Management Accounting : LM Engineering Ltd

Management Accounting

REFERENCES

INTRODUCTION
Management accounting is an important part for an organisation which assist them in
driving towards achievement of its desired goals and objectives within pre-determined time
period. It performs several functions such as analysing and summarising accounting reports such
as Income statement, Balance sheet, Cash flow statement etc. These reports facilitate managers
in framing an effective strategies and suitable policies for the beneficial of company such as
using management accounting and reporting systems, preparing of budget and different
techniques to monitor unnecessary expenses etc. LM Engineering Ltd. company a civil
engineering and planning services company having headquarter in London, United Kingdom and
offers to the people of northern British Columbia. The report discusses the concept of
management accounting and its various types with their benefits to company. In addition with
this, various reporting systems such as performance report, inventory management report etc. are
briefly discussed under this report with the context of selected organisation. Apart from this,
types of costing methods and its uses in calculation of net profitability, concept of budget and its
tools to control expenses, uses of management accounting systems and techniques to resolve
financial related issues which are faced by an organisation.
TASK 1
P1:
The process of recording, summarising, and presenting financial records of an
organisation is known as management accounting. For this different types of books are maintain
by the financial department of company such as profits and loss account, cash flow statement
and balance sheet for an organisation (Chapman, 2011). The concept of management accounting
is directly related with estimating cost that will be bear by organisation to operate business its
operations. Along with this it helps an department to manage the funds by removing or
eliminating the waste.
LM Engineering limited uses different types of accounting softwares or systems by which
they maintain financial records as it helps them to formulate the strategy that helps company to
achieve their expected results. Some accounting system that are implemented by organisation is
mention as follow:
1

Cost accounting system:. This helps an organisation to analysis, predicts and calculates
all types of cost such as fixed cost, variable cost etc. To maintain and calculate the financial
records helps an organisation to calculate proper cost that is invested by company and helps to
generate more profits in future. LM Engineering Ltd. update their financial system that helps to
analysing price of different products and services as it helps to find cost along with their added
margin. Along with this it helps an organisation to analysis the future profitability of firm (Cost
accounting systems, 2013).
Price optimisation system:. With the execution of price optimisation system LM
Engineering Ltd identify the perception of its customers which help them to decide the price that
ensure future profitability as price effects on buying and selling of its customers. For this
financial department needs effective employees’ that helps to research in market. As they
provide essential information to an organisation that relates with satisfaction level of its targeted
customers it is related with price factor of company. This helps an organisation to decide that
they follow with current policy or modify changes according to market demands (Christ and
Burritt, 2013).
Job costing system- It refers to the system by which an organisation total cost of its
operating activities are calculated by company. This provides various range of its products and
services that help an organisation to allocate financial service individually. For this it is the most
suitable to adopt by organisation as they provide different products and services with wide range
of its products. LM Engineering Ltd use such system to make estimate cost for each units
separately. Along with this it helps organisation to calculate its expenses and revenues
individually.
Inventory management system- These helps an organisation to manage and track the
status of its inventory. This helps an organisation to meet with the expectations of customer
which helps to generate faith in customers through delivering demanded products on time. LM
Engineering Ltd uses this system to ensure the availability of company products and their
services. Example- organisation wants to track the status of its conveyance system then this
system help organisation to check the productivity of their services (Garrison and et. al., 2010).
Difference between management and financial accounting
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Management accounting- This accounting system help an organisation to provide
necessary and relevant details that directly helps financial department to formulate effective
policy and plans for the project.
Internal department are whole sole controllers of business it includes managers,
employees, management etc. as they has authority to make plans and monitor the operations that
are performed by organisation. As they are developed to gains the future benefits by reducing the
cost of different activities that operates by organisation. For this all rules and regulations,
policies are developed within inside the organisations.
Financial accounting- With the help of financial accounting an organisation prepare and
records financial transaction or statements. For this financial department create profit & loss
account, balance sheet etc. It helps an organisation to ensure their financial position in industry.
External parties that involve investors, banks, financial institution etc. are the persons
which are major factors as they impact on financial decision of an organisation. For an effective
decision that relates with monetary decisions are developed through historical perspective such
as past data records, last year balances sheet etc. To manage effective accounts organisation has
to follow particular formats (Goetsch and Davis, 2014).
P2
There are several accounting system of management which are useful for the higher
authorities of the organisation in determining their actual financial positions in present times.
This helps to identify and prepare their effective plans or policies as it increases the chances of
achieving higher goals and expected results for an organisation. With this it is possible for
management to make productive result within decided time period. As this report includes
information, data and records for monetary and non-monetary terms that helps to make effective
decisions. Some reports that are prepared by LM Engineering Ltd is as follow:
Performance report- This report is prepares with the purpose of assessing and measuring
the performance of an organisation and its employees. As it provides reliable and useful
information that relates with current performance of the employees that work for the
organisation. With this it is easy for organisation identify and developed issues that create barrier
in the performance of employees. This helps the management of LM Engineering Ltd. o
formulate corrective decisions as it helps organisation to take corrective decisions that are for the
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welfare of employees because they improve their skills and productivity (Lavia López and Hiebl,
2014).
Budget report- With the preparation of budget organisation decides the estimate cost for
each activity of the organisation. As separate functions and activities are already decided or
formulated by the management that are perform by different departments of an organisation. LM
Engineering Ltd use this report to utilize optimum resources of the organisation by reducing the
number of unnecessary activities that is performed by the organisation.
Accounts receivable or debtors- This report explain and contain the information about
unpaid debtors or due amount that is earned by organisation but not paid by customers. It is
important for LM Engineering Limited to maintain the records of accounts receivable as they
highly impact on the profitability of an organisation. This is mainly related with the credit
facility of an organisation it is the responsibility of financial department of an organisation to
record unpaid amount so that they recover amounts which helps to gain high profits of an
organisation. Apart from this it helps an organisation to update their credits policy to overcome
from bad-debts (Linoff and Berry, 2011).
Cost managerial accounting report- It may be defined as the report which indicates the
information about the overall cost incurred in process of production and other business activities.
Using such report by LM Engineering Ltd. Help in identifying and analysing the actual cost
which makes easy for their managers to frame an effective pricing strategies for their products
and services offered in market. This will help in retaining loyal customers as well as generate
huge profitability. Through this report the organisation provide the full details of about money
that is invested for the execution of its business operations. This leads the administration of LM
Engineering Ltd. to calculate the expenses before selling of products and outcome or income that
is received by sale of its products when they are deliver to its customers. Along with this it helps
an organisation to control unnecessary cost which reduces the profits of the organisation (Lukka
and Vinnari, 2014).
M1
Each accounting system has separate benefits which brings positive results for the
company. If an organisation uses such system then it helps to accomplish goals and objective
easily. Some benefits of management accounting system is as follow:
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 Cost accounting system is beneficial for management as it help to set the price of
products through analysing the cost that is invested for the manufacture of products
and service.
 With execution of cost accounting system an organisation determines the unnecessary
cost that increases the price of products.
 The effective use of inventory management system helps an organisation to meet with
its loyal customers by fulfilling their demand and needs on time.
 Inventory management system manage the stock of products and reduce extra cost that
burden on company to make products. Like with effective inventory system
organisation find current position of stock which create balances between demand and
supply of stocks.
D1
To provide the favour of LM Engineering Ltd. it is necessary for organisation to integrate
between management report and accounting system as both of this concept helps to create
effective decisions and plans that help to achieve organisational goal and objective with
efficiency & effectiveness. So management combine both of this activities to increase the value
in their products or services.
TASK 2
P3:
It is the amount on the basis of which the company charged for the services rendered and
products sold to the customers. To evaluate cost, it is important for manager to check books of
accounts under which all transactions related with producing and selling products and services
are accurately recorded. There are two costing methods which includes marginal as well as
absorption which are briefly explained as under:
Marginal costing: It is most adoptable costing method by small and medium sized
organisation as it assist in presenting more profitability in financial statements. It increases
profits due to including only variable cost and ignoring fixed cost. Thus, it also known as
variable costing method as well.
Absorption costing: It is another technique to calculate net profitability which includes
both variable and fixed costs (Absorption costing, 2018). It provides accurate information
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regarding profitability of company to their shareholders due to inclusion of fixed cost which is
not done in marginal costing method. It increases credibility of shareholder towards company
due to which they may increase their amount in existing investment and enhance financial
position of company.
To identity and compare the net profits of an organisation by using both costing methods,
the manager of LM Engineering Ltd. Should use both these methods first and later on decide
which method is more profitable for them which will easily attracts large number of investors.
Here are the calculation of net profitability by using both marginal and absorption costing
methods:
Annex (A)
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
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Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Annex (c)
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Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M2
To maintain financial reports or documents management accounting is the best technique
as they create profits and loss a/c, cash and fund flow statement etc. LM Engineering Ltd
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evaluate its financial position by using accounting tools and techniques that involve cost
accounting system and analysis of financial statement of company.
D2
It is essential for every company to make financial reports of whole year or quarter
through this it is easy for organisation to analyse their current financial position. For this the first
task that is require to done by financial department is to interpret the transactions that take places
during different business activities. Along with an organisation calculate actual amount that is
invested in each activity of organisation.
TASK 3
P4
Budget- Budget is an internal tool that is used by company which helps them to analysis
and find out estimated cost for the upcoming year. This is divided by management of company
into quarterly and half yearly basis. As it helps the organisation to evaluate their output result
with expected results of management (Pavlatos and Kostakis, 2015). Usually budgets are made
for anything but specifically they are used to calculate money that is earn and spend by
government or organisation it help them to complete its activities with minimum cost.
Types of budget
Cash flow budget- These types of budget helps an organisation to record the transaction
from where cash come in and where it is spend or expense by management. Along with this it
helps an organisation to manage sufficient amount of funds by which they creates launch or start
new project. Like small companies are the major clients of LM Engineering Ltd that creates
budget from them.
Financial budget- The financial budget help the company to manage their finance or
money for the whole year. These includes income statement, profits and loss a/c etc. effective
financial budget help the company to show their financial strength in market or its stakeholders.
Management of LM Engineering Ltd. formulate effective financial budget through which they
monitor their expenses (Renz, 2016).
Static budget- The static budget is developed by management as they are stable and
cannot be changed easily. In this changes are developed only sales or profits of company are
increased. Like fixed cost it bear by every organisation either they operate its activities or not.
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Budgetary control- In simple words budgetary control helps an organisation to achieve
their specific goals in a pre-determined budget. Example- LM Engineering Ltd. helps small
industry to make their budget through which they increased their sales or profits,
Contingency tool- Each organisation has to face negative or difficult situation that create
negative impact on company. For this LM Engineering Ltd. prepare contingency budget which
helps to face this complex situation.
Benefits of contingency tool
Stability- Unexpected events are beyond the control of organisation so in this context
contingency tool provides sufficient funds through which an company maintain their current
position.
Responsibility- In difficult times contingency tool help the organisation to find out
reasons and persons who are responsible for bad situation.
Limitations of contingency plans
Complex- Contingency plans are difficult to create as it is difficult to understand the
future because uncertainties are beyond the control of an organisation.
Response- these plans work and create reactive action for organisation while to face
unexpected proactive plans are more beneficial for organisation.
Flexible Budget- It is the simplest form to develop a budget. This includes those factors
that directly effect on the revenue of company. If there is change in market the income is
increased and decreased of the organisation (Suomala and Lyly-Yrjänäinen, 2012).
Merits of flexible budget
 Flexible budgets are useful in those organisations in which price of products is changes
frequently. LM Engineering Ltd. develops budget for small firms as well as for industry
also.
 With the help of flexible budget it is easy for organisation to update and adopt the
changes that are required by company as it increase benefits for organisation.
De-merits of flexible budget
 In case of flexible budget it is difficult for organisation to differentiate between flexible
and variable cost. So this create problems for LM engineering ltd. as they has to change
the whole budget for organisation.
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 It is difficult to fill the data again in soft-wares for formulate the budget as it lengthy and
time consuming process that reduce down the process of an organisation.
M3
Some planning tools that are used by the organisation to control extra expenditure which
will not be covered in the budget for this flexible budget and contingency tool helps the
organisation to minimise business cost and to execute different business activities with investing
minimum money or cost. Like contingency tool helps LM engineering Ltd. to achieve their
targets in unexpected situations also.
TASK 4
P5
Financial problems:
It refers to the situation which restrict the organisations to achieve its desired aims and
objectives. It arises due to poor performance of employees, ineffective plans and strategies etc.
Thus, it is important for the management of LM Engineering Ltd. to identify and evaluate the
reasons behind arising financial issues. These reasons are mentioned as under:
Reason of arising Financial issues-
Financial issues is a condition when there is a shortage of fund for the activities which
causes stress in the internal environment of organisation. When people face hard time, the
problem related to health also arises due to extreme stress. There are the following reasons by
which issues arises- Error in financial statement- It is the main reason of arising financial issue because
whenever error occurs at the time of preparation of financial statement it shows wrong
view of financial position which creates confusion in budget allocation and wrong budget
allocation result in poor financial position as the funds are not utilised properly and
adequately (Uyar, 2010).
 Risky investment- When company wants to earn higher profit, they are required to make
huge investment involving high risk and if results come negatively then it is not
necessary that everyone is prepared for failed investment. Loss of fund results in poor
financial position of company as there will be shortage of fund in preparation of budget
which will result in inefficiency of performance.
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Tools to resolve above mentioned financial issues:
Management accounting approach:
It is a technique which is used to deal with financial issues more effectively through
keeping records of information at one place. It assist management in making an effective
decision which in results achieving huge profitability. In the context of LM Engineering Ltd.,
there are different management accounting approaches which should be undertaken to resolve
financial issues are mentioned as under:
There are many accounting systems which includes cost accounting and reporting system,
price optimisation system etc. which help an organisation to resolving issues and problems as it
supports in reducing storage cost, setting prices which increases their revenue etc. Therefore, LM
Engineering Ltd. Need to adopt such effective systems at the time of facing financial issues
(Yeshmin and Hossan, 2011).
Benchmarking-
It is the tool by which company measures quality of the products, services or processes
from which standards are set to be best among the competition. This identifies internal
opportunities present in the organisation for the purpose of improvement. This involves
implementing changes in the services offered by company or making good relation with
customers by more communicating with them. LM Engineering Ltd., a engineering company is
suffering from financial loss which can be removed by making changes in performance and
establishing a benchmark in comparison of quality of product so the performance can be
reviewed and corrective step can be taken.
Key Performance Indicator-
It is a tool used by company to measure the value which shows that how effectively
company is working toward achievement of key objective. This is used at multiple level to
examine the success in reaching target. This focus on the performance of overall organisation as
well as on work of ever department like sales,finance etc. LM Engineering Ltd. can use this tool
to come out from financial losses as this shows that how effectively the company is moving
towards achievement of goal and its shows deviations that occurs while performing which can be
erected and strengthen financial position of company (Zaleha Abdul Rasid, Ruhana Isa and
Khairuzzaman Wan Ismail, 2014).
Financial Governance -
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It is a tool by which company collects, manages, monitors, control financial information.
This tool examine that how company make financial transaction, manage performance, control
data, compliance, operations and disclosure. LM Engineering Ltd. is suffering from poor
financial management system which making it losing financial position and this can be overcome
by providing training to financial management department that how fund need to be utilised and
channelised. The department should estimate the fund requirement which is actually needed and
raise from the suitable source so burden do not increase on the company.
Therefore, by using these tool company can overcome its financial losses.
Comparison between L.M Engineering Ltd and Morgan Sindall Ltd.
Basis of differences LM Engineering Ltd. Morgan Sindall Ltd.
Problem Managing of risks is the major
difficulty that is facing by
organisation because pre-planned
decisions can be failed in future due
to dynamic nature of business
environment.
Whereas, Morgan limited is
facing problem of managing
cash flows because they have
restricted their managers in
making future plans and
polcies.
Approach Key performance indicators are
adopted by organisation because it
have enhances the performance level
of employees and motivated them so
that they are performing in right
ways which have provided support
to the organisation in overcoming
with the above challenges.
Whereas, financial governance
is adopted by company for
managing cash flow problems
as through using this tool,
managers and employees of
organisation understands the
systematic way from which the
further tasks can be
accomplish.
M4
In this LM Engineering Ltd and its tough rivalries Morgan Sindall Ltd focus on different
kind of financial resolving tools for example: KPI, financial governance etc. This will help them
to deal with different types of financial issues which might have negative impact upon prolong.
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Both KPI and financial governance will help to enhance the performance of the company and its
worker too. In context of Morgan Sindall Ltd they should adopt financial governance which will
help there organisation as it is one of the larger company.
D3
Number of planning tools can be found such as flexible budget, forecasting tools and
many more. This will be helpful in context of LM Engineering Ltd while conducting any of the
business activities in future as it ca be executed easily. Also, it will be beneficial for organisation
as any of the financial problem will not come across the company.
CONCLUSION
From the above report, it has been summarised and concluded that every organisation
exist in business world will survive for longer period of time only if they will get maximum
support from their accounting managers who is responsible to strong their financial stability. For
this, different accounting and reporting systems such as cost accounting and reporting system,
inventory report, job costing report etc. It also more helpful to prepare budget and using various
tools to control unnecessary expenses which makes direct positive impact on the current
financial position of company. There are multiple planning tools which are useful to deal with
financial issues such as KPI, Benchmarking etc. which assist an organisation to retain their
market position among their rivals for longer period of time.
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REFERENCES
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Online:
Cost accounting systems, 2013. [Online]. Available
through<https://accountingexplained.com/managerial/cost-systems/>.
Absorption costing. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.
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