Management Accounting and Performance Management

This assignment provides a comprehensive analysis of management accounting systems, their application in manufacturing industries, and the use of planning tools such as zero-based budgeting, ratio analysis, and variance analysis. It also discusses the importance of performance management and how it can be measured using Key Performance Indicators (KPIs) and benchmarking.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P1 Explaining management accounting and essential requirements of types of systems...........1
P2 Explaining methods and techniques for management accounting reporting.........................2
M1 Evaluating benefits of systems with organizational context................................................4
P4 Explaining advantages and disadvantages of types of planning tools on basis of budgetary
control.........................................................................................................................................5
M3 Analysing use of planning tools and application to forecast and prepare budgets...............7
P5 Evaluating how business are adapting accounting system for responding financial
problems......................................................................................................................................8
M4 Analysing that while responding financial problems, management accounting lead
business for sustainable success..................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is known as process to determine, analyse, tracing and reflecting
financial information which could be used internally through manager for purpose of planning,
decision making, planning and operational control. The present report will demonstrate
understanding of management accounting with their essential requirements and types. Similarly,
this would explain different methods of managerial accounting reports along with advantages
and disadvantages of planning tools with context to budgetary control. In the same series, there
will be analysis of these planning tools with application to forecast and prepare budgets. This
report would compare ways where organization could imply management accounting for
responding the financial issues. On basis of this report, each aspect would be described by
considering Sollatek (UK) as its line of business includes manufacturing of miscellaneous
fabricated products as comprised in industrial sector of manufactured goods.
P1 Explaining management accounting and essential requirements of types of systems
As per CIMA, management accounting is known as process of measurement,
identification, analysis, accumulation, preparation, communication and interpretation of
information used through management for planning, controlling and evaluating within business
and assuring appropriate application of accountability with context to resources (Cooper,
Ezzamel and Qu, 2017). The functions of management accounting with context to Sollatek (UK)
is formulation of financial strategies with application of sales forecast, job costing techniques,
budgets within managerial accounting tools. This would lead to elaborate financial consequences
of decisions as if senior leaders adjust capital structure of company, then with this help
ramifications related to financing of debt or equity.
Simultaneously it helps in monitoring expenses as with formation of static, flexible or
rolling budget with various other types, helps leader and head of the department for monitoring
expenses. The major function is to maintain profitability as there is presence of various tools for
keeping business profitable along with performing break even analysis.
Financial accounting lays special emphasis to prepare information with context to
external parties like public regulators, stakeholders and lenders. However, Management
accounting considers financial information of company along with developing reports for
confidential and internal use through managers for decision making and determining methods to
run company in efficient aspect.
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Significance of management accounting to integrate with organizations such as Sollatek
(UK) is stated below:
 This leads to measure actual performance comparatively with budgets.
 The activities of business are better managed through application both planning and
budgeting.
 This helps management in such aspect that latter could maximise rate of return on capital
employed.
 The businesses efficiency is increased and improves relation among labour and
management as well.
The types of management accounting system are detailed below: Cost accounting system: It is replicated as type of accounting system which evaluated
that how organization is doing and offers help to managers make decision on basis of cost
to do business. This approach is applicable to each kind of business as it trading or
manufacture products or delivering services. In simple words, this system is used through
manufacturers for tracing activities of production with application of perpetual inventory
system (Nitzl, 2018). This accounting system is framed especially for manufacturers
which traces inventory flow on continual aspect via different production stages.
 Job Costing system: This system is distinctive method costing as form of particular order
costing which is directly adopted for executing work strictly as per specification of
customer. The process of production is highly dependent on number of orders received
through customers as production is not intermittent and standardised in nature. In simple
words, it is process to assign cost which incur a particular job to individual of business
involved with. It is referred as cost allocation to company's construction projects as it is
broadly used in construction industry.
P2 Explaining methods and techniques for management accounting reporting
Managerial accounting implies accounts for planning and budgeting objective to measure
company's performance. In this aspect, it considers creation of capital budget which states
investments and expenses that might undertake in the future. Similarly, other concept is
projected decision making as managers uses managerial accounting reports like accounts
receivable ageing report for tracing benefits of underlying receivables with their time duration. It
helps for long term decision making for multiple companies. Moreover, performance
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measurement is used for purpose of comparing actual outcome of operations with forecast made
in phase of planning and budgeting. The types of managerial accounting reports are stated below:
Accounts Receivable Aging report: This is replicated as critical tool for managing
business. The most factoring organizations request for these reports as contribution of
application package because it shows the best idea of portfolio of receivables. This lists gathers
all unpaid customer invoices along with unused credit memos through data ranges. This report is
useful because it gives snapshot of outstanding money and due by customers as clear sign on
underlying issue. However, slow payments does not indicate financial issues, it shows possible
misunderstanding or dispute. It has been observed that various organizations uses this report
when planning of collections calls and trying to predict their cash flow.
The aging report is used as particular tool to estimate potential bad debts, is used for
revising allowance for doubtful accounts. The usual method for performing to derive historical
percentage in every range that become a bad debt with application of percentage to total of
columns in recent aging report (Azudin and Mansor, 2018). This types of report is crucial for
business that offers credit to its customers. It gives overview of balance of credit as per age,
which includes different categories for items which are 30, 60 and 90 days late. This could help
for adjusting credit policies for aligning with repayment capabilities of consumers.
Budget report: It is an internal report which is used through management for comparing
estimated projections of budget with actual performance number attained during a period. In
simple words, budget report is designed for comparing that how close budgeted performance was
with actual performance of accounting period. Moreover, budgets are on basis of financial
objective with estimate along with future projections, they are often inaccurate and could differ
on large basis through company's actual financial performance. In accounting period, managers
often compare budgeted numbers that were prepared at initial stage of period of incur of actual
number. It serves for two objective as could correct problems occurring business for inlining
performance with financial objectives in budget. Secondly for evaluating how accurate and
realistic were predictions.
Job cost reports: This report reflects expense for particular project as usually matched
with estimate of revenue so Sollatek (UK) could evaluate profitability of job. It helps for
determining areas of higher earning of businesses so company could lay efforts there rather than
wasting time and money on jobs with less profit margin. These reports are also used for purpose
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of analysing expenses as project is in progress so managers could correct answers of waste prior
to cost escalate (Accounting reports, 2017).
M1 Evaluating benefits of systems with organizational context
Cost accounting system
Advantages
The cost accounting system would provide benefit to Sollatek (UK) with its application is
stated below:
 This would lead to substitute wastes, loss and inefficiencies through fixing standard for
every aspect.
 The innovative and improved method of production are appropriately followed with
reference to cost accounting system and lead to reduction in cost. It extracts reasons for increment or decrement in profit margin, so management could
undertake remedial action for maintaining profitability of concern. There is absence of
possibility for shutting any process or product or department.
Disadvantages
In order to cost accounting, which has also presence of downside with context to Sollatek
(UK) are stated below:
 The cost of past year is not similar in succeeding year whereas data related to cost is not
useful. With context to cost accounting, cost are absorbed pertaining to pre-determined rate
which leads to under and over absorption of overheads.
Job costing system
Advantages
The Sollatek (UK) would adapt this system which would provide benefit are stated
below:
 The cost might be earned with every job is known as job costing.
 Management could directly estimate cost of job with reference to previous records.
 This is suitable for cost plus contracts and facilitates pricing of every job. There is absence of under or over recovery of overheads.
Disadvantages
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 This system is very expensive as absence of standardization in job costing. Although,
there is requirement of close supervision.
 During inflation, comparison of job cost is use less .
 There is absence of possibilities of corrective action, in case actual margin is lower
comparatively estimated job costing (Nishimura, 2019).
 The price of job is fixed with reference to market condition but not related to past
records.
P4 Explaining advantages and disadvantages of types of planning tools on basis of budgetary
control
Budget is known estimation of expenses and revenue over given future period of time as
this is re-evaluated and compiled on periodic aspect. Budgetary control is a system of
management control where spending and actual income are compared with planned income and
spending ,so it is monitored that plan is being followed and if with need to be altered in order to
make profit margin. The types of planning tools are stated below with their merits and demerits:
Ratio analysis: It is referred to analysis and interpretation of figures reflecting in
financial statements such as profit and loss and balance sheet etc.
Advantages
 The trend related to cost, profits, sales or other facts could be known through calculating
ratios of accounting figures of last few years. It would be help of ratios which might b
important to plan or predict business activities of the future.
 This would lead to indication of overall profitability as management is highly concerned
with this aspect along with capability to attain both long and short term obligations to its
creditors for ensuring reasonable return to its owners and securing optimum utilisation of
firm's assets. It acts as aid to decision making such as supply of goods on credit of business or bank
loans would be made available and many more financial decisions.
Disadvantages
 This tool is associated with only quantitative analysis whereas qualitative factors are
avoided.
 On basis of ideal ratios, no fixed standards could be laid down.
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 The financial statements offers historical information as it does not show current
conditions so it does not make sense for forecasting future.
Variance analysis: This term is used to identify areas where usually cost overrun and
determines that standard cost is established is reasonable.
Advantages
 It helps in controlling cost.
 The variances could be categorised as controllable and uncontrollable variances so , in
this aspect, controllable variances are used for consideration of further action.
 The sub-division of this analysis directly discloses the relationship among other variances
(Variance Analysis, 2016). This creates cost consciousness in minds of each employee of business entity.
Disadvantages
 It is on basis of financial outcome whose release is on later perspective.
 The exercise of budgeting might be performed loosely which is bound for deviating
through actual number.
Zero based budget: There is less possibility of error because it allows business to initiate
with zero for each item with consideration of proper factors.
Advantages
 It leads to accuracy as against daily methods of budgeting involves to make arbitrary
changes to budget or past year.
 It helps for efficient allocation of resources and does not observe historical numbers
instead of actual numbers. Improvise communication and coordination within department and motivates employee
through engaging hem in decision making.
Disadvantages
 There is requirement of high manpower as many departments does not have adequate
time and human resource.
 There is lack of expertise as this budgeting objective to show true expenses incurred
through state or department (Zero Based Budgeting, 2018).
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M3 Analysing use of planning tools and application to forecast and prepare budgets
Ratio analysis is planning tool which could be used for controlling budget of Sollatek
(UK) as it interprets financial statements along with data which is essential for its stakeholders.
Each business ensures that some assets are liquid or in case need of cash on immediate aspect.
So, in this context, business's liquidity is measured through ratio which are current and quick
ratio (Bedford and Speklé, 2018). It helps to maintain required level of solvency for short term
perspective. In the similar aspect, variance analysis used for managing the yearly budgets
through monitoring the budgeted amount and compared through actual cost or revenue.
Moreover, on basis of forecasting implies patterns of previous data to develop theory related to
future performance of business. Simultaneously, on basis of zero based budgeting where each
expense is justified for new period and this initiates with each function within Sollatek (UK) is
analysed for its costs and needs.
Particulars Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Cash inflows
Opening inflow of
cash 4500 6925 9894
1295
6
1611
3
1936
5
2271
2
2615
5
2969
3
3332
8
3705
9
4088
6
Total sales
revenue 9500 9690 9883
1008
1
1028
3
1048
9
1069
8
1091
2
1113
1
1135
3
1158
0
1181
2
Other income 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Total cash
inflows
1550
0
1811
5
2127
7
2453
7
2789
6
3135
4
3491
1
3856
7
4232
4
4618
1
5013
9
5419
8
Cash outflows
Direct material 1875 1454 1483 1512 1542 1573 1605 1637 1670 1703 1737 1772
Direct labour 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Other expenses 1700 1768 1839 1912 1989 2068 2151 2237 2327 2420 2516 2617
Cost of
administration 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500
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Total cash
outflows 8575 8222 8321 8424 8531 8642 8756 8874 8996 9123 9253 9389
Cash deficit /
surplus or closing
cash balance 6925 9893
1295
6
1611
3
1936
5
2271
2
2615
4
2969
3
3332
8
3705
9
4088
6
4480
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P5 Evaluating how business are adapting accounting system for responding financial problems
While evaluating business adapting management accounting system there is
consideration of Sollatek (UK) and its rival Alfatronix as both are UK based company. With
context of employees Alfatronix has more employees as 75 compared to Sollatek (UK). On the
contrary, Sollatek (UK) is generating high revenue as $13.4 M and Alfatronix has $11.8 M.
These both organizations are comprised in manufacturing industry whereas Sollatek (UK) has
adopted job costing system and Alfatronix has adopted cost accounting system as both are
beneficial for small manufacturing organizations to attain success.
Sollatek (UK) is facing cash flow issues which gave outcome about inability for paying
regular running costs, increment in overdraft and not capable for repaying its creditors or
suppliers. In this aspect, organization could solve this issue with application of key performance
indicator. Its detail explanation is stated below:
Key performance indicators: It is a metric which is very important indicator of current
level of performance of individual, department or organization to attain objectives. It is a set of
multiple quantifiable measures that business gauge its performance over time. Generally, it is
used for identifying progress of company in accomplishing operational and strategic objectives
along with comparing finances of company and performance against other business within its
own industry (Cooper, Ezzamel and Robson, 2019). Furthermore, Sollatek (UK) has implied this
tool for solving cash flow problem as measure of optimised efforts.
Simultaneously, Alfatronix was also similar issue of cash flow , so it has used
benchmarking for solving this issue.
Benchmarking: It is referred as process to measure company;s performance, services and
process against another best business in the industry. The managing cash flow is single thing as it
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is significant, cash flow benchmarking is only attained via comparing own history but other
organization's attainments and history of failure for gaining insight and implementing innovative
plans. There must be implication of utilizing benchmarking cash flow for improving hoe to
manage cash and control, so try for connecting with competitors and utilise internet as tool of
research for reviewing websites. The cash flow management benchmarking could be directly
attained if situation is not ignored and implement ideas for making improvements.
M4 Analysing that while responding financial problems, management accounting lead business
for sustainable success
The basic objective of management accounting is to serve management for purpose of
decision making. On basis of financial issues, management is in requirement of information
relating to increment. Moreover, to establish strategies, practices and business models for
addressing social and environmental challenge for creating financial value and success for their
shareholders. In the present scenario, there are various organizations have presence of skills to
meet challenges and competing with sustainable economy as per Environmental management
and Assessment Institute (Horton and de Araujo Wanderley, 2018). On the contrary, there are
multiple indicators it initiates to alter and forecasts that 2-3rd of estimated forecasted growth over
coming 2 years for social and environmental data.
Simultaneously, cash flow forecast helps for predicting upcoming cash surpluses or
shortages lead to right decisions. This would lead to tax preparation, planning purchase of new
equipment or to determine about requirement of securing loans of small business. The
management accounts has reported in various aspects as firm could guide organization for
attaining success such as utilising tools of administrative accounting along techniques as natural
resource gain, carbon foot print and life cycle cost for assisting consolidating affairs in process of
decision making. Furthermore, determining social and environmental trends which influence
ability of company to produce value over time (Schaltegger, 2018).
CONCLUSION
From the above report it had been concluded that management accounting plays very
important role for business especially to management for decision making. This report has shown
that expense could be monitored by implementing static, flexible or any other type of budget. It
has articulated that it increases efficiency and improves relationship among its management and
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shareholders of Sollatek (UK). On basis of management accounting system, both cost accounting
and job costing system are appropriate for manufacturing industry which raises productivity and
efficiency as well. Furthermore, it has reflected that managerial accounting reports accounts for
objective of planning and budgeting for purpose of measuring performance of organization.
Henceforth, planning tools such as zero based budget, ratio and variance analysis are best
planning tool for responding financial problems with application of KPI and benchmarking.
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REFERENCES
Books and Journals
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Bedford, D. S. and Speklé, R. F., 2018. Construct validity in survey-based management
accounting and control research. Journal of Management Accounting Research. 30(2).
pp.23-58.
Cooper, D. J., Ezzamel, M. and Qu, S. Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
Cooper, D. J., Ezzamel, M. and Robson, K., 2019. The Multiplicity of Performance
Management Systems: Heterogeneity in Multinational Corporations and Management
Sense‐Making. Contemporary Accounting Research. 36(1). pp.451-485.
Horton, K .E. and de Araujo Wanderley, C., 2018. Identity conflict and the paradox of
embedded agency in the management accounting profession: adding a new piece to the
theoretical jigsaw. Management Accounting Research. 38. pp.39-50.
Nishimura, A., 2019. Uncertainty and Management Accounting: Opportunity, Profit
Opportunity, and Profit. In Management, Uncertainty, and Accounting (pp. 73-95).
Palgrave Macmillan, Singapore.
Nitzl, C., 2018. Management Accounting and Partial Least Squares-Structural Equation
Modelling (PLS-SEM): Some Illustrative Examples. In Partial Least Squares Structural
Equation Modeling (pp. 211-229). Springer, Cham.
Schaltegger, S., 2018. Linking environmental management accounting: A reflection on
(missing) links to sustainability and planetary boundaries. Social and Environmental
Accountability Journal. 38(1). pp.19-29.
Online
Accounting reports. 2017. [Online]. Available through
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>.
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Variance Analysis. 2016. [Online]. Available through
<https://www.accountantnextdoor.com/variance-analysis-meaning-advantages-and-
disadvantages/>.
Zero Based Budgeting. 2018. [Online]. Available through
<https://www.wallstreetmojo.com/zero-based-budgeting/>.
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