It is a software that uses mathematical analysis to estimate the
customer response towards the changing prices. It help in determining the appropriate rate for
the products and services. This technique is vital for every business as the set prices should
neither be too high nor too low. Therefore Thirdway have adopted this system to cover the cost
that was incurred during production of furniture and other interior items. It also helps in
increasing the profits for the company.
Job Costing- It is the system of analysing the money and time being spent on the
completion of variety of tasks related with the production of product. These are mainly
concerned with cost associated with jobs being performed while manufacturing an output. As
Thirdway builds office spaces on the basis of customer's demand, this system helps acquiring the
cost of various production process. The requirement of this system ascertained from the fact that
it help to remove unnecessary expenses and to provide full emphasis on providing optimum
quality product and services that ensures higher return in future.
P2-Methods of management accounting reporting:-
Management accounting reporting refers to the process of creating reports for regulating
the operations of an organisation. One of the purpose of preparing them is to deliver information
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about the financial position of business. Managers take look at these reports and understand how
much revenues does the business is making from their different functioning. This help them in
making decisions about what type of needs are required to be consider to deal with potential
threats and also in the identification of opportunities that can increase future profitability. There
are different types of accounting reports which are defined below:
 Budgetary Reports- These reports are prepared in order to compare the actual figures
with the estimated figures. Budgets are set as standards which company has to made to
keep track of revenue and expenditure. This is done to check weather the business is
going on as per the set amounts stated in budget or not. Thirdway creates them to stay in
limit with respect to expenses. Thus any deviations are identified by the mangers brought
to the notice of management. The company can then take decisions regarding controlling
costs, and purchasing raw material in minimum price from suppliers.
 Account receivable ageing- These reports are related to manage the credit transactions
of business. Firms be it small or large has certain amount of creditors associated with
their business. It is important to keep track of invoices and credit memos to save the
company from the losses occurring due to defaulters. Managers of Thirdway can easily
locate those clients who has not made the payment and recovering their money with the
help of preparation such documents.
 Cost managerial accounting reports- These are prepared for the purpose of estimating
direct and indirect expenses of procurement of raw material, overhead and labour related
to manufacturing department. This helps in understanding the cost incurred on producing
the product and analysing it to determine the amount of revenue that has been generated.
Thirdway uses these reports to maintain the costs and controlling it in order to increase
the profits margin (Clinton and White, 2012).
 Performance reports- These reports are made to study the performance of employee by
comparing it as per the set standards to check if they are reaching them or not. It helps in
increasing the effectiveness and efficiency of an complete organisation. Thirdway
evaluates the flaws and potential of every employee after analysing it. Decisions
regarding rewards and actions needs to be taken to improve productivity are also taken on
the basis of their performance.
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Origin, Role and principles of management accounting
Management accounting begins with industrial revolution in the 19th century. It plays major role
in organisation adopting management accounting system helps to identify the errors and correct
it which leads to optimum utilization of resources. These are used by the managers in improving
the financial condition of business (Halbouni and Nour, 2014).
Distinction between management and financial accounting
Basis Management accounting Financial accounting
Usage These are created for internal use.
It helps in providing information
to managers and employees.
These are mainly for external use. It
provides information to creditors,
banks, government institutions etc.
Purpose It is used for the purpose of
controlling, planning, and decision
making.
These are created for to represent the
financial position of business after the
end of certified period.
compulsion It is not in legal compulsion to use
this by the organisation
Here legal compulsion is there for
limited companies to prepare this.
Nature Financial as well as non financial
information is included in this.
Here it consist of only financial
information.
Area It focuses specifically on various
divisions of organisation.
The main focus is associated with
organisation as whole.
TASK 2
P3-Covered in PPT
TASK 3
P4- Use of planning tools in management accounting
Budget is one of the planning tool that helps in estimating the finances required to
complete a project or programme. It helps in forecasting the income and expenditure for certain
period. Budgetary control is a procedure of evaluating the achievement of goals. Thirdway
prepares budget by first determining the amount being spent, afterwords revenues are analysed
which are based on the savings (Hasnan, Rahman and Mahenthiran, 2012). Final activity is
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concerned with checking the progress that has been made. In Thirdway various types of planning
tools are used for the purpose of budgetory control. All of them are as follows:
Capital Budget- It is concerned with estimating the value of huge expenses that are being made
on large scale projects with an aim to control the losses.
Advantages
 Risk assessment and determining the rate return are the main advantage of preparing such
budgets.
 Another advantage is improved decision making based on the complete information.
 Identification of financial and non financial factors impacting the business.
Disadvantages-
 Main disadvantage of capital budget are that these are based on prediction therefore it
suffers from lack of accuracy
 There are high Chances of wrong decision making which can lead to losses.
 It requires higher skills on manager's part which is one of the other disadvantage related
to this budget.
Operating Budget- These are prepared to evaluates expenses and revenues that can occur in
future. This helps in determining the day to day expenses and income with respect to performing
an activity. Managers can analyse the cash requirement to cover costs (Li, 2013).
Advantages
 As these are based on day to day transactions therefore flexibility is higher in comparison
with other budget.
 Advantages of efficiency in operations can be availed through the preparation of
operating budget.
 It helps in forecasting the future needs by managing short term and long term goals
related to business.
Disadvantages
 As these are estimated on daily basis therefore considered as time consuming and tedious. Lack of appropriate projections are the main concern of preparing this budget.
Pricing strategy- Companies uses variety of strategies to increase the sales of their goods
and services. Thirdway set pricing point to maximise their profits. Types of pricing strategies are
as follows:-
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Price skimming- It involves setting high prices by the business entities in the initial stage
and lowering it as afterwards. Thirdway can use this strategy to attract large number of
customers.
Price penetration- This strategy involves charging lower prices in the beginning. It can
be used by Thirdway to gain attention of customers towards it's new offering.
Economy Pricing- Under this strategy company charges fairly low price on wide range
of products to attract customers. Thirdway can use this technique by reducing the marketing and
production costs.
Common costing systems
Standard costing- This system is used to compare the actual figures with budgeted in
order to analyse weather the organisation is in favourable or unfavourable condition. Thirdway
can uses this to improve the efficiency of business.
Normal costing- This system records the direct material, labour and overheads on actual
costs in the books. This can be used by Thirway to analyse the accuracy of production cost
(McLaney and Atrill, 2014).
TASK 4
P5-Management accounting systems response to financial problems
Financial problems are concerned with organisation's inability to achieve targets due to
insufficiency of funds. Money is the blood of every business, it is useful in running an any
enterprise. Thirdway management accounting system like cost accounting and reports to identify
the such problems and take effective measures to deal with them. But company still faces
financial issues.
The two main approaches used by the organisation to identify of Financial problems are
Benchmarking and KPI.
 Benchmarking is a process of comparing one's own practices with the other company's
best practices. The other company can be competitor or a complete different institution.
This helps in identifying the drawbacks or faults the organisation posses by maintaining
it's financial statements. Using such standards will led to improvement in the
productivity. Thirdway adapts this method to compare it's income statements with
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competitor's to find deviations occurring. Therefore if Thirdway wants to increase it's
earning by 20% they should adopt this method to achieve their goals.
 Key performance indicator- This approach is used to identify the performance level of
employees, departments and sub divisions to asses the elements that are contributing
towards the organisation. These are the set standards against which individual
performance are measured. Due to it's lower scalability the Thirdway does not posses
effective workforce that can deliver quality services. It is one of the non financial
problem which the company is dealing with hence this method can be used to analyse the
workforce productivity by comparing it with match the set standards (Mclellan and
Moustafa, 2013).
 Financial governance are the predefined rules and regulations that guides the managers to
about financial information. It consist of recording financial transactions, controlling data
and operations with the help of auditing, managing cash flows, and different processes.
Companies has to abide by such regulations to sustain the in the business. It helps in
overcoming the risk ensures control of the flow of activities along with information in the
organisation. Thirdway should have capable managers who can perform this task
efficiently and provide directions to the company.
Characteristics of effective management accountant
Management accountant is a person that handles the accounts of every organisation that
engages itself with any kind of business. Variety of task are being performed from estimating the
revenues and expenditure by preparing income statements, balance sheets and cash flow
statements. An accountant predicts about the future sales, budgets, to improve the smooth
functioning of organisation. They helps in identifying the potential risks and opportunities
associated with various alternatives and selecting the best amongst them to maximise profits.
Accountant should have proficiency in mathematics, accounts, possession of strong analytical
and leadership skills to perform tasks as specified above. This helps them in dealing with
problems such as employee conflicts, finding prospective investors by taking effective decisions
as per the information available to them.
Management accounting systems are adopted as corrective measures to solve financial
problems. Cost accounting system can be used to decrease the expenses by eliminating those
features that are increasing the costs and lowering the profitability. Inventory system can take
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control of stocks and maintain inventory level to preserve the quality of products. Job costing is
used to decrease cost associated with performing different tasks and actions can be taken to
improve the profitability of organisation.
Comparing the ways in which organisation use management accounting to deal with financial
problems
Thirdway Airdri
As the company is dealing with lack of finance
resource therefore cost management system is
used to solve such issues (Mohd Khalid, Lord
and Dixon, 2012).
Airdri is hand drier manufacturing firm.
Company focuses on obtaining the large
market share by setting effective prices through
the adoption of price optimisation systems.
Lack of effective workforce is also another
issue faced this company. There can be many
reasons to that one such reason could be
inappropriate working hours. Job costing
system is used to locate faults and helps in
improving the productivity level of employees.
Airdri uses inventory management system to
maintain list of articles, tools and other
materials in order to keep track of stock level
(Socea, 2012).
CONCLUSION
From the above project report it has been concluded that management accounting helps in
providing assistance to managers by studying the non financial data. Different types of
management accounting system such as inventory, cost accounting, job costing and profit
optimisation are acquired by the management for effective execution of operations . Detailed
description of distinctive accounting reports states the way in which cost can be reduced and
profits be maximise. Organisation uses cost techniques such as marginal and absorption that
helps in understanding the profitability of business. Managers uses planning tools such as capital
and operating budgets to estimate revenues and expenditure in order to deal appropriately with
unforeseen circumstances. KPI and benchmarking are used by business entities to identify
financial problems.
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REFRENCES
Books and Journal
Cazier, R. and et.al., 2015. The impact of increased disclosure requirements and the
standardization of accounting practices on earnings management through the reserve for
income taxes. Review of Accounting Studies. 20(1). pp.436-469.
Cheng, Q., Lee, J. and Shevlin, T., 2015. Internal governance and real earnings
management. The Accounting Review. 91(4). pp.1051-1085.
Clinton, B. D. and White, L. R., 2012. The role of the management accountant: 2003-
2012. Management Accounting Quarterly. 14(1). p.40.
Halbouni, S. S. and Nour, M. A., 2014. An empirical study of the drivers of management
accounting innovation: a UAE perspective. International Journal of Managerial and
Financial Accounting. 6(1). pp.60-86.
Hasnan, S., Rahman, R. A. and Mahenthiran, S., 2012. Management motive, weak governance,
earnings management, and fraudulent financial reporting: Malaysian evidence. Journal
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Li, J., 2013. Accounting conservatism and debt contracts: Efficient liquidation and covenant
renegotiation. Contemporary Accounting Research. 30(3). pp.1082-1098.
McLaney, E. J. and Atrill, P., 2014. Accounting and finance: an introduction. Pearson.
Mclellan, J. D. and Moustafa, E., 2013. An exploratory analysis of management accounting
practices in the Arab Gulf Cooperative countries. Journal of Islamic Accounting and
Business Research. 4(1). pp.51-63.
Mohd Khalid, F., Lord, B. R. and Dixon, K., 2012. Environmental management accounting
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Socea, A. D., 2012. Managerial decision-making and financial accounting
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Online
Management accounting. 2018. [Online]. Available through:
<https://cleartax.in/s/management-accounting>
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