Management Accounting Systems and Techniques: Doc

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Management
Accounting Systems
and Techniques

INTRODUCTION
Management accounting is a procedure which guides internal stakeholders to examine
existent position of the organisation and assess that it is performing well or not. While
formulating strategic decisions top level executives use it as an essential element as it guides
them to find the areas of organisation where improvement is required. In order to execute all the
business activities in proper way it is crucial for the managers to make sure that they focus on
management accounting as it is required for betterment of enterprise (Arena and Arnaboldi,
2014). The organisation which is selected for present report is Oshodi Plc. It is a commercial
enterprise which is involved in the production of JOJO fruit juice.
This assignment aims at various topics such as understanding of management accounting
systems and methods of its reporting, calculation of cost using different techniques, formulation
of income statements using marginal and absorption costing. Along with this, different planning
tools used in budgetary control and comparison of the ways in which organisations are adapting
management accounting to respond financial problems are also covered under this project.
TASK 1
P1 Different management accounting systems and essential requirements of them for an
organisation
Management accounting: It can be characterized as a technique that is implemented by
top level executives of an organisation to assess that all the operational activities are executed by
staff members in a proper manner or not. In Oshodi Plc it is utilised by management to observe
existent position and condition of the company. With the help of it strategic decision are
formulated by managers for future developments. Management accounting is the technique
which is utilised by companies such as Oshodi Plc to determine actual position of the business.
With the help of it internal stakeholders analyse that the organisation is performing well in the
market or not.
Difference between management and financial accounting:
Basis Management accounting Financial accounting
Objective Main objective of management
accounting is to help managers to form
Objective of financial accounting is to
check financial accuracy of business
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strategic decisions for betterment of
organisation.
and determine that it is generating
profit or not.
Dependenc
y
While forming management reports
managers take help of financial reports as
it is dependent on financial accounting.
It is not dependent on management
accounting.
Management accounting system: It is a tool that is utilised by management of business
entities to keep statistical information so that decisions for carrying out day to day activities
could be taken. In Oshodi Plc managers are using it to form strategies for future so that growth
could be attain by the company (Armstrong, 2014).
Types of management accounting systems: Managers of Oshodi Plc are using various
management accounting systems to assess actual position of the company. All of them are
discussed below in detail:
Cost accounting system: It is the part of major management accounting systems which
are used by commercial enterprises in order to keep detailed information regarding cost of
production and other activities. Managers in Oshodi Plc are using it to analyse actual cost of each
and every unit of juice bottles which are manufactured by it. With the help of it, they try to
reduce the expenses which are not required and resulting in enhancement of cost. Cost
accounting system essentially required for Oshodi Plc as it guides managers to take effective
decisions to reduce unnecessary expenditures which may result in unforeseen costs in future
(Azudin and Mansor, 2018).
Price optimisation system: For large as well as small organisations it is very important
to decide right cost for the products which are offered to the clients by the company. For this
purpose, this system is used by managers so that expectations of client could be matched. In
Oshodi Plc it is implemented by management to set right price for juices that are manufactured
by it. With the help of it reaction of clients on different rates is analysed by the managers. It is
essentially required for Oshodi Plc because it facilitates the process of meeting the long term
business objectives such as profit maximisation by attracting large number of customers.
Inventory management system: It is used by managers in different organisation to
manage goods that are used to perform business operations. As Oshodi Plc is a manufacturing
company of fruit juices therefore it is vital for management to use it so that stock could be
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managed properly. It guides them to make strategic decisions to fulfil requirements of inventory
of the organisation. Three different types of this systems are as follows:
 FIFO (First in First Out): In this system earlier received inventory is utilised by
organisation for manufacturing activities (Bierstaker, Janvrin and Lowe, 2014).
 AVCO (Average cost): In this system of stock management inventory is utilised for
carrying out operational cost on the basis of average cost.
 LIFO (Last in First Out): It is a system in which fresh inventory is used for production
activities.
From all the inventory management systems in Oshodi Plc management use FIFO
method. It is essentially required to manufacture fresh juices for the clients and satisfy them with
the best quality products of organisation by keeping detailed information of inventory which is
used for business purpose.
Job order costing system: The system which is utilised by managers of companies to
keep an eye on all the business operations which are executed by organisation is known as job
order costing. In Oshodi Plc managers use it to analyse result of such processes which are
conducted accordant to conditions of customers. It is essentially required for Oshodi Plc as it is
beneficial to determine value of different activities of enterprise (Chenhall and Moers, 2015).
P2 Management accounting reporting methods used by organisations
Management accounting reporting: In Oshodi Plc managers use it to make sure that
detailed information regarding actual status of the organisation is kept by them or not.
Methods of management accounting reporting: Managers of Oshodi Plc are using
various methods to generate different reports. All of them are discussed below:
Budget report: It is one of the main internal reports which are formulated by members
of management team to compare actual and standard position of the company. It is generated in
Oshodi Plc by managers to allocate finance to various activities accordant to their needs so that
all of them could be performed appropriately by employees. Budget report is advantageous for
the company as it guides to utilise monetary resources properly. It is also used by enterprises for
the purpose of estimating future requirements of finance so that overspending of budgets could
be stopped (Cooper, 2017).
Performance report: A document which carries information of organisation and
employee's accomplishments is known as performance report. With the help of it reward,
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bonuses and incentives are offered to staff members. In Oshodi Plc it is generated by managers
to analyse that their efforts are resulting positively or negatively for the company. It is beneficial
for the company because by using it management can determine that their strategic decisions are
able to take the enterprise forward or not. It helps to enhance stockholder's engagement within
the entity because it guide them to determine that business is performing well or not.
Account receivable report: A report which is generated to keep track record of
outstanding amount of clients is known as account receivable report. Main purpose of
formulating it is to evaluate the debts that are owed by various customers (Fullerton, Kennedy
and Widener, 2014). Oshodi Plc is a successful company so it offer credit to its suppliers and to
record the due amount of them this report is generated by managers. It is beneficial for the
organisation to determine the funds which are going be received in future. Another benefit of it is
that, with the help of it credit policies could be tighten by management so that possibility of
debts could be reduced.
Inventory management report: In manufacturing company it is considered as one of the
important report because with the help of it actual status of stock can be analysed. In Oshodi Plc
it is generated by management to make sure that organisation is able to acquire stock to produce
juice according to demand of customers. It is beneficial for the organisation because it can help
to track actual position of goods. Main purpose of this report is to aware managers regarding
requirement of inventory for business operations.
M1 Evaluation of benefits and application of management accounting system within an
organisational context
Management
accounting systems
Application and benefits for the organisation
Cost accounting
system
In Oshodi Plc cost accounting system is used by managers to analyse
cost of all the business activities. It is beneficial for the organisation
because with the help of it funds could be allocated to different
activities according to their requirements.
Price optimisation
system
Managers in Oshodi Plc are using it as it has various benefits for the
organisation. On of them is that it helps to determine best suitable
price of different products so that expectations of customers could be
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matched.
Inventory
management system
Members of management team of Oshodi Plc apply it within the
organisation to manage stock and manufacture products according to
requirements of customers.
Job order costing
system
Managers in Oshodi Plc are using it as it is the best option to record
various operations which are executed by organisation to meet
expectations of customers.
D1 Management accounting systems and reports are integrated with organisational success and
processes
There are various systems and reports under management accounting which are generated
by managers of Oshodi Plc to conduct operational activities in proper style. Inventory
management system is used to determine that company is acquiring enough goods to produce
items and price optimisation system is used to set appropriate cost for products. On the other
hand, reports such as account receivable is created to analyse actual owed amount by client and
tighten credit plan of action so that problem of delayed payments from customers could be
reduced.
TASK 2
P3 Calculation of cost with the help of suitable methods and formulation of income statement
using marginal and absorption costing
Marginal costing: It can be defined as the technique which is utilized for the purpose of
finding out minimal expenditures related to units. Main purpose of using this method is to
analyse expenses which have taken place due to production of additional unit of juices
(Heinzelmann, 2017). In Oshodi Plc it is used by managers to assess cost of each and every
additive unit. Calculation of profit using this technique is as follows:
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Absorption costing: The cost accounting technique which is utilised by managers of
organisations to analyse expenditures which are associated with manufacturing activities of
particular product is known as absorption costing. In Oshodi Plc it is used by management to
make sure that the costs which have taken place due to production of different units get absorbed
from the revenues of the same. The table below is showing calculation of profits with the help of
absorption costing:
Working notes:
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Fixed production overheads absorption rate = Fixed production overheads
Production
= 99000 / 11000
= 9
M2 Application of range of management accounting techniques
Managers in organisations such as Oshodi Plc use different types of techniques to analyse
performance of organisation and that the way in which operations are carried out is appropriate
or not. Description of them is as follows:
Standard costing: It is a method that is utilized by organisations to find out variation
among standard and actual sales. In Oshodi Plc it could be used by managers to analyse the
causes which are resulting in difference between current and standard costs.
Historical costing: This technique states that all the assets and liabilities which are
recorded in final accounts of the organisation should be recorded on nominal value. Managers of
Oshodi Plc can use it to record all the elements of financial statements on the basis of historical
cost.
D2 Interpretation of data
While calculating profits of the Oshodi Plc with the help of marginal costing it is
showing net profit of 61000 for November and 101000 for December. While applying another
method of costing in November month net income was 79000 and for December month these are
83000. According to the calculation marginal costing is showing large amount of net income for
December month due to ignorance of fixed expenses.
TASK 3
P4 Explanation of budgetary control with planning tools that are used in it with their advantages
and disadvantages
Budget: It is a monetary arrangement which is formed by managers to conduct all the
future activities in appropriate manner. For all the organisations it is very important to analyse
that it is formulated properly in order to analyse current position of organisation. In Oshodi Plc
managers create budgets to forecast future expenses and revenues so that predetermined
objectives could be met.
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Budgetary control: It the procedure which is followed by companies to set performance
objectives for future. With the help of it unnecessary spending of monetary resources could be
stopped by Oshodi Plc because main goals of budgetary control is to increase profitability and
control unexpected expenses. It is also considered as the most effective way to conduct business
in more effective manner as it helps to make sure that all the resources are utilised in efficient
manner (Hitomi, 2017).
Process of budgeting: While formulating budgets managers are required to analyse
actual situation of the company and identify the needs so that required resources could be
acquired. Afterwards, they are responsible to ask the staff members to formulate different
strategies which could be implemented to fulfil all the requirements. When various options are
provided by employees then all of them are presented in front of top management so that they
can mark their approval on it. At the end the approved alternative is used to form budget and run
the business properly.
Different planning tools: There are various types of tools which are used by managers of
Oshodi Plc for the purpose of budgetary control. All of them are described below in detail:
Zero based budget: It is a budget which is created by ignoring all the incomes and
expenses of previous years. All the figures that are shown in it are justified and judged by
managers and then recorded in the books. In Oshodi Plc it is created to analyse incomes and
expenditures for each and every accounting year (Zero based budget, 2019). With the help of it
actual position of the company can be determined. Benefits and drawbacks of zero based budget
are discussed below:
Benefits Drawbacks
It helps to allocate budgets to all the business
activities appropriately according to
requirements.
The procedure of generating this budget is very
complex because all the transactions of last
years are ignored.
It helps to identify such operations which are
not resulting in profits so that they could be
discontinued and possibility of huge losses
could be reduced.
Time required to create this budget is very
higher and it is not possible for all companies
to invest large amount of time in budgeting
process.
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Operating budget: It is a financial plan which is created by managers on yearly,
monthly or quarterly basis according to the requirements. All the expenses and incomes for the
period which are directly related to the operations are recorded in it. In Oshodi Plc it is generated
by the managers to record expenditures which are taking place in non monetary terms. One of
them is depreciation which is a non cash item and recorded in the operating budget (Ismail and
King, 2014). All its benefits and drawbacks for organisation are described below:
Benefits Drawbacks
It guides managers to analyse the expenses
which are directly related to operational
activities and find the way in which all of them
could be controlled.
While creating it managers have to make plan
for a long period and then it will result
accurately for the company.
As it helps to determine cost of operational
activities therefore it is beneficial for managers
to allocate funds to all the operations according
to their requirements.
It requires experienced people to create the
budget because the process of creating it is
very complex.
Capital budget: It is created by managers of the organisations to determine that the
investments that are made by the company beneficial or not. In Oshodi Plc it is generated by
managers to differentiate between the most and least profitable projects. It guides top level
executives to make investment in best option which is available to them by analysing all the
alternatives (Nitzl, 2016). Different benefits and drawbacks of it are discussed below:
Benefits Drawbacks
It guides managers to select best suitable
project and they can make investment in it to
generate higher profits.
It is the most expensive method of budgeting
and all companies cannot afford it.
With the help of it risky options could be
determined with their impacts so that non
profitable investments could be ignored by
organisation.
It could be used for long term planning only it
cannot result positively for short period.
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M3 Analysis of usage of different planning tools and their utilization for the purpose of setting
up and forecasting budgets
Managers in Oshodi Plc are using different planning tools. These are operating, capital
and zero based budgets. All of them are used by managers of Oshodi Plc to forecast and prepare
budgets because with the help of such budgets actual position of the company could be analysed
and guidance for taking best suitable decisions could be acquired. Capital budget is used to
identify best option to make investment so that funds could be saved for future. Operating budget
is also used by management members to determine the costs that are related to operational
activities so that funds could be allocated to all of them accordingly.
TASK 4
P5 How organisations are using management accounting systems to deal with money related
problems
Financial problems: The condition where a company deal with challenges due to
inappropriate availability of funds known as financial problem. It is vital for enterprises to
formulate effective strategies and decisions so that all of them could be resolved appropriately.
Oshodi Plc is also dealing with some of the challenges due to low availability of funds (Otley,
2016).
Different financial problems: All the financial issues which are faced by Oshodi Plc are
as follows:
Unforeseen expenses: There are various such types of expenditures that are taking place
suddenly and managers of the organisation have to use monetary resources to overcome all of
them. These are repair, essential requirement of a new machine etc. While bearing such costs
company reaches to the condition of lack of monetary resources for future operations (Quattrone,
2016).
Late payment by suppliers: As Oshodi Plc is a manufacturer of fruit juices therefore it
allows credit to it suppliers for the purpose of increasing sales. Sometimes they get fail to pay the
owed amount of time and it leads the organisation toward the situation of lack of monetary
resources.
In order to identify all the above described financial challenges managers in Oshodi Plc
are using some specific techniques. All of them are described below in detail:
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Benchmarking: It is a tool which is used by organisations to compare their performance
with competitors so that appropriate changes to the policies and strategies could be made. With
the help of it competitive advantage could be acquired as it help to enhance customers base by
offering them highly competitive goods. In Oshodi Plc managers use it to identify the problem of
late payment by suppliers by comparing own credit polices and other companies. After
comparison managers make changes in the strategies so that such types of situation wont take
place again in future (Ross, 2017).
KPI (Key performance indicators): It is a performance measurement tool which is used
by business entities to analyse success and failure of different activities that are conducted by
them. There are two different types of KPI one is financial and another is non financial. One of
them is used to identify unexpected expenses as its main objective to figure out the costs that are
unnecessary. Second one is used to determine errors in non financial activities such as supply
chain. In Oshodi Plc managers use first KPI in order to identify unforeseen expenditures by
measuring success of each and every activity performed by organisation.
Managers in Oshodi Plc are using financial governance to resolve both the above
described financial problems. Description of it is as follows:
Financial governance: It can be defined as the set of rules and regulations which are
used organisations to respond the issues that are related to lack of financial resources (Siverbo,
2014). In Oshodi Plc managers use it to deal with the problem of unforeseen expenses and late
payment by suppliers by analysing that right accounting principles are followed by the
organization or not. When all the records are generated appropriately then it helps to create
budgets which could be used in difficult situations.
Comparison of organisation on the basis of use of management accounting to respond
financial problems:
Oshodi Plc Kiril Mischeff Group
Managers of Oshodi Plc are using cost
accounting system to resolve the problem of
unforeseen expenses as with the help of it cost
of each and every activity could be analysed
and afterwards monetary resources are
allocated accordingly to ignore situation of
In order to deal with the problem of lack of
monetary resources for different activities
managers in Kiril Mischeff Group are using
Job order costing system. It helps to keep track
record of different activities so that problem of
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unnecessary expenses. insufficient fund for activities can be resolved.
Price optimisation system is used by managers
of the company to set appropriate prices for the
products and resolve the problem of late
payments from suppliers because when they
get satisfied with the prices then they wont ask
for credit or pay the owed amount on time.
Kiril Mischeff Group is facing financial
challenge of improper money management
system which results in mismanagement of
records of finance. In order to respond this
financial challenge managers within the
organisation are using financial governance
which guides to form all the records according
to accounting principles and manage money
appropriately (Warren Jr, Moffitt and Byrnes,
2015).
M4 The way in which management accounting can lead organisations to deal with financial
problems and sustainable success
There are various types of financial challenges that are faced by Oshodi Plc. These are
unexpected expenses, late payments by suppliers etc. Managers are using various techniques of
management accounting to identify and respond all of them. These are KPI, benchmarking and
financial governance. With the help of all these tools managers try to resolve the challenges
which are faced by them by comparing own policies with competitor's, analysing such costs that
are unnecessary and following all the accounting principles (Welford, 2016).
D3 Evaluation of the way in which planning tools can help to resolve financial problems
Different types of planning tools such as capital, operating and zero based budgets are
used by managers to respond financial problems. All the budgets helps managers to be aware of
problems which may take place in future. With the help of it the problems such as unforeseen
expenses could be resolved by forecasting it in advance and finding the ways in which it could
be resolved.
CONCLISION
This assignment concludes that management accounting is a process of maintaining and
dominating performance of business entity. Its systems and reports are also used by managers to
formulate strategic decisions so that predetermined goals could be achieved. Different types of
budgets are also used by organisations in the process of budgetary control so that actual position
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of company can be assessed. All of them also guides to respond the financial challenges such as
late payment and unexpected expenses by estimating them in advance. There are various other
techniques that are also used to respond financial issues which includes benchmarking, KPI and
financial governance.
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