Analysis of Management Accounting Systems

This assignment involves a detailed examination of management accounting (MA) systems, exploring different methodologies such as traditional MA, performance measurement systems, business process re-engineering, ERP systems, cost-aware process management, job costing, and budget efficiency. The analysis aims to identify the strengths and weaknesses of these systems in supporting decision-making processes within organizations.

MANAGEMENT ACCOUNTING

INTRODUCTION
A branch of study where a wide range of financial plans prepared, assessed, implemented
as well as evaluated is considered as management accounting (MA). It is mainly helpful for
businesses for making those decisions and judgements which rely under the internal
environment. The reason is that it does not emphasise on any kind of external environment and
decisions related to this (Tucker and D. Lowe, 2014). For the current project, Hungry House
Company is taken into consideration which is a kind of small business enterprise in UK. Further,
it operates in the hospitality industry of UK where it serves different food items to target
customers. From the present report, different systems of MA which are used by chosen firm
along with key requirement within workplace of them will be discussed. Apart from this,
different reports used by Hungry House in order to complete the procedure of MA reporting are
described. Second part of study consists of preparation of income statements by applying
marginal and absorption these two MA techniques. Further, planning tools are evaluated which
are considered by the firm for budgetary control. At the end of project, techniques of MA are
described through which Hungry House solves different financial issues.
TASK 1
P1 Describing list of systems of MA which are implemented at the workplace of Hungry House
along with their essential needs
Business Report
From: Management accounting Officer
To: General Manager
Hungry House Company
Subject: Systems of management accounting
Date: 29th November 2017
Introduction
The present business report consists of those systems of MA which are implemented by the
manager of Hungry House at workplace. All the systems are highly important for every
business for making effectual internal business decisions. Moreover, in this report, essential
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needs of such systems are discussed.
Systems of MA
Illustration 1: Systems of management accounting
(Source: Messner, 2016)
Price optimisation: For every company, price is an important element on which products and
services are sold among customers. Further, managers highly concerned towards this aspect
because higher the pricing level leads to decline attraction of users. This stated system of
management accounting is a supportive tool for managers of Hungry House in order to
determine an effective price of food items which are sold by it. Generally, firms are charging
different levels of prices within particular period of time (Bruynseels and Cardinaels, 2013). On
several prices, responses of customers for purchasing goods and services differ up to a high
extent. Considering this tool, firm is able to determine that which pricing level more customers
attracted for purchasing food items. A specific price where the highest sales generated by
Hungry House that will be selected for selling products for long term. In short, this system is
applied by the company for opting one profitable price level at which more people attracted and
it can earn higher sales and income.
Cost accounting: An element of financials at which every business is highly concerned is cost
which must be lower within working environment. The reason is that, on this particular aspect,
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profitability and financial position of firm depends. When costing of the products is high, in that
case, firm is unable to generate more income as huge part of sales is covered by expenses. In
order to determine that which level of prices is associated within Hungry House for cooking
food items and deliver them, cost accounting is used. On the basis of this system, firm is able to
know total cost of production incurred at the end of financial year. Along with this, it supports
to make classification of all the expenses incurred in an appropriate manner (Messner, 2016).
Therefore, decision of using pricing strategy can be determined by the management. Moreover,
cost accounting is basically required within Hungry House to derive the cost of production and
make related decisions in profitable direction.
Inventory management: At the workplace of every enterprise, stock is highly important and
pivotal part which must be managed appropriately. If this specific component is higher within
firm then this leads to decline stock turnover ratio at the end of year which affects financial
performance adversely. Hungry House is using this system in order to manage and reduce level
of total inventory as well as to utilise it in an optimum direction. When employees use stock in
highly optimum manner then able to increase level of sales and turnover at the end of every
fiscal year. For managing this, it is necessary to determine the total value of stock which is
available in company (Inventory Management, 2013). In order to make valuation of stock
within Hungry House, three methods are there which include weighted average, LIFO as well as
FIFO.
Job costing: At last, a procedure of compiling data which is related to costs associated with
particular kind of production as well as specific job is referred as job costing system. It is
helpful for the managers for deciding accuracy of organisation's estimated system. When
management produces products on the basis of different jobs, then it is considered by the
managers. Reason is that, from this system, firm is able to know the cost of production of each
job through which Hungry House can determine price in a proper way. It consists of basically
three kinds of expenses incurred in the production of food items which are like direct materials,
direct labour as well as overheads (The job costing system, 2015). Using couple of this
information managers of Hungry House assesses that which type of dish considers how much
level of costs.
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Conclusion
Considering the above stated analysis, it can be summarised that various systems of MA are
supportive for Hungry House to take a wide range of internal business judgements. Cost
accounting and job costing systems are helpful to determine the cost of total production and
every job respectively. Apart from this, using price optimisation and inventory management
Hungry House is able to opt profitable price and manage the stock respectively.
P2 Describing several methods and reports which are used by Hungry House Company for
completing procedure of MA reporting
Business Report
From: Management accounting Officer
To: General Manager
Hungry House Company
Subject: Management activity reports
Date: 29th November 2017
Introduction
This particular business report focuses on several systems and methods which are used for
reporting of management accounting. On the basis of that, financial statements are to be
prepared at the workplace of Hungry House in proper manner. Further, ways through which
such reports are used also described in this report.
Importance of management activity reports
Considering to several reports, a company able to determine various financial transactions come
into consideration at the working environment. When manager found during analysis of such
reports that particular transaction is not productive then avoided. Apart from this, to assess
incomes and outcomes of financial generated in each business activity also this reports are
highly important. Further, for formulating all the financial statements which are like income,
financial position, cash flow etc (Nørreklit, 2014). also management activity reports have
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pivotal part. There are different kinds of reports included in this system or procedure which are
discussed under this business report.
Methods of MA reporting
Illustration 2: Methods of MA reporting system
(Source: Ward, 2012)
Inventory and manufacturing report: A method where stock level of the company discussed and
recorded is known as inventory report. When the company considers this then able to know that
how much stock is available at there. On the basis of this, decision for producing further goods
and services is to taken by the managers of Hungry House. Apart from this, for determine costs
incurred to manufacture the food products manufacturing report is considered. Under this, all
the records related to production of goods and services are mentioned. Along with this, number
of products are also recorded which is one of the very significance aspect of this particular
report. Moreover, it can be said that these both the methods are used for determining stock and
assessing financial transactions incurred in operation department of selected company (Cadez
and Guilding, 2012).
Accounts receivables ageing: In accordance with this system of MA reporting, those amounts
are recorded which will be received by the firm after sometimes or in next year. It is not
necessary that every customer purchase goods and services from the chosen firm of food
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industry in cash. Sometimes, people buy such products on credit also where payment is to be
made later on. Whatever amount at which sales made by company on credit that is recorded in
report of accounts receivables ageing. Total of this specific report is to be treated under balance
sheet of Hungry House under assets side in form of debtors.
Operation budget report: Apart from the above, a report in which all the transactions related
which will be incurred in the operation function of cited firm are recorded is referred as
operation budget. Basic objective of this method is to estimate incomes as well as outcomes
which will be there for producing food products within Hungry House workplace (Ward, 2012).
It is highly effective method where management able to make changes accordingly in sales and
payments for the next year. Further, if there is low level of income can be seen then strategies
will be applied for improving it.
Job cost report: As per this method of MA reporting procedure, expenditures incurred in order
to manufacture products of each job are recorded. It is one of the highly significant report
through which all the things or financial transactions are properly analysed which incurred at
each job level. Sum of this specified total is recorded in profit and loss account on the side of
expenses (Parker, 2012).
Conclusion
It can be assessed from the present report that, there are several numbers of methods come into
consideration which support to prepare financial statements at the workplace. Such ways of MA
reporting include operation budget, job cost, accounts receivables ageing as well as stock and
manufacturing reports. On the basis of these all, Hungry House can derive various costs and
incomes in an appropriate direction.
TASK 2
P3 Formulating profit and loss account considering two MA techniques i.e. marginal and
absorption
Income statement is very important part of every business enterprise because it clearly
represents outline of the incomes generated within one year. Along with this, level of payments
made in the whole accounting period are also analysed from P&L account. For preparing this at
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the working place several kinds of MA techniques are available. As per the current case scenario,
Hungry House uses two ways for completing this particular task which are like marginal and
absorption. On the basis of these both the costing methods the financial statements are prepared
below:
P&L using marginal costing:
Particulars Amount (in GBP) Amount (in GBP)
Sales (500 * 35) 17500
Cost of production (13*500) 6500
Less: Closing stock (13 * 100) 1300
Variable cost of sale 9700
Contribution 7800
Less: Variable sales overhead 500
Less: fixed costs
Production overhead 1800
Administration cost 800
Selling cost 400 3500
Net profit 4300 GBP
From the above stated profit and loss account it can be clearly determined that, Hungry
House has turnover worth of 17500 GBP at the end of an accounting period. On this particular
sales level it earns net income which is worth of 4300 GBP. This amount reflects that managers
of selected company of food sector applied some effective kind of cost management strategies.
The reason is that when costs are managed properly then only firm can generate better level of
incomes at the end of business year.
P&L using absorption costing:
Particulars Amount (in GBP) Amount (in GBP)
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Sales (500 * 35) 17500
Cost of production (14*500) 7000
Less: Closing stock (14 * 100) 1400
Variable cost of sale 9100
Contribution 8400
Less: overhead absorption of fixed production
overhead 100
Gross Profit 8300
Less: Variable sales overhead 500
Less: Fixed costs:
Administration cost 800
Selling cost 400 1700
Net profit 6600 GBP
The aforementioned P&L account which is prepared with the help of absorption costing
technique it has been seen that, at the same level of revenue Hungry House earns net income
which is 6600 GBP. According to this stated method, it generates more income which shows
more strong profitability position in the food industry. Basic reason behind occurring this
difference is that, marginal and absorption both method use various kinds of expenses which are
not same. One technique go through only variable kinds of expenses which is marginal costing.
While another stated MA technique focuses on variable and fixed both natures of the
expenditures incurred within firm (Herbert and Seal, 2012). Further, both the considered method
by Hungry House has some differences which are described in below section.
Segregation between two techniques of MA i.e. marginal & absorption
Marginal costing Absorption costing
This is one kind of tool of decision making
where managers of enterprise make required
On the other side, it considered as
apportionment of cost which applied under cost
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judgements in proper and fruitful direction. centre of the organisation.
Whatever amount generated at here in terms of
outcome is considered as a contribution of each
product. In this calculation any kind of
overhead expenses are not included
Sum of money generated at this method is
known as gross profit of the company. In the
outcome of gross income overhead costs are
involved by the managers.
Herein, expenses which are related to overhead
segregated in two parts only which are like
fixed and non-fixed.
In order to perform calculation at here,
overhead costs are classified in basic three
portions which are administration, production
as well as selling and distribution
(Taipaleenmäki and Ikäheimo, 2013).
Earned income is to be measured in this
method in terms of profit volume ratio. On the
basis of this income behind every product can
be determined easily.
In this technique of MA, when fixed expenses
increase or decrease then directly influence
profitability conditions.
Level of inventory is to be measured at here in
terms of variable cost of the manufacturing
within Hungry House.
According to this tool, stock is valued as total
expenditures of the whole production produced
or cooked at the business place.
For performing computation of stock level in
this method, any type of principles and
standards of accounting are not required to
follow (Cooper, Ezzamel and Qu, 2017).
To make calculation of inventory under
absorption costing then Hungry House must
follow IAS 2.
TASK 3
P4 Explaining different planning tools along with several benefits and limitations associated with
the planning methods
When budgets or any financial plans are required to prepare at the workplace then some
tools as well as methods are taken into consideration. There are various techniques available
under the area of management accounting which are generally considered by managers and
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accountants of the firm. As per the current case scenario, Hungry House implementing three
tools of planning which are evaluated below:
Zero based budgeting
A method in which base of zero value is taken while preparing the budgets as well as
financial plans is referred as zero based budgeting. Herein, any amount of last year like expenses,
incomes etc. are not carried forward in next year. When budgets are needed to formulate by
taking zero base then this method is applied in Hungry House.
Advantages:
 It is highly accurate as well as appropriate kind of method for preparing financial plans.
On the basis of this technique management easily able to meet targets and control over
the unproductive expenses (Sánchez-Rodríguez and Spraakman, 2012).
 On the basis of this stated tool, Hungry House able to boost up its efficiency in the
market. Once company become efficient then can enhance productivity which leads to
make it more financially sound in the food sector of UK. Zero based budgeting tool is supportive in order to establish effective coordination
among all the staff members as well as organisational functions which operate within
workplace.
Disadvantages:
 This particular method is highly time consuming which leads to decline efficiency of
managers and financial planners. Due to this, productivity of Hungry House will be
affected in an adverse direction.
 In order to prepare budget under this method, high manpower is needed which create cost
or financial burden on the business (Lukka and Vinnari, 2014). Further, profitability
position of next year will affect.
 Apart from this, highly skilled as well as qualified kind of employees required. Along
with this, for implementing budget formulated on the basis of this method imposes huge
costs on the enterprise.
Fixed budgeting
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Second method of making financial plan is fixed budgeting where the company fixed
some values of percentages. Considering to those values only the budgets are increased or
decreased every year. For instance: If sales and cost change with 10% and 7% then every year
this trend will be followed. In addition to this, for making such changes and prepare budgets,
base of last financial statements is taken into consideration by managers of Hungry House.
Benefits:
 For measuring performance of the company in each and every month this stated method
of budgeting is highly appropriate and beneficial for Hungry House. Herein, if negative
or higher level of performance not found then management easily able to take actions for
improving this in next year (Miriam, 2011).
 It is supportive planning tool for the company in terms of reducing costs and expenses sat
the end of financial year. If it has been seen that cost enhancing then through this kind of
technique it can be resolved properly. It helps to make changes in the budget statements according to limit or size of the
company. Further, this method work in order to survive the organisation i.e. Hungry
House in food sector.
Limitations:
 Key issue associated with this particular method or planning tool is that, it is not proper
and accurate kind of technique. The reason is that amount of costs and payments is not to
be calculated by managers in adequate direction. Therefore, appropriate decisions cannot
be made effectively by Hungry House.
 This stated method is not helpful for establishing a better level of coordination at the
working environment of selected enterprise (Chenhall and Moers, 2015). Along with this,
it does not consider facts and figures which make it sufficient.
 For applying fixed budgeting at the working environment more time is consumed which
directly create negative impact or efficiency as well as productivity.
Incremental budgeting
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According to this mentioned planning tool, budgets prepared on increasing trend where
any of the value not decline from the last accounting period. In this, costs or payments and sales
or receipts both enhanced as per the market and business conditions. Furthermore, expenses and
incomes are enhanced with low and high growth rate respectively.
Merits:
 Incremental budgeting is very simple as well as easy method where any employees
whether he or she is from financial background or not can understand. Apart from this,
application of this method at the working environment are also easy (Ahmad, 2013).
 It helps to make gradual change over the financial years by which Hungry House can
improve its financial position gradually. Major benefit of this tool is that, it not generates
any kind of losses in next fiscal period.
 Apart from this, incremental budgeting provides flexibility to the managers of Hungry
House for making financial plans as per their convenience. This thing highly supports to
company in order to prepares budgets properly.
 It is helpful planning tool in order to avoid conflicts from the workplace and create
effectual employee relations.
Demerits:
 Basic limitation of incremental budgeting is that, it not supportive for Hungry House in
order to generate incentives at the end of financial year. Issue behind this is that,
employees unable to come up new ideas and opinion because only managers make
budget of the enterprise (Klychova, Faskhutdinova and Sadrieva, 2014).
 Apart from this, data and information for preparing budgets are assumed on the basis of
market conditions and business performance of last years. If wrong assumptions are made
or economic conditions go down then Hungry House cannot achieve desired objectives.
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TASK 4
P5 Explaining and comparing methods of MA which are applied by management of Hungry
House for making solution of various financial problems
When business operates in the market then wide range of problems take place which are
mandatory to resolve. If issues are not solved then business procedure cannot run smoothly by
which performance hamper up to the higher extent. Herein, financial issues are discussed which
take place within Hungry House and affect smooth business process and performance both. The
obstacles related to financials are like reduce in net income, profit, sales revenue, return on
investment, increase in costs, decline efficiency of employees, productivity of organisation etc
(Laine, Paranko and Suomala, 2012). For making solution of such issues manager of Hungry
House uses various systems or methods of MA. The ways by which financial problems are
resolved are described below:
 Financial governance: Corporate governance regulates to the whole organisation where
for financial issues a framework established under this which is referred as financial
governance. It supports to Hungry House for assessing outcomes generated by the firm
by using wide range of financial resources. Apart from this, efficiency of workforce is
also evaluated against to utilisation of financial resources and costing. On the basis of
this, managers able to know that in which ways the firm performs in food industry. If
poor performance can be found then suitable actions or strategies applied at the
workplace. So that, causes behind occurring such conditions are to be resolved up to the
greater extent. Therefore, Hungry House easily able to boost performance and create
brand image in food sector of UK.
 Balanced scorecard: This is another method by which financial problems occurred are to
be resolved by Hungry House properly. This is majorly used for measuring and assessing
business performance and making changes accordingly. It consists of major four
perspectives or aspects which are such as financial, consumer, learning & growth and
internal business procedure (Wynn, Low and Nauta, 2013). For making solution of the
financial issues taken place in Hungry House first perspective of BSC considered. It
shows that up to which extent objectives related to this aspect achieved in front of
managers. Moreover, net income, cost, return on investment etc. terms are also easily
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determined by using past information. Moreover, causes behind declining performance
are also discussed at here by which Hungry House can easily manage and resolve
financial shortfalls.
 Variance analysis: At the end a method in which budgeted and estimated figures are
compared with each another is known as variance analysis. This tool clearly shows that in
which direction Hungry House performs and whether has capability for meeting financial
targets or not. During the procedure of comparison if manager of chosen food enterprise
unable to meet targets or budgeted data then poor performance will be discussed (Ward,
2012.). By applying this tool of MA, factors accountable behind declining performance
can be also identified easily as well as appropriately. Thus, effective kind of strategies
will be implemented and profitable solutions can be made up to the greater level.
CONCLUSION
It can be articulated from the above analysis that, management accounting is highly
significant part of every organisation where firm able to make plan of the financials and assess
that properly. It is supportive for determining business level and making wide range of effectual
business decisions of internal environment rather than external. There are various systems of MA
applied by Hungry House which involve cost accounting, job costing, stock management as well
as the price optimisation. Apart from this, some methods of MA reporting considered are such as
inventory, operation budget, job cost, manufacturing and then debtors or accounts receivables
ageing. Looking at the calculation part then it can be seen that, under the marginal and
absorption costing net income generated by Hungry House is worth of 4300 and 6600 GBP
respectively. Further, for controlling over the budgetary and meet targets of budgeted data some
effective planning tools are applied by the management. Further, such planning methods are like
fixed, incremental as well as zero based budgeting. Besides these all, in order to make an
appropriate and effectual solutions of financial problems some approaches of MA are
implemented at the workplace of food company. Such approaches include financial governance,
BSC, variance analysis as well as KPIs.
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