Management Accountanting - Dairy Crest Group Capital

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting systems................................................................................................1
Types of management accounting systems..................................................................................1
Benefits of management accounting system to Dairy Crest.......................................................3
Different types of management accounting reporting techniques (methods):.............................4
Management accounting system and reporting methods integration within the organisational
processes......................................................................................................................................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Management accounting also known as cost accounting or managerial accounting. It is a
regularised or systematic process of evaluating or analysing various organisational cost or
expenses and different functions to provide internal reports, accounts and other records to assist
managerial personnel in decision making activities to attain business goals and objectives.
Simply it is an act of creating costing and financial data and converting data or information into
useful and relevant for management within a business organisation (Hilary, and et.al., 2016).
This presentation covers an explanation about different type of management accounting system,
reporting methods, their advantages or benefits and evaluation of integration in other
organisational processes in the context of Dairy Crest Group plc, an UK company selling dairy
products.
TASK 1
Management accounting systems
Management accounting system refers to set of activities which includes activities or
functions like identification, recording , analysis and reporting financial data or information so
that organisation's internal management can use these information or data to take important
business decisions. Activities involved in management accounting system act as a fundamental
framework for decision making process which directly or indirectly ensures organisation's
growth and performance. In managerial accounting no formal set of standards defined, but there
are various management accounting tools and methods. Managerial personnel apply different
management accounting tools and methods to take vital business decisions. In current business
environment management accounting system is essential requirement for a business organisation.
Through process of management accounting system it is easy to resolve cost and finance related
issues and problems for managers (Holzhacker, Krishnan and Mahlendorf, 2015). It also help to
monitor performance and growth of organisation. In Dairy Crest Group plc, managers collects,
identifies and report accounting or financial information under management accounting process
to create a groundwork for efficient or effective decision making.
Types of management accounting systems
Following are the major types of management accounting system adopted by Dairy Crest,
are discussed below:
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Cost accounting system: Its is a systematic structure that is applied by business
organisations to project or forecast a certain cost of different products in order to analyse
profitability condition, valuation of inventory and to control cost. Following are the requirement
to establish a proper cost accounting system, as follows:
1. An input measurement basis: In order to make reliability in output of cost accounting
system a basis of input measurement should be uniform and continuous from one period
to another period.
2. An inventory valuation method: Inventory valuation is part of cost accounting system so
a widely accepted and universal method like FIFO, LIFO, Weighed average method etc.
of inventory valuation is required to implement cost accounting system.
3. A cost accumulation method: Cost is aggregated and allocated to a particular activity,
task or product so a proper basis and method of cost accumulation is required to asses
cost of product (Kholis and Maksum, 2017).
4. A cost flow assumption: Which is cost is to be considered while calculating cost flow
within an organisation depends on some assumptions, such assumptions should be
universal and reliable to enhance the accuracy of calculation in cost accounting system.
5. A capability of recording inventory cost flows at certain intervals: A systematic inventory
valuation procedure ensures computation of inventory out flow at certain interval. So cost
accountant in organisation should develop capability of recording inventory cost flows at
certain intervals.
Inventory management system: Inventory is material item in financial statement of an
organisation as it directly affects determination of profitability level. Inventory includes closing
stock, work in progress, raw material, spare tools, finished goods etc. Inventory management is
required to track or monitor the level and cost of various inventory by using some techniques and
methods. It is significant for business organisation to implement effective inventory management
system because it help to reduce or optimise extra costs, normal or abnormal wastage, scrap,
residual etc. It also help organisation to trace any issue related to inventory at early stage. By
using inventory management system, management can stop misuse, theft, unnecessary loss of
inventory which help to increase profits. Tracking of movement of stock or inventory is
important to asses actual inventory cost on real time basis. In Dairy Crest there are lot of
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products and unfinished products but inventory management is very well which provide
competitive advantages to company.
Job costing system: This management system emphasises on identification and allocation of
various cost to particular job or task effectively. In this system cost accountant by allocating
overall cost to different task or job, find out the unproductive jobs or those jobs that are
absorbing excessive cost as compare to budget. Under this system costs are classified as per their
natures and extent on the basis of various jobs. In Dairy Crest this system is adopted for internal
analysis of different activities which are considered as specific job. Such analysis based on this
system ensures efficiency of tasks. Company require following type of information to conduct
process of job costing system, as follows:
 Material: Material is basic element to produce product so under job costing value of
material involved in each job is classified for each job in Dairy Crest.
 Labour: Information of labour engaged in performing a particular job is necessary for
job costing system to calculate aggregate cost.
 Overhead: Various overheads costs which are directly or indirectly involved in
performing a particular task is necessary. In Dairy Crest these costs are also classified as
direct and indirect.
Price optimisation system: This system is adopted by business organisation to analyse
relationship of price with demand with an intention to optimise price of product to gain
competitive advantages (Mora and Walker, 2015). In Dairy Crest this system is based on finding
out the appropriate pricing structure to in order to achieve organisation's objectives and goals.
Price optimisation system assist in determining the following:
 Initial pricing: In Dairy Crest initial pricing act as basis for analysing product life cycle
of different products.
 Promotional pricing: This pricing is used by Dairy crest for temporary boost up of
demand of any particular product. This is generally applied in case of launching of new
product.
 Mark down pricing: It is used by company to eliminate the effect of change in taste and
preferences on customers due to any event or due to seasonal effect.
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Benefits of management accounting system to Dairy Crest
 Cost accounting method is advantageous for Dairy Crest to monitor and control cost of
any of its product to achieve desired profitability level, increase efficiency and to gain
competitive advantage. It also help to determine the efficiency level of workers.
 Inventory management system is essential for all business organisation selling variety of
products. In Dairy Crest this system is benefited by optimising inventory cost,
minimising wastage or loss, reducing storage cost. Beside this it also helpful to monitor
the actual movement of inventory during a particular period.
 Job costing system: In Dairy Crest this system is helpful to determine the viability of any
particular job or task, and also it identifies the unnecessary cost increasing job or tasks to
increase profitability.
 Price optimisation system: This system provided company to gain competitive advantage
by optimising price of various products.
Different types of management accounting reporting techniques (methods):
Reporting is essential element of Management accounting system, under which lower
level managerial personnels report the outcomes and other data or information generated through
management accounting process, to top level management. Different kind of management
accounting reporting methods are used by managers to take resolve different matters or to take
decision related to specific area (Nielsen, Mitchell and Nørreklit, 2015). Mangers prepares
reports on monthly, quarterly or annually. Such report assist top managers to frame new
strategies and action plans. These reporting methods help management to assess their
competitive position in market and way to improve their performance. In this context following
type of reporting methods are generally used by management of Dairy Crest, as follows:
Marginal Costing Method –Under this reporting method cost sheet is prepared by marginal
costing approach under which variable costs or expenses are allocated to cost units and fixed
costs are written off against the total contribution. Aggregate amount of allocated variable costs
is known as marginal production cost which includes labour cost, material cost, variable
overhead cost etc. This method is used where variable costs are regarded as product costs and
cost other than variable or fixed costs are regarded as cost of the period. In Dairy Crest this
method is used by cost accountant to prepare cost sheet to determine and control cost of
production. Following are some major principle of cost accounting method are as follows:
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11 Fixed cost are considered as period cost so fixed costs are always remain same for
any level or volume of activities.11 Sales or turnover will get increased as units sold by organisation.11 Cost or expenses related to product will get increased as variable cost per unit
increases.11 Overall profit will enhance by contribution amount earned from additional units
sold and vice versa.
Absorption Costing Method – It is method of reporting under which cost is calculated
by considering all costs of production not only direct costs as marginal method does. Reporting
under this method provides a more clear picture about cost per unit for a specific product. It also
provide accuracy in amount of profit as compare to marginal costing because fixed cost are not
reduced from revenue or sales unless all of the organisation's produced goods are sold (Nitzl,
2016). In Dairy Crest cost sheet also prepared by using absorption method for the assessment of
true profitability condition of organisation. This method is more appropriate for taking financial
decisions. Following are some significant principle is to be followed in absorption costing
method, as follows:
 Any variation in volume of output units, affects amount of fixed cost and convert them in
variable.
 To calculate profit both variable and fixed cost must be considered.
 Stock should be valued with more accuracy.
 Segregation of cost into fixed and variable is not always possible. For highly capital intensive firm ratio of fixed cost to total cost will high.
Break Even Point Analysis – Break even analysis is most popular and widely used
method. Under this method aggregate fixed and variable costs are compared critically with
amount of sales revenue to ascertain the level of sales volume, value of sales or production at
which organisation faces no profit and no loss situation. In Dairy crest this method is used to
assess the exact level of sales below which company can get losses.
Standard Costing – Under this method, variances or differences between actual cost of
production process and costs that should be incurred for production of product. Such variances or
differences may be favourable or unfavourable. Any adverse or unfavourable variance indicates
weak area in production process. Generally variances are calculated in respect of direct material,
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direct labour and manufacturing overheads. In Dairy Crest this method is used to identify and
evaluate the area of weakness involved in various element of production process.
Management accounting system and reporting methods integration within the organisational
processes
Management accounting system and reporting methods are interconnected with different
– different organisational processes directly. Various organisational processes provide basis for
management accounting system and reporting such as financial accounting process provides a
raw data or information for reporting purpose. For management accounting and reporting output
of financial process is used and classified as per requirement. Output of production and
manufacturing process is also used to report variances under management accounting system. In
Dairy Crest, managerial personnel by using financial and quantitative data from accounting and
other related process, report their analysis through different management accounting system for a
particular period of time.
CONCLUSION
From above presentation its has been concluded that management accounting is vital part
of a business organisation. It not only assist in decision making process but also provide a layer
for monitoring and tracing various financial and other business related issues. Various types of
management accounting assist in operating business activities and functions smoothly and in
efficient manner.
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REFERENCES
Books and Journal
Hilary, G., and et.al., 2016. The bright side of managerial over-optimism. Journal of Accounting
and Economics. 62(1). pp.46-64.
Holzhacker, M., Krishnan, R. and Mahlendorf, M. D., 2015. Unraveling the black box of cost
behavior: An empirical investigation of risk drivers, managerial resource procurement,
and cost elasticity. The Accounting Review. 90(6). pp.2305-2335.
Kholis, A. and Maksum, A., 2017. Analisis Tentang Pentingnya Tanggungjawab Dan Akuntansi
Sosial Perusahaan (Corporate Responsibilities and Social Accounting) Studi Kasus
Empiris Di Kota Medan. Media Riset Akuntansi, Auditing & Informasi. 3(2). pp.101-
132.
Mora, A. and Walker, M., 2015. The implications of research on accounting conservatism for
accounting standard setting. Accounting and Business Research. 45(5). pp.620-650.
Nielsen, L. B., Mitchell, F. and Nørreklit, H., 2015. March. Management accounting and
decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No.
1, pp. 66-82). Taylor & Francis.
Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature. 37. pp.19-35.
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