Advanced Management Accounting Report: Business Environment Impact

This report delves into the intricacies of advanced management accounting, examining the purpose and presentation of financial information from a stakeholder perspective, including investors, senior management, banks, and creditors. It evaluates various microeconomic techniques, such as cost-volume-profit analysis, absorption costing, marginal costing, break-even analysis, and flexible budgeting, illustrating their application in supporting organizational structures. The report also explores variance analysis, emphasizing its significance in organizational budget control, along with the analysis of actual and standard costs to manage and correct variances. Furthermore, it assesses the impact of both external and internal factors, such as changing business environments, on management accounting practices, providing a comprehensive overview of the subject.

ADVANCED MANAGEMNET
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Purpose and presentation of financial information from stakeholder perspective............1
TASK 2............................................................................................................................................3
P2 Evaluate the different type of accounting microeconomic techniques in application to
support organisation...............................................................................................................3
TASK 3............................................................................................................................................7
P3 the concept of variance analysis and its importance for organizational budget control. . .7
P4 Analyse the actual and standard costs to control and correct variances............................9
TASK 4..........................................................................................................................................11
P5 How external and internal factors changing the business environment impact upon
management accounting ......................................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is become a crucial element subject to managing and operating
the business. This is considered as an internal part and section of business which assist mangers
and accountants to manage departments and section of organisation, this report is prepared to
understand the dynamics of advanced management accounting system subject to operating and
management of business operations (Watts and McNair-Connolly, 2012). Purpose and
presentation of financial information from stakeholders prospective defined in this context.
Various type of accounting microeconomics techniques in application to assist organisational
structure explained briefly.
Variance analysis and its importance subject to making budgets elaborated in
organisational context. Actual and standard cost is defined in this context with the environmental
impact upon management accoutring also defined in this context. How external and internal
factors changing the business environment impact upon management accounting.
TASK 1
P1 Purpose and presentation of financial information from stakeholder perspective
In organisational context stake holders are the persons which retain significant interest in
the growth and development of organisation. These are the parties which has some certain needs
and requirement in terms of financial and non-financial interest. Putting the interest of
stakeholders first is one of the essential retirement of organization. Because these are the person
who only remain responsible for sustainable development and growth of organisation.
Presentation of financial information become more important and crucial task for organisations
for stakeholders. Stakeholders can be found in various form such as share
Purpose of financial information and presentation
Building communication and shared with stakeholders organisation is one of the key
objective of financial representation. Making financial records and presenting financial
information is also one of the key aspect in organisational context. To attain stake holder’s
interest and make accounting viability of the organisation in effective and optimum manner.
Purpose of financial representation can be bifurcated in following aspect’s;
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To Build credibility: there are to major characteristics remain associated with reporting
task, first is qualitative and second is quantitative. These concepts remain based upon concepts
in respect of presenting financial information to stakeholders of organisation (Jakobsen, 2012).
To Make accoutring structure viable: This is also one of the major purpose of
presenting financial reports in front of internal stake holders. It helps to make the organisation’s
structure flexible by gathering interest of employees and managers of organization.
Reliability: It contains the observation in respect of presenting information by following
all the legal structure, legislation and terms. Which policies and structure is being used is
disclosed in front of stakeholders.
Intangibility: This objective remains associated with representing information and
details in terms of complex business structure which contains some technical knowledge and
subject.
Financial information from stakeholders perspective
Investors: these information helps stakeholders to analyse the liquidity position and how
much flow generated by activities. This helps to make investment plan for better execution.
Financial representations is systematic procedure that contains a logical and regional aspects
while preparing and presenting financial statements to stakeholders and managers. This
information remains important for the investors subject to analyse the liquidity and flow of cash
for to give credits and manage the operations. Financial projection and analysing the
performance depends upon capital structure of organization. Investors mainly analyse the
financial position, capital structure, reserves and surplus ratio and return on investments.
Senior management: Financial information is required to justify the financial position of
business to senior management. It helps to determine the change in equity as the base of share
capital, reserve and surplus. How much control and ownership is distributed in the hands of
members and share holders is required to determine for stakeholders. Presenting financial
information for stakeholders is one of the complex task for senior managers and Accountants
because it contains large responsibility and credibility subject to presenting financial statements
and financial reports. Their main perspective mainly associated with presenting true and fair
report to external stakeholders and other associated parties.
Banks: The overall performance is presented in the form of financial position of
organisation. financial institutions and firms remain associated with analysing the requirement of
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financial resources within the organisation and provide financial help as per requirement.
Stakeholders as investors and banks invest in those organisation which retain strong capital base
and structure. To aware the stakeholders in term of capital and assets base financial position is
required. Banks and financial institutions evaluate the credit ratings of organisations. It analyse
whether organisation is able to repay loans and credits to banks on time or not. Information form
cash flow statement remain more important for banks and financial institutions.
Creditors: It is important for creditors to analyse the effectiveness of business. Creditors
seek for best earning companies to invest their amount and get good returns on time or recover
their lending in desirable time. To provide accurate information and data subject to financial
growth and development of organisation is one of the key perspective associated with creditors
for sustainable development and growth. If an organisation is adhering proper credit policy and
payment system then credibility of that organisation increased more. Creditors put their interest
only those organisations.
Form the past years it is observed that the rules and regulations regarding financial
representation has become more authenticated. Professional accounting organisations are
becoming the part of legalised accounting format and structure. ISAB, European commission are
authorities which provides a basis legal structure subject to presenting financial information to
stakeholders of organisation and outer parties. Accoutring and financial presentation provides
overview and vision of organisation that where the organisations stands and where to go. It
makes accounting credibility, tangibility and credibility of organisation.
TASK 2
P2 Evaluate the different type of accounting microeconomic techniques in application to support
organisation
Microeconomic techniques in management accounting
This is one of the essential aspect in respect of analysing the performance of organisation
these are the main concepts which are considered in manage met accounting system. There are
type of techniques which are used in management accoutring as microeconomic costing
techniques;
Cost volume profit: cost volume and profit are a concept which is considered as
essential in respect of understating. A perfect combination of cost volume and profit helps
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accountants and managers to make strategies and plans for generating income. This is one of the
effective and optimum technique in terms of analysing the profit margin and cost for production.
This technique is centralised around three major aspects such as margin of safety, break even
point in units and break even point in sales (Grabner and Moers, 2013).
Absorption costing techniques: this costing is also considered as full costing method
because while calculating profitability entire cost related to production, administration, selling
and distribution expenses are considered in this method. This can be implement to those areas
which remain ineffective in decision making and strategic planning.
Marginal costing technique: this costing technique helps to analyse the impact of
variable cost upon profitability of organisation. This costing contains the overall cost related to
direct material, direct expenses, factory expenses etc. with this costing technique managers be
able to make cost and profit strategies and be able to decide the selling price of the product. This
technique can be implemented as per the structure of organisation weather it is formative and
assertive. For effective execution it is important to develop the strategies and plans.
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Break even analysis: this is an analysis which is based upon contribution. These analyses
correlate the fixed cost and contribution. Break even analysis helps to analyse the optimum
requirement of production units for making the optimum sales results. This is one of the essential
aspect considered effective subject to control the wastage scrape and the values which remain
essential subject to enhancing profitability and productivity. This is basically analysed with the
help of contribution per unit and contribution margin. Contribution is calculated as per following
formula
Sales – variable cost = contribution and contribution margin is analysed with the help of sales
and contribution = (contribution / Sales) *100
Flexible budgeting: this is the budget which is basically helps to analyse cost of further
events and transactions. This budget is prepared in such a way that there if any incremental
changes occurred dusting the year can be adjusted at the time. This basically remains associated
with analysing potential suppliers and customers in terms of managing the cost and profit.
Budgets provides a pre occupation cost for upcoming years and time.
Cost variance: this is also one of the essential microeconomics technique which helps to
analyse the actual cost and standard cost. There is a difference and variances are analysed by
comparing the difference between the actual cost incurred in last year and standard cost occurred
in future. If actual cost remain less than standard cost then it is called as favourable variance and
the if actual cost is more than the actual cost is considered as adverse result. To con
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Cost allocation and appropriation on the basis of absorption costing
Absorption costing technique remains associated with the allocation or divination of cost
at different cost centres. Such as allocation of direct cost depends upon manufacturing and
production cost. This is one of the complex task in respect of managers and accountant because
they have to identify the relevance of the particular department and section (Fullerton, Kennedy
and Widener, 2013).
Discounted cash flow methods
NPV (Net present value): this is one of the commonly used investment appraisal
techniques which helps to analyse the net present value method of capital investment. This is
used with the help of cash inflows and the initial cash invested within the operations and
management. the difference between future value and meet present value is considered as net
present value of capital investment. Net present value is calculated by product sun of net present
value factor and outflows. It is calculated as per following formula;
NPV= ∑{After-Tax Cash Flow / (1+r)^t} – Initial Investment
IRR (internal rate of return): this is considered as an internal part of the investment in
which all the essential aspects are considered subject to evaluate the profitability and
comparability of capital investment. This is the one of the capital budgeting metrics which is
used to evaluate the cost of investment by considering internal factors of change. It is a method
which tells where the internal rate and net present value is equal to zero.
Year Estimated return P.V. Factor cash inflows
0 -1000000 0.9478672986 -947867.29
1 75000 0.8984524157 67383.93
2 150000 0.8516136642 127742.04
3 250000 0.8072167433 201804.18
4 330000 0.7651343538 252494.33
5 400000 0.725245833 290098.33
NPV -8344.46
IRR -0.24%
DCF (Discounted cash flow): this method is basically used to analyse the value of
project, task, capital projects and business expansion plans. A discounted rate of return is taken
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to calculate the discounted cash flow. This is one of the valuable method which is used to
estimate and measure the future opportunities for capital investment. This basically remain
associated with the decreasing the value of net cash outflows and inflows for better
understanding. This is calculated with the help of discounted cash flow.
Non- discounted cash flow methods
Payback period: this method provides an opportunity for better growth and sustainable
of investment made on particular project or section. It assists mangers and accountants that how
much time it will take to recover the amount incurred on capital investment (Ernstberger, Stich
and Vogler, 2012).
ARR (Average rate of return): This is the method which mainly used to calculate the of
return on the basis of average profit and average investment. It identifies the average returns is
being earned by organisation for a particular period.
TASK 3
P3 the concept of variance analysis and its importance for organizational budget control
Variance analysis as a concept and a technique
This is the qualitative technique of analysing the difference between the planned and
actual behaviour (DRURY, 2013). This analysis is basically used to maintain and control the
overall operational and management cost. It is considered by the example such as is budgeted as
a sales figure for the year of 2018 but an actual cost was recorded as 8000. Now the variance
yield is calculated as the difference of 2000. It is better understandable on variance analysis at
trend line. There are type of variances used in variance analysis technique like purchase price
variance, labour cost variance, variable hover head spending variance and fixed variance.
Favourable and unfavourable variances
There are two results can be found with the analysis of variance analysis such as positive
and negative variance. If actual results remain more then the budgeted results then it is
considered as the negative variance or unfavourable variance and if the budgeted variance
remains high then the actual results then it is considered as positive variance or favourable
variance.
Controlling and correcting variances
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This is basically used to analyse the difference and identifying the difference creating
factors. By analysing the differences and reason precautions can be taken on time to control cost.
With the help of variance analysis there is a report prepared called as variance analysis report.
This report is use to take important decisions and decision-making process.
Integrating variance analysis into budget monitoring across an organisation: this is
also one of the essential aspect in terms of analysing the difference and figure out the result.
These results are used in making important strategies and plans in order to make accurate
budgets and policies.
Schedule variance vs cost variance
Schedule variance is basically used to keep the project on schedule. It basically helps to
make schedule and plan for better effectiveness of task and projects. It assists managers and
accountants to track the project schedule and keep align the cost allocation process. It is
calculated as per following formula;
Schedule Variance = Earned Value – Planned Value
It is also considered essential in terms of approving the budget and complete the
task on time. It is observed that excess estimation of budget is not good for stakeholders and
organisation too. It mainly deals with the budget prepared for a particular project.
Cost Variance = Earned Value – Actual Cost
There are some examples of variance analysis given below
Material cost variance: standard cost - actual cost
= 408000-552000
= 144000(A)
Material price variance: actual quantity*(standard price - actual price)
= 240000*(2-2.3)
=72000(A)
Material usage variance: standard price*(standard quantity-actual quantity)
= 2*(204000-240000)
= 72000(A)
Calculation of labour variances
Labour cost variance: standard labour cost – actual labour cost
= 1062500-1400000
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= 337500(A)
Labour efficiency variance: standard rate*(standard time-actual time)
= 5*(212500-250000)
=187500(A)
Labour rate/pay variance: actual time*(standard rate-actual rate)
= 250000*(5-5.6)
= 150000(A)
Importance of variances in budgetary control
Variances plays vital role in budgetary control and decision making process. Variances
helps in determining the balance and gap between the actual and projected aspects.
 It assist the management accounting which provides a firm's cost structure and revenue
process.
 By variance analysis required areas of changes can be easily find out and provisions can
be made accordingly.
 This helps to identify the idle areas to control the extra cost which remain ineffective as
production perspective in budgetary control process.
 Appropriate variance analysis helps in understanding the changes and requirement of
additional sources for assessment of tasks and projects.
P4 Analyse the actual and standard costs to control and correct variances
Actual Costs: It refers to the actual amount paid or incurred in order to acquire an asset.
It is an accounting term that is mainly taken into account in order to determine actual amount of
money paid by business owner to acquire a product or assetsIt includes the cost of raw material,
overhead expenses and labour cost for the particular accounting year. It is one of the simplest
and most common method to taken into consideration by companies as it mainly works on
computing actual cost and does not need any pre-planning or any pre-defined standards
(Driouchi and Bennett, 2012). For example: For a plant producing pencil, company needs to take
into account factors like total working hour consumes, overhead cost, raw material cost so to
figure out actual cost of one pencil or total pencil
How actual cost is determined:
Actual Direct Cost Actual cost rates* Actual quantities used
Actual Indirect Cost Allocated Indirect Cost Rates*Actual
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Quantities of the Cost Allocation Bases.
How it is different from estimated and standard cost:
Actual Cost Estimated Cost Standard Cost
It determine actual cost
after evaluating each and
every aspect related with
acquiring a new asset.
It presumes what will the
total cost
It focuses on “What should
be actual cost”
It is flexible in nature as it
depends upon the cost of
other factors raw material,
overhead, labour etc.
It is also flexible in nature
and changed at every change
in particular situation.
It is more stable in nature
It can only be computed
once the cost of another
factor is determined
It can be taken into account
in every situation
It can only be used once the
total cost of data is available
Standard Cost: It can be defined as an estimated expense that normally takes place or
occurs at the time of producing a product or performance of service. In simple words, it
described the total sum of money a business will have to spend in order to produce a product or
perform a service. It is also referred as present costs because it is mainly computed on the basis
of management and statistics experience (Meaning of managerial account, 2017). These costs
are often used as target costs and are normally generated from analysis of historical data.
Standard Cost always vary from actual costs because every time situation has some
unpredictable factors.
How does it determined: (direct material+ direct labour + Overhead costs)*Price Rate*Quantity
Hours= Standard Cost.
Labour variance is also considered in above context and as per the above analysis the
labour cost variance was evaluated as 337500 adverse due to standard labour cost of 1062500
and actual labour cost of 1400000.
Labour efficiency variance is defined as 187500 adverse due to standard time of 212500
and actual time of 250000. this is calculated on the basis of standard rate of 5. labour rate is
calculated as 150000 adverse by differentiate standard rate of 5 and actual rate of 5.6.
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