Management Accounting Systems and Techniques for Financial Problem Resolution

This document discusses the various management accounting systems and techniques used to resolve financial problems in organizations. It explores the purpose of budgeting and its benefits, compares the financial performance of different companies using management accounting, and evaluates planning tools to reduce financial issues and achieve success.

Management
Accounting
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INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART 2............................................................................................................................................3
3.1 Explain purpose of budget and prepare different budget.......................................................3
4.1 Compare how organization following management accounting systems to resolve their
financial problem.........................................................................................................................8
4.2 Analyse how management accounting can improve the financial performance of both
companies to achieve the sustainable success.............................................................................8
4.3 Evaluate the planning tools used in management accounting to reduce the financial issues
to achieve success........................................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11
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INTRODUCTION
Management accounting includes the planning and adequate delivery of financial and
quantitative information to business executives so they can make day to day and short term
strategic decisions (Dierynck and Labro, 2018). In a variety of aspects, knowledge found in
management accounting varies considerably from that of financial accounting. Although reports
on financial statements appear to be focused on historical evidence, reports on the management
are largely forward thinking. This report is based on UCK furniture which adopts several
management accounting techniques to improve their operational efficiency and the purpose of
budgeting that how it is beneficial for the organizations.
MAIN BODY
PART 2
3.1 Explain purpose of budget and prepare different budget
Budget is a structured forecast revenue and expenditure document focused on projected
expectations and goals. In certain words, a plan is a report made by management to forecast
revenues and expenditures for the upcoming year that is based on their business objectives. Lots
of various types of budgets vary from short and long-term to agency specific. Management
should create a budget for whatever. The main thing to remember is that these plans are actually
just the potential expectations and strategies written down in financial form by the management
for the company.
Purpose of budget: Budgeting purposes are for allocating, organizing, arranging,
managing and empowering capital. It is also an essential method for decision-making, market
performance reporting and revenue and expense forecasting (Gomez-Conde And et.al., 2019).
Valuable resources are handled effectively, through proper budgeting. Below mention some
specific purpose help the managers of UCK furniture to produce budget and perform effectively
to maximise the productivity as well as profitability. All are as follow:
 Budget is an instrument for the planning and execution of short-range plans.
 This is a tool to convey certain plans to the managers of the accountability centre.
 Budget is a way to motivate managers to accomplish their goals at the centres of
responsibility.
 Controlling ongoing operations is a standard.
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 The budget acts as a framework for evaluating the success of accountability centres and
their administrators.
Above mention budgeting purpose help the UCK’s managers to estimate income and
expenditure according to the operational activities. It is also beneficial to evaluating overall
performance of the company in comparison to last year performance or with their competitors.
Different types of budget along with advantage or disadvantage:
Cash budget: Cash budget is a plan or schedule for forecasted cash collections and
payments over the year. Other money inflows and outflows involve income received, expenses
charged, and refunds and payments for loans. In other words, capital budgeting is a projected
future financial situation forecast of the business. Management creates the cash budget after the
budgets for revenues, acquisitions, and capital expenses have already been made. Such forecasts
must be made in advance of the cash budget to accurately predict how the cash will be impacted
over the time. For example, manager of UCK furniture needs to have an estimation of revenue so
it can determine how often cash will be gathered over the era. Management using the cash
budget to control a company's cash flows.
Advantage: There are also benefits of using cash budgeting. This method helps to assess
whether cash balances are adequate to meet daily obligations and if the necessary criteria for
stability and cash balance specified by banking or internal company regulations are preserved
(Laela And et.al., 2018). It also lets an organization decide whether it holds too much money that
could otherwise be invested in productive things. Companies that lend from banks have to track
their ratio of cash coverage and plan a cash budget is the first phase in measuring that ratio.
Disadvantage: Cash budgets can trigger errors, too. Cash inflows aren't efficient. Cash
inflows arising from bond transactions, penalties, asset sales, or other one-off, semi-sustainable
operation do not generally reflect credible additional revenue sources. Decreased cash flow not
need always be a cause of concern. At times, selling goods with long credit terms will lead to a
much greater long-term profit that would cover more than the cost associated with receiving
short-term loans to fulfil immediate obligations. To interpret the data, managerial assessment is
required.
Master budget: The master budget consists of the accumulation of all low-level budgets
generated by the different functioning areas of a organization. It also requires budget accounts,
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cash estimates and a payment plan. Usually the master budget is provided in either a monthly or
quarterly format, and generally covering the entire fiscal year of a corporation. A master budget
is the centrally planned tool used by a management team of UCK furniture to guide a
corporation's operations as well as to assess the success of its different accountability centres. It
is common for the senior management department to review a variety of master budget variations
and implement changes before it reaches a budget which assigns funds to achieve desired
outcomes.
Advantage: Using a master budget has the advantage of being able to recognize
challenges and prepare accordingly (Li, 2018). For example, if one department spends over its
cap, the master budget will show them which causes the business to invest than it earns per
month. To address the issue, by examining at the actual department expenditures, you can
determine which department is spending excessively. You will then either cut the expenses of
that department or make reductions in other departments to free up money to fund the extra cost.
It is harder to detect budget problems by just looking at departmental budgets individually.
Disadvantage: One of the drawbacks to getting a master budget is their lack of detail.
The dollar sums and figures written on both the master budget constitute a cumulative total of all
the expenditures and profits of the divisions. For example, they would not be able to tell how
much of the marketing team spends on a monthly basis because the amount would be applied as
one total of all other department spending.
Flexible budget: It is considered a variable budget, a financial program of projected
revenue and expenditure based on the real current production number. In other words, a flexible
budget using the income and expenditure generated in production as a benchmark and forecasts
how profit and expenditure will adjust based on performance changes. During an accounting
cycle, flexible budgets may also be used to determine the effective areas and ineffective areas of
last-performance. Management of UCK furniture contrasts the budgeted figures closely with the
real performance results to see where business has been improving and where the company needs
further change.
Advantage: The main advantage of such a budget being that it allows the management of
the company to assess the level of production in various consumer and business environments.
This also helps to reclassify the various types of budgeted expenses together with revenue so that
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executives can better recognize the areas of benefit and therefore behave accordingly. Based on
the activity rates, this budget could be re-casted. It is not stiff.
Disadvantage: It will take time to work out exactly how unpredictable such
unpredictable costs could be and during the budget season, time is always at a premium (Qian,
Hörisch and Schaltegger, 2018). Consequently, a flexible budget might contain just a few
variable cost factors that in the first place diminish the importance of designing a flexible budget.
Flexible costs can be hard to predict, thus weakening the importance of a flexible budget. For
example, the labour costs can be especially unpredictable
Prepare a schedule of expected cash collections for September:
Particulars September (£)
Cash Sale 39,000
Collection for sales on account:
July 392
August 4,416
September 840
Total collections 44,648
Schedule of expended cash disbursements for merchandise inventory purchases in
September:
Particulars September (£)
Payment for inventory purchased in September 4,800
(24000*.2)
Payment for inventory purchased in August 15,000
Total disbursement for inventory purchase 19,800
Prepare cash budget for the month of September:
Particulars Notes September (£)
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Opening balance (A) 20,000
Collections
Cash Sale 39,000
Collection for sales on account:
July 392
August 4,416
September 840
Total collections (B) 44,648
Disbursements
Payment for inventory purchased in September 4,800
(24000*.2)
Payment for inventory purchased in August 15,000
Selling and administration expenses 9,000
(excluding depreciation of 4000)
Purchase of equipment 18,000
Dividend to be paid 3,000
Total disbursements (C) 49,800
Balance (A+ B- C) 14,848
Financing Activity:
Loan Taken (1,152)
Closing Balance 16,000
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4.1 Compare how organization following management accounting systems to resolve their
financial problem
Organizations are following several management accounting systems such as inventory,
cost management, job costing, price optimization etc. to help tackle financial problems
(Rikhardsson and Yigitbasioglu, 2018). It is impossible to recognize financial issues by using the
management accounting methods. Clearly, it is not possible to come up with approaches to
financial issues when issues themselves cannot be described. Using management accounting
strategies, UCK furniture is able to recognize areas of risk due to which financial troubles occur
appropriately and correctly. Not only this, management accounting also allows to quickly and
efficiently address those problems.
Particulars` UCK furniture
(Design Division)
UCK Furniture
(GearBox Division)
UCK
(woodworks)
Return on Capital employed 25.49784 % 11.27466 % 8.562108 %
Assets turnover 0.562771 0.779831 0.191801
Operating profit margin 45.30769 % 14.45783 % 44.64056 %
Notes:
Return on Capital employed = Operating profit / capital employed * 100
Assets turnover = Sales / total assets
Operating profit margin = Operating profit / Total sales * 100
4.2 Analyse how management accounting can improve the financial performance of both
companies to achieve the sustainable success
ROCE used to tests the company's profitability with respect to the invested capital in the
business. It displays the company's earnings as a proportion of the resources hired in another
context. Higher percentage indicates the better performance of company (Usenko And et.al.,
2018). Here, the UCK Furniture Design Division and the GearBox Division have a 25.49 % and
11.27% ROCE respectively, while UCK Woodworks has a ROCE of just 8.56%. It means that,
UCK Furniture Design Division receives the most income per pound of capital invested in it,
followed by the GearBox Division of UCK Furniture and the Woodworks. Assets turnover ratio
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is an measure of the revenue a corporation will produce per unit of total assets. Here, the UCK
Furniture GearBox Division has the highest asset turnover ratio at 0.7798 and the UCK Furniture
Design Division at 0.5627 and the UCK Woodworks at 0.1918 respectively. This means that
GearBox Division of UCK Furniture will produce maximum revenue per unit of its properties.
The operating profit margin is the amount of income a firm earns from sales. The highest
operating profit margin for UCK Woodworks is 44.64 percent, followed by the UCK Furniture
Design Division is 45.30 percent and the UCK Furniture GearBox Division is 14.46 percent.
That means UCK Woodworks will gain the full profit from its revenues.
4.3 Evaluate the planning tools used in management accounting to reduce the financial issues to
achieve success
Budgetary control relates to the procedure by which managers contrast budget forecasts with
real results then assess and attempt to limit the differences between projections and real
revenues. It helps tackle problems that create inconsistencies between real data and expected
values. Ratio analysis is a very important method of management accounting (Weetman, 2019).
There are several ratios such as acid test, current ratio, equity ratio, asset turnover ratio, debt
coverage ratio etc., are measured and evaluated to determine overall growth and to evaluate the
corrective steps to be taken to boost negative ratios. Each planning technique used in
management accounting also allows financial statements to be improved and financial issues
removed to achieve success. In addition, ratio analysis of project estimation, calculation, and
costing methods help to minimize financial challenges and improve management accounting
performance.
CONCLUSION
From the above analysis it has been evaluated that, management accounting systems and
techniques are essential for the organizations because it helps in facing financial issues that
organizations face during the business operations. By using several accounting techniques such
as budgetary control, ratio analysis, marginal or absorption costing make business able to
improve financial performance and get success to achieve desired goals & objectives.
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REFERENCES
Books & Journals
Dierynck, B. and Labro, E., 2018. Management accounting information properties and
operations management. Foundations and Trends® in Technology, Information and
Operations Management. 12(1). pp.1-114.
Gomez-Conde, J. And et.al., 2019. Environmental innovation practices and operational
performance. The joint effects of management accounting and control systems and
environmental training. Accounting, Auditing & Accountability Journal.
Laela, S. F. And et.al., 2018. Management accounting-strategy coalignment in Islamic
banking. International Journal of Islamic and Middle Eastern Finance and Management.
Li, W. S., 2018. Strategic Management Accounting. Management for Professionals.
Qian, W., Hörisch, J. and Schaltegger, S., 2018. Environmental management accounting and its
effects on carbon management and disclosure quality. Journal of Cleaner
Production. 174. pp.1608-1619.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Usenko, L. N. And et.al., 2018. Formation of an integrated accounting and analytical
management system for value analysis purposes.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
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