Table of Contents INTRODUCTION...........................................................................................................................1 TASK 1............................................................................................................................................1 P1. Management accounting systems.....................................................................................1 P2 Different methodologies used in management accounting reporting;..............................3 M1. Benefits of management accounting systems.................................................................4 D1.Managementaccountingsystemandaccountingreportsareintegratedwithin organisational processes.........................................................................................................4 TASK 2............................................................................................................................................4 P3 Calculations of costs using appropriate techniques to prepare income statement............4 M2 Different techniques of management accounting system...............................................9 D2 Interpret data for a range of business activities................................................................9 TASK 3............................................................................................................................................9 P4 Advantage and disadvantage of different types of planning tools used for budgetary control ................................................................................................................................................9 M3 Uses of different planning tools and their application for preparing and forecasting budget ..............................................................................................................................................11 TASK 4..........................................................................................................................................12 P5 . Compare how organisations are adapting management accounting systems to respond to financial problems:...............................................................................................................12 M4 Responding to financial problems, management accounting can lead organisations to sustainable success...............................................................................................................14 D3 Evaluate planning tools for accounting period to respond financial problems appropriately ..............................................................................................................................................14 CONCLUSION..............................................................................................................................14 REFERENCES..............................................................................................................................15
INTRODUCTION Management accounting is the process where analysis of business activities is presented to management for the purpose of facilitating financial as well as management decisions. It includes application of skills along with knowledge while preparing accounting information in ordertoassistmanagersforformulatingpoliciestocontroloperationsatworkplace (Abdelmoneim Mohamed and Jones, 2014). To understand management accounting concept, Aon Consulting is selected which is a medium size organisation and serves clients which are operating in sectors related to retail, hospitality, construction as well as manufacturing in order to provide information to take business decisions in effective manner. Airdri Ltd is one of its clients and the report is based on such company. The report includes management accounting systems along with methods in management accounting reporting. It also includes calculations of costs by using appropriate techniques to prepare income statements. It further discusses about planning tools along with various ways through which usage of management accounting for responding towards financial problems. TASK 1 P1. Management accounting systems. Management accounting encompasses various methods as well as concepts which are necessary for planning business actions along with controlling by evaluating performances and interpreting the same. Financial along with non-financial information’s are presented through such accounting to organisational management in order to forecast budgets, assist in planning as well as in depth analysis of business activities. Such accounting helps managers in stock evaluation, capital budgeting analysis, break even analysis and many more. Financial managers provides timely as well as accurate financial along with statistical information to middle level managers in order to take daily and short term decisions for the betterment of business. Different management accounting systems used at Airdri Ltd are as follows: Inventory management system:This system is used for keeping records of stock and is considered as important system in any organisation. Inventory is used for raw material, unfinished goods or finished products. It helps in stock level forecasting, materials tracking, automatic reordering, inventory alerts and many more. It is used for determining goods available through entire supply chain along with business operations procedures. It covers production to
retailing, shipping, warehouses where products are kept in stock(Bloomfield, 2015). This system is essential required at Airdri Ltd to keep as well as tracking inventory in order to maintain productivity within the business units. Inventory management system helps in assisting required inventory, real time movement as well as different types of inventories required in completion of projects. Such system provides various benefits in the form of managing stocks and placing next orders whenever required before shortage of required inventory. 2
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Cost accounting system:This system is used for estimating product cost for the purpose of valuation of inventory, controlling expenses as well as analysing profitability. Estimation of actual cost is very necessary for any business enterprise. It encompasses activities based on understanding,recording,analysing,classificationaswellassummarizingexpenditures associated with products or services. The essential requirement of this system is to estimate as well as record the expenses like variable and fixed costs and so on. Managers of Airdri Ltd uses such systemtocheck reimbursementofassociated financialproducts. Withthissystem, comparison between budgeted and actual costs can be done in effective manner which helps in taking corrective decisions related to increasing profitability. Price Optimisation system:Such system is a mathematical analysis which determines perception of customers towards value of products or services. It helps in determining value of organisational products which will meet objectives related to maximising operating profit. The selected company uses this system to set prices of its financial products based on customer expectations(Bagautdinova, Kundakchyan and Malakhov, 2013). Executives optimises prices by understanding client perceptions which results in maintain relationships as well as increasing profits. It benefits in reducing wastage in order to optimise prices by taking effective decisions. The essential requirement of price optimisation system is to analyse review of clients towards prices of investment as well as securities of the company. Job costing system:This system is used for accumulation of information related to expensesassociatedwithparticulartasksorservice.Accumulatedinformationhelpsin submitting expense information to top level management for the purpose of reimbursement of expenditures. It is used for analysing accuracy on estimation system where prices are quoted in such a manner that allows reasonable profits. Airdri Ltd uses such system to make estimation of individual unit expense in order to deliver products or services. The essential requirement of such system is that it contains specialized rules which are applicable to all types of jobs and helps in estimation of costs pertaining with particular job. P2 Different methodologies used in management accounting reporting; Costaccountingreport:Costaccountingisaprocessofcollecting,analysing, classifying and reporting the data and information’s so that the cost of any project or process can be calculated and after that the cost can be controlled efficiently. There are various different reports are prepared to analyse the cost such as budget reports, cost centre reports, variance 3
reports etc. Airdri Ltd.Prepare different cost accounting reports so that it can allocate the cost tovarious cost centres, maintain the cost trend, analyse the budget compliances and discover and control the causes of variance. Performance Report:Performance report is a report that is prepared to analyse the performance or efficiency of any person or activity. Performance report is prepared by the individual unit expense organizations so that it can set some measurements to achieve its objectives and compare the success of outcomes in relation to the measurements(Bargate, 2012). The cost accounting management of the Airdri Ltd. prepares performance report for each and every project and employee so that efficiency and capability can be measured. This procedure helps in controlling the cost and managing the workforce. It also improves the communication with internal and external stakeholders of the organization. Budget Report:Budget report is a report that covers all the variances and causes of variances between budgeted or estimated outcomes and actual results in relation to any activity or project. This report helps the management to set the measurements for the performance report. Airdri Ltd. prepares a budget report at the end of any project. This procedure helps the organization in finding out the errors in budget, moderation in budget and controlling the cost and adverse variances. It also assists the management in the direction of fund and finance management. Inventory Management Report:inventory is the goods held by the organization for the purpose of sale and it is the major source of income. Inventory management report contains all the information about the maintenance and recording of the inventory. This report contains all the information about the stock of goods produced by the organization. The Management of Airdri Ltd maintains a proper record of the stock with the help of advance technology. An effective record keeping of the inventory helps the management to track the availability of the products, minimise the cost of storage and maximise the profitability, automate the integration among the different departments and achieve a high happy customer base. M1. Benefits of management accounting systems. Management accounting system is important for all types of business organisations as it provides necessary information to make critical decisions which benefits the company(Collis and Hussey, 2017). In reference to Airdri Ltd, all systems benefits in one or other way. Cost accounting system benefits in collecting detailed information related to costs involved in 4
manufacturingproceduresatselectedbusiness.Inventorymanagementsystembenefitsin keeping up dated information based on available along with required inventory to carry out manufacturingprocedureswithoutanydelays.Priceoptimisationsystembenefitschosen company by analysing behaviour as well as perception of customers towards prices of financial products. Job costing system benefits in accumulation of information based on associated costs with specific job as well as service. D1. Management accounting system and accounting reports are integrated within organisational processes Management accounting systems and reports both are interrelated with each other in many ways. Without accounting systems it is not possible to prepare accounting reports and on the other hand systems helps in making business decisions to face uncertain circumstances arising at workplace(Demerjian and et.al., 2012). Managers of Airdri Ltd uses inventory management system to provide detailed information related to raw materials, semi-finished as well as finished products for the preparation of inventory reports. At the same time, cost accounting system helps in preparing budgets as well as performance reports to know about expensesalongwithincome.Moreover,managersofchosencompanyprepareaccount receivable reports by using price optimisation system which helps in determining prices of various products. TASK 2 P3 Calculations of costs using appropriate techniques to prepare income statement Marginal Costing:It is a most common kind of costing method that emphasises on systematic classification of expenses into fixed and variable. Under this method after classification of expenses or costs a fixed or variable contribution per unit is calculated by considering only variable production overheads. On other hand all fixed cost are charged as period costs. Absorption Costing:Under this method all overheads related to production is irrespective of their nature are charged to unit cost of product. Here no classification of expenses is required in fixed or variable(Demski, 2013). Income statement under Marginal costing method for month of May & June MayJune 5
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Selling per unit price501500025000 Less: Various Marginal Costs Per unit Direct materials cost-8-2400-4000 Per unit Direct labour cost-5-1500-2500 Per unit variable production overheads cost-3-900-1500 Contribution1020017000 Less: Variable selling commission5% of sales revenue-750-1250 Fixed Cost Fixed selling expenses-4000-4000 Fixed admin expenses-2000-2000 Fixed Production cost-4000-4000 Net profit-5505750 Income statement under absorption costing method for month of May & June MayJune Sales501500025000 Less: cost of sales26-9880-13000 Gross profit512012000 Under/over absorbed production overhead1000-200 Less: S&D expenses Fixed selling expenses-4000-4000 Fixed admin expenses-2000-2000 Less: Variable Sales commission5% of sales revenue-750-1250 Net Profit/loss-6304550 Per unit Direct materials cost8 Per unit Direct labour cost5 Per unit variable production overheads cost3 Absorbed fixed productin cost per unit10 Cost of sales26 6
MayJune Actual production overhead50003800 Standard rate40004000 Under/over absobed production overhead1000-200 Material cost variances: Given information is as follows- Standard price(SP)-£10 @ per kilograms Actual price (AP)-£ 9.5 @ per kilograms (20900/2200) Actual quantity (AQ)- 2200 Kilograms Standard quantity(SQ)- 1000 Kilograms Material price variance (MPV)= (SP-AP) * AQ (10-9.5)* 2200=£1100 F Material usage variance (MUV)= (SQ-AQ)*SP (1000-2200)*10=£12000 A Material cost variance (MCV)=Standard material cost- actual material cost Valuation of closing stock using LIFO DateReferencePurchaseIssuesBalance (Inventory) Units£/Units£ TotalUnits£/Units£ TotalUnits£/Units£ Total 05/01Previous balance (inventory)403.00120.00 05/12403.00120.00 Bought25units at £ 3.60 each203.6072.203.6072.00 05/15203.6072. Issued 36 units163.0048.243.0072.00 05/20243.0072.00 7
Bought20units at £ 3.75 each203.7575.203.7575.00 05/23Issued 10 units103.7537.5243.0072.00 103.7537.50 05/2793.7533.75 Issued 25 units253.0075.00 05/30Issued 5 units53.0015.0043.7515.00 Valuation of closing stock by using weighted average method: 05/01Previousbalance (inventory)403.0000120.0000 05/12Bought 25 units at £ 3.60 each253.6090.653.2308210.0000 05/15Issued 36 units363.2308116.307 7293.230893.6923 05/20Bought 20 units at £ 3.75 each203.7575.493.4427168.6923 05/23Issued 10 units103.442734.4270393.4427134.2653 05/27Issued 25 units253.442786.0675143.442748.1978 05/30Issued 5 units53.4417.213593.442730.9843 M2 Different techniques of management accounting system Use of different techniques along with management accounting systems provides a framework for systematic presentation of financial information. Cost accountants and employees of management can apply these techniques to compute the financial performance of company over a particular period(Gullkvist, 2013). It provides detailed and relevant information about company's performance to higher level managers for taking business decisions. 8
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D2 Interpret data for a range of business activities By applying marginal costing method in order to prepare income statement it has been analysed that entity's profit is GBP 1050 in the month of May and GBP 5750 in the month of June. Whereas as per absorption costing method profit is GBP 2450 in the month of May and GBP 4750 in the month of June. Such difference is arise due to different treatment of fixed costs in both methods. Under marginal costing fixed cost is regarded as period cost. TASK 3 P4 Advantage and disadvantage of different types of planning tools used for budgetary control Budget–Budget simply implies to projection. It is prepared by business enterprises to estimate its performance in coming period. Budget in business context called as statement of projection. Management and accountants in business organisation prepares different kind of budgets to critically evaluate actual performance of business enterprise in near future. While preparing budgets accountants first analyse the past trends and scenarios to increase the reliability and accuracy of budgets(Kanellou and Spathis, 2013). Various budgets cover different financial and monetary aspects of enterprise. It provides assistance in business processes related to planning and decision-making. Budget gives a strong basis for preparation of strategies and formulationofactionplan.Foreffectivebudgetarycontrolwithinabusinessenterprise management, budget plays a vital role. Airdri Ltd, also emphasises on preparation of budgets for implementation effective budgetary control system. In company manufacturing heads and managers of production department prepare different budgets to assess under or over statement of any expenses or income. Cash Budget Cash budget prepared by accountants and managers to compute the real flow whether in flow or out flow within a business entity. This kind of budget only focuses on cash and cash related aspects of business organisation. It provides a true image of organisation's position in term of liquidity. Airdri Ltd also use cash budget to identify and improve the weak areas which leadtonegativecashfloworexcessivecashoutflow.Foreffectivecashhandlingand management, company is using information of cash budget. In company cash budget is prepared department-wise by various departmental heads. 9
Advantage: This budget help business entities in tracking of movement and flow of cash or cash related items(Maher, Stickney and Weil, 2012). In Airdri it helps mangers in monitoring cash flow and in effective cash management. In Airdri, trough cash budget managers accumulate funds for future contingency to ensure its availability of funds in future. Disadvantage: Approaches used in preparation of cash budgets sometime may be manipulative and does not show real performance of entity. So in Airdri this budget is only used for internal cash management not for reporting purpose. Cash budget is some time fails to detect the fraud done by accountants due to avoidance of accrual concept. Operating Budget This budget is prepared by entities while considering only operational expenses and income incurred during a particular period. It contains estimation of income and expenses concerned with operating functions of entity(Malinić and Todorović, 2012). In Airdri Ltd first managers prepare different small budgets thereafter they prepare a complete operational budget with help of such budgets. It is used by company to evaluate operational efficiencies and performance in coming time period. This budget is significant as it covers all operational activitiesand functions. Ascompany ismanufacturing hand dryers, production headsin company prepare sub budgets than a complete operational budget is prepared by management to assess its operational efficiencies related to activities of manufacturing processes. Advantage Managers in Airdri with help of this budget organise and control company's day to day operations. It assists entity in allocation of any weak operational area and provides a basis for overcoming from such weakness. Disadvantage This budget is prepared normally on daily basis so practical implication of operational budget is complex and consumes times(McLaren, Appleyard and Mitchell, 2016). 10
Data of operational budget for small size enterprises like Airdri is not so much relevant as it covers only operational part and requires preparation of sub-budgets. Master Budget Master budget is most relevant and widely used budget. Normally it is part of financial statements. A master budget acts as a summary budget as it involves all other budgets. It is used by business entities for assessment of combined and total performance. It covers all financial and accounting aspects business entity to provide a detailed and complete picture of organisation's position. Airdri Ltd is using this budget to take manufacturing and other business decisions. Management in company with help of this budget prepare plan for effective implementation of strategies. Advantage Master budget is used by Airdri to identify any probable financial event that may create hazard for company in future. Master budget also help company to make effective coordination between different- different product segments and departments. Disadvantage Practically it is very time consuming task or job for company to prepare master budget along with consolidated financial statement. Combining different budgets to prepare master budget can lead to increase in chances of error or mistakes. M3 Uses of different planning tools and their application for preparing and forecasting budget Preparation of budgets requires some tools and methods which lead to increase in accuracy and efficiency of results of budgets. Planning tools are essential tools and methods for systematic budget preparation processes. Planning tools like cash budget, master budget etc. provide a basis for estimating figures of future. Managerial personnel’s can make reliable estimate of future performance on entity. For reporting purpose managers can apply these planning tools(Mitchell, Van Buren III, Greenwood and Freeman, 2015). For intense in Airdri managerial personnel’s and accountants are using planning tools at large level to increaser their forecasting ability to prepare a more realistic budgets. For loan and other funding purpose budget prepared by applying planning tools are admissible. 11
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TASK 4 P5 .Compare how organisations are adapting management accounting systems to respond to financial problems: In all kind of organisations and business entities whether small, medium or large, at all level of activities and functions there some problem may arise due to dynamic business environment. Financial problems are issues or facts that may arise due to lack or shortage of monetary funds or resources. Early asses of financial problems help business entities to achieve sustainability in growth and ensure survival. In small or medium sized entities like Airdri ignorance of financial problem can lead to insolvency in long run. In respective company managers put their efforts towards solving different financial problems. In this context following are some major financial problem that Airdri is facing, as follows: 1.Lack of liquid funds: This is a major financial problem of Airdri. Company having adequate funds but company's liquid funds are very low, so sometimes company is not able to pay its day to day expenses. It directly connected with company's working capital position(Morden, 2016). As company is manufacturing entity so company should maintain adequate liquid funds for any sudden expenditure or contingent manufacturingexpense.Frequentshortageofliquidfundscanevenstopthe manufacturing process of hand dryer in company. 2.Cashmismanagement:InAirdri,thereisanotherfinancialproblemofpoor management of cash. Due to this company is facing issues like loss or theft of cash, excess cash expenditure, and negative cash flows. It is required for company to manage cash effectively because mismanagement of cash in company can lead to adverse liquidity condition. Following are some significant techniques that are used by managers to solve financial problems in Airdri, as follows: Benchmarking:Benchmarking is a systematic process of setting certain levels and criteria and putting efforts towards achievement of these criteria or asses performance of entity based on such benchmarking criteria. Main motto of benchmarking is to recognise the areas of improvement within business entity(Needles and Crosson, 2013). In Airdri management by using benchmarking technique can analyse the way by which financial problem can be solved. It also provides data related to improvement in organisation's performance. 12
Key financial indicators:These are certain measures that assist entities to allocate dull financial areas and financial problems. Under this technique various key certain areas like gross profit margin, liquidity ratio etc. are analysed to identify and solve financial problems. In Airdri, managers using analysis of key financial indicators can solve main cause or area of operation which leads to mismanagement of cash funds and solve this problem at early stage. Various key financial indicators can also be used by company to solve the financial problem of shortage of liquid funds in manufacturing and production process. Comparison between Airdri and TPG processing company: AirdriTPG Airdriisfacingproblemoflackof liquidfunds,Asasresultofthis financial problem company is not able to effectively handling of day to day manufacturing activities and functions which leads to decline in productivity level.Inlongrunitmayleadto reduction in profit margin. TPG is continuously facing problem of excessivecostsorincreasein manufacturingandproductioncosts. Due to this company's profit margin per unit has been decreased. Airdri can use cost accounting system tosolvesuchfinancialproblem. Managersthroughcostaccounting system analyse the different activities which is main cause of such financial problem.Byuseofcostaccounting system,costaccountantincompany cantrackrecordofvariouscosts incurringshortageofliquidfunds within in day to day operations. ManagersinTPGcanuseprice optimisationsystemtocontrol excessivecostsandexpensesin manufacturing activities. By adopting price optimisation system company can allocateareofoperationscausing increaseincost.Itcanalsohelp company to increase their profit margin per unit. Airdri is applying SWOT analysis as company wants to find out root cause oflackofliquidfunds.Usingit WhereasTPGisusingbalance scorecard for solving excessive costs' problem.Usingbalancescorecard 13
company can recognise its weak areas andvariablesaffectingcompany's liquidity.This tool also add value in shippingbusinessstrategiesasit provide a chance to view things form a new perspective. company evaluates figures and fiscal eventscausingexcessivecosts.This tool make improvement in integration of managerial processes and empowers personnels. M4Responding to financial problems, management accounting can lead organisations to sustainable success Every small or medium size enterprise like Airdri wants to make expansion and achieve sustainable success but due to financial problem it is very difficult, thus it is essential for business entities to respond such problems within reasonable time. In Airdri managers can apply management accounting systems to solve its financial problem. As company can use cost accounting system to capture the area related to mismanagement of cash. Managers always tries to recognise and respond to financial problem but in dynamic business environment and tuff competition it is complex, so it is required for managerial personnels to apply management accounting system to identify and respond to these problems at early basis(Robalo, 2014). D3 Evaluate planning tools for accounting period to respond financial problems appropriately Planning tools act as a frame work for accountants and managerial personnel’s to smoothly respond to different financial problems. For intense master budget is used by business entities for overall internal analysis, which assist managers to take strategic decisions(Zoni, Dossi and Morelli, 2012). Planning tools such as master budget, inventories budget, cash budget etc. provide a detailed groundwork for systematically identification of main area of financial problem and solve them at early basis. Responding of financial problem can boost the performance of business organisation within a short period. CONCLUSION From above report it has been articulated that management accounting systems and its various elements are significant for a business entities. Managers at different level can apply management accounting systems like cost accounting systems, inventory management system, cost accounting system etc. to achieve overall development within organisation, which can lead to 14
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enhancement in profitability. Various planning tool and techniques are also vital for managerial personnel’s to take strategic or business decisions and prepare blue print for achievement of organisational objectives and goals. Reporting is essential part of management accounting as it assists in communicating the overall performance of entity to higher level management. 15