Aligning Accounting Systems in SME Manufacturing Firms

This assignment, titled 'Aligning Accounting Systems in SME Manufacturing Firms', delves into the factors influencing the alignment of accounting information systems in small and medium-sized Malaysian manufacturing firms. It is based on a journal article by H.T. Johnson, along with other supporting references from the fields of management accounting, environmental management, and hospitality management. The assignment also incorporates online resources discussing budgeting methods and tools & techniques of management accounting.

MANAGEMENT
ACCOUNTING

INTRODUCTION
A method through which effective financial plans or schedules are prepared at the
workplace for taking fruitful decisions of business is known as management accounting (MA). It
consists of wide range of methods, techniques and tools which are supportive for each entity. For
the present study, R.L. Maynard Limited firm is taken as base which is a small business
enterprise and operating in construction industry of UK. The reason for selecting this firm is that,
it has less than 50 employees and generates annual turnover less than £500,000 (R.L. MAYNARD
LIMITED, 2016). The present assignment shows various systems along with methods that are
considered for reporting by chosen firm. Further, requirements and needs of such systems and
techniques are also explained in the project. Apart from this, income statements are formulated
with the help of two methods i.e. marginal as well as absorption costing. Besides this, planning
tools which are taken into account for controlling budgetary procedure are described with merits
and limitations. At the end, some systems which are used by R.L. Maynard Ltd for responding
financial obstacles are explained.
TASK 1
P1 Explaining MA and its systems with reference to R.L. Maynard Limited
Business Report
From: Management Accounting Officer
To: General manager
R.L. Maynard Limited
Subject: Different management accounting systems
Introduction
At the internal environment of any business various decisions are required to take in proper and
fruitful direction. So that, it will be able to fulfil its desired objectives related to any branch of
the enterprise. In the present study financial aspect or area isused where several decisions are
needed to make like cost, margin, expenses etc. Moreover, the report describes about some
methods and their key requirements with context to R.L. Maynard Limited. Those systems
which are undertaken by the small enterprise are like cost accounting, job costing, stock
1

management and price optimisation.
Various systems of MA
Cost accounting system: It is framework where cost of the products are analysed which incurred
to manufacture goods are services is referred as cost accounting. It is one of the highly used
way because it gives details about the expenses after segregating in structured manner. R.L.
Maynard uses this aspect for assess amount which spent to build specific building or house or
any other. Basic need due to which it is undertaken is for analysing position of the profitability,
valuing level of stock etc (Ismail and King, 2014). Further, on the basis of total costs the
management easily able to take pricing decisions which is one of attractive point of customers
towards the enterprise. It covers basically three kinds of the expenses which are like actual,
normal as well as standard.
Inventory management system: An approach where stock levels are tracked using specific
software in the firm and analyse orders, sales as well as deliveries is known as inventory
management. In short, when stock is needed to manage in business of R.L. Maynard with
proper way then this system is considered. It is necessary to reduce this aspect because it leads
to affect efficiency or entity in negative direction. Therefore, stock turnover ratio also decreased
which is sign of declining the business performance in construction industry. Further, to know
value of stock in terms of amount and units then R.L. Maynard incorporates basic three ways
which involve LIFO, FIFO and weighted average.
Price optimisation system: MA includes pricing decisions also which is used to charge amount
of one product from the consumers with higher ratio. As per this system, profitable decision of
pricing of each building or house is taken in beneficial direction (Bruynseels and Cardinaels,
2013). The construction firm i.e. R.L. Maynard changes its prices on specific time where
response of customers also fluctuate up to the greater level. A particular amount at which when
more purchasers of the house are attracted then that will be used as price on permanent basis.
Hence, key requirement of price optimisation system in R.L. Maynard enterprise is to opt a
pricing level in the business to make it profitable. Apart from this, some strategies are also for
making decisions regarding to the pricing which are market penetration, cost, competitor and
market based, cost plus, skimming etc.
2

Job costing system: When an enterprise produces different range of the products and services
and it wants to know cost associated with each batch then job costing is applied. The R.L.
Maynard constructs buildings, houses, offices etc. where it has to determine that each kind of
product takes how much amount of cost. For this, it has to segregate all the expenses associated
with this separately and then can know about expenditures of each item (Tools and techniques
of Management Accounting, 2017). The job costing is a system through which management of
R.L. Maynard can analyse cost of every product which constructed in different batches.
Therefore, it can make effective decisions for charging amount in terms of price of each unit
properly.
Conclusion
It can be summarised that, cost accounting is used for tracking record of costs and analyses total
expenses incurred by the firm. When decisions related to pricing and stock is required to be
taken by R.L. Maynard then price optimisation and inventory management systems are used
respectively. Hence, the systems of MA are highly incorporated by cited firm to make various
judgements.
P2 Several methods of reporting in MA using example of R.L. Maynard Ltd.
Business Report
From: Management Accounting Officer
To: General manager
R.L. Maynard Limited
Subject: Different management accounting reports
Introduction
Reporting is a system in which small reports related to financial transactions are prepared and
then used for formulating financial statements of the firm at the end of an accounting period.
The current report presented to general manager where various methods of management
accounting reporting are discussed. The company R.L. Maynard Limited uses some ways which
3

are like job cost, operating budget, departmental, stock management as well as account
receivables, which are explained at here.
Explanation
Job cost report: A method in which data related to cost aspect recorded of each batch or job at
the workplace is considered as job cost report. It helps to know those types of expenses which
are associated to construct building, office, house or any other kind of product. It is one of the
highly used method because of providing clear information about the every cost for each job.
Total amount of this particular is treated in the books of profit as well as loss and deducted from
the revenue generated (Johnson, 2013). If this cost is higher, then affect to the profitability of
R.L. Maynard in adverse direction. However, if job cost is low then able to charge lower pricing
of the houses and buildings. Therefore, sales and profits will give positive response in the
financial statements.
Operating budget report: According to this, incomes as well as outflows are forecasted for the
next fiscal year in the present times. Further, it keeps record of only operation department
where expenses and incomes related to operation are analysed. Amount which is incurred to
construct building only like materials, labour, purchase of instruments etc. in R.L. Maynard is
recorded under this for upcoming period. Once this report is completed or prepared then treated
in P&L account as operating expenses. Therefore, operating profit at the end of year is analysed
by the cited firm of construction sector.
Accounts receivables ageing: A firm when selling products and services in the market then
usually go through two types which are like cash as well as credit. The method of reporting in
which sales of the R.L. Maynard recorded which are done on credit is known as accounts
receivables ageing. As name it can be clearly identified that amount which will be received by
cited firm in the future is recorded in this (Burns, 2014). In short, credit sales and revenue are
transacted in this mentioned report and shows the amount will be generated in upcoming period.
When this report is completed at the year ending then total amount treated in the statement of
financial position. In the B/S it is recorded as debtors who purchased buildings from R.L.
Maynard on credit.
Departmental report: In the business of every firm, various departments work there for
4

achieving objectives and gaols of it. Various segments are like human resource, production,
finance and accounts, operation, marketing, research and development, selling and distribution
etc. The method in which expenses, costs and other financial information recorded after
segregating department wise is known as departmental report. A reason due to which this
technique used by R.L. Maynard is to determine financial performance of each and every
organisational function. During this, if management finds that specific department incurs more
expenses and less return, then corrective actions and strategies are applied on that.
Inventory management report: Lastly, a method in which data as well as information related to
stock recorded and analysed is considered as inventory management report. In the firm when
level of stock is high and create adverse influence on the revenue and profit (Fullerton,
Kennedy and Widener, 2014). Along with this, turnover ratio of this also give negative response
to R.L. Maynard. Therefore, management of this aspect is necessary in highly efficient
direction. The chosen enterprise of construction segment uses this particular reports which
reflects stock available at the beginning of year and inventory remained at the end of accounting
period. To manage this some techniques are used which are like re-order point, EOQ, LIFO,
FIFO, just-in-time etc.
Conclusion
By considering the above analysis it can be said that reporting system is essential part for each
enterprise because it helps to track the financial performance of it. Apart from this, it helps to
prepare final accounts like trial balance, income statement, changes in equity and gains, balance
sheet etc. Methods of reporting used by R.L. Maynard Limited are like job cost, stock
management, departmental, operating budget and accounts receivables ageing. Further, when
cited firm is going to manage and reduce stock then some methods used.
TASK 2
P3 Computing costs and formulate income statement by incorporating marginal and absorption
costing
For preparing the financial statements, there are some methods included in the area of
accounting study. The present task reflects about the income statement and to prepare this
5

marginal as well as absorption costing techniques are used by chosen firm. Further, profit and
loss account for R.L. Maynard Ltd is stated below:
Preparation of I/S applying marginal costing method:
As per the above statement of incomes and expenses it can be assessed that, firm made
net sales worth of £21000 at the end of financial year. After incorporating different costs
associated with construction of buildings it earns only £9300. Further, majority part of revenue is
covered by variable kind of expenses which is not beneficial for it (Chenhall and Moers, 2015).
Under this, it must use some strategies which support to decline total costs and boost up
profitability.
Preparation of I/S applying absorption costing method:
6

The above presented I/S is prepared using absorption costing method where variable and
non-variable both kinds of costs are included. Thus, it can be said that, R.L. Maynard generates
net income worth of £9600. In this, sales revenue remains unchanged that is £21000 but profit
differs with very minor level. Basic reason for which profitability condition differs is that, both
approaches use different kind of costs. In the below section, basic different of these two methods
is explained which help to R.L. Maynard for taking decisions that which will be most suitable
and profitable.
Differentiation among marginal and absorption costing
Marginal costing Absorption costing
An approach of costing technique in which
total cost of constructing buildings is
determined, known as marginal costing.
A portion of total expenses which included as
cost centre and used to derive total
expenditures associated with construction is
referred as absorption costing (Grabner and
Moers, 2013).
Under this, variable kind of costs known as
product costs whereas fixed expenses referred
as periodic expenditures.
In this costing method, fixed as well as non-
fixed both are considered as cost of production
in the business.
7

As per this, overheads are classified in two
ways which are fixed and non-fixed.
In this, overheads costs are segregated in three
parts like production, selling & distribution as
well as administration.
Profitability position of R.L. Maynard is
measured in terms of PV (Profit volume) ratio
at the business place.
Under absorption method, fixed expenses are
also involved with variable costs by which
profitability position affects in negative
direction.
Due to change or fluctuations in closing or
beginning stock, unit cost does not get
influenced under the marginal method (Cadez
and Guilding, 2012).
In the firm, if fluctuations in stock level like
opening and closing occur then cost of each
building or unit affected either in positive or
negative manner.
Outcome of this method is presented in terms
of contribution of each unit.
Under this mentioned method, output of I/S
referred as net income of each building or unit.
It considered by R.L. Maynard company for
determine costs which are associated with the
construction in every financial year.
The absorption costing is used by the firm for
tracking record related to stock and make
valuation of this in proper manner.
TASK 3
P4 Planning tools which undertaken by R.L. Maynard firm for budgetary control with their pros
and cons
Budgetary control is one kind of financial plan where budgets are prepared to forecast
and estimate some financial information for next year in the present times. Under this, when
expenses are required to control or reduce along with boost up incomes then budgetary control is
one of essential technique. In order to make this plan, various tools and methods are available
which supports to prepare effective financial schedule and meet the objectives properly. The R.L.
Maynard Limited small enterprise considers basically three techniques which are zero based,
fixed and then incremental in the firm. Evaluation of these three planning methods using pros
and cons is stated below:
Incremental budgeting
8

A method in which base of the past financial statements is taken and values increases
with specific percentage each period for preparing budgets is known as incremental budgeting.
Under this, incomes are increased with high rate whereas change in expenses mentioned with
low rate comparatively (Davies and Crawford, 2011). It is used by R.L. Maynard on major and
wide basis due to supportive for enhancing business performance continuously. Further, its
benefits and drawbacks are stated below:
Benefits:
 Budget statement prepared under incremental method is in the nature of stable
improvement where change occurs gradually.
 Managers of R.L. Maynard easily able to operate this in all the departments on
continuous basis.
 It is very simple to prepare in the business along with easily understandable for every
employee who works in the enterprise.
 Influence of change or increment can be visualised quickly as per this stated planning
tool.
 Issues of the conflicts in the firm are to be avoided when all the departments treated in
same or similar direction.
 It helps to establish an effective kind of coordination among the budgets and managers of
various functions properly (Budgeting Methods - Incremental Budgeting, 2015). Apart from this, for achieving financial objectives on consistent basis and boost up
growth rate also incremental tool is beneficial for R.L. Maynard small business.
Drawbacks:
 Major problem associated with incremental budgeting is that, it makes assumptions that
all the working activities will continue with same manner as responded in the past
financial years.
 Opportunities or chances to earn incentives amount behind developing new opinions and
ideas are lost by R.L. Maynard when it implements this planning tool of budgetary
control.
9

 There are no incentives occurred to decline costs and expenditures.
 Priority in order to utilise the resources can be fluctuated or changed until and unless the
budgets are not set originally.
Fixed budgeting
This budget does not fluctuate when there is increase or decrease in sales observed by the
organisation and it is also called as s static budget. It does not change as the volume changes.
This does not flex whenever sales increases or vice -versa (Kotas, 2014). Eg: commission on
sales is 10%, then whether firm is earning or not it will pay the said commission only.
Advantages:
 The first advantage of fixed budgeting is that it helps R.L. Maynard Ltd to prioritize. It
helps us to put an eye so that our expenses does not exceed out of our planned budget.
 Next advantage relating to cited company is that its construction company and in that
context it will be helpful in clearing debt due to past financial choices, company has
made.
 The R.L. Maynard finds it easy to implement it and then follow accordingly because it
need not to be updated continuously throughout the accounting period of that year.
 As it is construction company, it offers great insight into company's costs and profits. The company can put an eye about under estimating and over estimating and shift the
over estimations to under estimations.
Limitations:
 Firm cannot constantly update it which makes it more degradable because company is
dynamic in nature and what has planned needs to altered or changed accordingly as may
be the case be (Zimmerman and Yahya-Zadeh, 2011).
 No flexibility is observed as it cannot be changed through the accounting period to which
it is applicable.
 R.L. Maynard Limited company which allows increasing its sales volume, it cannot add
additional resources as resources are tied up in this budget.
10

 Fixed budgeting is mainly focused and based on previous data, as a result, newer
companies find it difficult to operate.
Zero based budgeting
This budgeting starts with the zero base, it means that all the expenses and costs which
the company might incur must be justified for each of the new accounting period. This is taken
with the perspective that what is needed for the coming period and not with the earlier
implemented budget.
Benefits:
 The first benefit of zero based budgeting is that it is flexible and not rigid. We can make
changes in it according to our requirement.
 It involves focused operations with regard to this construction company, as it will be
more in maximising its return on investment and reducing its cost (Lee, 2011).
 The execution of the services will be in disciplined manner because it is constantly
reviewed by the managers according to the needs of the construction industry. Since, every line of item is to be justified, it reduces the chances of budget inflation.
Disadvantages:
 The company will be bias in short term planning as it will involve more resources and it
will eventually lead to more cost in operations.
 Manipulation by the managers might be done as a result, the operations will be vain and
not according to the said aims and objectives of the firm.
 Next disadvantage is that due to more and constant use of the resources, it creates an
intensive pressures on the resources of the R.L. Maynard, as a result more use of it will
be duplication and wastage of valuable resources (COMPARING BUDGETING
TECHNIQUES (INCREMENTAL V ZBB), 2017).
 Explaining each and every task requires more time and needs the expertise of the
managers and involve additional training and automatically adds to more cost.
11

TASK 4
P5 Comparing that how R.L. Maynard uses some systems of MA for making solution of
financial issues
At the working environment of an enterprise various kinds of problems and obstacles
incurred which create negative impact on the business performance. Such issues can be related to
financial department, marketing, HR, production, research and development etc. In the present
study shortfalls are considered which are regarded with financials only in the business place of
R.L. Maynard Ltd. According to this, declining sales and profit as well as increasing expenses
there are major financial issues. Apart from this, efficiency and productivity reducing, turnover,
return on investment etc. are also one kind of financial shortfalls for cited entity.
Due to affecting business performance adversely, it is highly compulsory to eliminate
them from the working place. Until and unless the management not uses any system, methods
and strategies then cannot fight with such problems and raise performance in the industry of
construction. R.L. Maynard incorporates some systems which are part of MA for combating
financial obstacles which are explained such as follows:
 Budgetary targets: A tool in which budget statements are considered to find out those
issues which are come into consideration and affect performance of enterprise. According
to this, once data which estimated in budget are derived and then identified facts and
figures of current year (Steed and Gu, 2009). If R.L. Maynard Ltd able to grab or achieve
budgeted data then it can be said that there are not any financial issues occurred.
However, if cited construction enterprise unable to meet forecasted data then reason for
this specific shortfalls are identified. For example: if firm estimates that in next year net
profit has to raise with 13% and enhanced only 9%. In this case, causes are analysed like
cost increasing and efficiency declining are factors which affect to achievement of goal.
Therefore, strategies for these both elements will be taken by R.L. Maynard which is sign
of eliminating financial obstacles.
 Key Performance indicators: Another system of MA is KPIs which helps to identify
and reduce financial and non-financial both types of the issues. On the basis of this, R.L.
Maynard can easily assess its performance and causes behind incurring problems. It
includes some indicators like quality, cost, margin, expenditure, service, efficiency,
12

productivity etc. If any of the aspect giving response in unfavourable manner towards
enterprise then will raise financial issues. It is one kind of effectual measurement to
analyse issues of financials and eliminate them from cited construction firm
(Baldvinsdottir, Mitchell and Nørreklit, 2010). For instance: if quality of the product's
decline and expenditures improve in next year then it can be commented that R.L.
Maynard not performs well. In this case, cost and quality management will be
implemented to make an effective solution of such issues.
 Financial governance: Other than the above, a part of corporate governance which
analyses financial transactions incurred in the firm against to resources incorporated is
known as financial governance. Majority of the entities of construction industry uses this
aspect because it supports to assess that employees are giving which kind of response
using financial resources. If they are highly capable to utilise in optimum manner and
raise turnover of cash as well as assets then will be beneficial for R.L. Maynard to solve
financial obstacles. On the other side, if financial governance found that, various
resources are not utilised in optimum way then by providing training to employees their
efficiency will be raised. Ultimately, such shortfalls will be resolved effectually from the
small enterprise of construction sector.
 Balanced scorecard: This approach consists of major four perspectives of which
business performance can be assessed in appropriate manner. Furthermore, aspects of
BSC are such as customer, internal business process, financial and learning & growth
(Vaivio, 2008). The R.L. Maynard company applies this particular method of MA by
which financials are analysed along with issues and problems. It is very easy and simple
to apply and execute fin the business environment.
CONCLUSION
On the basis of above analysis, it can be ascertained that, MA has a pivotal place in every
organisation whether it operates under construction industry or any other market sector. Basic
reason for adopting this aspect by R.L. Maynard is to track internal information of business and
make profitable decisions where and whenever required. Further, it uses four systems like cost
accounting, job costing, inventory management and job costing. In order to accomplish process
of reporting the cited enterprise considers some reports which are like job cost, operating budget,
13

stock management, departmental, accounts receivables etc. Moreover, as per the marginal and
absorption costing, R.L. Maynard Ltd generates £9300 and £9600 net profit respectively. In
order to control over the budget three tools are mainly considered by the SME which involve
zero based budgeting, incremental and fixed budgeting. Besides this, financial governance,
budgetary target, benchmarking as well as KPIs are applied by the construction company.
14

REFERENCES
Books and Journals
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory
and practice in management accounting. Management Accounting Research. 21(2). pp.79-
82.
Bruynseels, L. and Cardinaels, E., 2013. The audit committee: Management watchdog or
personal friend of the CEO?. The Accounting Review. 89(1). pp.113-145.
Burns, J., 2014. Qualitative management accounting research in QRAM: some reflections.
Qualitative Research in Accounting & Management. 11(1). pp.71-81.
Cadez, S. and Guilding, C., 2012. Strategy, strategic management accounting and performance: a
configurational analysis. Industrial Management & Data Systems. 112(3). pp.484-501.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, Organizations and
Society. 78(6). pp.1-13.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices.
Journal of Operations Management. 32(7). pp.414-428.
Grabner, I. and Moers, F., 2013. Management control as a system or a package? Conceptual and
empirical issues. Accounting, Organizations and Society. 78(6). pp.407-419.
Ismail, N. A. and King, M., 2014. Factors influencing the alignment of accounting information
systems in small and medium sized Malaysian manufacturing firms. Journal of
Information Systems and Small Business. 1(1-2). pp.1-20.
Johnson, H. T., 2013. A New Approach to Management Accounting History (RLE Accounting)
Routledge.
Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.
15

Lee, K. H., 2011. Motivations, barriers, and incentives for adopting environmental management
(cost) accounting and related guidelines: a study of the Republic of Korea. Corporate
Social Responsibility and Environmental Management. 18(1). pp.39-49.
Steed, E. and Gu, Z., 2009. Hotel management company forecasting and budgeting practices: A
survey-based analysis. International Journal of Contemporary Hospitality Management.
21(6). pp.676-697.
Vaivio, J., 2008. Qualitative management accounting research: rationale, pitfalls and potential.
Qualitative Research in Accounting & Management. 5(1). pp.64-86.
Zimmerman, J. L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control.
Issues in Accounting Education. 26(1). pp.258-259.
Online
Budgeting Methods - Incremental Budgeting. 2015. [Online]. Available through:
<https://www.tutor2u.net/business/reference/budgeting-methods-incremental-budgeting>
[Accessed on 31st October 2017].
COMPARING BUDGETING TECHNIQUES (INCREMENTAL V ZBB). 2017. [Online].
Available through:
<http://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f5/technical-articles/comparing-budgeting-techniques.html> [Accessed on
31st October 2017].
R.L. MAYNARD LIMITED. 2016. [Online]. Available through:
<https://beta.companieshouse.gov.uk/company/01103184> [Accessed on 31st October
2017].
Tools and techniques of Management Accounting. 2017. [Online]. Available through:
<https://accountlearning.com/tools-and-techniques-of-management-accounting/>
[Accessed on 31st October 2017].
16

APPENDIX
WORKINGS OF P3
Working Note 1
Fixed Production overhead absorption rate (OAR)= £1,800/600 = £3 per unit
Working Note 2
Working Note 3
17