Management Accounting Report: Costing Methods, Budgeting & Control

This report provides an analysis of management accounting, focusing on costing methods and budgetary control within a manufacturing context, specifically referencing Unilever Inc. It begins by explaining management accounting and its essential requirements, including the relevance, reliability, ac...Read More

MANAGEMENT ACCOUNTING
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Table of Contents
Introduction......................................................................................................................................2
1.0 Task 1....................................................................................................................................2
1.1 Explanation of management accounting and essential requirements of different types of
management accounting systems.................................................................................................2
1.1.1 Explanation of management accounting.........................................................................2
1.1.2 Requirements of different types of managerial accounting system................................4
1.2 Different methods of management accounting......................................................................5
2.0 Task 2.........................................................................................................................................5
2.1 Income statement by considering Absorption costing and Marginal costing........................5
2.2 Explanation of the difference between Absorption costing and Marginal costing................7
3.0 Task 3.........................................................................................................................................7
3.1 Advantages and disadvantages of different types of planning tools in budgetary control....7
Task 4.............................................................................................................................................11
4.1 Comparison between the processes, which organisations use the management accounting
to respond the financial problems..............................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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Introduction
Managerial accounting in a profit seeking concern is to be considered as one of the most
important factors of financial control. As accounting is considered as an important aspect of
financial management, managers are to use suitable cost and financial accounting techniques in
order to put control over the financial facts of an organization. In the initial part of the study, the
researcher shall act as a Management Accountant and make report to the General Manager of a
profit seeking concern in order to describe the essential requirements of different types of
managerial accounting. The researcher shall make discussion on the different methods of
management accounting in the next part of the first part. in the next part of the study, the
researcher shall make calculations of cost in two different methods of managerial costing.
Financial budgeting and other planning tools are also to be discussed by the researcher after
making calculation of costs. Moreover, the budgetary control and the financial resource
allocation will also be discussed in order to select financial management problems. The
researcher shall make the discussuins by considering Unilever Inc. In this context, the researcher
is to mention that the selected company belong to the manufacturing sector.
1.0 Task 1
To: Name- (General Manager)
From:- Your Name- Management Accounting Officer
Date: ................
Subject: Management Accounting & Management Accounting System
1.1 Explanation of management accounting and essential requirements of different types of
management accounting systems
1.1.1 Explanation of management accounting
Management accounting could be considered as one of the most crucial financial factors that
affects the financial controlling system of an organization as financial accounting is the most
essential tool to record all the financial facts and figures. In this context, Vernimmen et al.
(2014) stated that the financial accounting records all the quantitative data for particular period
of time. On the other hand, the researcher is required to mention that the financial accounting
data are used in developing the managerial accounting. In the profit seeking organizations, the
management accountants are required to use the accounting information from the financial books
of accounts to prepare different managerial accounting statements such as budgetary reports,
variance statement and standard costing statements.
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In case manufacturing firms like the company in the case study, the managerial accounting is
required to be considered as the most important aspect for putting control over the financial facts
of the company. As the company involves in manufacturing of goods, which belongs to FMCG
group, the company is required to make management of the financial results and performance on
the basis of the market demand. In the Unilever Inc, the objective of management accountants
are to compute the per unit cost of sales along with the computation of the variable costs and
fixed costs.
As opined by Micheli and Mari (2014), manufacturing companies are needed to include the
managerial accounting tools in order to put control on the different cost centers. In this context,
the researcher is required to mention that as the company manufactures a large number of goods,
the comopany is required to prepare managerial accounting statements for each of the cost
centres. In managerial accounting, the accountant is required to analyse variances and prepare
budget. Moreover, the marginal costing is also to be found as important for the management
accountants to compute the profitability and breakeven for a product (Cornelissen, 2014).
Therefore, the researcher could mention that the managerial accounting helps to make financial
planning and this process is heklpful in case of large sclae manufacturers. The management
accounting system of the company follows the computation of total cost of production and the
cost of sales. On the other hand, the management accounting system of the company woulf
facilitate the manufacturing managers to reduce the maintainable fixed costs.
Cost accounting system
In management accounting, managers could ascertain per unit cost of production. The influence
of fixed and variable costs could also be identified in cost accounting mechanism. Moreover,
cost accountants could also use the marginal costing approach in order to put control over the use
of variable costs in the production process. In this context, the researcher could mention that The
company could consider the marginal accounting system to compute the breakeven of the
products that the company manufactures. In this context, the researcher is required to mention
that the breakeven point could help the management accountants of the company to compute the
the number of units to be sold by the selling manasgers to make no profit and no loss. As stated
by Hill et al. (2014), in marginal costing, variable costs are considered as product related cost
and the fixed costs are assumed as time specific. Therefore, marginal costing could help the
management accountants to eliminate the fixed overheads from the production process of the
manufacturing companies.
Job costing:
Job costing facilitates the managers to compute cost for a certain job. Costs for different jobs
could be ascertained by using this approach of costing and planning.
As stated by Brown (2013), management accountants could compute the job cost by considering
the fixed and variable costs of the production process. In this context, it is to mention that the
company could consider job-costing system for putting control on the marginal costs related to
job.
Inventory management system:
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For managing the inventories, managers could use EOQ model, Just in Time model and ABC
system for controlling the inventories. In this context, Cornelissen (2014) opined that inventory
management is one of the most crucial aspects in an organization as it affects the pricing policies
of the company.
Price optimization:
Price optimization strategy helps the managers to identify the change in demand due to the
change in the price level. Therefore, this method is required to be considered for managing the
price of the products.
1.1.2 Requirements of different types of managerial accounting system
In manufacturing companies, the managerial accounting is to be considered as the tool, by which
management accountants could examine the excessive costs in manufacturing process. On the
other hand, service sector companies could also use the management accounting tools in order to
compute the cost of service and the loopholes in the process of servicing. In this context, it is to
mention that managerial accounting requires relevant, reliable and accurate information to
manage the financial resources of the orgaznisation. On the other hand, information is reqiored to
be received timely in order understand the present condition of the business.
Relevance of information:
In manmagement accounting, the data are required to be relevant as irrelavant data could results
in inappropriated forecasting. On the other hand, it is to mention that the relevant informatin in
management process could facilitate the managers in developing proper budgeting as budgeting
depends on the data used in managerial accounting.
Reliability:
Along with relevance information, the information is required to be reliable as the budget as
prepared by reliable data results in appropriate planning.
Accuracy:
Accurate data is also an important aspect of management accounting as use of accurate data
ensures the quality of budgeting. On the other hand, the accurate information could be
considered as the resaon behind the appropriate planning. Therefore, the information in
management accounting is to be accurate.
Up to date information:
In management accounting, managers are required to use up to dated information in order to
make financial planning. In this context, it is to mention that the up to dated qualitative
information such as demand and price changes are also required to be consizdered as important
aspects of management accounting.
Timely receipt:
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Management accountinhg also requires timely receipt of data to make planning. On the other
hand, the researcher is to mention that the managers are required to get relevant and reliable
information at the time of preparing budget.
On the other hand, Gibson (2014) stated that budgetary costing is the most relevant costing
system for the managers in large manufacturing concerns as this managerial accounting system
helps the management to set a target to the subordinate staffs. In this same context, Jung et al.
(2016) cited that target costing facilitates the management accountants to minimise waste of
financial resources. Therefore, the managerial accountant is required to mention that the
budgetary costing is required for the large manufacturing firms to minimise erosion of financial
resources.
1.2 Different methods of management accounting
Manufacturing firms are required to prepare managerial accounting reports and variance analysis
reports in order to examine the feasibility in the production process in terms of finacial figures.
In this context, Armstrong et al. (2015) stated that managerial accounting statements are not
controlled by any boards, which are internationally approved. In this context, it is also required
to mention that the management accountants in manufacturing companies could adopt marginal
accounting techniques in order to ascertain profit or loss by selling a particular number of units.
On the other hand, the management accountants could prepare the cost schedule by considering
the absorption costing, in which the overheads are calculated by considering the machine hours
worked.
In this context, managers could consider financial planning tools such as standard costing and
process costing in order to put control over the financial aspects of the company. Moreover,
financial planning is also required to be considered as one of the most important aspects of
planning as it provides the financial managers the facility of managing the financial resources.
On the other hand, financial statement analysis is also required to be taken as another method of
managing the financial resources. In this context, it is to state that the cash flow analysis and
fund flow analysis are to be made for analyzing the application and sources of the funds.
In cash flow statement, financial managers analyze the sources and application of cash in
different segments of the company. therefore, this analysis tool is also required to be assumed as
an important tool of analysis. Ion the other hand, the budgetary control is also to be considered as
an important part of financial controlling as this facilitates the management of the company to
put control over the financial resources of the company.
2.0 Task 2
2.1 Income statement by considering Absorption costing and Marginal costing
Particulars GBP GBP
Sales (35*600) 21000
Cost of goods sold
Production cost (16*700) 11200
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Less. Absorping cost 1600
9600
Gross profit 11400
Variable sales overhead
(1*600)
600
Administration cost 700
Selling cost 600
Over absorption -100
1800
Operation profit 9600
Particulars GBP GBP
Sales (35*600) 21000
Cost of goods sold
Production cost (13*700) 9100
Less. Absorping cost
(100*13)
1300
7800
Gross profit 13200
Variable sales overhead
(1*600)
600
Production overhead 2000
Administration cost 700
Selling cost 600
3900
Operation profit 9300
Table 1: Income statement by considering Absorption costing and Marginal costing
(Source: As created by the researcher)
Total cost per unit:
Computation of cost of production
Particulars Margina
l
Absorption
Direct Material 6 6
Direct labour 5 5
Variable overhead 2 2
Fixed production
overhead
0 3
Cost of production per
unit
13 16
Table 2: Computation of cost of production
(Source: As created by the researcher)
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Fixed production overhead = GBP 1800/600 units = GBP 3.
Over and under absorption of overhead:
Over and under absorption of overhead = Actual production overhead – Absobed production
overhead
= GBP 2000 - GBP 2100 = 100
As the actual overhead is lower than the absobed producrtion overhead, there shall be an Under
absorption of fixed manufacturing overhead of GBP 100.
From the above calculation table, the researcher is to mention that the total contribution of the
organisation is the profit under the marginal costing method. Moreover, the variable and fixed
selling overhead were required to be ignored as the selling expenses are not related with the
manufacturing process of the company (Variable costing versus absorption costing | Accounting
For Management. 2017). In case of the calculation of profit as per the absorption costing, the
fixed costs in relation to the manufacturing and the administration have been deducted.
Explanation of absorption and marginal costing:
Absorption costing:
In absorption costing, the cost of production could be computed by considering the variable and
fixed manufacturing overheads. In case of manufacturing companies, the management
accountants consider overhead absorption rates as the basic factor of overhead costs.
Marginal costing:
In case of marginal costing, the variable costs are considered the only cost in the manufacturing
process. In this regard, the researcher is to mention that the per unit variuable costs are
consisdered as the per unit cost of productions in marginal costing.
2.2 Explanation of the difference between Absorption costing and Marginal costing
In the above calculation of total cost and profit, the researcher has considered absorption costing
and marginal costing methods. In this regard, it is required to mention that both methods
consider different assumptions and techniques. If the discussion is to be made on the recognision
of cost, the researcher is required to mention that marginal costing method consisders the fixed
costs as the period cost. On the other hand, absorption costing consdiders the fixed
manufacturing costs as the product costs.
On the other hand, Mahadevan (2015) stated that marginal costing method assumes the profit
volume ratio as the measurement of profit. But in the absorption costing, profitability depends on
the fixed costs related to the manufacturing process. Furthermore, it is to be mentioned that the
fixed costs affects the profitability in case of the absorption costing. In the above table, it has
been seen that the profit of the company was lower when the absorption costing is considered. In
this context, it is to state that the involvement of fixed cost in the financial statement and cost
schedule has resulted in low profit.
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If the discussion is to be made on the decesion making factors in the marginal costing, the
researcher is to mention that management accountants consider the contribution per unit as the
most crucial factor for making decesions. On the other hand, the absorption costing considers the
profit per unit as the most important factor for making decesions. As the marginal costing
method does not consider the fixed costs as the influencing factors in the cost schedule, the
contribution per unit couls also be considered as per unit profit. On ythe other hand, the
exeistence of fixed costs in the cost schedule makes it compulsory for the cost and management
accountants to compute profit per unit by deducting the fixed costs from total contribution.
3.0 Task 3
3.1 Advantages and disadvantages of different types of planning tools in budgetary control
Budget is to be considered as the financial planning of a company. In this context, it is to
mention that budget facilitates the managers to get the probable information regarding the
financial performance of the company. On the other hand, budgetary control helps the financial
managers to put control over the financial resources. In this context, it is to mention that the
budgetary control is made from the budget statements of the company.
Pros and corns of two budgetary tools:
Cash budget
Advantages:
1. Forecasting of cash balances for future,
2. Forecasting the payments is to be made for a certain period.
3. It facilitates to compute the investable money.
Disadvantages:
1. Cash budget is a time consuming process,
2. Cash budget considers assumptions therefore there could be a chance of inappropriate
forecasting.
3. As this budget tool considers cash basis of accounting, the actual incomes could not be
ascertained.
Performance budgeting:
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Pros:
This budgeting helps the managers to get the forecast of manufacturing for a financial year.
Cons:
Performance budget could not facilitate the managers to identify the amount of sales in a ceratin
period.
In this context, the researcher is to mention that the revenue budget, capital expenditure budgets
are also made by the management in order to control a company.
Budgeting process requires various assumptions, through which managemenmt accountants
make forecast for the financial fiures and profiutability (Vernimmen et al. 2014). In this context,
it is to mention that the manmagers could not make forecast withgout making the required
assumptions. Therefore, the managerial accountants could able to compute the forecasted profit
by considering the asumption and therefore budgetary control is to be founded as quite helpful
for the companaies. On the other hand, it is also to mention that the assumptions of the budget
calculation could results in fake profitability reporting, and therefore this is to be considered as a
drawback of the budgetary control. The other advantages and disadvantages of the different types
are as follows.
Advantages of different types of planning tools in budgetary control
Use of previos year data:
In case of financial budgeting, the management accountants are required to consisdser the
previous year data to make forecast of the revenue statement and the profit. As stated by
Armstrong and Taylor (2014), financial budgeting is made by considering the financial figures of
the past years and therefore, the trend of the financial performance are reflected in the budgetary
statement. In the case study given in the problem, the researcher is required to mention that the
budgeted data has been calculated by considering the previous year data. Therefore, there is
lesser chance of data manipulation.
Cash flows:
Cash budgets of a company are prepared by considering the planning of the company of
generating cash from the different sources. In this context, the researcher is required to mention
that as the financial managers in budgetary controlling do the cash generation planning, the
managers could easily ascertain the future cash balances. In this context, if the researcher is to
give example of the computation process of the cash budget, it could be mention that if the total
cash receipt of the company for a particular period is GBP 10000 and the total payment of cash
of the same period of the company is GBP 8000, the company would have a forecasted cash
balance of GBP 2000. In this context, the researcher is required to mention that the company
could invest the available fund for future benefit. In the present case study, the profit has been
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computed by considering all the probable expenses and revenue. The sales revenue has been
planned to make computation of the closing cash flows.
Production specification:
In operational budget planning, financial managers are to make computation of the production of
a future period. This kind of production specification could be found as helpful for the financial
managers and the purchasing managers as the material requirements could be computed with the
help of budgeted quantity of sales. For example, the researcher is to state that if the budgeted
sales of the company are 1000 units and the available inventory of the company is 400 units, the
company is required to make purchase of 600 units of material for meeting the demand in the
market. In the case study, closing inventory balance of the company has been mentioned, which
was required to be considered as an important factor for determining the production requirement
for the current accounting period. Therefore it is to mention that the planning tool helps the
management accountants to forecast the production requirement of the organization.
Disdvantages of different types of planning tools in budgetary control
Use of vague assumptions:
Financial managers make assumptions in order to make planning through budgetary controlling.
As stated by Hayes (2014), sometimes managerial accountants of a manufacturing organization
consider that the trend of sales and cash flows for making budgetary statements, which could
result in wrong profitability reporting.
Rigidity:
Financial budgeting often faces the problem of rigidity as the preparation of financial budgeting
requires firm specific standards. On the other hand, the researcher is required to mention that
lack in personal intervention results in lack in flexibility of budgeting.
Lack in consistency:
In financial planning, management accountants ignore the existence of abnormal losses and
gains. Therefore, the consistency could not be maintained in financial budgeting. In case of the
company, the probability of machine breakdown could not be ignored as the manufacturing
process involves heavy machines and plants. As the management accountants of the company
considers the regular facts and figures of the manufacturing concern, the abnormal losses and
gains are ignored by the management in the time of preparing budget. Therefore, the financial
and management accounyt6antds could face the problem of inconsistent result due to the
financial planning through budgetary control. In the case study discussed above, the computation
over the profit under marginal costing method and the absorption costing method have not been
made by considering the abnormal items of the financial year.
Decline in the quality of the output:
In the standard budgeting, the managerial accountants set target cost for the subordinate staffs.
This technique results in compromise over the quality of the output. Therefore, standard
budgetary control tool affects negatively to the production process. As the budgeted costs of the
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company was given due to the reason of putting control over the activities of the manufacturing
officers of the company, there could be a chance of declining in the quality of the outputs.
Cash budget of the company could be as follow;
Cash budget of the company
Particulars Workin
g note
No.
GBP
Januar
y
Februar
y
Marc
h
April May June
Opening cash balance 15000 23000 35650 5229
0
6622
5
81971
Receipts
Cash sales 1 5000 5650 5640 6500 7000 5000
Cash collected from customers 2 10000 12000 15000 1200
0
1000
0
15000
Total receipts (A) 30000 40650 56290 7079
0
8322
5
10197
1
Payments
Payments to creditors 7000 5000 4000 4565 1254 5650
Total payments (B) 7000 5000 4000 4565 1254 5650
Closing cash balance (A-B) 23000 35650 52290 6622
5
8197
1
96321
Task 4
4.1 Comparison between the processes, which organisations use the management
accounting to respond the financial problems
In an manufacturing organisation, financial amanegers use different tools and techniques to put
control over the manufacturing processes defined in terms of financial and accounting figures. In
this context, the researcher is also required to mention that the management accounting in an
organisation helps to assure the financial managers to make the forecasted financial statements.
As stated by Renz (2016), future cash flow statement and the forecasted income statements are
important reports, which help the financial accountants to address the stakeholders to enhance
the investment quantity in the organisation. In this context, the researcher is required to mention
that the budgeted income statement and performance budgeting helps the manufacturing
managers to to analyse the production of the company.
If the researcher is to make the comparative analysis on the different tools and techniques, which
are used by the financial managers, it is to mention that the cash budgeting helps the
manufacturing firms as well as the service providers to make forecast about the cash balances
after a certain period of time. In this context, it is also to state that the manufacturing managers
could coordinate with the investment managers to inform about the availability of the liquid
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fund. On the other hand, the flexible budgeting process helps the financial managers to forecast
the profitability with different level of productions. Flexible budgeting does not facilitate the
finance managers to make forecast regarding the cash balances and availability of liquid fund.
In performance budgeting, the financial managers could get the relevant information regarding
the production. As stated by Brigham and Ehrhardt (2013), production requirement is needed to
be identified as one of the most important problems that the financial managers face in recent
times due to the fluctuation in the demand in the market. In this context, the resercher is required
to mention that the different budgeting tools are used for different purposes as the intension of
financial managers are found as different.
Conclusion
Financial management tools and techniques have been identified as impactful as per as the
financial problems of an organisation are concerned. In the initial part of the stsudy, the
researcher has identified that the management accounting is one of the most crucial parts of
financial controlling for the manufacturing firms. In case of large firms, the requirements of
management accounting has been found as more crucial as the number of cost centres are higher
as compared to the small manufacturing firms. In the next part of the study, the researcher has
found that the profit calculated under marginal costing method is higher than the same calculated
under absorption method. Moreover, the researcher has identified that the financial problem
regarding inverstment decesion, divident decesion and the financial controlling decesions could
be made easily by considering the managerial accounting tools.
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References
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theory and practice. John Wiley & Sons.
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Brown, A.J., (2013). Whistleblowing in the Australian public sector: Enhancing the theory and
practice of internal witness management in public sector organisations (p. 333). ANU Press.
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Hill, C.W., Jones, G.R. and Schilling, M.A., (2014). Strategic management: theory: an
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banking firms and the financial services industry.
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Jung, W.O., Park, S.O. and Chung, H., (2016). Debt financing and voluntary adoption of the
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Gibson, A.M., (2014). Financial Freedom through Budgeting.
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(2017). Accountingformanagement.org. Retrieved 22 February 2017, from
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