Comprehensive Analysis of Management Accounting for IMDA Business

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Added on 2020/06/04

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This report provides a detailed analysis of management accounting principles, focusing on its application within the IMDA business context. It begins by differentiating management accounting from financial accounting and emphasizing its crucial role in decision-making. The report then explores various management accounting functions, including cost accounting systems, inventory management, and pricing strategies. It delves into different types of costing methods, such as absorption and marginal costing, and their impact on income statements. The report also examines the tools of planning and the balance score card approach. Through this comprehensive analysis, the report aims to provide insights into how management accounting supports effective business operations and strategic decision-making within IMDA, including the use of different pricing strategies to maximize profits. The report also includes income statements based on absorption and marginal costing, showcasing their differences.

MANAGEMENT
ACCOUNTING

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Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................ 1
P1 Management accounting functions........................................................................................ 1
P2 Types of Management Accounting Systems..........................................................................3
TASK 2............................................................................................................................................ 5
P3 Income statements..................................................................................................................5
TASK 3............................................................................................................................................ 7
P4 Tools of planning................................................................................................................... 7
TASK 4.......................................................................................................................................... 10
P5 Balance score card approach................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES.............................................................................................................................. 13

INTRODUCTION
Management accounting is referred to preparation of accounts and reports of the
organisation. It is also known as managerial accounting (Bodie, 2013). The accounting
information prepared by the organisation is used by managers in taking accurate timely decision.
The management accounting reports is used before making plans and policies it supports in
managing the operation activities of business and increases the performance. In simple terms
management accounting is refers to presentation of financial and non-financial information of
organisation for managers. The reports of management accounting are prepared on weekly or
monthly basis to assist internal departments within the organisation. It has prepared with certain
objectives of organisation which supports in evaluating performance of employees and monitors
production efficiency. Certain businesses conduct assessment of risks and it is also done to
allocate required resources within time frame. Following assignment is based on the IMDA
business which provides services in media sectors. The document will help to study difference
between management accounting and financial accounting and importance of management
accounting as a decision making tool is described significantly. This assignment will help to get
knowledge on different types of budgets and their advantages and disadvantages. The different
pricing strategies which can be used by business to maximise its profits are studied significantly
in the following report.
TASK 1
P1 Management accounting functions.
(1)Management accounting:- It is also known as cost accounting and it is completely different
from financial accounting. It is a significant process of formulation of reports which provides
detailed information to managers of organisation and assists them in taking effective short and
long term decisions. It used by managers in planning and controlling business activities
(Chenhall and Smith, 2011).
Differences Between Financial Accounting and Management Accounting.
Basis Financial Accounting Management Accounting
Meaning It is referred to process of preparing
financial statements of business
It is a systematic process of accounting
which provides knowledge to internal
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which supports in providing
knowledge about financial position of
organisation (Cinquini and Tenucci,
2010).
departments and managers of
organisation and assists in effective
planning and decision making.
Objectives Main objective for preparation of this
report is to provide complete
financial information of business to
external parties.
It is prepared in order to support
internal departments and managers in
planning and making effective
decisions for achieving goals and
objectives of business.
User Information laid down in this report
is used by outsiders of business such
as shareholders and investors who
have interest in organisation.
Reports is only used by internal
members of organisation such as
managers and employees.
Requirement Preparation of these report is
necessary for organisation.
It is not necessary for organisation to
prepare this. It can be prepared as per
need of organisation.
Format Financial reports is prepared in
specific format.
There is no specific format for
preparation of this report.
Information This reports of organisation includes
on monetary information.
Both monetary and non-monetary
information of business is included
under this report.
Legal Rules All legal rules are followed in
preparation of financial reports and it
is prepared as per the Accounting
Standards.
There is no legal rules for preparation
of the reports.
Auditing and
Publication
The reports prepared in financial
accounting is published among public
and it is the audited by appointed
statutory auditors of organisation.
Report prepared in management
accounting is nether published among
public nor it is audited by auditors of
business.
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Reports Financial status of organisation is
summarised in this report.
Complete detailed information about
various matters of organisation is
included in this report.
(2)
Importance of management accounting information in decision making.
In today's competitive business world management accounting is an important part of
organisation. It guides and advises internal managers of different departments within
organisation on each steps of planning and in process of decision making. Management
accounting help to enhance performance of managers along with employees (Fullerton, Kennedy
and Widener, 2014). The certain importance of management accounting as a decision making
tool to managers is described as follows :-
Helps in forecasting future:- The process of decision making is assisted by future
forecasting. This accounting process helps manager of IMDA to forecast certain activities before
time which helps in taking timely decisions effectively.
Helps in make or buy decision:- Management accounting supports managers in
comparing the manufacturing and purchase cost of the products. The comparison aids
management in making best decision for whether the product is to be manufactured within
organisation or it has to be purchased from outside.
Forecasting future cash flows:- The prepared report assists mangers in forecasting
future cash flows within the organisation. The forecasting determines requirement and
availability of funds for IMDA. This assists managers to take decisions within time frame
whether fund its to be allocated or not if yes then from where they will allocate funds.
Helps in measuring performance and taking decision:- management accounting helps
manager to mark standards for performance and supports in evaluation of performance and
determine whether the performance is a per the standards or not. If performance is not as per
standard it determine where it lacks behind and supports managers to take significant decision
for eliminating factors reducing performance (Garrison and et.al., 2010).
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P2 Types of Management Accounting Systems.
Management accounting system allocated the data from different sources of business
functions such as sales data, cost of raw materials and inventory and prepare reports from these
collected data. There are different types of systems which are described as follows:-
Cost accounting systems:- This system of accounting is also referred to product costing
system and costing system. This method is used by IMDA to evaluate the cost of product in
production. It is done in order to determine the profitability and it is also done to evaluate the
cost of inventory and controlling the production cost (Kaplan and Atkinson, 2015).
1. Normal costing:- The measurement of overhead costs incurs in production of product is
said as normal costing. Normal costing considers the actual cost of labour and material in
calculation.
2. Actual costing:- The actual cost incurred in producing product is being recorded in
actual costing. Actual cost of labour and overheads are considered under this costing.
3. Standard costing:- The predetermined cost of products which incurs in production of
product is referred standard costing. It uses the ratio i.e. efficiency and compares the
actual labour and material required in production of product.
Inventory management systems:- The inventory management system assist
management to determine cost of inventory available within organisation. It also helps in guiding
organisation in planning when to make order for raw material and guides in what quantity is to
be ordered. Main motive of inventory management system is to reduce total cost of inventory
which assist in reducing production cost and maximising profitability. The overhead cost in
inventory management such as storage cost, cost of insurance are reduced with the help of this.
The proper inventory management is done in order to continue production cycle significantly.
Job-costing systems:- It is referred to the tool which helps manager and account to
record the cost for a product manufacturing. Under this method cost of each job can be
significantly evaluated. It is done in order to measure cost of each job required in production of
a product. This system of cost accounting collects all cost information such as direct material,
direct labour and overhead costs.
Price optimising systems:- It is a mathematical evaluation conducted by businesses in
order to measure reaction of individuals for various price levels of similar products and services.
This system is used to for determining effective price for product and service which supports in
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earning maximum profits from provided product (Lukka, 2010). Costs of operation, costs of
inventories and selling costs is included under-price optimising system of cost accounting. It
supports businesses in formulation of effective pricing structure for its products and services.
TASK 2
P3 Income statements.
The systematic calculation and measurement manufacturing cost of product with a tool is
referred to costing. The production cost on different stages involved in manufacturing a product
is determined with the help of costing (Macintosh and Quattrone, 2010). It supports in allocation
of fund from different financial sources with time frame in order continue production cycle
continuously. The selection of best costing methods supports in determining relevant cost and
supports in comparing the costs of other similar activities and aids in selection of best available
alternatives to increase profitability of business. The significant method is used by IMDA in
order to determine the cost of production. The net profit and net losses is determined by IMDA
by using methods Absorption and Marginal costing. The both methods used by IMDA provides
different values of losses for organisation. These method used by company is described as
follows:-
 Absorption costing:- It is a cost accounting method used by business in valuation of
inventory. Cost of manufacturing which is being absorbed by produced product is
referred as absorption costing. The method includes cost of direct labour and material
whether it is fixed or variable cost and overhead costs. It includes all direct cost which
are associated with production of product. It assists organisation to in calculating actual
accurate cost in manufacturing the product.
 Marginal costing:- Marginal costing is referred to the extra cost incurred in
manufacturing an additional unit if product(Nixon and Burns, 2012). This cost is also
said as variable cost. The calculation of cost is done by dividing change in total cost by
change in output.
Income statement on the basis of Absorption costing method:
Selling Price £35
Unit costs
Direct materials £8
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Direct Labour £5
Variable Production overhead £2
Variable sales overhead £5.25
Budgeted production for the period is 3000
units
Fixed cost for a month:
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: In this budgeted cost is £10,000and Actual cost is £7875
Absorption costing
Working 1: Calculate full production cost
Direct material £8
Direct labour £5
Variable cost £2
Fixed cost £5
Total £20
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40000 500*20 = £10000
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £15000
Fixed overhead: £10000
Total £5000(under absorbed)
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
Opening stock 0
52500
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Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod. O/h
Gross Profit
Less Expenses
Variable sales expenditure
Fixed selling expenditure
Net loss
40000
(10000)
7875
10000
(30000)
(5000)
17500
17875
(375)
Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material 8
Direct labour 5
Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing £ £
Sales
Less Variable costs
Opening stock
Manufacturing
Closing stock
Variable sales
Contribution
0
30000
(7500)
52500
(22500)
(7875)
22125
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Less Fixed costs
Fixed Production expenses
Selling cost
Net loss
15000
10000 (25000)
(2875)
TASK 3
P4 Tools of planning.
(a) Types of budgets and their advantages and disadvantages:-
Master budget:- It is a set of various budgets which includes sales budget, labour and
production budget(Pipan and Czarniawska, 2010). Master budget helps management in planning
activities of business operation and controlling it.
Advantages:-
 It is a complete budget of business.
 Supports in evaluating problems and assist in planning and taking necessary action to
overcome it.
Disadvantages:-
 It is very complex in nature which is difficult to read and understand.
 Updating is not easily possible.
 Lacks in specialisation.
Operational Budget:- The daily expenses incurred in production cycle is of organisation is
included under operational budget. The sale of products shows the income in this budget whereas
Cost of goods sold are expenses.
Advantages:-
 Aids in evaluating monthly expenses.
 Tracks business operation cycle.
Disadvantages:-
 Future prediction is not possible.
 Operational budget has doubt.
Cash Flow Budget:- The complete report of cash outflow and inflow within organisation is
included under cash flow budget. The budget includes received revenue receipts and payments.
Cash management of business is done through this (Renz, 2016).
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Advantages:-
 Determines actual financial position of organisation.
 Supports in forecasting liquidity position of business.
Disadvantages:-
 Actual profits and loss cannot be determined from the budget.
(b) Process of preparing budgets:-
The basic steps of preparing budget is described as follows:-
1. Gathering information: This is a first step in preparation of budget all the monetary
information related to income and expenses must be allocated before preparing it.
2. Recording all sources of income: All the collected information of income and expenses
of organisation must be recorded in a significant manner for preparing budget
(Schaltegger, Gibassier and Zvezdov, 2013).
3. Creating list of monthly expenses: The list of monthly expense must be created. The list
includes the information expenses such as rent paid, stationary expenses and
miscellaneous expenditure done by business.
4. Breaking expenses into categories: The all the expenses done must be divided among
fixed cost and variable cost.
5. Summation of income and expenses: The all recorded income and expenses must be
summed.
6. Making adjustments to expenses: The changes must be made in statements as per the
need and adjustments of new expenses must be done.
7. Reviewing budget monthly: The budget must be reviewed on daily and monthly basis in
order to check the whether it is on path or not.
8. Balancing budget: The balance of the budget must be done by adjusting income and
expenses.
(c) Pricing strategies:- There are wide range of prising strategies which can be used by
businesses. The pricing strategy helps to set effective prices for its products and services and
supports in maximising profits with increase in sale for that price level. Different pricing
strategies which can be used by business organisation is described as follows.
Premium Pricing:- In the following pricing strategy the prices of products and services is kept
higher in order to increase the profits by increasing customers at that price level. This strategy is
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only used for unique product and services and mainly used by monopolist. It helps to create
superior brand image of organisation (Vaivio and Sirén, 2010). It helps in increasing the
profitability of business apart from this it reduces the number of customers as it can be afforded
only by the individuals who have high purchasing power.
Penetration Pricing:- In this strategy businesses keeps prices of product and services low to
attract new customers towards there services. These strategy is normally undertaken by new
business to increase their market share. In helps to generate more customers for business and
supports in competing with competitors.
Price Discrimination:- Under this strategy different prices are charged for similar products to
different customers in different market. This pricing strategy helps to increase profits of business
by charging high price for same product where individuals have high purchasing capacity. The
area where individuals have low purchasing capacity lower prices for similar products is charged
(Van der Stede, 2011).
TASK 4
P5 Balance score card approach.
Balance score card:- It is a system used by organisations in evaluating the actual
performance. It supports managers to manage the performance in order to compete to gain
success in competitive business market. It is used by managers in order to keep performance of
employees on track and also supports in controlling activities of employees and monitors its
effect on organisation(van der Steen, 2011). It supports organisation to manage different
activities of it.
The IMDA uses balance scorecards as a management system in order to:-
 Communicate what organisation wants to achieve from there operations.
 Align daily functions that individuals are performing with strategies.
 Giving priority to organisations products, services and projects.
 Evaluating and monitoring the strategic goals of business.
The balance score card have different perspectives which supports in developing business
objectives. With this business can measure their key performance indicators which supports in
achieving business targets significantly by taking proper initiatives(Van Helden and et.al., 2010).
Some of the prospectives of balance scorecard are described as follows:-
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