Requirement of Management Accounting Systems

Management Accounting

Table of Contents
Introduction......................................................................................................................................1
LO1..................................................................................................................................................1
LO2..................................................................................................................................................5
LO3..................................................................................................................................................8
LO4................................................................................................................................................12
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

Introduction
Management accounting also called managerial or cost accounting that help the manager to
analyse various operational activities. It helps in developing financial reports which further
required by the manager in order to take effective decisions and it also beneficial for the
investors who take their decision as per the financial position of the company (Baird, Schoch and
Chen, 2012). Management accounting help the organization to increase their operational
efficiency as well as effectiveness, which further increase the productivity or profitability. These
practices automatically generate more revenue for the organization. For the better understanding
of these concepts, this report choose the medium size company. Brightstar is UK based financial
services Provider Company that established in 2011. They provide various financial solutions to
their clients.
Naked wines in one of the client company of the Brightstar, which consult regarding their
financial solution. This report includes the various topics such as management accounting and
essential requirement of management accounting systems. It also includes the different types of
accounting reports, benefits of management accounting, costing techniques, advantage or
disadvantage of various planning tools that helps in controlling budget. In addition, it includes
that how organization solve their financial problems with the help accounting system or
reporting. Manager have to use appropriate way to resolve problems for the sustainable
development or success in the future.
LO1
Organizational overview: Naked wines is an independent wine maker company, it was founded
in 2008, and founder of the company is Rowan Gormley. UK based organisation provide their
products to the customers on wholesale price and situated in Norwich, United Kingdom. For
their internal operational activity, naked wines consult with the Brightstar Company that provide
the financial solutions (Naked wines, 2019).
Management accounting: It is the process of preparing management report, which help the
manager to develop accurate financial report. It further helps in building effective strategy for the
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future decisions that is beneficial for the organization. With the help of management accounting,
manager can efficiently take daily basis decision, which helps in formulating operational activity.
Manager of Naked Wines Company use the management accounting to enhance their internal
efficiency which is beneficial to develop their financial report by using various financial
information. Financial information useful for the stakeholders who take their decision regarding
further investment is totally based on the management report.
Management accounting system: It include various practices, which help the organisation to
maintain their operational activities. Manager try to manage their inventory level that help in
reducing waste along with product cost and it will further help in increasing organizational
efficiency or effectiveness. Manger of Naked wines use the different types of management
accounting system to enhance their operational functions, which increase productivity as well as
profitability.
Inventory management system: It is the system or software, which help the organization to
track their inventory level on regulation basis that helps in preventing shortage of material. If
company face the problem regarding shortage of raw material for the production then it will
negatively affect the manufacturing process (Barth and et.al. 2012). It automatically affect the
profit margin of the company. In Naked wines, manager use this management system to keep
track their stock level in the warehouse. It is essentially required to analyse their inventory level
because over stock cause the wastage that generate high product cost and low availability of
stock cause the shortage which affect the production.
Cost accounting system: It is also called costing system because with the help of this system
manager can identify each unit cost and further implementation helps in reducing and controlling
for the whole period of manufacturing. It is essentially required by the organization to reduce
their product cost that automatically generate the high profit. Manager of Naked wines company
use the cost accounting system for the analysis of their cost. With the help of this system,
organization reduce their product cost, which increase the productivity as well as profit margin.
It also help in maintaining same cost for the entire manufacturing process and try to reduce it.
2

Price optimization system: It is a mathematical analysis where organization introduce the
different range of price that satisfy the customers need and their willing to pay specific price for
the product. It also helps in measuring customer buying behaviour that is also very important to
analyse. It is required to identify their product price where customer is ready to pay. In the
Naked wines, manager use the price optimisation system to know that customer willingness to
pay for their products or it is important to meet with their objectives too. With the help of this,
company identify the customer behaviour, so manager build their strategy as per the market
demand and their pricing strategy. Price optimisation system helps in manger's decision-making
process, which provide high productivity or profitability and, in the future, helps in achieving
business goals & objectives (Basu, 2012).
Above mention system, help the Naked wines to increase their operational efficiency or
effectiveness, which further increase the productivity or profitability.
P2
Management accounting reporting: This report prepared after collecting all the financial
information that required producing various report. Accounting reports used to evaluate the
performance, planning, regulation and decision making process. It includes the various report,
which help the business to take further actions as per the requirements. These reports produce in
the financial year and manager will take decision according to it. There are various management
accounting reports that are used by the manager of Naked wines and some of it discussed below:
Performance report: This report prepare for the performance evaluation of organization as well
individual who work in company as an employee. It is used by the organization to measure their
employee’s performance, which helps in future to build strategy or take decision. Manager of
Naked wines use the performance report to measure performances of their employees as well as
whole business. With the help of this, they identify the progress or if they required any
improvement then done accordingly. It provide the deep analysis which help in developing
strategy to complete their organizational goals & objectives. Therefore, manager have to ensure
that, individual perform their task well in order to increase their productivity or profitability.
Performance report help the manager to provide incentives to the high performer employee that
motivate them to perform well in the future.
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Budget report: It is very critical report, which help the organization to measure the performance
of business as per the different department. Almost every company produce budget to understand
their internal functions, which provide clarity in their task. Budget include the estimated
expenses and revenue because of previous results and experience. Manager of Naked wines uses
budget report that include all the resources, which required the company to performing its task in
order to increase productivity or profitability. It further helps in achieving their business gaols &
objectives. With the help of budget report, organization spend money as per their budget which
further help in maintain each product cost which further helps in increasing their productivity as
well as profitability. It is beneficiary for the business to achieve their organizational goals &
objectives.
Accounts receivable report: This accounting report used by those organisation, which deals in
credit terms. Because it is not easy to remember all the creditors who buy products on credit, so
it is good method to record which help in measuring all the creditors. With the help of this report,
organization identify their defaulters and it will be used by small to large size organization. It
further helps in recovering their money from the creditors (Burritt and Schaltegger, 2014). In
Naked wines, manager use this report to know exact people who do not pay their pending
amount.
Above mention reports used by the manager of Naked wines in order to maintain their records,
which further helps in producing various strategy, which is required at the time of decision-
making process.
M1 Benefits of management accounting systems and their organizational applications
System Benefits
Inventory management
systems
 It helps in maintaining and controlling their inventory
level and keep track.
 It help the Naked wines to increase their efficiency as well
as productivity because it reduce the wastage.
Price optimization system  It help the manager of Naked wines to develop various
strategy regarding different price range which meet the
customers objectives.
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 It also help in measuring customer buying behaviour,
which further helps in formulating strategy.
Cost management system  With the help of this system, manager reduce the product
cost (Cooper, 2017).
 Reduce the cost and control in the manufacturing duration
that increase the productivity as well as profitability.
Nevertheless, Naked wines as an organisation perform various activities, which help the business
to run their operational activities in order to achieve business goals and objectives. Management
accounting system helps in enhancing their internal functions that increase the productivity.
Besides, inventory management system helps the organisation reduce the wastage and it will
directly affect the cost of per unit that is automatically reduce and increase the productivity or
profitability of the organization. Conversely, accounting report helps in analysing organisational
as well as individual performance. With the help of performance report, manager identify the
individual performance either is good or bad. If it is bad, then manager have to provide relevant
training to increase their efficiency or if it is good then offer various rewards & incentives.
Accounting system or reports both are linked with the organisational functions.
LO2
Absorption Costing: It is a costing method, which help the organization to evaluate their
product cost in the accounting period (Darabi, Moradi and Toomari, 2012). It include the
different types of cost such as materiel, labour and other manufacturing overheads that affect the
overall product of the organization. Here, Galway Plc sell single product in the market so they
have to calculate their product with the help of absorption costing method and it is calculated
below:
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Particulars May June
Selling Price 50 15000 25000
Less: Absorption Costs
Direct materials per unit 8 4000 3040
Direct labour per unit 5 2500 1900
Variable production overheads per unit 3 1500 1140
Fixed Production cost 10 3000 3800
Total 11000 9880
Less: Opening inventory - 5200
Add: Closing Inventory 5200 2080
Gross Profit 9200 17200
Less: Fixed Costs
Fixed selling expenses 4000 4000
Fixed admin expenses 2000 2000
Less: Sales commission 750 1250
Net Profit -550 6150
Marginal Costing: It includes those cost that charged as per the addition unit produced in the
organization. This costing method use the variable cost for the further decision which taken by
the manager to reduce their product cost which increase the productivity or profitability. Below
mention calculation, show the net profit with the help of marginal costing method:
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Particulars May June
Selling Price 50 15000 25000
Less: Marginal Costs
Direct materials per unit 8 2400 3040
Direct labour per unit 5 2500 1900
Variable production overheads per unit 3 1500 1140
Total 6400 6080
Less: Opening inventory - 3200
Add: Closing Inventory 3200 1280
Gross Profit 11800 17000
Less: Fixed Costs
Fixed selling expenses 4000 4000
Fixed admin expenses 2000 2000
Fixed Production cost 4000 4000
Less: Sales commission 750 1250
Net Profit 1050 5750
Using Average Cost Method:
Date Purchase Issues Inventory
Units Cost Total Units Cost Total Units Cost Total
01/05/19 40 3 120 40 3 120
12/05/19 20 3.6 72 20 3.6 72
60 192
15/05/19 36 3.2 115.2
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Average cost of
Inventory (1) 24 3.2 76.8
20/05/19 20 3.75 75 20 3.75 75
44 75
23/05/19 10 3.45 34.5
27/05/19 25 3.45 86.25
30/05/19 5 3.45 17.25
Total inventory:
Date Units Valuation Amount
15th May 36 20*3.6 = 72
16*3 = 48
120
23rd May 10 10*3.75 = 37.50 37.50
27th May 25 10*3.75 = 37.50
15*3.00 = 45
82.50
30th May 5 5*3 = 15 15
255
Cost of Issue 4*3 = 12 12
TOTAL 267
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M2
Management accounting includes the various technique, which help the organisation to produce
various financial documents. It further help the manager or external parties such as stakeholder
to develop strategy that is beneficial for the company to achieve their business gaols &
objectives. Accounting techniques help in preparing financial statement, so they required
financial information because of this accountant produce various information. Manager of Naked
wines record daily transaction that helps in preparing incomes statement and balance sheet of the
company, which shows the financial position of the company.
D2
With the help of financial report, stakeholders of the company analysis the financial performance
of the company, which affect investors, decision regarding investment. It also helps in
identifying financial position of the company weather it is in profit or in loss. If financial report
not available then it is impossible to understand or identify the actual condition of the business
activates (Hajjawi, 2012). Financial statement of the company includes various reports such as
profit and loss account, cash flow and balance sheet.
LO3
P4
Budget: Budget is an estimated plan of all operational and functional which are required for the
success of business objectives in a particular period. It covers estimation of revenues and
expenditures, which may take place in organization. This financial statement is prepared with the
help of previous information available regarding operations have already take place. Budget
represents evidence regarding financial condition hence it is used by the external stakeholders as
well as internal users.
Budgetary control: Budgetary control is the process of comparing budgeted estimates with
actual results. This process helps the organization in preparing the budget, making comparisons
and controlling costs and operations. It assists in co-ordinating different departments of the
organization.
Cash Budget: Cash budget is an estimated statement for cash related transactions, which may
take place in order to operate daily business activities for a specific period. It includes all
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operations related to cash inflow as well as cash outflow. All cash receipts, expenses paid,
repayment of loans, etc. are recorded in cash budget. Accuracy of cash budget is based on the
estimation of sales budget, purchase budget and capital budget (Harrison and Lock, 2017).
Naked Wines that is an online wine retailer company has so many cash transactions on daily
basis. The company can adopt the cash budget statement within its records:
Advantage:
 Cash budget helps to determine whether the organization managing sufficient cash for
operating daily transactions.
 It ensures that enough funds would retain in the organization and others are used for
productive activities.
 This budget helps the management to make better decisions regarding borrowings and
repayment of loans.
Cash budget has some inherent disadvantages with it that may not allow the selected
company to choose this statement. Some of these disadvantages are:
Disadvantage:
 Cash budget is based on estimates, which are not always correct.
 This budget does not include non-monetary transactions, which may be material
information for the organization.
 It bounds the organization in spending limits and eliminates the profits of credit
transactions (Jones, 2014).
Master Budget: Master budget is an overall summary of all subsidiary budgets. This budget
includes all major information about sales budget, purchase budget, cash budget, capital budget,
production budget, general expenses budget and other budgets. This budget is prepared after
preparing all other budgets. It provide information about all the departments working in the
organization in one go. Management of Naked Wines may include the master budget in its
accounting records because it can provide many advantages to the company, which are:
Advantage:
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 Master budget assist the management to make its planning and take decision regarding
specific period.
 It helps to allocate fairly funds among all the departments working for achieving business
goals.
 It is a strong document to make confident communication with external stakeholders.
Master budget is being resist by the management of Naked Wines because:
Disadvantage:
 It does not provide minor information about functional budgets.
 This budget is not easy to understand, expertise is necessary for reading the budget.
 It is difficult to moderate or update the master budget.
Zero Based Budget: Zero-based budgeting is an approach that estimate all the costs and
expenses according to their needs for upcoming specific time without considering previous data
and information. This method re-evaluate and defines requirement of particular expenditure in
future (Lapsley, 2012). Naked Wines can adopt this budget because most of the firms are in
favour of this approach. Reasons behind the adoption of this budget may be:
Advantage:
 This budget increases the accuracy and efficiency of the estimations.
 Zero based budget helps to eliminate the unproductive activities and cost from the
company.
 It develops better communication and co-ordination within the firm.
Although zero based budget is an effective and creative approach, yet it has some
disadvantage, which are:
Disadvantage:
 Zero based budget consumes a lot of time to be prepared.
 The organization and management has lack expertise to adopt this new budget structure.
Above mention budget
Above mention planning tools, Naked wines use the zero based budgeting to estimate all
the expenses and revenue which generate at the time of manufacturing products.
Balance scorecard: It is a strategic tool to measure the performance of the organization by
analysing health of different aspects. This method divides organizational health into different
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sections, majorly into finance, customer satisfaction, business process and learning and growth.
Consecutive performance of these four parts represents health of the organization (McManus,
2013).
M3
Planning tool also required the financial information to produce their forecasting budget.
Planning tool is very important for the organisation, which helps in providing alternative
solutions. Selected company Naked wines implement the different planning tool such as master
budget, zero based budget, cash flow and others. These accounting tool help Naked wines to
decide the direction to channel their resources concerning profit maximisation. These financial
information help management to develop forecasting budget that further helps the organisation to
increase productivity or profitability and in the future achieve all the business goals & objectives
(Shi, Zhang and Guo, 2014).
Furthermore, some planning tools for accounting such as cost accounting; financial planning;
Income Statement analysis; cash flow analysis and Standard costing. Besides, Marginal costing;
and budgetary control also enhance organisational planning and help the Naked wines to solve
financial problems that may lead the company to sustainability.
Financial planning:
It is the procedure of determining their task and develop strategy to achieve their goals &
objectives. Almost every organization prepared their financial plan after setting their vision,
mission or objectives of the company. Here, management include their current financial position
and future expectation regarding their investments or profit.
Income Statement analysis:
It is the comparison of profit & loss of the year from the previous year. With the help of
income statement, top management analyse financial position of the company and it can be better
or bad. This analysis done by the stakeholder to take their further decisions regarding investment.
Basically this analysis used by the manager to evaluate cost structure of the organization.
Cash flow analysis:
This analysis includes the inflow or outflow of cash which is very essential to identify.
This analysis will be done on specific time period where they compare opening and closing
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balance of cash deducting all cash receipt and expenses. It is used for the financial reporting
purpose which is beneficial for stakeholder for further analysis.
Standard costing:
It is an accounting system which is used by manufacturing company in order to analyse
or compare their cost such as variable or fixed. It helps in measuring actual cost of product that
occur and which management set for participial product. This analysis based on historical data
through time or motion study.
Marginal Costing:
It is a costing method which help the organization to calculate each unit cost where
variable cost charged as per the change in production units. In this costing, fixed cost will be
completely written off for the period.
Budgetary control:
It is a process of controlling their product cost in order to maximise the profit margin and
it is used by the manager to set their financial and performance goals. With the help of this,
manager compare their expenses and revenues. It further helps in developing strategy and take
effective decisions.
LO4
P5
Naked wines face the various financial problems, which affect the business in terms of
profitability. So manager use the different techniques to resolve financial problems and it is
discussed below:
Financial problems: It is related to the money where organization face the shortage of finance
due to some reasons, which also affect the productivity or profitability. In the Naked wines,
manager also face some financial issues, which affect the business and reduce the profit margin
and it will be discussed below:
Over expenses: Company face the issue regarding over expense in the organisation, which
reduce the profit margin of the company. Therefore, manager have to take extra care and build
strategy to reduce their over expenses (Siraj, 2012).
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High product cost: In the organization, due to waste of raw material at the time of
manufacturing product increase the product cost which reduce the profit margin of the company.
Techniques of solving financial problems:
Key performance indicator: KPI is a tool to trace and measure the performance of factors in
order to achieve the main objective of the organization. It focuses on the factors or matters that
are deemed crucial by the upper management.
Benchmarking: Benchmarking is the technique related to setting rules, guidelines or
measurements by analysing outside factors' strategies and performance level. Benchmarking
helps the organization to improve its performance by comparing itself with other companies
working in the same industry and situations (Sunarni, 2015).
Financial Governance: Financial governance is a technique of collecting, recording, classifying,
analysing, managing and controlling the financial information’s in relation to achieve the
business goals. Financial governance process helps in maintaining quality and controlling
conflicts and misappropriations regarding finance. It includes internal controls, tax policies, data
validation and security, audits, etc.
Basis Naked wines Airdrie
Financial problem Company face the issue
regarding over expenses at the
time of producing products. It
will further reduce the margin
cost (Tulloch, Chadès and
Possingham, 2013).
Airdri face the issue regarding
high product cost. It will occur
due to wastage of inventory at
the time of manufacturing.
Management accounting
system
To solve this financial
problem, company use the cost
management system. With the
help of this, they reduce the
non-profitable activities, which
occur the cost but not provide
Organization use the inventory
management system to reduce
wastage, which occur at the
time manufacturing goods.
This system help the manager
to keep track their inventory
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any monetary benefits. After
reducing their extra expenses,
each unit cost of product will
be reduced which provide high
profit margin.
level, which reduce the
chances of shortage or over
ordering of material. It will
increase the efficiency or
effectiveness of the
organization. Which further
helps in achieving business
goals & objectives.
Below mention calculation, represent the LIFO method, which is used for the inventory
management:
Using
LIFO
Date Purchase Issues Inventory
Units Cost Total Units Cost Total Units Cost Total
01/05/19 40 3 120 40 3 120
12/05/19 20 3.6 72 20 3.6 72
12/05/19 60 192
15/05/19 36 3.6 129.6 24 3.6 86.4
20/05/19 20 3.75 75 20 3.75 75
20/05/19 44 161.4
23/05/19 10 3.75 37.5 34 3.75 127.5
27/05/19 25 3.75 93.75 9 3.75 33.75
30/05/19 5 3.75 18.75 4 3.75 15
15

Using Average
Cost Method
Date Purchase Issues Inventory
Units Cost Total Units Cost Total Units Cost Total
01/05/19 40 3 120 40 3 120
12/05/19 20 3.6 72 20 3.6 72
60 192
15/05/19 36 3.2 115.2
Average cost of
Inventory (1) 24 3.2 76.8
20/05/19 20 3.75 75 20 3.75 75
44 75
23/05/19 10 3.45 34.5
27/05/19 25 3.45 86.25
30/05/19 5 3.45 17.25
Average cost of
Inventory (2) 4 3.45 13.8
Average cost of
inventory (1)
3.2 (40*3 =
120 +
16

20*3.6 =
72) /
(40+20)
Average cost of
inventory (2) 3.45
(24*3.2
= 76.8 +
20*3.75
= 75) /
(20+24)
M4
Management accounting help the organisation to resolve their operational or financial issues that
affect the productivity and profitability. For the successful outcomes, Naked wines have to
follow systematic process with the help of various techniques. It help the business to overcome
from their financial problems because accounting tools increase the efficiency which further
provide profitability (Van der Stede, 2016). With the help of management accounting,
organization resolve their financial issues because it helps in sustainable development, which
provide success in the future.
D3
Planning tools help the organisation to resolve financial issues and it plays very critical role.
Naked wines use the various tool such as master budget, zero based budget that help the manager
to produce some budgets that further increase the efficiency or effectiveness of the organization.
Company use the zero based budgeting to control their expenses, which helps in reducing cost,
and it will automatically increase the productivity or profit margin. These budget help in solving
financial problems and it further used to achieve their business goals & objectives.
CONCLUSION
From the above discussion, it has been concluded that management accounting help the business
to increase their efficiency or effectiveness that further maximise the profitability of the
company. Accounting system such as inventory or cost management help in reducing cost of
17

product, which maximise the profit and further increase the demand. In addition, with the help of
planning tools and accounting techniques organization solve their financial problems, which
affect the operational activities.
18