INTRODUCTION Management accounting is a technique which is used by managers in most of the business entities for the purpose of determining the ability of company to reach all its predetermined goals. In order to perform all the operational activities appropriately, it is very important for all the enterprises to conduct it every year so that internal information could be gathered to form decision for future (Abernethy and Wallis, 2018). The organisation which is selected for this project is KPMG which is one of the leading accountancy firm in the world and delivering services to different clients such as Excite Entertainment Ltd. It is running its operations in leisure and entertainment industry.This report contains the subject the management accounting systems, reporting methods, formulation of income statement by applying marginal and absorption technique of costing it is tried to execute the importance of costing techniques. Role of financial governance and benchmarking in management accounting is correlated to respond financial problems effectively. TASK 1 P1 MA systems and the requirements of various type of MA systems Management accounting:In most of the business entities a technique is used for the purpose of analysing, controlling and monitoring effectiveness of operations which is known as management accounting. In Excite Entertainment Ltd., managers are focusing on it as it helps them to determine that the efforts which are made by them are benefiting the business or not. It is considered by them in decision making as with the help of it, actual information about performance of company could be gathered. Financial accounting:It is one of the recording structure that is used by large as well as small companies to form final accounts so that actual financial status of business could be determined.InExciteEntertainmentLtd.,accountingprofessionalsarefocusingonthe formulation of financial statements so that they can analyse that whether operations are resulting in profit or losses (Alawattage, Wickramasinghe and Uddin, 2017). Difference between management and financial accounting: BasisManagement accountingFinancial accounting FormatThere is no specific format to prepareInordertoformulateallthefinal 1
allthereportswhicharegenerated under management accounting. accounts which are formed in financial accountinghaveaspecificformatin which all the accounts are required to be generated. Compulsio nand auditing Foralltheorganisationsitisnot necessary to conduct it every year as there is no requirement of auditing for management reports. For all the companies, it is compulsory to conduct financial accounting every year as auditing is very important for final accounts. Cost accounting systems:It can be defined as a system which is mainly used by companies for the purpose of determining actual cost which is faced by them while executing operational activities. In Excite Entertainment Ltd., managers are using it for the purpose of finding causes of all the expenses which are taking place due to operations. It is essentially required for the enterprise as it can guide the managers to determine the factors which are resulting in higher cost. There are two types of it which are as follows: Direct costs:All the expenses which are directly related to business activities are known as the part of such costs. In Excite Entertainment Ltd., managers face such costs while promoting the concerts and festivals all around UK. Standard costing:It is a costing technique which is used in most of the business entities such as Excite Entertainment Ltd in order to gather information regarding the factors which are resulting in variation between standard and actual cost. Job costing systems:This system is mainly used in large organisations in order to segregate all the expenses which are resulting from different jobs. In Excite Entertainment Ltd., managers are using this system for the purpose of keeping track record of all the jobs which are performed according to specification of clients. It is very important for the organisation as it can help to segregate different expenses according to the customers. Inventory management systems:this system is recognised by entities to manage all the goods which are used subject to conduct operations effectively. In Excite Entertainment Ltd it is used by managers to maintain record of all the inventories in which is being used by employees to provide leisure to the clients (Anderson and Dekker, 2014). There are three different types of it which are as follows: 2
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Last in First Out (LIFO):In last in first out inventory management system currently bought goods are used to deliver the services firstly. AVCO:It is a method that is utilised by organisation to set the price of products and services on the basis of average cost. FIFO:In first in first out inventory management system earlier bought goods are used by managers to deliver all the leisure and entertainment services to clients. From all the above described systems managers in Excite Entertainment Ltd are using FIFO method as it helps to utilise all the resources properly. It is essentially required for the company as with the help of it inventory could be managed properly. P2 Diverse methods of management reporting methods Management accounting reporting:It is the process of forming management reports which is followed by all the companies in order to analyse actual performance of business. In Excite Entertainment Ltd., managers are formulating four different kinds of reports in order to keep detailed information of business. All of them are described below in detail: Account receivable report:It is the document that includes covers in-depth material subject to theunpaid amount which was not paid by clients at the time of purchase. Managers in Excite Entertainment Ltd., are creating this report in order to analyse the amount which is owed by customers. It is very beneficial for the organisation as it helps to analyse total outstanding which will be received by the company in upcoming period (Fallan and Opstad, 2014). Inventorymanagementreport:Itisthepaperthatcontainsignificantdataof inventories that are used by companies to perform all the executional and operational activities. In Excite Entertainment Ltd managers are formulating the objectives of business.the company is having sufficient inventory to deliver leisure and entertainment services to customers. It is advantageous for the enterprise as with the help of it stock could be ordered by the managers on time before the crisis related to shortage of them take place. Performance report:In all the organisations, such reports are generated to analyse that all the staff members and business is performing well of not. Managers of Excite Entertainment Ltd. are also formulating it to track that employees are making their best efforts to contribute in the attainment of organisational goals. It provides various benefits to business which includes facilitation in providing bonuses to employees, formulating decisions for future etc. 3
M1 Benefits of management accounting systems and their application Management accounting systemsBenefits and application Cost accounting systemCost accounting system is used by managers of Excite Entertainment Ltd because it helps them to be aware of all theexpenseswhicharetakingplacewithinthe organisation. Inventory management systemItisappliedwithinExciteEntertainmentLtdby management as it helps to keep track record of inventory which is used to perform operational activities. Job costing systemInExciteEntertainmentLtdmanagersimplementthis systeminordertoidentifycostsofdifferentjobs separately. D1 Critical evaluation of the way in which management accounting systems and reporting is integrated within organisational process In Excite Entertainment Ltd., managers are concerned with enhanced performance of the organisation for this purpose, different systems and reports are used by them which are related to management accounting. Main purpose of all of them is to provide detailed information regarding performance and operational efficiency of business. For example, cost accounting system is used by managers to segregate different expenses which are resulting from operations. On the other hand, managers are formulating management reports such as performance report. With the help of it, actual status of the company and efforts which are made by employees are assessed. TASK 2 P3 Calculation of cost using marginal and absorption costing Absorption costing: The technique is used in cost accounting for the purpose of determining the cost of absorption is known as this method. In Excite Entertainment Ltd., managers use it for the purpose of finding the best method to form the income statement so that actual information regarding business could be gathered. 4
Limitations:One of the biggest limitation of this technique is the difficulty which is faced by analysers while comparing the results as all the expenses are taken in to consideration while using it to calculate profit (Feng and Ho, 2016). Benefits:It guides managers through out the way in which they can formulate strategies to increase operating income for the company for a specific period of time. Marginal costing:This technique is used in management accounting to find the cost which gets changes when the units in total production is modified by top managers. While using this method, managers in Excite Entertainment Ltd write off all the fixed costs. Limitation:There is high level of difficulty which is faced by analysers while classifying costs in this costing as all the costs are variable in long run. Benefits:As this method is very easy to understand so it can help the managers to formulate the strategies as soon as possible so that business can attain growth. M2 Accurate application of range of management accounting techniques There are various types of management accounting techniques which could be used by Excite Entertainment Ltd. All of them are described below: 5
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Standard costing:In this, costing technique difference between actual and budgeted figures are analysed. It helps managers to find the causes of which are affecting the current situation of business and the forecasted position of the company. Historical costing:According to this costing technique, all the figures in balance sheet and other financial statements should be recorded on actual amount rather than the book value. With the help of it, actual position of business could be determined. D2 Accurate application and interpretation of data for a range of business activities Financial report showing results of profits for September 2019 ParticularsAmount Marginal costing method69000 Absorption costing method35000 From the incomes statements which are formed for Excite Entertainment Ltd. it has been determined that marginal costing is resulting in profits of 69000 and absorption method is reflecting the net income of 35000. The main cause of the difference is ignorance of fixed cost in marginalcosting.Byanalysingthecurrentsituation,ithasbeenrecommendedtothe organisation to use the first method which is showing net profit of 69000. TASK 3 P4 Different planning tools used in budgetary control BudgetaryControl:Budgetsarestatementsthatinvolvesestimationsaboutthe expenditures or gains which are framed after analysing objectives of company. Methods that are optedbyanentityforcontrollingfinancialperformancethroughpreparingadditionto implementing distinct budgets is said to budgetary control. Finance department of Excite Entertainment Ltd prepares various budgets and determine results through budgetary control mechanisms in which they compares actual performances with the estimates. With this, they are able to find discrepancies together with takes remedial actions at specified time (Giacomini, Sicilia and Steccolini, 2016). Different planning tools: 6
Zero based budget:One of the budgeting tool wherein all transactions are justified for beginning of new accounting period. Budget manager of Excite Entertainment Ltd. uses the budget through scratching all expenses to zero every time in order to justify money spent as per business goals. Advantages:Zero based budget creates opportunities for managers of respective firm as it helps in capitalising resources on inefficiencies addition to finding innovations for reducing costs (Hertati and Sumantri, 2016). Disadvantages: Preparation of the budget at enterprise consumes more time as the procedure of preparation involves new aspects in each cycle that takes more duration in evaluating activities for making estimations. Cash budget: Another planning tool where in expected cash receipts together with cash disbursements are recorded for accounting period. With this budget, Excite Entertainment Ltd managers gets complete information about cash status so that further critical decisions in context to creating reserves and usages in prudent manner are framed. In addition, cash budget is also used while prioritizing payments and analysing variances in outflow or inflows of cash (Jinga and DUMITRU, 2015). Advantages: Cash budget benefits the entity in avoiding any debt circumstances that further results in getting true results about current cash at workplace (Benefits of Cash budget. 2019).Withcashbudget,managersdevisesrealisticpredictionsandanalysesfinancial statements so to look into expenditures that are made in the period. Disadvantages: No credit transaction are transcribed in cash budget that fails in providing accurate position of company. It also specify the limits the areas of spendings that resulting in preventing opportunities to make future investments by company. Master budget: One of the central planning tool that comprises interrelated financial programmes addition to budgets so to attain strategic business goals. It primarily documents production levels, future expenses incurred, expected future sales, capital investments, purchases as well as other loads that are to be repaid addition to acquired. At Excite Entertainment Ltd, managers with the help of master budget frames rough guidelines about near term expectations. Advantages: Master budget benefits the business owners in identifying problems by reviewing other departmental budgets in order to plan ahead. It provides summary of other 7
budgets due to which businessman analyses total earnings and nature of occurred expenses as whole. Disadvantages: Master budget usually takes more time in updation and not easy to alter easily due to involvement of lengthy descriptions together with charts. With master budget, managers fails to consider new growth opportunities for company (Kihn and Näsi, 2017). From the all, cash budget and master budget are only opted by Excite Entertainment Ltd managersthathelpsthemtoaccurateestimationsaboutcashpositionandevaluating departmental performances promptly. Comparison between master, zero and cash budget Basis of comparisonCash budgetZero budgetMaster budget MeaningCash budget is defined asplanincluding expectedcash amountsregarding receipts and expenses. Zero budget is said to planinwhichallthe expensesarejustified and begins as zero base. Masterbudgetis termedtoplan involvingother budgetsthatare preparedatdifferent departmentswithin organization. Main objectiveTheobjectivebehind using cash budget at ExciteEntertainment Ltd is to get fair idea aboutidlecash position and available cashtomeet obligations (Nimtrakoonand Tayles, 2015). Zerobasedbudget catersobjectiveof reducingunnecessary and required expenses. Masterbudgetis preparedwiththe objective to set rough guidelinestoattain future expectations. Master budget, zero based budget and cash budget have similarity that these all are used as effective planning tools and aids in future financial planning of Excite Entertainment Ltd. 8
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With these budgets, managers set short term addition to long term objectives, analyses deviations in set and actual outcomes and devise strategies for improvements (Papazov and Mihaylova, 2015). M3. use of different planning tools and their application for preparing and forecasting budgets Planning tools are generally used to frame strategies for upcoming durations. All entities uses planning tools including cash budget, master budget addition to zero based budget so to estimate revenues with expenses. In context to Excite Entertainment Ltd, managers follows cash budget in order to ascertain cash position to meet cash requirements. In order to prepare as well as forecast budgets, master budget is applied via budgetary control mechanisms so to achieve set targets in limited duration. TASK 4 P5. Compare how organisations are adapting management accounting systems to respond to financial problems. Financial issue – This can be defined as those problems which are associated with lack of financial sources to complete various activities and operations. It is one of the crucial issue for companies because in the absence of proper financial resources companies can not exist in the competitive environment (Revellino and Mouritsen, 2015). There are vital range of financial issues and some of them are mentioned below that are as follows : Lower profit or revenues - It is a kind of financial issue that occurs to companies due to frequent decreasing in activities which are revenue generating. In this kind of financial issue, organisations face the problem of lack of liquidity because if profits will be lower then companies will not be able to get enough amount of cash. The main reason of occurring this financial issue is increased in amount of expenses. Such as the above respective company, Excite limited is facing this financial issue which is becoming a main cause of their lower performance (Richardson, 2015). Decreasing in sales – Another financial issue that is majorly faced by companies is decreasing in sales and output. There can be many cause of decreasing in sales of businesses.Duetothisfinancialissue,businessescannotexistincompetitive environment because they do not have enough amount of fund in order to prepare plans and strategies (Schaltegger,Burritt and Petersen, 2017). 9
Financial governance- This technique act as monitoring strategy for companies in the aspect of solving financial issues. It has been defined as a kind of method which collects and manageallfinancialtransactionofcompaniesinasystematicmanner.Inthecase,if organisations face any kind of financial issue then in the process of resolving this plays a significant role. Methods for deducting financial issues: Ratio analysis – It can be defined as a kind of method which is linked with calculation of different types of ratios in order to define exact financial issue. Such as the above Excite limited company is using this technique to find the cause of exact financial issue. They computes ratios like profitability ratio and by help of it exact issue is find out (Seal and Mattimoe, 2014). KPI – This is named as key performance indicator in which activities are identified on the basis of their profitability and cost level. Due to this activities which are resulting in higher cost as compare to standard cost are highlighted and termed as cause of financial issue. On the basis of it companies make futuristic plans and strategies. Comparison of organisations : Basis of comparison Excite limited companyPC clothing limited company Financial issue Thefinancialissueofaboveexcite limited company is decreasing in level ofprofit.Duetothistheirfund reserves are decreasing in order to pay debts and performing activities. This company's financial issue is of decreasing in sales. Due to this their competitive existence is getting weak as well as funds are decreasing. TechniqueThey are using ratio analysis technique for finding exact financial issue. By help of it they calculated net profit margin ratio that guided them to know exact financial problem. This company is using KPI technique for finding and making plan to solve theissue.Byusingthistheyare focusing on those activities which are resulting in higher cost. 10
MASThis company is using cost accounting techniquetosortoutthefinancial issue.Thereasonforapplyingthis system is that because by use of it companiescanawareaboutactual expenditures and can minimise those which are above set target. The above company is getting benefit from this systemto focus on minimisation of expenditures and increasing in profits. They are applying price optimisation systeminordertosolvefinancial problem. By help of this system they revised their pricing structure and set thepricesatalevelwhichcanbe acceptablebycustomers.Thustheir sales increased and problem of lack of salessortedwithease(Vasarhelyi, Kogan and Tuttle, 2015). Calculations: Calculation of contribution: ParticularsAmount Selling price per unit40 Less: variable cost per unit-10 Contribution per unit30 BEP in units: =Fixed cost /contribution per unit = 120000/30 = 4000 units BEP to attain desired profit =fixed cost+desired profit/ contribution per unit = 180000/30 = 6000 units Profit at sales of 4000 units 11
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Profit at sales of 6000 units M4. Role of management accounting in responding to financial problems Businessentitiesfacesuncountablefinancialproblemswhileexecutingsuccessful operations. Such as Excite Entertainment Ltd., goes through financials issues including lower revenues as well as decrease in sales. For resolving such problems, adoption of distinct accounting systems are proved beneficial as these systems have capability to understand the issues and solve them promptly. Use of benchmarking, KPI addition to financial governance results in framing effective solutions and implementing them at correct duration will help the institution in achieving sustainable success. D3 Use of planning tools to respond financial problems When planning tools are adequately implemented then proper budget are prepared that further results in resolving any sort of financial issue. Planning tools involves budget and controlling methods such as cash budget, master budget and zero based budget that predicts future uncertain situations and at same time provide effective solution to overcome from the problems that benefits the entity in leading towards sustainable success. CONCLUSION From the presented report, itcan be summarised that management accounting plays significant function to provide financial information to top managing authorities such that critical decisions are framed for business growth. Management accounting system is combination of distinct systems such as inventory management system, cost accounting system as well as job costing system that helps in preparing accounting reports like performance reports, inventory management report and account receivable reports in systematic together with understandable format. Further, cost analysis techniques such as marginal and absorption were used in preparing financial statements. Planning tools that organisations uses in budgetary control are cash, master 12
and zero based budget which plays role in adequately estimating future revenues with expenses. Financial problems that business concerns faces are decreasing in sales addition to lower profit margins and to resolve them effective approaches of KPI and benchmarking are preferred that further helps in sustainable success in competitive world. 13
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