Evaluation of Management Accounting Systems and Reporting Methods

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Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Part 1................................................................................................................................................4
Part 2................................................................................................................................................8
Task 2.............................................................................................................................................10
Part 1..............................................................................................................................................10
Part 2..............................................................................................................................................12
Task 3.............................................................................................................................................16
Conclusion.....................................................................................................................................18
Reference list.................................................................................................................................19
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Introduction
In spite of not being a mandatory or obligatory part of an organisation, management accounting,
in the current scenario, has become one of the most important aspects of every organisation in
the world. This is because due to factors such as technological advancements and globalization,
it has become increasingly important for organisations to make both effectual long-term and
short-term decisions. In this study, management accounting along with its application,
significance and tools will be discussed and evaluated in detail. It will be conducting a detailed
analysis of management accounting systems, the methods of cost analysis and financial
performance evaluation related to management accounting, the planning tools that are used in
management accounting followed by illustrating how financial tribulations within a firm can be
solved with the medium of management accounting. Thus, in simple terms, this study will be
providing a deep insight on management accounting.
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Task 1
Introduction
In this report, a detailed discussion will be made regarding management accounting and the
systems within the field of management accounting in the context of the organisation AGA
Rangemaster Group Limited, which is a medium sized manufacturer from Britain, manufacturing
kitchen appliances, interior furnishings as well as range cookers (Agaliving.com, 2019). It will
be discussing also about the three major planning tools, which management accounting offers to
companies.
Part 1
A. Explain management accounting and give the essential requirements of different types
of management accounting systems.
There are different ways in which management accounting can be defined. In simple terms,
management accounting, also called managerial accounting, can be referred to as that branch,
profession, or field related to accountancy that helps a firm in performance management,
planning and making decisions, which in turn assists in financial control as well as financial
reporting (Hermason et al., 2016). Noreen et al. (2014) mentioned that management accounting
is significant in a business relating to decision-making, costing, planning, controlling along with
performance evaluation and acts as a major pre-requisite in a firm. Management accounting
systems are of four kinds and they are as follows -
 Cost accounting system - A managerial accounting system, which plays the role of
evaluating, measuring, analyzing, controlling and managing the costs of a firm, is the cost
accounting system (Fry and Fiedler, 2014). Through the means of this system, firms are
able to review their cost structure, analyse their profitability and take necessary steps to
control costs. Among the essential requirements of a cost accounting system lie
absorption costing, marginal costing, activity based costing, batch costing and life cycle
costing.
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 Job costing system - Also called as job order costing, the job costing can be defined as a
system in which the cost of manufacturing goods and services in a firm are assigned and
accumulated while the costs spent for performing the jobs are also measured (Weygandt
et al., 2015). Among the essential requirements of a job, costing system is that the system
is extremely beneficial in terms of prioritization, maximization as well as elimination of
the jobs that are not required depending on their usefulness, their profit generating
capacity and such other aspects.
 Inventory management system - This is one of the most widely used and integrated
systems of management accounting in firms throughout the world. Inventory
management systems can be defined as the ones by which the flow of stock and other
non-capitalized assets of a firm are tracked and managed and looks into the factors such
as overseeing and controlling the order of inventories, the storage of inventories and
controlling the volume of products for sale. Among the essential requirements of an
inventory management system lie EOQ (Economic Order Quantity), MRP (Material
Requirement Planning System) and JIT (Just in Time).
 Price optimizing system - Nagle et al. (2016) mentioned that another significant system
in management accounting is the price optimizing system, thereby helping it in achieving
and obtaining a strong base in terms of customers. It is the system, which helps
organisations in deciding and setting prices of its goods and services. Among the
essential requirements of a price optimizing system lie target pricing, CVP analysis,
penetration-pricing strategy, elasticity of demand and price skimming.
B. Explain different methods used for management accounting reporting.
In addition to management accounting systems and the assistance that these systems provide to a
firm, there are other ways as well through which management accounting helps a firm, and one
of them is management accounting reporting. The diverse methods, which are usually used in
firms for management accounting reporting, are the following -
 Variance report - A commonly used form of management accounting reporting is the
variance report. As stated by Braun et al. (2014), a variance report is that report prepared
in management accounting in which the variances in the budgeted, estimated and
forecasted performances of a firm are contrasted against the performance actually shown
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by it. The budgetary variances in the performance of AGA Rangemaster Group are
recorded and listed under this report and through the medium of this report; the favorable
and adverse variances in the firm can be derived.
 Departmental report - The performance that the different departments and segments of a
firm show along with the costs, the resources, the responsibilities and the authorities
given to these departments can be evaluated using departmental reports (May, 2014).
Through the means of a departmental report, AGA Rangemaster Group is able to improve
the efficacy and the performance of all its departments and is used as the base for making
decisions related to improving the effectiveness of departments in a firm.
 Performance report - This is yet another method that firms use for management
accounting reporting (May, 2014). A performance report can be defined as the
management accounting report within which a firm’s overall performance is evaluated
and all details regarding its performances and the performances of all its employees are
incorporated. In the context of the organisation AGA Rangemaster Group, a performance
report can be used for the evaluation of the firm’s efficiency level and the efficiency level
of its employees and can be used in order to provide them with incentives and rewards
based on their performance.
C. Evaluate the benefits of management accounting systems and their application within an
organisational context.
From the discussion of the essential requirements of management accounting systems, it is quite
evident that the application of these systems is extremely beneficial for organisations. The
benefits of applying them into an organisational context can be evaluated from the example of
AGA Rangemaster Group, which has been discussed below -
 The application of the cost accounting system into a firm is beneficial since the system is
useful for the reduction of costs and expenses of a company, the maintenance of the level
of stock it has as well as making effectual decisions regarding costs and maintaining
profitability in the firm.
 Inventory management system, when applied to a firm, is beneficial since it helps in the
efficient management of its inventories along with overseeing and controlling the order of
inventories, the storage of inventories and controlling the volume of products for sale.
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According to DiFatta et al. (2017), this system is also beneficial in a firm since it helps in
increasing transparency of its information associated with inventories and stock.
 Job costing system, when applied to a firm, is beneficial because the system assists firms
in the evaluation of its costs relating to jobs, enhancing the jobs that are cost-effective in
nature while concentrating on reducing the ones that are cost intensive in nature and do
not generate profits for the firm (Altbach, 2015).
 The price optimization system, when applied to a firm, is beneficial is beneficial since the
system helps a firm in holding its customers while helping it to gather more and more
customers (Yang et al., 2019). It also helps in the evaluation of the demand and the
outlook that customers have regarding the prices at which it offers its goods and services
in the marketplace.
D. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
Organisational processes are also improved and enhanced due to the application of both
management accounting reporting and management accounting systems. For example, in the
context of AGA Rangemaster Group, application of both management accounting reporting and
management accounting systems are implemented into organisational processes. Management
accounting reports and systems backs all the significant processes of the firm. For instance, AGA
Rangemaster Group integrates the cost accounting as well as the inventory management system
into its process of production. This is because cost accounting helps the firm to manage, reduce
and control its costs of production while the inventory management system assists it to bring
about enhancements in the orders related to inventories, along with managing its work in
progress and managing the variations it has related to raw materials needed for production.
Similarly, price optimization and job costing systems are implemented into AGA Rangemaster
Group’s decision-making process. Implementation of the job costing system helps the firm in
minimizing, facilitating and eliminating the various jobs performed in it depending on the costs
spent on executing them and the revenues that they are able to generate while the price
optimization system helps in making and improving decisions related to its pricing. On the other
hand, integration of reports, for example, the performance reports, the variance reports and the
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departmental reports help AGA Rangemaster Group in all its processes, such as production
process, decision-making process and others by providing valuable information.
Part 2
Analyse three planning tools used in management accounting, indicating how effective you
judge each to be and why. Your judgements should be supported by evidence.
In the profession or field of managerial accounting, planning tools are of a variety of kinds.
Companies can be using planning tools for several purposes, for example, to enhance budgetary
control. In the context of AGA Rangemaster Group, budgets are one of the commonly used tools
for planning. The three major budgets or planning tools that AGA Rangemaster Group uses are
as follows -
 Operating budget - An operating budget is the financial plan and a planning tool, which
consists of the estimation of the total value of resources a company requires for
performing its activities and operations (Boyabatli et al., 2015). In the context of AGA
Rangemaster Group, operating budgets are used for describing the income-generating
operations of the firm along with estimating the incomes in a specific time. The benefit of
the budget is that it assists firms to keep and record accurate information of the overall
income and expenses of a firm and helps in guiding the overall operations of the firm.
However, the limitation of this budget is that in order to prepare an operating budget,
both cost and time are majorly required. Another drawback of this planning tool is that
the management of a firm needs gathering all kinds of information about its operations,
its costs as well as forecasted revenues to prepare this budget.
 Cash budget - As stated by Balance et al. (2015), a cash budget can be defined as the
planning tool that includes the estimation of the expected receipts of cash as well as the
disbursements of cash, which might be taking place within a firm during a specific period
in the future. In the context of AGA Rangemaster Group, cash budgets help in estimating
the cash position of the firm in the future years. The effectiveness of this form of a budget
is that it provides assistance to firms in maintaining optimum amount of cash reserve to
be used as and when required, helping a company in better credit management and
having enough cash in hand to meet the requirements of all its daily operations. However,
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the cash budget is limited since it is entirely based on estimates and these estimates may
not be the actual outcomes. There might also be various sorts of distortions in the budget,
which is yet another drawback it has.
 Capital budget - It is one of the commonly used tools for planning. Capital budgets can
be referred to as the kind of financial plan that assist firms in planning and estimating the
capital expenditures of a firm along with anticipating its income (McVay, 2018). In the
context of AGA Rangemaster Group, the capital budget helps in planning for raising
long-term and large sum of investments of a company for a long period. The benefits or
merits of this budget is that the budget provides assistance in the projection of outflow
and inflow of funds associated to firms as well as finding out the sums required being
invested to maintain capital of a firm. However, the limitation or disadvantage of this
budget is that the preparation of the budget is time consuming while does not involve any
other expenses except for capital expenses.
Conclusion
Thus, the business report helped in evaluating the diverse management accounting systems,
which can be used in the context of a company. It also assisted in understanding what planning
tools are and how planning tools can be used in companies.
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Task 2
Produce a portfolio of completed calculations and analysis on company financial
statements and income statements using variable costings.
Part 1
Complete a simple statement of profit or loss, under absorption and marginal costing
principles for the months of May and June
Statement of profit or loss of Eymen Ltd
For the months of May and June
(As per absorption costing)
Particulars May June
Amount
(in £)
Amount (in
£)
Amount
(in £)
Amount (in
£)
Income from operations (Sales) 3900000.00 3510000.00
(-) Cost of goods sold (COGS)
Beginning inventory Nil Nil
Cost of manufacturing
Expenses for direct material 450000.00 450000.00
Expenses for direct labor 600000.00 600000.00
Expenses related to fixed overheads 400000.00 1450000.00 400000.00 1450000.00
Closing inventory Nil 145000.00
Total COGS 1450000.00 1305000.00
Net profit for the period 2450000.00 2205000.00
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Statement of profit or loss of Eymen Ltd
For the months of May and June
(As per marginal costing)
Particulars May June
Amount
(in £)
Amount (in
£)
Amount
(in £)
Amount (in
£)
Income from operations (Sales) 3900000.00 3510000.00
(-) Cost of goods sold (COGS)
Beginning inventory Nil Nil
Cost of manufacturing
Expenses for direct material 450000.00 450000.00
Expenses for direct labor 600000.00 1050000.00 600000.00 1050000.00
Closing inventory Nil 105000.00
Total marginal COGS 1050000.00 945000.00
Contribution 2850000.00 2565000.00
(-) Expenses related to fixed
overheads
400000.00 400000.00
Net profit for the period 2450000.00 2165000.00
Interpretation - Evaluating and comparing the net profits of Eymen Ltd shows that the net
profit of the company has remained the same under both these costing methods in the month of
May. This is because the closing stock of the company remained nil at the end of the month.
However, during the month of June, the closing stock of the company and the difference in the
valuation of closing under the two methods led to creation of difference between the profits of
Eymen Ltd. It can also be seen that the profits achieved for Eymen Ltd are higher when it uses
absorption costing. Hence, it is suggested that the firm uses absorption costing instead of
marginal costing.
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Part 2
Write a business memo to the management of the organisation to communicate the results
of your financial analysis and recommendations
MEMO
Date:
To:
From:
Subject: Communicating the outcomes of the financial analysis of Kier Group Plc and
recommendations for improving its performance
The Kier Group Plc, commonly called the Kier Group, is a services, construction and property
group, which has been active in the UK for building as well as civil engineering, land
development, support services, PFI (Private Finance Initiative) and private and public house
building (Kiergroup.co.uk, 2019). The financial statements of the organisation has been used in
order to analyze its financial performance and position along with communicating
recommendations for it to enhance and improve its performance. The calculated financial ratios
of Kier Group Plc have been presented below -
Profitability ratios 2015 2016 2017
Gross Profit ratio 8.64% 8.93% 9.25%
Net Profit ratio 0.17% - 0.42% 0.29%
Liquidity ratio 2015 2016 2017
Current ratio 1.13 0.99 1.09
Quick ratio 0.60 0.51 0.7
Investment return ratios 2015 2016 2017
EPS 40p - 18.5p 11.1p
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