Management Accounting Assignment: UK

MANAGEMENT
ACCOUNTING

Table of Content

INTRODUCTION
Management accounting is the procedure of analysing operations and business cost to
prepare records, accounts, internal financial report to aid decision making process of managers.
This will helps them in attaining business goals in a proper manner (Ax and Greve, 2017). This
assignment is covered in context with The Austin Company which is a UK based engineering
company providing services in design, engineering, consulting, construction and management,
Headquartered in North London. Company carry-out construction processes to upgrade or create
public and commercial buildings, industrial processes, research etc. This report will cover
management accounting and various kinds of management accounting system and management
account reporting. Beside this, cost is calculated by using appropriate technique of cost analysis
to prepare income statement. Advantages and disadvantages of different planning tools for
budget control is discussed. At last, comparison is carried out to show how companies adapt
management accounting system to respond to financial problems.
TASK 1
P1
Management accounting is referred to the process of measuring, analysing, identifying,
communicating, interpreting information to managers so that organisational goals can be attained
in a proper manner. Managerial accounting will helps the manager in The Austin Company in
taking right decisions for business organisation. It handles margin analysis so that profits can be
assessed when weighted against different kind of costs. Concepts of management account are
associated with estimating and tracking costs which can be incurred by company in future
business operations. It will benefits The Austin Company in eliminating wastage of funds due to
which high profitability can be attained (Management accounting and its importance, 2019).
The Austin Company can use different management accounting systems so that their
financial records can be prepared in an organised manner. Beside this, it will help company in
taking those decisions that helps them in achieving their targets and goals easily. Below are
mentioned some management accounting systems that can be adopted by The Austin Company:
Cost accounting system: This system is beneficial in analysing the cost of services and
goods involving fixed, variable costs etc. In order to attain high output, it is essential for
organisations like The Austin Company to have proper estimation about their invested costs
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throughout the year. This will benefits them in calculating their profit margins. Company can
adopt this accounting system with the aim of analysing cost for various services or product that
can be offered in market with added margins to achieve high returns (Bennett and James, 2017).
Price optimisation system: It is an accounting system that assists The Austin Company
in understanding the buying behaviour of their potential and existing consumers. This help
company in setting prices with additional margins so that company can attain high profitability
without creating a major impact on purchasing power of people. In this context, accounting
manager in The Austin Company is required to research about satisfaction rate of customers
regarding their pricing policies. This will allow them in revising their prices as per market
conditions and customer's perceptions.
Job costing system: It is referred to a system that will assists The Austin Company in
calculating total cost spent while providing their services and products to customers. It is best
suited for those companies which offer services in different range. The Austin Company can use
this accounting system in proper estimation of unit cost to acknowledge future profit margins by
selling of different products or services (Cheng, 2012).
Differences between management accounting and financial accounting:
Management accounting Financial accounting
 This system provide useful and relevant
details to management so that they can
prepare effective policies and plans.
These plans will help the company in
attaining their desired targets and goals.
 In this system, main emphasize is on
formulating financial statements
involving loss and profit accounts along
with balance sheets. This helps a
company in acknowledging their
current financial position in market.
 This system is used by management
and manager of a company that posses
authority to formulate plan and monitor
business operations.
 It is used by external parties like
financial institutions, investors etc.
which posses the authority to take
financial decisions.
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P2
There are various accounting report systems that facilitates management of company to
acknowledge their existing position within marketplace. It allows them to formulate efficient
policies and plans that are capable to attain their pre-decided goals and targets in a timely
manner. These kinds of reports includes both non-monetary and monetary terms. In case of The
Austin Company, following types of reports are prepared:
Performance reports: This kind of report is formulated with the aim of measuring
organisational and workforce performance. It will helps The Austin Company in getting
appropriate information regarding current performance of workers so that their contribution in
organisational success can be calculated. By this, it will be easy for concerned company to take
measures and actions so that productive and loyal customers can be retained for a long time span.
Budget report: This report represents the cost allocation to each business operation and
activity according to the need and requirements. It will benefits the finance manager of company
to provide budget in an organised way. Budget report will helps the workers and management in
The Austin Company to perform work without wasting resources. It will benefits the concerned
company in assuring that sufficient money is allocated to the departments while performing
construction activities. With the help of this report, cost of operation will reduce and optimal
utilisation of resources will take place (Garrison and et. al., 2010).
Accounts receivable ageing reports: These kind of reports explains information and
other aspects of unpaid debtors of a company. These debtors impacts the profitability of a
company in a negative manner. This report is mainly concerned with credit transactions. It assists
the finance unit in firm to find those customers whose payments are remaining so that effective
plan can be formulate to take money from them. With the help of this report, management in The
Austin Company can upgrade their credit policies so that situations associated with bad-debt can
be avoided.
M1
Management accounting system posses various benefits to business organisations due to
which it became easy for them to attain desired objectives and goals. Below are mentioned
benefits of management accounting systems and their application in organisational context:
Benefits and application of cost accounting system
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Main advantage of cost accounting is that it benefits in classification and sub division of
costs and specify standards for measuring efficiency. In organisational context, due to this
system costs associated with production of services or product is classified into different sections
so that it can be ascertained that every area is getting expected profitability. Due to this system,
The Austin Company can eliminate unprofitable activities and adopt those measures which can
improve the existing activities in profitable manner (Jamil and et. al., 2015).
Benefits and application of Job costing system
Main advantage of job costing system is that it allows the managers of firm to calculate
profit margin which is received on individual jobs. By this, they are able to decide whether it is
profitable to pursue specific job in future or not. It is most suitable for business firms which are
associated with contracts and constructions such as The Austin Company. In context with The
Austin Company, this management costing system will help managers in tracking the
performance of individual employees and team's performance in relation with productivity, cost-
control and efficiency.
D1 Integration between management accounting system and reporting
Austin company can get beneficial outcomes by integrating management accounting
system with accounting reporting as these assist the management in making suitable plans and
strategies to attain strong financial position in market. For example, the management can able to
prepare performance report on the basis of information provided through using performance
management system.
TASK 2
P3
Cost: It is referred as the amount that is incurred by a business firm for their services or
products in the form of investment in distribution and production policies. This aspect is
essential for every aspect initiating from production of service to offering it to final customer.
Absorption costing: It refers to the technique that is taken into consideration to calculate
costs which are invested in producing or manufacturing or providing services and products. It
consists of both fixed and variable cost and this is the reason it is also called as full costing
method (Lavia López and Hiebl, 2014).
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Marginal costing: It is referred to the additional cost which is incurred for the
manufacturing of additional unit of output. This method is required to calculate profitability of
organisation by involving variable costs only. Most of small and medium organisations use this
method to show more profit margins in financial statement of company.
In case of The Austin Company, both types of costing methods can be used so that
purposes and objectives of company can be attained. Here, net profit is calculated with the help
of both absorption cost and marginal method:
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
Total Overheads = £6000*12 = £8000*24
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= £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)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
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4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
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
There are different management accounting techniques that benefits a business
organisation in maintaining financial reporting statements and documents like loss and profit
accounts, cash flow statements, balance sheets etc. The Austin Company can measure its actual
financial position only with the help of accounting techniques and tools like cost accounting
system, financial statement analysis (Modell, 2014).
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D2
Every business firm such as The Austin Company is require to formulate its financial reports
like loss and profit account, balance sheet etc. so that actual financial position of company in
market place can be acknowledged. To achieve this, business organisation is required to interpret
the transactions that are made while execution of different business activities. By this, company
will easily understand the actual amount which is invested in particular business (Lukka and
Vinnari, 2014).
TASK 3
P4
Budgetary control is a tool used by the organizations to achieve objectives with adequate
and proper use of budget. This tool is basically used in every organization for controlling and
monitoring financial operations. Budgetary tool provides an overall estimation of funds to The
Austin Company's requirement for future expenses such as in production, manufacturing,
material, labour and overhead cost etc. budgeting is a decision tool which plays a key role in
management of organizations funds for future needs. Some of the budgetary tools are discussed
below with advantages and disadvantages.
Contingency planning : this plan is designed for the organization to overcome with the
future occurring. This planning is generally known as plan B which means that any if any event
occurs suddenly and the organization is not ready than contingency planning helps to overcome
with such happenings. Contingency planning is used to resolve the issues at workplace.
Advantages of contingency planning
 it helps in designing the techniques to overcome with the workplace problems of The
Austin Company.
 This planning can also be used as the strategy which helps in eliminating the companies
risk.
 This planning helps the employee to grow by sharing ideas.
Disadvantages of contingency planning
 it create conflicts between the managers and employees because of contrary ideas and
thinking.
 This process is time consuming as it takes time in designing the strategies.
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 The suggestions of contingency approach are complex in nature.
Flexible planning : this planning tool is used by the managers in this planning changes
are made and fulfilled by the managers at urgent fund requirements of organizations. The Austin
Company's requirements are always considered flexible so to overcome with this problem
flexible planning is designed.
Advantages of flexible planning
 this planning is considers as flexible in nature.
 This helps the organization in easy decision making for future course of actions.
 This helps in control overheads.
Disadvantages of flexible planning
 it leads to mismanagement of funds due to sudden requirements made by organizations.
 this planning is not effective for rigid organizations.
 It increases the expenses and burden of organization.
Forecasting tool : this tool helps in analyse the short term and long term future needs of
an organization by measuring past and present budget of company. The Austin Company
forecast its future fund allotment in various activities after an overview of present expenses.
Forecasting can only be planned by fulfilling the present needs of an organization.
Advantages of forecasting tool
 it helps The Austin Company in designing the future budget and financial statement of a
company.
 It provides valuable information for future outcomes.
 This tool is helpful for organization to predict the change.
Disadvantages of forecasting tool
 lack of accuracy because of unpredictable future events.
 it is not easy for The Austin Company to determine the future analysis by estimating
present events.
 This can effect the organization with inadequate information.
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M3
There are different planning tools such as forecasting tool, contingency tool etc. which
can be used by the company in controlling their unexpected expenses which are not contained in
the pre-decided budget. The Austin Company can use these tools to reduce operational costs and
completing the activities of business with pre-defined budgets. For instance, forecasting the
planning tool will help management to estimate future expenses in a proper manner so that
company can take actions and measures to reduce the wastage. It will results in optimal
utilisation of resources (Pavlatos and Kostakis, 2015).
TASK 4
P5
Financial problems: It is defined as a situation in which a company fails to attain its
basic requirements so that business can be operated in a successful manner. It can take place due
to different factors like poor performance of staff, enhanced business cost, misinterpretation of
data in business records. Hence, it is essential for the manager in The Austin Company to
properly analyse factors. This will protect the company from different kind of financial crisis.
Below are mentioned some problems that can impact financial position of The Austin Company.
Problem of cash flow: It is a major problem in which an organisation is not able to meet
its liabilities and debts because of shortage of funds. If company will attain less profits as per the
expectations, financial condition of a company can became poor. Because of this, company faces
difficulty in paying salary to their staff, taxes to government and returns to shareholders.
Risk management: It is associated with risk factors that acts as a barrier for company in
attaining expected profits. These factors involve competitive strategies which are implemented
by the competitors, enhancement in labour cost etc. These aspects can bring high risk for the
financial condition of company. Company is required to fight these risks in a proper manner so
that The Austin Company can attain a strong presence in marketplace for longer time duration
(Renz, 2016).
Financial tools to resolve problems mentioned above:
Financial governance: It is referred to a financial tool that directs employees and
management to strictly follow all the regulations and rules that are formulated by high authority
of company. It will prevents the company from becoming a part of illegal and unethical
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activities. For instance, recorded transactions in the financial statement with overly pricing do
not denotes fair and true financial position of organisation. This resists the stakeholders to invest
heavily in business activities. This tool will assists the workforce in performing their work in an
ethical manner.
Management accounting approach: It involves different tools to solve the problems of a
company which are related with finance and accounts. In this context, there are some tools which
can be applied by The Austin Company to solve their financial issues: Cost accounting system: This system is used to acknowledge the actual cost which is
invested in execution of business activities. In accordance with that concerned company
can charge maximum prices for their offered services. This will help the company in
attaining high profitability.
 Key performance Indicators: It is a performance analytical tool that is used by
companies to measure the performance of employees in comparison with past records. It
helps in identifying the highest and lowest performer by comparing their contribution in
business success. In this respect, company can take beneficial decisions. For instance, by
giving rewards to the highest performer and organising training sessions for employees
with low performance will benefits the company in attaining desired outcomes and
maximised profitability.
M4
The Austin company and its rival firm Morgan Sindall Ldt. Uses different types of tools
that helps them in resolving their financial issues in a proper manner. Some of these tools are
Benchmarking, KPI, financial governance etc. In order to manage these financial issues, both
companies can use these tools so that sustainability of company in marketplace can be enhanced
in a considerable manner. In case of The Austin company, financial manager of firm can adopt
Benchmarking and KPI as they will helps the concerned company in enhancing their profit
margins and productivity of organisation & employees. In respect with Morgan Sindall Ltd.,
company can adopt financial governance as this tool is very beneficial for organisations with
large size (Suomala and Lyly-Yrjänäinen, 2012).
D3
There are various planning tools like forecasting tool, flexible budget etc. that facilitates the
management in The Austin Company in estimating the hurdles that can be faced by company in
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performing their business operations desirably. This will benefits the company in performing
their activities within allotted budget and without wastage of capital and funds. This will benefits
the company in securing themselves from financial problems.
CONCLUSION
From above discussed report, it can be concluded that management accounting plays a
vital role in driving business so that high revenues and profitability can be attained in specific
time frame. In achieving this, adequate support from accounting manager is needed so that
different accounting systems and reports such as price optimisation system, job costing
system,batch costing report etc. can be prepared in a desired manner. In addition to this, there are
different planning tools that are required to control budget like flexible budget so that extra
expenses can be cut and reduced. Benchmarking, KPI and cost system are different approaches
that can be used by an organisation to secure themselves from different financial resources and
instabilities.
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REFERENCES
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Online
Management accounting. 2018 [Online]. Available through:
<http://www.businessdictionary.com/definition/management-accounting.html>.
Statements on Management Accounting. 2018 [Online]. Available through:
<https://www.imanet.org/insights-and-trends/statements-on-management-accounting?
ssopc=1>.
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