Financial Analysis: Management Accounting Systems at Creams Ltd

This report provides a detailed analysis of management accounting practices at Creams Ltd, a medium-sized UK company specializing in sweets. It covers various aspects of management accounting, including an explanation of management accounting and its essential system requirements, differe...Read More

Management
accounting

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Explanation of management accounting along with essential requirements of its systems...1
P2 Description of different methods which are used to report information of management
accounting....................................................................................................................................2
M1 Evaluation of benefits of all the systems which are used for in organisations.....................3
D1 Integration of management accounting reports and systems within organisational context
in critical manner.........................................................................................................................4
TASK 2............................................................................................................................................4
P3 Calculation of costs with the help of different costing techniques such as absorption and
marginal costing...........................................................................................................................4
M2 Application of range of management accounting techniques to generate financial reporting
documents..................................................................................................................................10
D2 Interpretation of data............................................................................................................11
TASK 3..........................................................................................................................................11
P4 Explanation of budgetary control along with advantages and disadvantages of different
planning tools which are used in it............................................................................................11
M3 Analysis of various planning tool’s use in preparing and forecasting budgets...................12
TASK 4..........................................................................................................................................13
P5 Comparison of different organisations on the basis of use of management accounting
systems to respond financial problems......................................................................................13
M4 Assessment of the way in which companies are using management accounting to respond
financial problems and the way in which it can lead entities o sustainable success..................14
D3 Evaluation of use of planning tools for responding financial problems..............................15
CONCLUSION..............................................................................................................................15

REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is one of the key factors which are focused by all the entities to
make sure that detailed internal records are formulated which can help to analyse the market
position of business. If the enterprises are not able to generate it then it may leave impact upon
mind set of insider parties such as employees, managers and stakeholders as they assess and
evaluate internal records to analyse actual position of company. It shows that for all the
companies it is very important that they should conduct it every year so that interest of
stakeholders could be improved (Abernethy and Wallis, 2018). Present report is based upon
Creams Ltd which is a medium sized company of UK. Currently it is selling different types of
sweets in the market which includes waffles, ice creams, doughnuts etc. Various topics that are
covered in this assignment are analysis of management accounting, its systems, their essential
requirements, reports to record its information, costing techniques such as marginal and
absorption costing etc. Additionally, planning tools along with their advantages and
disadvantages, comparison of companies on the basis of use of management accounting systems
to respond financial challenges etc. are also covered in this project.
TASK 1
P1 Explanation of management accounting along with essential requirements of its systems
Management accounting is the process of controlling, evaluating and analysing all the
steps which are taken by the managers for betterment of business so that progress of company
could be analysed. In Creams Ltd it is used by managers for the purpose of analysing actual
performance of business. While conducting it different types of systems are used which are
described below:
Price optimisation system: This management accounting system is used by all the
organisations so that they can set appropriate price for all the products and attract large number
of customers. In Creams Ltd it is used to analyse responses of clients on the prices that are set of
ice creams, doughnuts and waffles. It is essentially required for the entity as it helps the
managers to set best suitable price for the items that are sold by it which is beneficial to meet
business goals such as higher revenues and profits (Alawattage and Wickramasinghe, 2018).
Cost accounting system: Under this accounting systems managers keep detailed
information of all the costs that have taken place while operating business. In Creams Ltd it is
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being utilised by management so that accurate information regarding the activities that are
resulting in higher costs could be determined. Essential requirements of it for the business is to
formulate cost control strategies because it will guide to estimate all the expenses which may
take place in future while carrying out operations.
Job order costing system: The companies which are involved in multiple activities use
this system so that requirements of all the clients could be fulfilled according to their
specifications. Creams Ltd is using job order costing so that managers can keep record of all the
jobs that are performed by them to carry out operations. One of the key requirements of this
system to the organisation is that it guides all the members of company to make sure that they
perform all the jobs according to specification of customers to meet long-term goals (Bento,
Mertins and White, 2018).
Inventory management system: It is used by all the companies to analyse the stock
which is used for performing all the operations in systematic manner. Managers of Creams Ltd
are using it so that they can analyse that they are having sufficient goods to meet requirements of
clients. There are three different types of it which are as follows:
 First in First Out (FIFO): This inventory management system is used by entities to use
previously purchased goods to manufacture products.
 Average cost (AVCO): In this method of inventory management all the goods are used
on average basis for production activities.
 Last in First Out (LIFO): This method of managing inventory is taken in to
consideration when enterprises use recently purchased stock to perform operations.
From all the above described management accounting systems Creams Ltd is using FIFO
as it helps to utilise all the resources properly. Its essential requirement for business it that it
guides managers to make sure that they use all the stocked items properly to perform all the
operations (Eldenburg, Krishnan and Krishnan, 2017).
P2 Description of different methods which are used to report information of management
accounting
In all the companies, specific procedure is followed for the purpose formulating records of
whole years so that internal stakeholders can analyse actual performance of business. This
process is known as management accounting reporting. In Creams Ltd it is used by managers so
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that they can record information of all the operations which are performed by them. Description
of all of them is as follows:
 Inventory management report: This report is mainly used for the purpose of recording
details regarding the stock which is used to perform business activities. In Creams Ltd it
is used by managers to analyse that they are having appropriate amount of stock so that
they can meet requirements of clients who order ice creams, waffles and doughnuts. It is
beneficial for the business because it can help to ignore the situation of lack of stock to
perform operational activities (Englund and Gerdin, 2018).
 Performance report: Most of the companies are generating this report to record actual
performance of business and the individuals who are working in it. In Creams Ltd it is
created by management so that they can analyse that the efforts that are made by them to
improve business have resulted positively or negatively. It is very beneficial for the entity
because it helps to motivate employees by providing them rewards according to their
performance.
 Budget report: It is related with the allocation of funds to different departments so that
all of them can perform all their activities properly. In Creams Ltd financial division
generates it in order to assign budget to all the functional departments according to their
requirements. The key benefit of it to the enterprise is that it helps to perform all the
activities properly because it allocates sufficient funding to all the divisions.
 Account receivable report: It is used in most of the large and some of the medium sized
companies who are allowing credit to the clients. Creams Ltd is generating it for the
purpose of analyse the actual receivables that are required to be collected by it from the
clients in future. It is beneficial for the organisation because with the help of it
management and other concerned parties get aware of actual owed amount of company
from different customers (Horton and de Araujo Wanderley, 2018).
M1 Evaluation of benefits of all the systems which are used for in organisations
Managers of Creams Ltd are using different types of systems of management accounting.
Application and benefits of all of them could be understood with the help of following table:
Management
accounting
Application and benefits
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systems
Price optimisation
system
It is applied in Creams Ltd because it is beneficial to set appropriate price
for all the products that best suits to the objectives of business.
Cost accounting
system
It is used by managers of Creams Ltd as it helps to analyse the costs that
may take place in future and formulate effective strategies to deal with
them.
Inventory
management
system
This system is applied in Creams Ltd because it benefits the company to
analyse the actual status of inventory and assure that it is having sufficient
goods to perform all the business activities.
Job order costing This management accounting system is used in Creams Ltd as it is
beneficial to meet all the requirements of customers according to their
requirements.
D1 Integration of management accounting reports and systems within organisational context in
critical manner
Managers of Creams Ltd are using various types of management accounting systems are
reports as all of them helps to attain success for business. For example, costing accounting
system helps to analyse costs so that strategies to control them could be formulated. Price
optimisation system is used by the managers as it helps them to set right price for all the items
that are sold by the entity in the market. On the other hand, different types of reports such as
performance report is generated by the company as it helps to analyse that all the efforts that are
made by them are resulting positively or negatively (Laing, 2018). Accounting receivable reports
are used to tighten the credit policies because it helps to analyse the arrear which is made by
clients in making payments of owed amount by them.
TASK 2
P3 Calculation of costs with the help of different costing techniques such as absorption and
marginal costing
In all the companies, different types of costing techniques are used for the purpose of
analysing net income for the year. Two of them which are used by Creams Ltd to assess the
actual profits are as follows:
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Marginal costing: This costing technique is used by all the companies to analyse the cost
of all the additional units that are manufactured during the year. In Creams Ltd the managers are
using it to analyse the expenses which have taken place due to production of additional items that
are sold to the customers to meet their demand (Nørreklit, 2017). It is also known as variable
costing because only variable costs are used in it while calculating profits with the help of it.
Detailed calculation of profits with the help of this technique is as follows:
Absorption costing: This technique of cost accounting is used by companies to analyse
that all the cost which have taken place at the time of production of different units are being
absorbed from the revenues of same units or not. In Creams Ltd it is used by the managers to
make sure that the expenses that have taken place because of making of different items such as
ice creams, doughnuts and waffles etc. are being absorbed from the sales of them. All the fixed
as well as variable costs are taken in to consideration while calculating profits from this costing
technique (Nuhu, Baird and Appuhamilage, 2017). Calculation of net profits by using this
technique is as follows:
5

6

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M2 Application of range of management accounting techniques to generate financial reporting
documents
There are various different types of management accounting that could be used by
companies for the purpose of formulating financial reporting documents. Description of some of
them is as follows:
Standard costing: This technique of management accounting could be used by Creams
Ltd to analyse the difference between actual and standard performance of business. With the help
of it, strategies for improvement in performance could be formulated.
Historical costing: Under this technique of management accounting all the assets and
liabilities are required to be recorded on the basis of actual value rather than market value. By
using it Creams Ltd will be able to record accurate information of all the figures of balance sheet
in books.
D2 Interpretation of data
The calculation of marginal costing is showing that the organisation will generate profit of
50000 pounds for January month and in February loss of 10000 pounds will be faced by the
entity. The calculations for absorption costing are showing that total under absorption for month
of February will be around 51000 pounds. On the other hand, the calculation of variances are
showing that quantity and labour rate for the entity will be around 6428 and 3638. Both of them
are showing adverse results. Quality and material cost variance s are showing 2000 and 900
favourable results.
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TASK 3
P4 Explanation of budgetary control along with advantages and disadvantages of different
planning tools which are used in it
Budget is characterised as general statement that involves estimated receipts and expenses
for an accounting year. In Creams Limited, managers prepare budget in order to create spending
plan for monetary resources and to ensure that all departments have resources to execute
operations effectively.
Budgetary control is termed as procedure to create spending plan addition to periodically
comparing real expenses against defined plan for controlling spending along with meeting
financial goals. With this, financial managers of Creams Ltd are able to manage all line items
that results in controlling business operations and expenses in order to gain maximum revenues.
It involves various number of planning tools that helps in controlling operational working and
some are as discussed in context to Creams Ltd:
Zero based budget: The budget type in which all expenses are justified for new period is
said to zero based budget. In Creams Ltd, managers prepare Zero based budget as per
requirements for upcoming period as well as to collect information related to expenses and costs
concerned with new product (Qian, Burritt and Monroe, 2018).
Advantages: With zero based budget, managers of Creams Ltd are benefitted in improving
operations for upcoming period and eliminates resource wastage through providing new
calculations of income and expenditure.
Disadvantages: To prepare zero based budget, finance department of Creams Ltd requires
huge time and also in-depth knowledge for each financial mechanisms which becomes
cumbersome difficult for the entity.
Flexible budget: The financial plan wherein modifications are done as per needs of
organisation. It calculates distinct level of expenditures for costs that depends on fluctuations in
actual revenue. With the help of flexible budget, finance team of Creams Ltd is able to make
relevant changes in budgets as per activity level.
Advantages: Flexible budget benefits Creams Ltd in predicting performances addition to
income level for changes in of sales and production. It also helps the company in recognising
irregular earnings so to use funds in much needed times.
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Disadvantages: Drafting flexible budget creates huge confusions and requires huge planning
for tracking expenses as well as adjusting differences among periods.
Cash Budget: The budget type which provides estimation of cash inflows and outflows for
specific time period is said to cash budget. The objective for preparing cash budget at Creams
Ltd is to estimate inflows and outflows of cash within particular time frame.
Advantages: Cash budget assist finance managers of Creams Ltd to avoid debts and finding
inefficiencies on accurate time. It also helps in identifying potential deficits quickly.
Disadvantages: Cash budget creates theft dander for the company and also limits spending
powers for different transactions. Moreover, the budget also limits potentials for the business
concerns to build credit profile (Rikhardsson and Yigitbasioglu, 2018).
M3 Analysis of various planning tool’s use in preparing and forecasting budgets
Planning tools are important to prepare along with forecast different financial budgets.
Budgets engrosses planned sales revenues together with volumes, costs and expenses, cash
flows, resource quantities and many more. The main components of planning tools that are
applied in Creams Ltd are cash budget, flexible budget and zero-based budget. In context to cash
budget, it is applied for estimating flows of cash within the business. Moreover, zero based
budget is applied for lowering costs through avoiding increase or decrease in budget as per
previous period’s budget. Finance team of Creams Ltd applies flexible budget for adjusting
variables as per changes in activities.
TASK 4
P5 Comparison of different organisations on the basis of use of management accounting systems
to respond financial problems
Most of the companies around the world face problems related to lack of finance, these are
known as financial issues. It is very important for all the entities to make sure that they deal with
them properly so that possibility of negative impacts of them upon the business could be
reduced.
Comparison of companies:
Creams Ltd The Waffle Factory
Price optimisation system is used by the Costing accounting system is used by
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managers of the entity so that financial
problem of delayed payments from the clients
could be resolved. With the help of it,
appropriate price for all the items that are sold
by enterprise will be decided which will reduce
the number of debtors.
managers to deal with the financial problem of
unplanned expenses. It guides managers to
estimate the actual expenses so that possibility
of such costs which are not planned could be
controlled properly
Job order costing system is used to deal with
the problem of inappropriate management of
funds because with the help of it all the jobs
will be performed appropriately and funds will
be managed in systematic manner.
Inventory management system is used by the
managers to deal with the problem of lack of
stock for operations as it guides to manage
goods properly and make them available when
they are needed.
There are various financial challenges which are faced by Creams Ltd. Description of them
is as follows:
Delayed payments from clients: This problem takes place when all the clients who have
promised to pay the owed amount after certain period of time get failed to make payment on due
date. This issue is affecting Creams Ltd because it creates the situation of lack of funds to carry
out operational activities (Shields, 2018).
Inappropriate management of funds: It is another challenge which is faced by Creams
Ltd. When the employees working within the entity are not experienced or not having
information of accounting principles then they make mistakes in the records. Afterwards, it
results in the problem of inappropriate management of funds. Due to this, management get failed
to identify the actual resources that are available to the entity. It also results in improper
execution of operational activities.
Unplanned expenses: This problem is faced by The waffle Factory because the
managers are not able to determine them in advance and it results in lack of funds for future
operations.
Lack of stock for operations: It is another issue which is faced by The Waffle Factory
because the management us not able to manage the stock properly. Due to this issue the
functionality of business is decreasing continuously.
The above discussion shows that Creams Ltd and Waffle Factory are facing different
types of financial issues. As the chose entity is Cram Ltd so there are various types of techniques
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which could be used to identify all the above described problems. Following tools could be used
by the organisation for identification of the finance related issues which are faced by it:
Benchmarking: This technique is mainly related to the comparison of company’s actual
position with competitors so that mistakes in company’s policy could be determined. It is used in
Creams Ltd to figure out the problem of delayed payments from clients. By using it managers try
to compare their credit policies with another company and make changes in own strategies.
Key performance indicators: These are the performance measures which are used by
companies to analyse the failure or success of the steps that are taken by them to perform
operations. There are two different types of them which are financial and non-financial (Van der
Stede, 2016).
Financial KPIs are used to analyse and control the finance related issues and non-
financial KPIs are used to determine the causes of errors in activities such as distribution, supply
chain etc. that are not related to finance division. In Creams Ltd, financial KPI is used to identify
the problem of inappropriate management of funds because it helps to analyse such issues.
When all the financial challenges are being identified then the companies are required to
deal with them by applying appropriate techniques. In Creams Ltd financial governance is used
which is described below:
Financial governance: It can be defined as a technique which guides all the
organisations to create their records appropriately and effectively according to accounting
principles. With the help of it, problems of delayed payments and inappropriate funds
management could be dealt as it will guide managers of Creams Ltd to make sure that they
formulate all the records properly. When it will be done then possibility of the issues will be
reduced (Wagenhofer, 2016).
In Creams Ltd. the managers can also use balance score card to deal with financial issues
because it can help to respond the challenges by recording information of progress of business.
Apart from this, the managers of the entity can estimate the financial issues in advance so that
they can respond all the issues in systematic manner.
M4 Assessment of the way in which companies are using management accounting to respond
financial problems and the way in which it can lead entities o sustainable success
Creams Ltd is one of the medium sized companies of United Kingdom. There are two main
financial problems which are faced by it. These delayed payments by clients and inappropriate
12

management of funds. In order to identify and deal with them managers within the company are
using management accounting techniques such as KPI, financial governance and benchmarking.
With the help of all of them the organisation make modification in its strategies and deal with the
issues properly.
D3 Evaluation of use of planning tools for responding financial problems
There are various types of planning tools which are used by Creams Ltd in budgetary
control. These are cash, flexible and zero-based budget. All of them can also be used in
responding financial problems. These tools can help to identify the causes of the financial
challenges and make arrangements of funds to deal with them properly. All of them are
beneficial for Creams Ltd to respond the finance related challenges systematically.
CONCLUSION
From the above project report it has been concluded that for all the business entities it is
very important to use management accounting systems and reposts so that all the operations
could be carried out properly. It can help to analyse actual performance of business and result in
attainment of all the long-term business goals. There are various types of costing techniques such
as marginal and absorption which could be used to analyse actual profits for the year. Different
types of budgets such as cash flow, flexible and zero based are used by most of the companies in
budgetary control and deal with financial problems faced by business. There are some techniques
which are also used to identify and deal with finance related challenges. These are key
performance indicators, benchmarking and financial governance. These should be utilised by
such enterprises that are planning to deal with all the problems which are faced by them due to
lack of financial resources.
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REFERENCES
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