Management Accounting & Financial Performance

This solved assignment examines the role of management accounting in addressing financial challenges faced by SRC Ltd. It analyzes various tools like benchmarking, budgeting, and KPI's employed by both public and private firms to assess performance gaps and implement corrective measures. The report highlights the importance of financial governance for public firms and contrasts it with the approach taken by private firms. Furthermore, it delves into specific management accounting systems such as cost accounting and inventory management, showcasing their contribution to SRC Ltd's financial goals.

MANAGEMENT
ACCOUNTING

INTRODUCTION
The system of accounting under which various elements like planning, implementing,
monitoring, review, analysis of financials are included is called as management accounting. The
particular approach is used by the companies for taking several kinds of internal business
decisions and make it profitable within the industry. The present report is on the basis of SRC
Private Limited company which is operating under the sector of food processing. The study
focuses on various concepts of management accounting which are adopted by the selected firm.
Apart from this, reporting systems which are required for the entity in terms of management
accounting for prepare the final accounts are explained at this report. Income statements with the
help of marginal and absorption method are to be made at the current study for the SRC Pvt Ltd.
Moreover, planning tools as well as management accounting approaches to combat issues arisen
within workplace regarding to the financials are described in this study.
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Client Comments Addressed by
writer
Page Number
You have not evaluated and explained management accounting
and essential requirements of its various systems
Yes 1,2,3
You have not evaluated benefits of MA system Yes 4
You have not evaluated integration of MA system and reporting
with organizational process
Yes 5
You have not calculated costs in order to prepare income
statements with the help of marginal and absorption
costing method
Yes 5,6
Not analysed undertaking MA techniques for producing
financial reporting documents
Yes 7
Not Explained various planning tools which are used for
budgetary control along with its merits and demerits
Yes 7, 8, 9 ,10
Not used different planning tools in the preparation of and
forecasting budget
Yes 11
You have not compared how SRC Pvt Ltd. Uses management
accounting systems in order to combat financial issues
Yes 12,13
You have not stated the planning tools that helps in responding
financial problems
Yes 13
You have not analysed how management accounting could lead
to resolve financial problems
Yes 13
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P1 Explanation of management accounting and essential requirements of its various systems for
the SRC Pvt. Ltd.
MA serves financial information or data and thereby gives indication to the team of
higher management about the areas that demand for improvement. Hence, MA is highly
significant which in turn provides assistance in decision making, planning, performance
management as well as control to the great extent. Management accounting is the concept where
different kind of techniques, approaches, systems and budgets are involved which help to
manage financial resources and enhance performance of the firm. Very basic objective of the
specific system is to assess internal business conditions and users of this are internal stakeholders
like managers, workforce etc. There are some financial reports and sheets are prepared but not
necessary to frame by considering legal systems and accounting standards (Ahmed and et.al.,
2013).
Management accounting systems that can be undertaken by SRC are enumerated below
along with their applications:
Cost accounting: The system in which costing aspects are included which incurred in the
business process is identified as cost accounting. Through this, management of the SRC Pvt Ltd
able to assess level and amount of the total expenses which is supportive to make pricing
decisions. Further, it is the method of recording all those financial transactions which rely under
cost or expenses aspect. By considering this, the company able to determine that how many
expenditures are incurred there. On the basis of this, decision is taken for making further
expenses within workplace to produce food items like chocolate, cake and others. Basic need of
the cited system is to analyse total cost and take pricing decision to sale items in its respective
market. By using the system of cost accounting firm can get information about fixed and variable
expenses. Thus, by summing up both the expenses and dividing the same with food processing
units firm can determine per unit cost. Thus, by assessing such cost firm would become able to
set appropriate price of product that helps in getting suitable margin.
Batch costing system: Other approach in which also expenditures are determined by the
business of SRC Pvt Ltd but according to the batch system. When the firm having production
range in different kind of goods, then the batch costing is applied and adopted within working
environment (Hennes and et.al., 2013). At the present study, chosen enterprise has presence in
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different products like cake, chocolate, boxes etc. Further, the batch costing is required for the
SRC company in order to compute and determine expense of every product range. It is easy and
supportive to analyse price of different type of the goods and services.
Inventory management: In the company stock or inventory having major place because
it sometimes reduces the capability of the management in terms of generating revenue. When
stock remains in the firm in higher quantity, then it leads to decline performance in the industry
because it is symbol of revenue decreasing. Due to this, essential need of stock management
system is to reduce and manage the overall inventory available within SRC private limited firm.
Moreover, to make valuation of inventory there are generally three types of procedures and
methods are available which are such as:
11 LIFO (Last in first out)11 FIFO (First in first out)11 WAM (Weighted average method)
Along with this, by applying the inventory management tools such as EOQ firm can
determine the units which need to be maintained for the smooth functioning of operations. This
in turn helps firm in saving ordering as well as holding cost to the significant level and thereby
would become able to make profit margin.
Price optimisation: Aspect of management accounting in which pricing element is
considered as the majority level and determine one price is known as price optimisation.
Normally business organisations change price of one product within specific period of time due
to several reasons like modifications, taxes, quality etc. At the different level of selling charges,
number of customers also differ in the market (Ahmed and Duellman, 2013). Hence, requirement
of the particular system is to opt one price at which more number of people purchase the goods
and items of food from SRC business.
P2 Describing several methods which are adopted by the firm in order to management
accounting reporting
In the management accounting some reports are prepared by which the firm able to
analyse level of its internal financial. In this kind of documents different financials are recorded
and transacted which are such as cost, revenue, expenses, production, stock, income etc. Further,
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various type of reports which considered under the management accounting reporting are
described below:
Account receivables report: The document in which those amounts are recorded which
comes from the credit sales are known as account receivables. When the company provide or sell
its products and services in the market at credit then the amount recorded in this report. Lower
the account receivables are better and profitable for the entity because it decreases the revenue
and profit generation power. Total amount of the respective report is treated under the balance
sheet of SRC Pvt Limited in the current assets side as debtors (Ball, 2013). On the basis of this, it
can be said that company needs to sell food items at the cash rather than on credit.
Production report: In the management accounting reporting, other kind of report
associated is like production where units which are manufactured by the firm included along
with the amount. On the basis of this, the management of SRC organisation can determine the
total number of food items and services which are produced by it. Further, decision of next
production is easily derived by which entity able to become financially sound. Moreover, amount
of the total production goes in the profit and loss account which helps to make pricing decision
and analyse profitability as well.
Sales report: In this kind of particular report, there are revenue earned by the firm is to be
recorded which playing role as a base of profit and loss statement. Every company has concern
towards the turnover or sales aspect while operating in the industry because higher the revenue is
sign of effective business performance (Warren and et.al., 2013). In this report, those
transactions are included which earned by selling the items of food and bakery on cash. If the
payment is not given in cash and turn into credit sales then money goes in the account
receivables report or balance sheet. Moreover, the summation of sales or revenue report is treated
under the profit and loss account with the same name. From this value, all the expenses which
are incurred in the firm are deducted and then condition of profitability is assessed by the
management.
Income report: In addition to above all reports, other is regarding to the income in which
whatever earn by the company in terms of profit is recorded. In the market sector, every entity
having presence and operation for maximise the income value. Under this report also revenue
data used for calculating the income generated by SRC firm (Adibah and et.al., 2013). Further,
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generally three types of incomes are considered in this report which is like gross, operating and
net or final yield.
M1: Benefits of MA system
Advantages of cost accounting
 Helps in measuring expenses and thereby improves efficiency level Provides input and assist in fixing the price
Advantages of inventory control
 Helps in managing cash flow and maximizing the profit level;
 Reduces labour cost and facilitates business intelligence
D1: Integration of MA system and reporting with organizational process
From assessment, it has been identified that MA systems and reporting are highly
associated with the organizational process. Moreover, MA system helps in preparing reports
pertaining to the activities and functions of an organization.
P3 & D2 Calculating costs in order to prepare income statements with the help of marginal and
absorption costing methods
The statement or report which shows that company is up to which level efficient in terms
of generating income and profit is known as income statement. Generally two kinds of processes
are undertaken by the cited company to assess profitability which is like absorption and
marginal. Moreover, accounts of profit and loss using these methods are stated below:
Cost of each unit of cake
Particulars Amount (in GBP)
Direct material 50000
Direct labour 30000
Variable manufacturing overhead 20000
Variable selling and administrative expenses 30000
Fixed manufacturing overhead 40000
Fixed selling and administrative expenses 30000
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Total cost of production 200000
Units produced 10000
Cost per unit of cake 20 GBP
From the above stated table, it can be said that to produce each cake cost incurred in the
SRC Pvt Limited is worth of 20 GBP.
Income statement using the marginal costing system:
Particulars Amount (in GBP) Amount (in GBP)
Sales @ 25 GBP 250000
Less:Direct expenses
Direct material 50000
Direct labour 30000
Total direct expenses 80000
Less: Variable overhead expenses
Variable manufacturing overhead 20000
Variable selling and administrative expenses 30000
Total variable overhead expenses 50000
Contribution or profit 120000
Income statement using the absorption costing system:
Particulars Amount (in GBP) Amount (in GBP)
Sales @ 25 GBP 250000
Less: Direct expenses
Direct material 50000
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Direct labour 30000
Total direct expenses 80000
Less: Variable overhead expenses
Variable manufacturing overhead 20000
Variable selling and administrative expenses 30000
Total variable overhead expenses 50000
Contribution or gross profit 120000
Less: Fixed overhead expenses
Fixed manufacturing overhead 40000
Fixed selling and administrative expenses 30000
Total fixed overhead expenses 70000
Net profit 50000
Interpretation
The above stated tables shows profitability condition of the SRC firm where production
unit A is considered where cake are baked or cooked. Under both the methods, it performs well
because positive profit is earning at the end of year. When looking at the marginal, then SRC
generates profit which is worth of 120000 GBP by selling 10000 units of cake. Moreover, as per
the absorption method, net profit earned by the management is worth of 50000 GBP. It can be
seen from both the statements that, performance differ due to adopting different methods of
costing. The reason for incurring such difference is that, marginal costing takes only variable and
direct expenditures associated with the business process. Apart from this, another method
considers all kinds of costs like direct, fixed, variable and whatever (Kim and et.al., 2013). Due
to this, level of total costs are higher compare to marginal which is the cause to generate lower
profit. Moreover, actual scenario of profitability and business performance is assessed through
the absorption method of costing because of taking all expenditures.
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M2: Undertaking MA techniques for producing financial reporting documents
By doing assessment, it has found that management accounting technique such as
absorption and marginal costing helps in assessing profit margin. Thus, by considering such
technique manager of SRC Ltd can prepare suitable report and thereby would become able to
provide information to them that whether absorption costing will offer suitable results or
marginal.
P4 Explaining various planning tools which are used for budgetary control along with its merits
and demerits
In the budgetary section, there are several kinds of techniques and tools involved which
support to the firm in terms of making effectual financial plan. Along with this, it is able to set
standards which help to meet with the objectives in proper manner. Furthermore, those tools
which are highly used by the SRC Pvt Limited entity for budgetary control are explained with
the advantages and limitation as below:
Cash budget
The tool under which position of the firm in terms of cash availability is assessed by the
management is called as cash budget. Higher the cash position is effectual and profitable for the
SRC firm because it shows that company generating more profit or money (Huber and Scheytt,
2013). Moreover, difference of the expenses and incomes or cash outflows and inflows are
considered as the cash situation. Further, behind preparing the cash budget some advantages and
demerits are there which are given as below:
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Benefits:
 The cash budget is supportive for the SRC company in order to predetermine cash
position that it will generate how many incomes and incur expenses in the further fiscal
period. When cash outflows are lower in comparison to inflows then it can be said that it
performs well in the industry.
 It helps to make the financial plan according to fluctuations in sales and expenses as per
the season. On the basis of that expenses are to be planned by the entity for next year
which is symbol of becoming more financially strong in the food industry.
 Along with this, through cash budget the SRC firm able to establish effective and strong
relation between different activities and functions of the organisation (Methot and
Wetzel, 2013). Due to this, goals and objectives which are agreed and determined by it
can be achieve on the deadline.
 By considering and using the cash budget in the firm allocations or allotments of the
financial resources can be done in adequate manner. In addition to this, requirement of the cash amount or capital is also determined along
with the appropriate financing sources.
Disadvantages:
 The cash budget is prepared by the management on the basis of estimations and
assumptions. Further, due to improper and ineffective estimations the firm cannot make
better decisions at the workplace (McIntosh, 2017).
 Further, due to lack of flexibility in cash budget the company cannot make fruitful
decisions. By this, proper and smooth planning cannot be done which is sign of
hampering the business profit.
 At the time of preparing cash budget any kind of non financial factors and elements are
not discussed which impact on the firm. Because of this particular reason cash position
cannot be forecasted properly which lead to hamper objective achievement within
deadlines.
Production budget
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Other planning tool which is undertaken by the firm for controlling over the budget is
production under which number of units and forecasted. It considers basic three items and values
while estimating the manufacturing units which are such as sales, closing and opening inventory
(What is production budget?, 2012). Further, example, merits and limitations of the respective
budget are described below:
Advantages:
 In order to manage the stock level and reduce it from the workplace, production budget is
one of the best tool. In the SRC entity, units which are required, will be prepared in next
year which lead to decline chances of closing stock.
 In addition to this, machinery, equipments and plant are optimum utilised by the
management up to the highest level. It helps to increase total units with the same quantity
of raw materials.
 The budget is helpful in terms of declining those costs and expenditures which are
associated with the production. Ultimately, total cost will be reduce which is sign of
generating high profit at the end of year. With the help of production budget, the SRC business able to achieve targets of sales and
revenue generation (Hopper and Bui, 2016). Further, price which needs to charge for
each and every product unit or food item is also can be derived.
Limitations:
 Market research and assumptions about the future demand must be clear and appropriate
at the time of preparing the production budget. The reason is that, if estimations are
demand increasing determined by the firm and after manufacturing demand declines then
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stock increases. Moreover, cost of carrying and holding will be also raise and decline
profitability of SRC firm. Apart from this, it can lead to incur and improve basically two kinds of expenses which
are like inventory storage and obsolescence. Due to increasing such kinds of costs the
management cannot meet with the objective of profit maximisation in the food processing
sector (Nitzl, 2016).
Zero base budgeting: This is one of the most effectual modern budgeting techniques that
SRC Ltd can undertake for the purpose of forecasting and the preparation of budget. In such
technique, firm starts with zero bases and justifies all the expenses assessed for new period.
Thus, under such technique manager makes analysis of each and every function for the
determination of its need as well as cost.
Advantages: ZBB technique facilitates optimal allocation of resources in accordance with the
department. Along with this, it assists in reducing the level of redundant activities and thereby
helps in preparing accurate plan with proper justification.
Disadvantages: There are some aspects which in turn closely influences the significance of ZBB
are as follows:
 Time intensive activity
 Demands for skilled and high manpower
M3: Use of different planning tools in the preparation of and forecasting budget
Management team of SRC ltd can undertake following traditional and modern technique to
prepare budget such as:
Activity based budgeting: On the basis of such technique manager makes forecast of
financial data through considering activities and cost driver. Thus, in this, manager conducts
research as well as analysis of activities that incur cost and thereby makes allocation of
resources.
Advantages
 ABB assists in recognising the activities that drive cost It furnishes appropriate information for TQM
Disadvantages
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 In ABB, it is highly difficult for the manager to assess individual’s responsibilities for
activities.
 Highly time consuming
Incremental budgeting: It comes under the category of traditional budgeting technique in
which manager considers past framework for the preparation of new one. Hence, by considering
the market trend manager makes forecast of % needs to be added in the previous budget for
developing new financial plan.
Advantages:
 Easy to implement because it does not include complex calculations It assists in eliminating rivalry and build value of equality within the departments of firm
Disadvantages:
 In this, manager makes only some changes in budgetary allocations which are not
suitable.
 Along with this, incremental budgeting system encourages higher spending within the
firm
P5 Comparison that how SRC Pvt Ltd. Uses management accounting systems in order to combat
financial issues
At the workplace of every entity there are different number of issues and problems arise
by which smooth functioning of it hampers up to the higher extent. The obstacles can be in terms
of HR, marketing, sales, financial, employees etc. The current study is talking about the financial
aspects in which shortfalls can be comes into account like cost increasing, profit and sales
declining, employee turnover raising etc. For combating and resolving such financial issues some
systems of management accounting are used by SRC Pvt Ltd. Further, the systems are described
as below:
Bench marking: The system in which one specific standard is settled out by the business
itself or industry framework for particular criteria is called as benchmarking. When the standard
made are achieved by the SRC management then it can be said that it performs well in the
industry. For various kinds of values like net profit, current ratio, liquidity etc. industry set the
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proper benchmark (Mokhtar and et.al., 2016). Ideal or standard proportion of current ratio is 2:1
which is adjusted by industry framework. At the end of fiscal period, if SRC firm has the 2:1
current ratio then performance will be analysed in increasing trend.
Budgetary target: According to this method the company prepare budget and target for
different values and then make strategy to achieve it. The targets and intentions which are made
by the company if achieved within proper time frame then performance will be considered in
increasing trend. For example, if target in budget is set out that net profit must increase by 10%
and after completion of the year entity not generates then performance is measured in negative
manner. Moreover, factors which hamper to achievement of target are also identified which lead
to face and reduce the issues of reducing net profit.
Key performance indicators: Under the respective system of management accounting,
different symbols and indicators are used to assess business performance. The symbols are like
quality, profit, income, revenue, turnover of workforce etc. considered by SRC company in
appropriate ways (Hennes and et.al., 2013). If undertaking to the quality concept at the
workplace, when management provides higher quality of food items to the firm then it can be
assessed that business performs well in the industry. Apart from this, improving income and
profitability is the symbol of enhancing business performance at the year ending.
From assessment, it has been assessed that from public to private sector firms all
undertake management accounting tools with the motive to make contribution in the sustainable
success. Hence, both public and private firms consider benchmarking, budgeting as well as KPI
for assessing the deficiencies and responding the same. The main difference is that public firms
lay high level of emphasis on employing the system of financial governance over others. In
accordance with such aspect, public firms assess the extent to which council has met
accountability requirement through undertaking strict regulations as well as policies. On the
other side, not all the private firms make focus on practising financial governance to respond the
monetary issues.
M4 Management accounting could lead to resolve financial problems
Management accounting is important for management by which it can easily resolve to
problems in a better way. Particularly, if actual costs exceeds budgeted costs, then it can be
resolved by taking variance analysis and deviations could be eradicated for initiating
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improvement. Hence, management accounting is quite beneficial for SRC Ltd in accomplishing
financial goals by resolving them.
D3: Stating the planning tools that helps in responding financial problems
There are several tools that can be employed by SRC Ltd for responding the financial
problems includes benchmarking, financial governance etc. On the basis of such aspect, by
making comparison of actual performance in against to the set policies, procedures and standards
firm can assess deficiencies. Thus, by assessing deviations and associated causes firm would
become able to take corrective action for improvement. In this way, technique of financial
governance assists firm in responding the financial problem in a prominent way.
CONCLUSION
It can be summarised from the report that, management accounting is highly significant
approach in order to make effectual internal business decisions. Various number of its systems
like price optimisation, cost accounting, batch costing, inventory management etc. are supportive
for SRC firm for managing stock and financial resources up to the higher level. It can be said
after considering the income statements that, SRC organisation generating profit worth of
120000 GBP and 50000 GBP under the marginal and absorption costing method respectively.
Along with this, different tool and techniques such as cash, sales, production etc. are helpful for
cited enterprise in terms of budgetary control. At the end, it can be concluded that for giving
fruitful response to the financial issues and shortfalls, various management accounting systems
are available. Moreover, SRC enterprise uses budgetary target, KPIs and benchmarking in order
to combat issues of financials.
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