Analysis of Management Accounting Systems for Business Success

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Management Accounting
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Table of Contents
Assignment Part A - Management Accounting Principles..............................................................3
Assignment Part B - Effective Planning Tools for Managing Accounts.......................................12
Reference list.................................................................................................................................17
Appendix........................................................................................................................................20
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Assignment Part A - Management Accounting Principles
Introduction
Within this report, function and role of a department of management accounts has been assessed
while management accounting systems working in a company are going to be evaluated. It will
also show how management accounting’s techniques are used within companies.
1. An explanation of the principles of management accounting
Management accounting that often is also called the “managerial accounting” refers to the
procedure that is utilised for the verification, the quantification, the interpretation, the
examination as well as the communication of various information holding substantial
significance to managers of enterprises for the detection of issues and taking necessary steps on
accomplishing goals (Hopper and Bui, 2016). It encompasses every field in accountancy and
aims at the information of management regarding the metrics of business operations. However,
the foundation of management accounting consists of several principles (Busco et al., 2016).
They have been discussed underneath -
 Value - Performing managerial accounting largely affects upon a company’s worth.
 Relevance - Managerial accounting is a provider of information that is not only of
substantial importance but also of enormous relevance.
 Trust - Managerial accounting is also based on the trust principle, which means that it
leads to the enhancement of credibility, trust and legitimacy of organisations.
 Influence - Managerial accounting aids in communicating information, all of which
provide insight that works as an influence for all enterprises.
2. The role of management accounting and the essential elements of different types of
management accounting systems
Role played by managerial accounting in business entities is imperative (Institute of
Management Accountants, 2019). The below are the common managerial accounting roles -
 Making decisions
 Planning and designing
 Organising activities
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 Forecast of performance
 Control of performance
 Effectual communication
 Cooperation and coordination of performance
Systems within managerial accounting are primary of four kinds (Watts et al., 2014). Their
essential elements involve the below -
 Cost accounting system - Responsible for the cost estimation, cost accounting system not
only helps business entities in determination of expenses or costs, it also assists in finding
out unprofitable and profitable activities while guiding in reducing costs, expanding
production and profit analysis (Drury, 2013). TPG Processing can improve efficacy of
cost measurement with it.
 Inventory management system - Responsible for tracking and ensuring proper inventory
movement, inventory management system deals with achieving better operations through
inventory ordering, tracking, and meeting consumer demand (Sayed et al., 2018). TPG
Processing can keep proper balance of its inventories with it.
 Job costing system - Playing the role of accumulating, allocating and quantifying a
business entity’s job costs, the job costing system also helps in making effectual
decisions on jobs to control their costs (Zahller, 2017). TPG Processing can use the
system so that it can take decisions in exclusion of unnecessary cost incurring jobs.
 Price optimising system - Responsible for deciding prices, price optimising system helps
business entities ensuring that customers are satisfied and they are responding positively
to its decided prices (Ferreira et al., 2015). TPG Processing can use the system so that it
can track consumer responses towards its product prices and amend them accordingly.
3. Different methods used for management accounting reporting
It is possible for a business entity to integrate and analyse not only its monetary information but
also its non-monetary information with managerial accounting. The following discussion
evaluates four differing reporting methods, which managerial accounting offers to business
entities -
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 Variance report - Differences that are found in a business entity’s budgets in contrast to
its performance in actual are recorded in this form a report (Maas et al., 2016). TPG
Processing can be making use of this method for verifying uncontrollable variances
derived in its performance focusing on their removal.
 Investment appraisal report - The feasibility, liquidity, and the possible returns that can
be earned from a business entity’s investments are recorded, summarised and included
within this form of a report (Michl et al., 2016). TPG Processing can be making use of
this method for appraising the business entity’s investments while making proper
investments within it.
 Departmental report - A business entity’s departmental effectiveness along with their
ineffectiveness, performance lags and other aspects are included in this report (Stephens
and Wardrop, 2016). TPG Processing can be making use of this method for bringing
about efficiency into departments while taking necessary decisions on their improvement.
 Debtors’ receivables aging report - Delays in payments and bad debts are a common
problem in every business entity and the form of report recording such aspects is the
debtors’ receivables aging report (Karim, 2019). TPG Processing can be making use of
this method for optimising debt collections while reducing bad debt possibilities.
4. The use of techniques and methods used in management accounting by presenting
calculations for an income statement using variable costing to show how these financial
reporting and statements support business growth and success
Managerial accounting encompasses an extensive variety of techniques as well as methods, each
of which is of great advantage to business entities for not only decision-making but also or the
cost calculations, profit determination and financial reports preparation of organisations (Gitman
et al., 2015). Income statements of business entities can also be developed with the assistance of
techniques offered from managerial accounting. The two most significant techniques that one
can be employing for the creation of a business entity’s income statements include marginal
costs and absorption costs.
Valued at the full or entire manufacturing costs, absorption costs as a managerial accounting
method help business entities in calculating costs with the means of considering all sorts of direct
and indirect expenditure incurred for manufacturing (Herath and Lu, 2018). Conversely,
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marginal costs as a managerial accounting technique calculates costs of business entities only
based on the costs that are variable in nature (De Oliveira et al., 2018).
Depending on the FIFO technique of valuing stock, the below income statements have been
drafted based on absorption costs as well as marginal costs, the calculations of which are
attached in the last part of the report.
Income statements using absorption costs -
Year 1
Particulars Amt
Total sales revenue £2520000
(+) Beginning stock 0
(-) Manufacturing costs
Direct labour associated expense £640000
Direct material associated expense £480000
Variable expense £800000
Indirect manufacturing expense (Fixed) £64000
Total manufacturing costs £1984000
(-) Ending stock £198400
Gross income £734400
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £10000
Overheads spent on administration £15000
Operating income £709400
(-) Expenses on interest £1000
PBT (Income before taxes) £708400
(-) Taxes 0
PAT (Income after taxes) £708400
Table 1: Year 1’s income statement
(Source: Learner)
Year 2
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Particulars Amt
Total sales revenue £2800000
(+) Beginning stock £198400
(-) Manufacturing costs
Direct labour associated expense £768000
Direct material associated expense £576000
Variable expense £960000
Indirect manufacturing expense (Fixed) £64000
Total manufacturing costs £2368000
(-) Ending stock £592000
Gross income £825600
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £10500
Overheads spent on administration £15000
Operating income £800100
(-) Expenses on interest £1250
PBT (Income before taxes) £798850
(-) Taxes 0
PAT (Income after taxes) £798850
Table 2: Year 2’s income statement
(Source: Learner)
Year 3
Particulars Amt
Total sales revenue £4200000
(+) Beginning stock £592000
(-) Manufacturing costs
Direct labour associated expense £816000
Direct material associated expense £612000
Variable expense £1020000
Indirect manufacturing expense (Fixed) £64000
Total manufacturing costs £2512000
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(-) Ending stock £55640
Gross income £1151640
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £11000
Overheads spent on administration £15000
Operating income £1125640
(-) Expenses on interest £1500
PBT (Income before taxes) £1124140
(-) Taxes 0
PAT (Income after taxes) £1124140
Table 3: Year 3’s income statement
(Source: Learner)
Income statements using marginal costs -
Year 1
Particulars Amt
Total sales revenue £2520000
(+) Beginning stock 0
(-) Manufacturing costs
Direct labour associated expense £640000
Direct material associated expense £480000
Variable expense £800000
Total manufacturing costs £1920000
(-) Ending stock £192000
Contribution £792000
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £10000
Overheads spent on administration £15000
Indirect manufacturing expense (Fixed) £64000
£703000
(-) Expenses on interest £1000
PBT (Income before taxes) £702000
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(-) Taxes 0
PAT (Income after taxes) £702000
Table 4: Year 1’s income statement
(Source: Learner)
Year 2
Particulars Amt
Total sales revenue £2800000
(+) Beginning stock £192000
(-) Manufacturing costs
Direct labour associated expense £768000
Direct material associated expense £576000
Variable expense £960000
Total manufacturing costs £2304000
(-) Ending stock £576000
Contribution £880000
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £10500
Overheads spent on administration £15000
Indirect manufacturing expense (Fixed) £64000
£790500
(-) Expenses on interest £1250
PBT (Income before taxes) £789250
(-) Taxes 0
PAT (Income after taxes) £789250
Table 5: Year 2’s income statement
(Source: Learner)
Year 3
Particulars Amt
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Total sales revenue £4200000
(+) Beginning stock £576000
(-) Manufacturing costs
Direct labour associated expense £816000
Direct material associated expense £612000
Variable expense £1020000
Total manufacturing costs £2448000
(-) Ending stock £144000
Contribution £1320000
(-) Operational or non-manufacturing expense
Overheads spent on selling and distributing £11000
Overheads spent on administration £15000
Indirect manufacturing expense (Fixed) £64000
£1230000
(-) Expenses on interest £1500
PBT (Income before taxes) £1228500
(-) Taxes Nil
PAT (Income after taxes) £1228500
Table 6: Year 3’s income statement
(Source: Learner)
Comment on results
Thus, from the calculations, one can derive that absorption costing showed higher profits in year
1 and year 2, which however has turned opposite in year 3. These discrepancies have aroused not
only because of difference in fixed cost treatments in the two methods but also due to different
ways of valuing stock within them.
5. An evaluation of how management accounting is integrated within the organisation
One of the fundamental methods using which business entities can be integrating managerial
accounting into it is the help of implementing management accounting related reporting methods
and systems within its processes (Lopez-Valeiras et al., 2015). Starting from processes of
decision-making to processes of production, managerial accounting can be effectually integrated
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into business entities. For instance, within the process of decision-making of TPG Processing,
inputs can be received from systems such as the price optimising and inventory management
along with reports such as investment appraisal and debtors’ receivable aging. All these systems
as well as reports would be assisting TPG Processing in making optimised and effectual
decisions.
Similarly, TPG Processing’s production process can be integrated with the systems such as that
of cost accounting as well as job costing while reports such as departmental reports and variance
reports could be implemented. All of these systems and reports would in turn be facilitating the
business entity in ensuring enhanced production, better productivity, lower production costs and
control of overheads. In such ways, management accounting is integrated within enterprises.
6. The benefits of the function to the organisation
Managerial accounting, as a function, is largely beneficial to business entities (Nuhu et al.,
2017). It is through the means of applying managerial accounting systems that business entities
such as TPG Processing could be enjoying large amount of benefits. For example, when cost
accounting system would be applied into TPG Processing, the business entity will be benefitted
with better cost estimation and profitability analysis. Similarly, when job-costing system would
be applied into the business entity, jobs performed within it can be optimised while the ones
affecting revenues negatively can be removed.
Inventor costing system, if applied to TPG Processing, would be benefitting the business entity
in better management of stock in hand while optimising their maintenance, proper meeting of
customer demand and ensuring their availability all the year round. Lastly, when price-
optimising system would be applied into the business entity, enhanced satisfaction of customers
could be accomplished while proper profits can be earned.
7. Conclusions that critically reflect the application of management accounting
Thus, with the end of the report, one can reflect that applying managerial accounting for all
business entities is an important task to be done so that success can be accomplished and better
effectiveness can be ensured. It is not only because managerial accounting helps business entities
in the accomplishment of improved decisions, but also because it helps it in reporting both non-
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monetary information and monetary information while acting as a major ingredient for cost
calculations.
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