Management Accounting - Nero Ltd Assignment

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting and essential needs of various kinds of management accounting
system..........................................................................................................................................1
P2. Several methods used for management accounting reporting..............................................4
TASK 2............................................................................................................................................5
P3.Calculation of cost using appropriate techniques of cost analysis:........................................5
As per absorption costing:...............................................................................................................8
TASK 3............................................................................................................................................8
P4. Advantage and disadvantage of planning tools in budgetary control:..................................8
TASK 4..........................................................................................................................................10
P5.Comparison of companies in resolving the financial issues:...............................................10
CONCLUSION..............................................................................................................................12
REFERENECES............................................................................................................................13
.......................................................................................................................................................13

INTRODUCTION
Management accounting is considered as the crucial business term which facilitates
internal information of the firm. This involves organisation's ability for giving a specific
liquidity, capability to accomplish obligation, business flexibility and so on. Moreover, this is the
procedures to prepare accounts and reports of management which facilitate relevant as well as
timely statistical and financial data to the managers (Brennan and Merkl-Davies, 2013). For this
report the chosen company is Nero Ltd. Which locally designed luxury products by Kenyans.
The purpose of this report is to describe the whole concepts of management accounting and
essential needs of several kinds of management accounting system. Various methods utilise for
management accounting reporting. Calculation of cost with the help of cost analysis techniques
as well as advantage and disadvantage of budgetary control planning tools. Apart from this,
ways through which firms are adopting system of management accounting for responding the
financial problems are also mentioned in this report.
TASK 1
P1. Management accounting and essential needs of various kinds of management accounting
system.
Management accounting is the process of presenting accounting information required
for managerial use for formulating policies adopted by the organization and to assist in day to
day and short-term decision making. This information helps Nero Ltd. managers to perform all
managerial function like planning, organising, staffing, directing and controlling. According to
Batty, Management accounting is considered as the term which is utilise to explain methods as
well as techniques of accounting that couple with essential capability and knowledge that aids
management with their work of enhancing profitability or reducing losses.
Management accounting system consists of internal systems that an organization uses
to measure and evaluate it's performance. The main objective of this particular system is provide
accurate information to managers so they can make sound decisions (Budding, Gross. and
Tagesson, 2014). So, Nero Ltd. Use management accounting system so that they can get relevant
data in order to develop effective decisions. It is the essential accounting tool for Nero Ltd. as
this involves both financial as well as non financial information which is helpful into business
management.
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Origin, role and principles of management accounting:
According to traditional history, it is developed in England before and during the
industrial revolution. Its role includes execution of several task in a series for improving any
organisation's financial related problems. Principles of management accounting incudes
influence, relevance, building trust and so on in organisational perspective.
Difference Between Management Accounting and Financial Accounting:
Management Accounting Financial Accounting
It aims at providing both qualitative and
quantitative information to managers to assist
them in decision making (Christ and Burritt,
2016).
It aims at providing true and fair financial
position of the company to various other
parties.
It is used for internal reporting such as for
managers, CEO.
It is used for external reporting, mainly for
stakeholders.
Not regulated by any law. It has be presented as per defined standards.
It is not subjected to any audit. Financial reports must be audited.
There is no defined frequency for generation of
these reports. It can be prepared weekly,
monthly, quarterly.
Financial reports are generated annually at the
end of financial year.
Various types of management accounting system are mentioned below:
 Inventory management system: This is considered as the type of system which tracks
various products or services movements into whole procedures. It aids in checking raw
material as well as finished goods quantity which assists firms to do production
consequently (Burns, 2014). Moreover, this facilitates a way to meet products or services
demand and supply. The essential key function of of this particular management system
is to keep records of overall products which transfer into warehouse. Nero Ltd. Used this
management accounting system into several products or services procedures. With the
help of this they can maximise its working manner and formulate the products on
stipulated time period.
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 Price optimisation system: This is considered as the methods that is utilise to decided
the price of several product or services. This facilitates a base for examining the price
level which can be effective for firm and consumers. Moreover, it also provides the
manner of identifying consumers behaviours at various pricing level. With the help of
this, firm can fixed the price at advantageous level. Nero Ltd. Utilise this particular
system to ascertain various product and services price that aids them to grab the attention
of more customers. Cost accounting system: This is considered as the systematised ways of computing
product or services total cost so that firms can examine the loss as well as profit upon
various goods or services (Chiwamit, Model and Yang, 2014). Eventually, this is
effective for that type of company that deals in broad range of goods and services. It is
divided into two parts first one is Job order costing system and another one is process
costing system. Nero Ltd. Can utilise both the system that are explained below:
Process costing system: This is refers as the methods that are utilise to allot the overall
cost to the several units of output. In this , the total cost of various procedures is computed then it
is known as the total cost different goods or services. Nero Ltd. apply this particular system to
approximate the products overall cost through examining costs at several stages of projects.
Job costing system: This is refers as the system which is applicable into bot products as
ell as services facilitating industries. It is the system that utilise job cost sheet, labour and
material cash flows for analysing several goods and services cost. Moreover, it performs when
consumers gives order for any specific products or services. Nero Ltd. used this particular system
to evaluate the different types of products cost that they provides into marketplace. They applied
it in computing their luxury product cost as well as it aids them in effective analysing in respect
of loss or profit.
Benefits of various kinds of system:
Management accounting system includes various types of system under this. Every
system have their own significance. Nero Ltd. Use various system of management accounting
their benefits are explained below:
Inventory management system:
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 This system trace the movements of products or services which perform in appropriate
inventory management. Within Nero Ltd., this aids them to check the raw material
availability that are used to produce luxury products.
Price optimisation system: The benefits of this particular system is to ascertain the goods or services price (Collis
and Hussey, 2017.). In Nero Ltd., this facilitates them a structure to assign the luxury
products price. Moreover this facilitates a base for examining the impact upon consumers
because of different pricing.
Cost accounting system:
 The benefits of this system is that it can compute the total cost of respective company
luxury products. Moreover, this also measure the exact profit of firm by comparing the
overall gained amount with incurred cost.
P2. Several methods used for management accounting reporting.
Management accounting reporting is responsibility of management accountant, it
provides direction to the top level management for taking important decisions related to business
operations. These reports may be used by management for evaluating the employees
performances. Some of types of such reports are as follows:
Inventory management report:
It is an essential activity of management accountant to prepare this report as it gives all
information about the inventory of Nero Ltd. such as holding period of closing sock, storage cost
and so on. Inventory management report also gives information about which method is useful for
valuing the closing stock. The main objective of such report is to strike a balance between
inventory investment and customer service.
Accounts receivable ageing report:
It is a report which provides details about the invoices which are given to the
customers on credit which assist the Nero Ltd. in finding the unpaid amount customers amount
and unpaid credit memos. It is an primary tool utilised by the collection staff of such company to
find which involves are overdue for payment, for determining the effectiveness of the credit and
collection functions.
4

Performance report:
It is prepared for measuring the performances of its employees, it is prepared by the
management accountant in the form of detailed statement which includes incentives to the
employees on the basis of performance appraisals. As a result, employees may get motivated and
work productively. Nero Ltd. uses this for providing bonus as well as required training to its
working staff.
Budget Report:
It is prepared by the management of Nero Ltd. for its future business operations which is
very useful to evaluate its actual business operations and accordingly take corrective action for
the benefits of the organisations. Budget report also provides about the incentives to its working
staff, If there is a positive result from its workings as compared to the standard. This report also
assist the company in ensuring that critical resources of the company are utilised in effective
manner for the betterment of the company.
TASK 2
P3.Calculation of cost using appropriate techniques of cost analysis:
Cost means monetary value which organisation spent to produce something valuable for
the its survival specifically products and services. There are different cost which occurred in an
organisation like Nero Ltd. Such as fixed cost, variable cost, direct cost and so on. Some of these
are as follows:
 Direct costs: These costs may be easily identified in a particular product manufacturing
process. For example, material cost, labour cost and variable overhead cost.
 Indirect cost: These are cost which can not be identified in a particular product
manufacturing process. For example, depreciation, variable overhead and supervisory
salary etc.
Cost volume analysis:
In this analysis, Nero Ltd. decides how to change in costs in positive direction which
result in increase in volume which ultimately results in enhancement in company's operating
income and net income. In doing this analysis, various analysis is used by the company like sales
per unit and variable price per unit should be constant.
5

Flexible budgeting:
It is a type of budget which gives an advantage to the companies like Nero Ltd. in
predicting its future level for more than one level of production volume. Therefore, it can help
the company in adopting appropriate budgeted volume for its future production level.
Cost variances:
It is used by the Nero Ltd. for evaluating its current business operation's related cost, in
cost variances, actual incurred costs are compared between the standard budgeted cost and take
appropriate action in case of unfavourable business results.
Absorption costing:
This is a technique of cost accounting which is used by manufacturing organisations like
Nero Ltd. for its various cost related aspects. For example, for preparing income statement,
company may use absorption costing method.
Marginal costing:
In this technique of management accounting system, only relevant cost is considered by
the Nero Ltd. Producing the a specific cost. All historical cost are the sunk or irrelevant cost.
Fixed cost: These are the costs with remain same with any level of production volume of the
company. It is also known as historical cost because this cost either occurred in past or occurred
in future but it is decided in already in past.
Variable cost:
These are costs which are always relevant in all alternative course of action and it
increases in total with increase in volume of production. Though per unit cost is remain same
irrespective of its volume of production. For example, variable overhead, labour cost etc.
Cost allocation:
It refers to allocating different cost in different categories to identify the cost of various
activities which are undertaken in an organisation.
Normal costing:
It is a method of costing that is used in cost derivation. It is consist of actual cost of
material, actual cost of direct labour and absorbed overhead based on recovery rate.
Standard costing:
In this technique of cost accounting, Nero Ltd. compares the actual cost with standard
cost figures to identify the weaknesses in production process.
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Activity based costing:
It is an other method of cost accounting in which fixed overhead is absorbed among the
different products on the basis of different activities which are undertaken in manufacturing of
these different products in unequal proportion.
Role of costing in setting prices:
Cost accounting plays a important role in setting the prices of a product of an
organisation like Nero Ltd. If there is low producing cost of a product then it results in setting
low prices, which ultimately increases the profitability of the company and vice-versa.
Inventory cost:
It is cost which is incurred by the companies in manufacturing sector like Nero Ltd. and
this cost is associated with the inventory of the company such as purchase cost inventory storage
cost etc. if company tries to reduce the inventory cost then it can help it in reducing its product
cost. Various valuation methods are as follows:
 FIFO: In this method, inventory are valued on the basis of inventory which is purchased
first.
 LIFO: In this method, inventory are valued on the basis of inventory which is purchased
last.
 Weighted Average cost: In this method, inventory are valued on the basis of weighted
average price of the stocks.
Overhead cost:
The cost which is incurred in indirectly in production process is called as a overhead cost.
As per marginal costing:
Particulars PER UNIT Budgeted Actual- Q1
80000
Sales Revenue 1 80000 66000
COST OF SALES
Cost Of Production: Variables
Direct Material 0.65 52000 50700
Opening Inventory 0 0
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Less : Closing Inventory 0 52000 7800 42900
CONTRIBUTION 28000 23100
Fixed Overheads 16000 16000
Fixed selling and administration costs 5200 5200
Profit 6800 1900
As per absorption costing:
PER UNIT Budgeted Actual- Q1 Actual- Q2
80000
s Revenue 1 80000 66000 7
ST OF SALES
Of Production: Variables
ct Material 0.65 52000 50700 42900
d Overheads 0.2 16000 16000 16000 16000
ning Inventory 0 0 10200
: Closing Inventory 0 52000 10200 56500 3400 6
NTRIBUTION 28000 9500
d selling and administration costs 5200 5200
it 6800 4300
TASK 3
P4. Advantage and disadvantage of planning tools in budgetary control:
Preparing a budget – It is a process that a defines the process of estimating the future
figures related to business operations. Budget is financial statement of revenue and expenses
which is prepared by the person responsible for this.
For understanding purpose, Some types of budget are as follows:
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Operational budget:
this type of budget helps the Nero Ltd. In planning its day to day business operations
which helps the company in doing the its business processes in desired manner.
 Benefits: It assist the company in evaluating the different worker's performances in an
organisation.
 Weaknesses: Preparation of these type of budget requires more time and cost.
Master Budget:
This is prepared by the management accountant for a specific division of an organisation
like Nero Ltd. For evaluating the investment requirement and other related aspects of a particular
division.
 Benefits: It is very beneficial in planning the operations of a particular division.
 Disadvantages: The main weaknesses of master budget is that there is no co-operation
from divisional staff.
Zero-based budget:
It starts in all the department with zero level for their financial requirements. In this
budget, company does not consider previous budget's figures.
 Benefits: It has justified spending, identify redundancies and focuses on use of
resources.
 Disadvantages: it includes lot of money and time to prepare this budget and there is loss
of long-term planning.
PEST analysis:
It is an method for evaluating the external environment related to an manufacturing
company like Nero Ltd. and to determine the opportunities and threats, so that appropriate action
is to be taken for this. PEST analysis includes the following:
 Political: It includes Govt. policies, regulations and rules and their effect on the business.
 Economical: It includes Exchange rates, inflation rates and interest rate and their effect
on the functioning of the business operations of Nero Ltd.
 Social: It includes beliefs, culture and social values of the people resided at different
geographical location.
 Technology: It includes technological changes such as increasing use of computers and
other peripheral devices for the business.
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SWOT analysis:
It is a technique which is used by company for identify its internal and external at micro
level. SWOT analysis includes the following:
 Strengths: Company identify its internal strengths which may be use by the company for
enhancing its profits.
 Weaknesses: It includes identification of weaknesses in internal process of a business
organisation.
 Opportunities: It includes identification of opportunities so as to increase its profits.
 Threats: It includes identification of various threats which exist in the external
environment.
TASK 4
P5.Comparison of companies in resolving the financial issues:
Management accounting plays an important role in the companies to resolve the financial
issues. Herein, some types of financial issues are mentioned below:
 Increasing in expenditures- It is a type of issue in which organisations face the problem
of more expenses in compare to earning. With encompasses of time, this becomes a
financial issue.
 Lower sales- This is a kind of issue in that companies fail to sell more products and
services. The reason behind this is that sometimes organisations fail to determine the
price of products at a right level and due to this sales decreases. It overall results in lack
of fund.
Method to find the financial issue:
 Benchmarking- This is a type of method that is associated with the comparing an
organisation's plans and policies with other successful companies of same sector. Due to
this organisations get able to find out the actual cause that is resulting in a financial issue.
 KPI- The key performance indicator is a technique of finding the financial issue by
focusing on those activities which are revenue generated or loss occurring. By this
companies can evaluate the actual financial issue.
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Financial governance- This is related to the gathering, analysing and interpreting the financial
transaction of any company for the purpose of minimising the financial issue.
Financial governance as monitoring strategy- Eventually, the financial governance acts as a
monitoring strategy. This is why because it manages the financial transaction of organisations in
a systematic manner and due to this companies can able to control all their financial activities.
Thus the financial governance is considered as a monitoring strategy.
Comparison of two companies:
Basis of
difference
Nero limited Aston Martin
Financial issue This company is facing the issue of
more expenses in compare to
income. It means they are
expanding in various activities but
not getting the desirable return. Due
to this above company is facing
from a huge financial issue.
Same as the comparative company,
they are also facing a financial issue but
different in nature. Their issue is lower
sales and due to this they do not have
enough liquidity to operate their day to
day activities. Hence, it is resulting in a
financial issue.
Accounting
system
As per the above mentioned
financial issue, the company is
needed to apply an effective
accounting system. The appropriate
accounting system as per their
financial issue is the Cost
accounting system. It is kind of
accounting system whose main
objective is to minimise the
expenditures as much as possible by
use of effective functions. If above
company will apply this system then
The above company is required to
apply a system of management
accounting to resolve from their
financial issue. They may apply Price
optimisation system because it can help
them in assigning the right price of
products and services. Due to this
above company will be able to
determine the right price of their
products and services as well as their
sales may increase. Thus their financial
issue will be resolve easily.
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automatically there financial issue
will be resolve.
Characteristics of a management accountant:
 Knowledge of accounting- It is the main characteristic of an accountant to have detailed
knowledge about the concept of accounting.
 Punctual- Along with an accountant should be punctual of time in relation to providing
the accounting reports on time so that business can take suitable decision on time.
CONCLUSION
As per the above report, it has been concluded that management accounting is the crucial
functions that facilitates internal information. Cost accounting system, price optimisation system
and many more are some system of management accounting that gives accurate information to
managers, to measure whole performance during specific duration. For computing the cost, cost
techniques such as marginal and absorption costing are utilise through firm. Several budgetary
control planning tools are helpful to prepare budgets as well as evaluation of whole business
performance. Various firms used different management accounting system that aids them to
resolve the financial problems, that ultimately leads towards maximising profitability as well as
productivity.
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