Evaluation of Management Accounting Systems for Financial Stability

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MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION............................................................................................................................. 2
PART 1............................................................................................................................................3
P1 EXPLAIN MANAGEMENT ACCOUNTING AND GIVE THE ESSENTIAL REQUIREMENTS OF
DIFFERENT TYPES OF MANAGEMENT ACCOUNTING SYSTEMS..................................................3
P2 EXPLAIN DIFFERENT TECHNIQUES AND METHODS USED FOR MANAGEMENT ACCOUNTING
REPORTING AND HOW THEY INTEGRATED WITHIN THE ORGANIZATION PROCESSES..............5
PART 2............................................................................................................................................7
P4 EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF AT LEAST 3 DIFFERENT TYPES OF
PLANNING TOOLS USED FOR BUDGETARY CONTROL AND ANALYSE THEIR APPLICATION FOR
PREPARING AND FORECASTING BUDGETS.................................................................................7
P5 EVALUATE HOW THE PLANNING TOOLS DISCUSSED ABOVE CAN BE USED TO SOLVE
FINANCIAL PROBLEMS IN THE GIVEN ORGANISATION, SUCH AS CASH FLOW PROBLEMS......10
CONCLUSION............................................................................................................................... 15
REFERENCES.................................................................................................................................16
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INTRODUCTION
When actual performance needs to be evaluated against the proposed budget, the role of
management accounting is very important. Management accounting is different from financial
accounting as former prepares weekly or monthly reports of the business for managers and
CEO so that they can take better decisions while latter prepares annual reports which are
generally used by external stakeholders. This report will discuss different types of management
accounting systems such as Job costing, Price optimisation and Inventory management. The
benefits of using management accounting system are also discussed in detail. Later, the report
will discuss different techniques of management accounting and how these techniques can be
used to prepare an effective budget for the organisation. The advantages and disadvantages of
different planning tools are also discussed.
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PART 1
P1 EXPLAIN MANAGEMENT ACCOUNTING AND GIVE THE ESSENTIAL
REQUIREMENTS OF DIFFERENT TYPES OF MANAGEMENT ACCOUNTING
SYSTEMS
Management Accounting is the process of preparing the accounting information in a
professional way so that management can analyse the data easily. By evaluating and
interpreting the business performance in an organised way the managers can inform
themselves better which helps in effective decision making (Andor et al., 2015).
DIFFERENT TYPES OF MANAGEMENT ACCOUNTING
1. Cost accounting systems
Cost accounting system represents the cost of different functions product wise,
department wise, process-wise or branch wise, this enables managers to compare the
cost between two processes and take appropriate steps if there are big differences in
two costs (Brooks, 2015).
2. Job Costing
Under this accounting system, a particular job is allocated costs and this job costing
system is applied to the products only when the products that are manufactured are
different from each other. Job costing calculates three types of costs which are material
cost, labour cost and the overhead cost (Edmonds et al., 2016).
3. Inventory management accounting system
Inventory represents the total stock of the goods and material of a company. It is
necessary to keep the records of all the inventory items so that production, packing and
distributing process can run smoothly (Chen et al., 2014). The management accounting
systems are used in inventory management. The role of management accounting in the
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inventory management is to know the accurate inventory level so that outgoing
functions the goods can be managed.
4. Price optimisation system
This system analyses the demand of the consumers at a different level and by analysing
many other data such as cost and inventory level suggests a recommended price which
may help in increasing profits (Eldenburg et al., 2016). The role of management
accounting in the price optimisation process is to provide different data regarding
consumer demand, cost of raw materials and the current stock level so that the right
pricing for the products can be done.
BENEFITS OF MANAGEMENT ACCOUNTING SYSTEMS
 The management accounting systems help in internal decision making.
 The analysis of the financial data is done on an internal level and therefore there is no
need for any external audit (Lanen, 2016).
 These reports contain both the monetary and sell as monetary information and
therefore it is easy to understand and interpret.
 The report is presented in weekly, monthly and fortnightly which helps the managers
plan different business activities effectively.
 As the accounts and the work progress are presented at regular intervals c the managers
can take proactive steps to solve a particular problem expected in future (Otley, 2016).
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P2 EXPLAIN DIFFERENT TECHNIQUES AND METHODS USED FOR
MANAGEMENT ACCOUNTING REPORTING AND HOW THEY INTEGRATED
WITHIN THE ORGANIZATION PROCESSES
Management account reports are used for planning, decision making and performance
appraisals. Below explained are some methods which can be used for effective management
reporting:
Budget reports
The budget reports are used to provide an overview of the grand scheme of the business. These
budget reports are prepared both department wise and as a whole so that managers can
understand the performance of departments as well as the overall performance of the
organisation. The previous experience of the business are used to prepare these budget
reports, however, for making the budget report more effective, it is necessary that this report
should have a margin for any unforeseen circumstances (Saarinen, 2017). The efforts should
also be made to achieve various goals and objectives within the budget.
Cost and variance report
The cost and variance report analyses the variance in the cost of raw materials and other
necessary items used for production. The report compares the previous cost and new cost and
prepares an estimate on the impact of the price changes on different business functions of the
company (Theriou, 2015). Calculating all these expenses in a proactive manner facilitates the
decision-making process and the problem of over or under budgeting is resolved.
Divisional and departmental reports
These kinds of reports contain the information regarding performances of different
departments, by having exact data regarding specific departments the management can
understand the reason for the low performance of the business and make strategies to boost
the performances of specific departments (Warren and Jones, 2018).
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Investment appraisal report
This report focuses on assessing the feasibility of new investments in different projects. Having
a detailed report of all the options available for investments makes it easy for the managers to
make the right investment choice (Warren et al., 2015). The effective decision making will be
based on the quality of the report prepared; the report should contain the viewpoints of
different stakeholders.
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PART 2
P4 EXPLAIN THE ADVANTAGES AND DISADVANTAGES OF AT LEAST 3
DIFFERENT TYPES OF PLANNING TOOLS USED FOR BUDGETARY CONTROL
AND ANALYSE THEIR APPLICATION FOR PREPARING AND FORECASTING
BUDGETS
Budgetary control techniques are used by the organisations to define the standards which are
must for control systems. These budgetary control techniques provide a clear picture regarding
the resources available and the expectations. Below mentioned are different techniques used
for budgetary control.
CASH FLOW BUDGET
The cash flow budget is used to understand the exact requirement of cash so that different
expenses of the company can be managed on time (Andor et al., 2015). The cash flow budget
can be used effectively to prepare and forecast the budget for different activities.
Advantages
 The cash flow helps in effectively managing the working capital requirements.
 Routine obligations can also be managed with the help of a cash flow budget (Weygandt
et al., 2015)
 Liquidity can also be maintained effectively is the cash flow budget is managed
accordingly.
Disadvantages
 The cash flow budget may block the capital in following a cautious approach to handling
various expenses (Andor et al., 2015).
 The information on different budgetary expenses may be distorted which will lead to
faulty conclusions.
 The report may also be manipulated.
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STATIC BUDGET
This type of budget stays unchanged even if there are fluctuations in the prices of raw materials
or other such factors (Chen et al., 2014). The advantages and disadvantages of the static budget
are explained below:
Advantages
 This budget can be used to measure the variance in the costs over the years
 The budget does not need a regular update.
 The implementation process of the Static budget is very easy.
Disadvantages
 Lack of flexibility in terms of cost creates a situation of misbalance between cost and
expenses (Andor et al., 2015).
 This budget does not allow the allocation of any additional resources and it is a demerit
of this type of budget.
 The data used in the budget is used on the basis of last year’s business data.
ROLL OVER BUDGET
This type of budget allows carrying over the expenses of the budget to the next year. This
means that even if the organisations overspend in this month, in the next month the budget
can be started in negative.
Advantages
 This type of budget can be used as a buffer to manage the expenses of different
unforeseen expenses.
 It allows companies to plan ahead for expenses and helps to even out the cost of the
entire year (Warren et al., 2015).
 It becomes easy to monitor such budgets
Disadvantages
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 When compared with the traditional budget, it takes a little extra time to prepare the
budget at the beginning of the month.
 The information system needs to be managed effectively to prepare this type of budget.
 Continuous preparations are required to make the budget effective.
To prepare and forecast budget, the above-mentioned tools and techniques of management
accounting can be used effectively. The cash flow budget assesses the current workflow needs
of the company and on the basis of this analysis, the overall budget required in the future can
be predicted. The static budget works as a benchmark for comparing the differences in the
expenses in different financial years and the requirements in the upcoming year (Edmonds et
al., 2016). The forecasting process helps is making a proactive approach to manage expenses
and the company can use these estimates to develop long term plans for success. The rollover
budget is a more flexible form of budget and allows managing the budget according to the
resources available.
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P5 EVALUATE HOW THE PLANNING TOOLS DISCUSSED ABOVE CAN BE USED
TO SOLVE FINANCIAL PROBLEMS IN THE GIVEN ORGANISATION, SUCH AS
CASH FLOW PROBLEMS
The cash flow problem is associated with the shortage of cash and it indicates that the business
is spending more than its current income from the business. If a business is spending 50,000
GBP on rent, supplies and payrolls and the total sales of the business in 40,000 GBP; the
business has a negative cash flow of 10,000 GBP. The problem of cash flow problem arises
when the businesses fail to plan their budgetary expenses (Edmonds et al., 2016). These
financial problems can be effectively managed by the help of management accounting
principles. The need is to prepare detailed reports of the expenses and the plan different
contingencies so that a proactive approach to face the problems can be followed.
The rollover budget is used by smaller organisations so that a flexible approach can be followed
to manage different expenses. The rollover budget facilitates the regular expenses of the
company and the budget for all these activities can be managed without getting worried about
the expenses. The static budget is used to measure the differences in the expenses of different
departments as the budget does not need to be updated regularly (Warren et al., 2015). The
static budget can be used to effectively solve financial problems. While managing the budget
for different activities it is necessary to understand the rate of fluctuations in the expenses
according to the current inflation rate. The processes of budget management need to
collaborate with the price consideration so that customers can be offered effective prices for
the products and the values provided can be maximised.
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A COMPARISON BETWEEN RYANAIR AND BRITISH AIRWAYS TO UNDERSTAND HOW THESE
ORGANISATIONS USE THEIR MANAGEMENT ACCOUNTING SYSTEMS TO RESPOND TO
FINANCIAL PROBLEMS
Ryanair and British Airways are one of the biggest aviation companies in the world. Below
discussed is a comparison between these organisation on how they use different tools and
techniques of management accounting to carry their daily operation effectively.
.
MANAGEMENT
ACCOUNTING
SYSTEMS
RYANAIR BRITISH AIRWAYS
Key Performance
Indicator (KPI)
KPI are the primary factors need
to be managed by Ryanair in
order to maintain the profitability
of the organisation.
British Airways need uses KPI’s to
understand the budgetary
requirement for the company and
manage different resources
accordingly.
Benchmarking
method
Benchmarks are the industry
standards which need to be
followed in order to ensure the
safety and security of passengers.
The benchmarking is used by
Ryanair to improve the quality of
services and manage the budget
efficiently (Weygandt et al., 2015).
British Airways use the benchmark
budgeting technique to figure what
portion of the budget needs to be
followed in the sales, marketing or
any other activity (Warren et al.,
2015). This type of budget is also
used by the company to justify its
operating cost to different
stakeholders.
Financial
Governance
Financial governance at Ryanair is
the way the company manages
the performances and control
A British airway operates on a global
level and financial governance is
important for the company to
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