Management Accounting

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management Accounting Systems........................................................................................1
P2: Management Accounting Reporting......................................................................................3
TASK 2............................................................................................................................................4
P3: Calculation of costs...............................................................................................................4
TASK 3............................................................................................................................................8
P4: Advantages and Disadvantages of planning tools.................................................................8
TASK 4..........................................................................................................................................10
P5: Comparison of organizations in the use of management accounting systems to solve
financial problems......................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management Accounting refers to different financial techniques which are used through
the analysis and interpretation of the available financial data to ensure that the right decisions are
taken during the future time period (Al-Mawali and et.al., 2018). When the managers use it they
can make sure that the overall profitability level can be enhanced in an effective manner. For the
managers, it is crucial that they make its use for deriving conclusions and recommendations
which will be very useful for them in the future time period. This assignment will put its focus
on Innocent Drinks. It is a company which provides smoothies and juices to its different
customers. In this report, analysis will be made on explanation of management accounting and its
systems, methods used for reporting, calculation of various costs. Additionally, focus will be
made on planning tools for budgetary control and comparison of organizations in the use of
management accounting systems to solve financial problems.
TASK 1
P1: Management Accounting Systems
Management Accounting is a tool which can be used by the managers to ensure that they
are able to exercise better planning and control within the organization (Management
Accounting, 2020). Its various systems are explained as follows-
Cost Accounting System- Cost Accounting System is an accounting method which is
used to determine the costs of an organization such as Fixed Cost, Semi-Variable Cost and
Variable Cost (Amir, Rehman and Khan, 2020). Its use can be made to ensure that various costs
can be determined in a highly effective manner. Further, it estimates the overheads and
segregates them according to the departments. In this way proper apportionment of overheads
can be ensured. Innocent Drinks can make the use of this system to estimate the costs and reduce
them which will help it a lot to enhance its profits. They can use the various techniques for doing
so.
Essential requirements-
 In this system there must be the use of appropriate techniques for the purpose of
determination of different types of costs so that they can be segregated according to the
departments. This will help the managers of Innocent Drinks to find out their
departmental costs.
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 This method should allow the managers to be able to identify the scope of improvement
in the processes so that the costs can be reduced. In this way the managers of Innocent
Drinks will be able to maximize the level of profits.
Inventory Management System- Inventory Management System is a technique which is
used in accounting which helps in the proper evaluation and estimation of the stock level
(Borker, 2016). In it there are different types of techniques such as LIFO, FIFO, Weighted
Average Cost etc. They can be used to identify the inwards and outwards movement of the items.
The managers of Innocent Drinks can make use of it to properly manage their stock level and
also to find out the problems with the stock management. Thereafter, they can also use rectifying
techniques to rectify them in an effective manner.
Essential requirements-
 This system has to ensure that the tracking of movement of goods within an organization
can be done effectively and efficiently. This will help the management of Innocent
Drinks to be able to properly manage the stock items.
 This method needs to ensure that problems and issues related with the stock management
are resolved. In this way help can be provided to the managers of Innocent Drinks to
remove deficiencies and variations.
Job Costing System- Job Costing System is a method in which there is an estimation of
different job orders of the company (Endenich and et.al., 2016). It is particularly useful for those
firms which are indulged in manufacturing. Innocent Drinks can use it by ensuring that it is able
to estimate the job costs and use techniques to reduce them which will help in raising its level of
profits in an effective manner.
Essential requirements-
 This method has to ensure that the various job orders are properly managed in an
organization. This will help the management of Innocent Drinks.
 In this technique there has to be an estimation of job costs so that the right approaches
can be adopted to reduce them. In this way the required help can be provided to the
managers of Innocent Drinks.
Price Optimization System- Price Optimization System is a technique in which methods related
to forecasting are used to estimate the prices (Johnstone, 2018). It is helpful in setting of right
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prices so that profits can be enhanced. The managers of Innocent Drinks will be able to ensure
that they make its use which will help them in enhancing their earnings.
Essential requirements-
 This system should ensure that mathematical and statistical models are used so that prices
can be forecasted in the future time period. In this way the management of Innocent
Drinks will be able to set right prices for products.
 This method must be able to help the managers in ensuring that prices are set according
to the prevailing market situation. Thus the managers of Innocent Drinks can aim for
earning sustainable profits.
P2: Management Accounting Reporting
In Management Accounting, different types of reports are prepared by an organization.
Some of these are explained as follows-
Departmental reports- In a company, there are various departments which can operate.
These can be Production, Finance, HR, Marketing, Sales etc. For the firms it is essential that they
are able to summarize the work done by each of them by preparing these reports to make a
thorough assessment of the profits earned by each one of them (Labrador and Olmo, 2019).
Therefore it is required from the management of Innocent Drinks that they are able to estimate
the departmental requirements in a proper manner and prepare reports showing the progress of
the departments and the end of the year. If there are problems and issues with the departments
then they can be rectified by making the use of these reports.
Performance reports- These reports are used specifically so as to assess the overall
performance of an organization for a specific time period (Matsuoka, 2020). The comparisons
can be made with the set standards and with the other organizations who are operating in the
similar sector. For the managers of Innocent Drinks, it can be quite helpful to ensure that the
overall level of performance can be evaluated effectively and efficiently. It can be compared
with the set standards and deviations and variances can be identified. Thereby rectifying actions
can be taken for removing them in an effective manner.
Operating Budget reports- In these reports, there is an estimation of the operating
incomes and expenses incurred within an organization. They are useful for the management of
Innocent Drinks because they can ensure that an overall estimation of operating profits can be
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made. Also these reports can be helpful for the company to ensure that operating profits are
enhanced in the future time period.
Product profitability reports- These reports are prepared so that the profits earned by
different products of the organization can be estimated (Mazarak and Fomina, 2016). It
facilitates the taking of right decisions. Therefore analysis and interpretation can be done to find
out the items which are highly profitable for the company and allow it to earn higher level of
profits in the future time period. Strategies can be prepared by the firm regarding its goods when
it uses these reports in an effective manner. Thus, for the managers of Innocent Drinks the use of
these reports is quite helpful in ensuring that appropriate techniques are used by them to be able
to increase the profits.
TASK 2
P3: Calculation of costs
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It is crucial for the organizations to calculate the costs by making use of appropriate
techniques. These methods are explained as follows-
Marginal Costing-
It is a technique through which the determination of profitability level in an organization
can be done. It ensures that the variable cost is charged to the units of cost and the fixed cost is
written off against the contribution level (Murthy and Rooney, 2018). It is used for the purpose
of calculation of Break-even point. This is a point where an organization neither earns profits nor
incurs loss. Thus an effective comparison can be made easily with the other firms with the use of
this method. In the context of Innocent Drinks it is quite useful for the managers so that they are
able to take appropriate decisions whenever required.
Advantages-
 Simple to use- This technique is quite simple to use and thus in this way proves to be
quite useful for the management of the organizations. In this way it helps the managers of
Innocent Drinks.
 Easy to apply- Use of this method is quite useful for the management because it can be
easily applied in the various organizational processes. Thus in this way the required help
is provided to the management of Innocent Drinks.
Disadvantages-
 Use of assumptions- For using this technique, there are various assumptions which are
required to be made. Therefore this can create a disadvantage for Innocent Drinks.
 Lack of proper treatment of overheads- In this method, the overheads are not treated in
an appropriate manner. For Innocent Drinks, this can create a disadvantage.
Absorption Costing-
It is a method in which the costs are found out in an effective manner (Ostaev and et.al., 2019). It
takes into account all the costs which incur within the organization. It is quite effective to ensure
that the overheads are properly segregated in the company and allocated to the various
departments according to their share. For the managers of Innocent Drinks, this can be very
useful to ensure that the costs are identified in an effective manner.
Advantages-
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 Segregation of overheads- When this technique is used within the organization it can
lead towards ensuring that overheads are treated in a proper manner. In the context of
Innocent Drinks this can create an advantage.
 Proper estimation of costs- This method helps in estimation of the costs in a highly
effective manner. For Innocent Drinks, this can lead towards an advantage.
Disadvantages-
 Skewness in profit or loss- Use of this method can result in creation of skewness in
profit or loss. For the managers of Innocent Drinks, this can lead towards a disadvantage.
 Cannot be used to calculate Break-even point- This technique cannot be used for the
calculation of Break-even point. Thus, for the managers of Innocent Drinks this can lead
towards a disadvantage.
Thus, the managers of Innocent Drinks make the use of both these methods for the
determination of their overall profitability level. This allows them to be able to take decisions for
the future time period. These decisions can be either short-term or long-term in nature. When the
management of the company uses these techniques it ensures that they are able to maintain a
desired level of efficiency and effectiveness easily without facing problems and issues.
TASK 3
P4: Advantages and Disadvantages of planning tools
Fixed Budget-
It is a budget in which there is no change in the figures over a period of time. In it, there
are constant figures which are maintained (Oyewo, Ajibolade and Obazee, 2019). The managers
of Innocent Drinks can make use of this budget to determine surplus or deficit.
Advantages-
 Constancy- In this type of budget, there is a constancy which can be maintained. In
Innocent Drinks, it can be used so as to ensure that the managers are able to maintain
constant figures in the budget.
 Accuracy- Due to the maintenance of constant figures, this budget can result in high-
level of accuracy. In Innocent Drinks, this can ensure that the right amount of profits can
be determined.
Disadvantages-
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 Not useful for all organizations- This budget is not useful when the figures of sales in
the organization keeps on fluctuating. Thus in this way problems can be created for
Innocent Drinks if it witnesses fluctuations in its sales.
 Lack of flexibility- Use of this budget leads towards a decrease in the level of flexibility.
Therefore when a company makes use of it then this can affect their adjustment to
different fluctuations in the market. Thus this can create disadvantage for the managers of
Innocent Drinks.
Flexible Budget-
In this method, the figures keep on changing according to the changing circumstances (Rickards
and Ritsert, 2018) (Rybicka, 2018) (Tan, 2016) (Tucker and Lawson, 2016). Thus it can be used
by Innocent Drinks so that it is able to adjust its revenues and expenses in an effective manner.
Advantages-
 Flexibility- When this budget is used it allows the companies to be highly flexible. Thus
in this way it provides an advantage to the management of Innocent Drinks.
 Removal of deficiencies- Using this budget helps the organizations in the removal of
different types of deficiencies. Innocent Drinks thus has an advantage here.
Disadvantages-
 Bad impression on investors- As this budget makes use of constantly fluctuating figures
it can create a bad impression on the investors. The management of Innocent Drinks thus
have a disadvantage here.
 Requires proper accounting disclosures- Use of this budget requires proper accounting
disclosures. Thus this creates a disadvantage for the management of Innocent Drinks.
Performance Budget-
In this budget, the evaluation of overall performance of an organization is made
(Rickards and Ritsert, 2018). This is quite helpful in ensuring that the company is able to identify
the right way through which it can enhance its performance so that goals and objectives can be
achieved. Innocent Drinks can make its use so that they are able to maximize their profits.
Advantages-
 Assessment of performance- Using this budget helps the companies a lot in assessing
the performance. Thus this creates an advantage for the managers of Innocent Drinks.
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 Improvement of performance- With the use of this budget, the organizations can ensure
that they are able to improve the performance. Thus for the managers of Innocent Drinks,
this can result in an advantage.
Disadvantages-
 Incorrect standards- Use of this budget can lead towards setting of inappropriate
standards. In Innocent Drinks, this can create a disadvantage.
 Difficult to estimate benefits- When this budget is used it becomes quite difficult to
estimate the benefits of various activities. In the context of Innocent Drinks, this can lead
towards a disadvantage.
Justification- Innocent Drinks must make the use of Flexible Budget so that they are able to
adjust their figures according to a change in the various situations and circumstances which they
are facing in the market. This allows them to be able to ensure that they achieve their goals and
objectives.
TASK 4
P5: Comparison of organizations in the use of management accounting systems to solve financial
problems
Financial Problem- It refers to issues which are related with funds of an organization.
These are faced when the financial position of the company is not good (Rybicka, 2018). Like
other companies, Innocent Drinks also faces financial problems and therefore is required to make
use of certain techniques to be able to solve them in an effective manner. The problems which
the company is facing are as follows-
 Wrong valuation of inventory- In Innocent Drinks, the value of stock items is not being
estimated in a proper manner. This is resulting in wrong value of inventory which is
thereby creating an impact on the overall profits level.
 Increase in expenses in fulfilling job orders- In Innocent Drinks, there has been an
increase in the expenses which are incurred in job orders. This is creating an impact on
the level of profits which are earned in the company.
Techniques for solving these problems-
 KPIs- These refer to Key Performance Indicators (Tan, 2016). By using them an
organization can ensure that it is able to set metrics for evaluation of performance and
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rectify errors if any. Thus Innocent Drinks can use them to be able to solve the problem
related to inventory by using the technique of Ratio Analysis in an effective manner.
 Benchmarking- It is a process of setting standards and measuring the performance to
find out deviations and variances so that they can be rectified (Tucker and Lawson,
2016). Innocent Drinks can make the use of this process so that it is able to solve the
problem related to job orders as it can set standards for costs to be incurred for these
orders so that they can be reduced effectively.
Comparison between organizations-
Basis Next Marks & Spencer
Financial problem Next is facing financial
problem of excessive
overheads.
Marks & Spencer is facing
financial problem of setting
wrong price for its products
which is reducing its profits.
Management Accounting
System
Next can make the use of Cost
Accounting System.
Marks & Spencer can make
the use of Price Optimization
System.
Application of the system Next can apply this system by
ensuring that it is able to
estimate the overall costs
effectively and reduce the
excessive overheads.
Marks & Spencer can apply
this system by ensuring that
mathematical and statistical
models are used so that right
prices can be set in the
organization to enhance the
level of profits.
Thus, from the examples of Next and Marks & Spencer, it can be concluded that the
managers of Innocent Drinks can use management accounting systems to solve their financial
problems. They can make the use of Inventory Management System to solve the problem related
to inventory and can use Job Costing System to solve the problem related to job orders in the
organization.
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CONCLUSION
From the above report, it can be concluded that management accounting is a process in
which analysis and interpretation is performed so that right actions can be taken by the managers
at an appropriate time. This allows the managers to ensure that they achieve the goals and
objectives. Management accounting has various types of systems which can be used by the
organizations. Its reports are useful for the management to draw conclusions and
recommendations. Estimation of costs can be done by making the use of different techniques.
Planning tools can be used for the purpose of creation of plans for the future time period.
Organizations are making the use of different systems so that they are able to solve the financial
problems.
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REFERENCES
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Online
Management Accounting. 2020. [Online]. Available through:
<https://efinancemanagement.com/financial-accounting/management-accounting>
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