Management Accounting: A Reference Manual for Excite Entertainment

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MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION............................................................................................................................. 2
LO1.................................................................................................................................................3
SECTION A: UNDERSTANDING MANAGEMENT ACCOUNTING SYSTEMS...................................3
SECTION B: METHODS USED FOR MANAGEMENT ACCOUNTING REPORTING..........................8
LO2............................................................................................................................................... 11
CALCULATION OF COSTS USING APPROPRIATE TECHNIQUES OF COST ANALYSIS TO PREPARE
AN INCOME STATEMENT USING MARGINAL AND ABSORPTION COSTING METHODS.............11
LO3............................................................................................................................................... 15
ADVANTAGES AND DISADVANTAGES OF DIFFERENT TYPES OF PLANNING TOOLS USED FOR
BUDGETARY CONTROL.............................................................................................................15
LO4............................................................................................................................................... 20
COMPARING THE ADAPTATION OF MANAGEMENT ACCOUNTING BY ORGANIZATIONS TO
RESPOND TO FINANCIAL PROBLEMS.......................................................................................20
CONCLUSION............................................................................................................................... 22
REFERENCES.................................................................................................................................23
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INTRODUCTION
Accounting has two divisions that are financial accounting and managerial accounting.
Management accounting is the type of accounting used by the managers in the company in
order to help them in formulating policies as well as anticipating, planning as well as controlling
their daily business operations by gathering and analysing both qualitative and quantitative
information (Garrison et al., 2010). Managerial accounting is vital for any business as it helps in
forecasting future, in decision-making, forecasting cash flows and also understanding the
performance variances along with examining the rate of return. In contrast, financial accounting
focuses on presenting a true plus fair view of a company's financial position to different parties.
This assignment takes into consideration of a leading firm that works for the organization Excite
Entertainment that operates in the leisure and entertainment industry. This assignment
includes a reference manual prepared for the management accounting department of Excite
Entertainment, demonstrating understanding related to the management. Also, it includes the
application of a range of techniques of management accounting to calculate the profitability of
operations of Excite Entertainment. This assignment also explains the usage of different
planning tools that are used by the organizations in management accounting. At last, different
ways are compared wherein an organization uses management accounting to respond to
financial problems.
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LO1
Being an intern at one of the leading firms, the first draft of reference manual is prepared and
produced for the management accounting department of their client Excite Entertainment Ltd
operating in leisure as well as the entertainment industry in the UK.
SECTION A: UNDERSTANDING MANAGEMENT ACCOUNTING SYSTEMS
Accounting is utilised as an operative tool to analyse the business and its activities in order to
Definition:
Management Accounting: it is also referred to as managerial or cost accounting. It is defined as
the process to evaluate the costs and operations of the business for preparation of financial
reports, records as well as account to aid the decision making the process of the managers in
accomplishing the business goals (Zimmerman and Yahya-Zadeh, 2011). The management
accounting for the management accounting department of Excite Entertainment helps in
identifying, calculating, evaluating, interpreting as well as communicating the information to its
managers in order to make the effective decision of the achievement of its goals.
Financial Accounting: it is the process to record, summarise, and report the innumerable
transactions occurred due to business operations over the time period. It is a specialised brand
of accounting in order to keep track of the financial transactions of the company (Warren et al.,
2013). Excite Entertainment prepares financial statements in order to be used by them to show
their financial performance as well as position to the individuals outside the company such as
creditors, suppliers, investors, and customers. The financial statement includes the income
statement, statement of cash flow, balance sheet, and retained earnings statement.
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a) DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING
Basis of difference Management accounting Financial accounting
Meaning It is known to provide relevant
information to the company
management for making,
plans, policies and strategies
to operate the business
effectively (Warren et al.,
2013).
It is used to prepare the financial
statement of the company for
providing financial information,
performance and position to
interested parties.
Legal requirements The company can voluntary
prepare management
accounts. There is no legal
binding.
It is compulsory to prepare
financial accounting statement by
following GAAP rules and
standards. It is a statutory
requirement,
Format of Presentation It does not have any
prescribed or specified format.
It must be prepared under the
prescribed format of accounting
standards and company law
(Warren et al., 2013).
Area
of coverage within the
organisation
It comprises disaggregated
information for supporting the
local decision and primary
emphasis on segment
reporting
It includes highly aggregated
information about the overall
organization and is primarily
concerned with reporting for the
organization as a whole.
Types of data
used
It uses both financial and non-
financial data (Warren et al.,
2013).
It mostly uses financial data.
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b) COST ACCOUNTING SYSTEMS
It is considered for monitoring the costs sustained by any business organization. It comprises a
set of processes, forms, controls as well as reports that are framed to aggregate as well as the
report about the costs, revenues and profitability to the management (Horngren et al., 2010). It
is an accounting process that helps Excite Entertainment in calculating as well as analysing the
cost related to their products and services so as to report the correct amount on their financial
statements.
The benefits of the cost accounting system are the removal of wastes, losses as well as
inadequacies, reduction of cost, price fixation and cost control while the drawbacks are making
a future decision on past available performance. Cost of preceding years is not uniform with
succeeding year.
Direct Costs: direct costs involve the costs incurred in producing goods or services. It includes
the labour, material expenses as well as distribution cost linked to the production of goods or
services (Horngren et al., 2010). Direct costs are those costs such as human and physical
resources included by Excite Entertainment in promotion of concerts as well as festivals at
different places in the UK.
Standard costs: it is a part of the annual profit plan and operating budget of manufacturers. It is
also described as expected cost, future cost, predetermined or estimated cost (Horngren et al.,
2010). It will be established for the direct labour, direct material, as well as manufacturing
overhead of the following year.
DIFFERENT COSTING TECHNIQUES:
Marginal Costing: it involves the apportionment of only variable costs such as direct material
and labours along with other direct expenses as well as variable overhead to production. It does
not reflect fixed production cost (Horngren et al., 2010). It emphasises the difference between
variable and fixed cost.
Absorption Costing: it engrosses all the costs that are fixed and variable cost into the
production cost.
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Standard Costing: in this costing, actual costs are compared with the predetermined standards
costs and causes analyses the cost of any deviation (Horngren et al., 2010). It compares the
standard cost with the actual cost at a periodic interval and revised to avoid losses.
Historical Costing: it is unlike standard costing, which utilises actual costs to determine the cost
after it has been incurred. Majority of the organizations utilise historical costing accounting
system for costs.
c) INVENTORY MANAGEMENT SYSTEM
It is defined as the process of ordering, storing as well as using the inventory of the company. It
includes the management of components, raw material warehousing and processing such item
and finished products (Bauer et al., 2012). It is the process to ensure that an organization such
as Excite Entertainment always has the product it needs and also maintain its cost as low as
possible.
METHODS OF INVENTORY MANAGEMENT SYSTEM:
FIFO: it stands for first in first out. This method is used to sell or consume the first purchased
inventory at first. Under this method, the old inventory is withdrawn by the organization for
sales or consumption.
LIFO: it stands for last in first out (Bakker et al., 2012). This method is used to sell or consume
the last purchased inventory at first. Under this method, the latest inventory is withdrawn by
the organization for sales or consumption.
AVCO: it stands for the average value of cost. in this method, the weighted average is used to
calculate the cost of the units being used by the company. The average cost of the inventory is
computed to identify the cost of inventory consumed or sold and inventory in storage (Bakker
et al., 2012).
d) JOB COSTING SYSTEMS
It is defined as the method to register the cost of a manufacturing job instead of the process. A
project manager or consultant at Excite Entertainment uses job costing systems to monitor the
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cost of each job as well as maintain data that is more appropriate to business operations. It
determines the manufacturing cost in a systematic manner by dividing them in the cost of
direct material, direct labour and overhead (Horngren et al., 2010). It is a costing method to
compute the cost of each job. It is used in the industry where one job is differentiated from
other jobs.
The benefits of job costing system are it can be ascertained at any completion stage of the job,
estimate the job cost based on past records in job cost while the drawbacks are it is expensive,
no job standardisation, and no accuracy in the obtainment of cost information.
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SECTION B: METHODS USED FOR MANAGEMENT ACCOUNTING REPORTING
I. DIFFERENT TYPES OF MANAGERIAL ACCOUNTING REPORTS
The major emphasis of management accounting is to get relevant inside information through
financial accounting. The reports of management accounting are used to plan, regulate, and
make a decision and measure performance. The management accounting department of Excite
Entertainment must consistently generate these reports throughout their period of accounting
and bookkeeping as per their requirement in order to make any critical decision (Hall, 2010).
The management accounting managers assess this report to highlight certain patterns in order
to convert them into useful information for Excite Entertainment.
Pro Forma Cash Flow: this report shows the excite entertainment about the amount that is
expected to gain during the short-term as well as medium-term accounting periods (Hall, 2010).
It provides the monthly summary to managers of Excite Entertainment about the incoming as
well as outgoing cash in order to anticipate the time period of shortfalls and surpluses.
Financial Reports: traditional financial report of Excite Entertainment helps the managers in
gathering useful information in order to understand their operations. The P&L account of Excite
Entertainment shows their overall expenditures and income and summarise the profit earned.
The balance sheet of Excite Entertainment represents the charges and possessions of the
company.
Sales Report: this report is useful for the management accounting department of Excite
Entertainment as it represents its sources of revenue and also highlights the avenues that are
most or least successful. It represents that kind of promotion of concert or festivals that are
fruitful (Hall, 2010).
Item Cost Report: this report allows the company Excite Entertainment to understand their
profitability by breaking down the labour, material and other overheads contributing to a
different type of earnings (Hall, 2010). This report helps the company to determine the aspects
of business building the potential for increased profitability.
Budget Report: it is a very critical report that measures the performance of the company and it
is also generated department wise for Excite Entertainment. An overall budget is created by the
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company to understand their grand business scheme. It helps them in comparing the budget
with actual results in order to improve any deviation if occurred (DRURY, 2013).
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II. WHY INFORMATION PRESENTED SHOULD BE ACCURATE, RELEVANT TO THE USER, RELIABLE
UP TO DATE AND TIMELY
A good management accounting system is useful for the organization such as Excite
Entertainment in order to collect information and data and helps the managers to make
effective decision to achieve their business goals. All the data and information is derived from
the financial accounting and other non-financial data in order to further progress and achieve
the aim and objectives of the company.
Accuracy and reliability: the accuracy, as well as reliability of the information, is the key
measure for the effectiveness of good management accounting system within Excite
Entertainment. If the management accounting department of Excite Entertainment has
accurate and reliable information, their management team can rely on the accuracy of the data
to make Effective decision. It allows the management accounting department to use different
reconciliation method to verify the correctness and accuracy of accounting data and thus
reliability (Garrison et al., 2010).
Relevance: the information collected using management accounting by the department in
Excite Entertainment must relate with the decisions made by the manager. The manager of the
company gets the opportunity for making thoughtful decisions or projects regarding the
business through relevant and timely information from management accounting (Hall, 2010).
The management team of Excite entertainment uses relevant financial data to review the
current facts as well as data and compare it with historical trend and make future prediction
Timeliness: an effective management accounting system in an organization such as Excite
Entertainment helps in providing accurate and timely information in order to make the effective
decision of efficient cost control. The data must be reviewed and collected at regular interval to
get updated information so as to make an effective decision (Hall, 2010). It is referred to as the
need for the accounting information to be presented to the managers of management
accounting in time and fulfil their needs to make decisions.
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LO2
CALCULATION OF COSTS USING APPROPRIATE TECHNIQUES OF COST
ANALYSIS TO PREPARE AN INCOME STATEMENT USING MARGINAL AND
ABSORPTION COSTING METHODS
There are two different approaches such as marginal and absorption costing that helps in
dealing with the fixed overheads of production. Both focus on to include or not include fixed
overhead production in inventory.
MARGINAL COSTING METHOD: it is a costing technique in which marginal or variable costs are
imposed to cost units. In this method, the fixed cost for the time period is set off against the
contribution. It offers an alternative outline to the traditional statement of income as
compared to absorption costing. It treats fixed as well as variable cost separately (DRURY,
2013). Marginal cost is a term that implies the additional cost included in the production of an
extra output unit and can be calculated by total variable cost allocated to one unit.
The calculation of marginal cost=
Marginal costs=direct material+direct Lab our +direct expenses+ variable
h eads
ABSORPTION COSTING METHOD: it is a cost method of managerial accounting that outlays all
the cost related to the manufacturing of the specific product. It is required of external financial
reporting under generally accepted accounting principles (GAAP) and also for income tax
reporting (DRURY, 2013). It is a method to build up a full cost of product that adds direct cost as
well as a proportion of the overhead cost of production through a means of one or more
overhead absorption rates.
The total cost of product=direct material +direct Labour + direct expenses+variable manufacturing
h eads+¿ manu
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