Analysis of Management Accounting Techniques and Financial Reporting

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Management accounting
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
Lo1...................................................................................................................................................3
P1 Management accounting and essential requirements.............................................................3
P2 Methods for management accounting reporting.....................................................................4
M1 Benefits of management accounting systems and application..............................................5
D1 management accounting systems and management accounting reporting............................6
Lo2...................................................................................................................................................7
P3 Income statement using marginal and absorption costing......................................................7
M2 management accounting techniques and produce appropriate financial reporting
documents....................................................................................................................................9
D2 Financial reports that interpret data for business activities....................................................9
Lo3...................................................................................................................................................9
P4 advantages and disadvantages of planning tools used for budgetary control.........................9
M3 use of different planning tools and their application...........................................................11
Lo4.................................................................................................................................................11
P5 Use of management accounting systems to respond to financial problems.........................11
M4 management accounting lead organisations to success.......................................................13
D3 planning tools for accounting respond.................................................................................13
Conclusion.....................................................................................................................................14
Works Cited...................................................................................................................................15
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Introduction
Accounting is the most significant business activity as well as a functional unit of any business
enterprise. The essential branches of accounting are management accounting (MA) and financial
accounting (Abernethy & Wallis, 2018). Financial accounting is the art of recording and
summarizing financial transactions and statements and on the other side; the management
accounting is the presentation of the financial information and data in front of the management
so that effective decisions can be made.
The present study is concerned with the application of the concepts of management accounting.
Excite entertainment Ltd. is an organization that operates in the leisure and entertainment
industry in the United Kingdom. The activities that are conducted by the cited organization are to
promoting festivals and concerts at various locations throughout the nation.
Lo1
P1 Management accounting and essential requirements
The term Management means to manage resources or human force together, and the term
Accounting means keeping finance records, it reveals profit and loss in a certain period hence
management accounting means the reports of financial data of organisation to formulate the
policies to maximize the profit of the organisation, By management accounting managers, get
help to plan, make decision and operational control in simple words translating that data into
useful information for management to achieve business goals (Endrikat, Hartmann, & Schreck,
2017). Management accounting is for an internal purpose; it provides an overview of the
financial information of the company. There is various number of management accounting
system in this most basic type of account system are-
• Cost Accounting System
• Inventory Management System
• Job-Costing System
• Price-Optimization System
Cost Accounting System- It means the system is to forecast the product cost for profitability
analysis, to track the flow of product through the various stages. Determine the estimated cost of
the product. There are two parts of the cost accounting system 1) Job order Costing 2) Process
Costing
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Inventory Management System-Inventory represents the stock, good and material of business the
main function of this system is create a purchase order; print barcode labels receive the material
to relocate, adjust, ship, pick, etc. it has control over the stock room and warehouse.
Job Costing System-Its means to collect the information about the cost for the specific unit or
service job it is used when many items are producing, but they differ from each other (Otley,
2016). It is mainly used in the construction industry. The system has to accumulate the
information of the three categories-
1. Direct Materials
2. Direct labour
3. Overhead cost
Price Optimisation System-It is a mathematical process in which finding the demand at different
price levels. The system is used for maintaining the demand and price of the product for example
if the price is too high no will buy if its low no profit will make in business. There are three
factors which affect the most-
1. Pricing planning.
2. Value of the product to both the party’s buyer and seller
3. A scheme that manages all elements to make a profit.
The system is finding all the stages of initial cost pricing, promotional pricing, discount price
(Shields, 2015).
This system is used for preparing the data for external use as well as internal use too. Selecting
the right management system is not that easy. This system is made for making a profit in
business. It helps in various aspects of the organisation to make a strategy, making the decision
more accurate or easy, planning, and production. Management accounting system used in all
department of the organisation like human resource, operation, finance, and sales this provides a
clear overview of the financial status of the organisation...
P2 Methods for management accounting reporting.
Reports are the deciding part of the organisation to know the actual performance of the business.
Management accounting report helps to make more profit in business (Granlund & Lukka,
2017). The three main factors which effects the report is accurate, up to date, more reliable, the
main purpose of preparing the report is making a decision, planning, controlling. Accounting
reports are prepared within a month or particular unit or quarter periods according to the
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requirement because many critical decisions depend on these reports. There are several methods
that used for management accounting reports they are under below-
1. Budget Report-By this report we can measure the performance of the business. It’s a
document to estimate future income and expenses. It is a process to use past information to make
a profit in the future. An organisation tries to achieve its goals while remaining in the budget.
This report helps managers to offer better incentives to employees or reducing cost.
2. Account Receivable Aging Report-The information is giving in the report is offers credit to
customers. It helps managers to identify the defaulters as well as finding the issue in the
collection process. It gives us an overview of credit balance according to age it involves separate
columns for the credit as per the late days like who is 30 days, 60 days late. It can help to adjust
credit policies to align them and repayment. The organisation will make strict policies against
defaulters (Gunarathne & Lee, 2015).
3. Job Cost Report-It involves all the articles of the business-like material cost, overhead cost,
labour cost, etc. It determines the price of items. The entire costs divided into total items created.
It an overview of the total cost arises in a single project compared to the forecast revenue, the
record of the cost of producing the individual unit (Quattrone, 2016).
4. Performance Reports-It is prepared for determines and analyzes the performance of the
company. It can be prepared for the whole the organisation or a particular employee of the
organisation. Managers make a strategy from this report for the future goals of the organisation.
5. Inventory and Manufacturing Report-It’s a compressed account of the goods or supply of the
products...The sum each stage of producing, manufacturing and selling. the main objective of
this report to maintain a balance between inventory investment and customer services
6. Other Managerial Accounting-Other information of the company like a competitor, any new
product lounged in the market. They are generated either internally or externally sourced.
No matter which kind of organisation you are running right kind of reports help you to make
more profit and can help achieve the organisation goals more effectively, by reports we can
know exact position or performance of the organisation. We can say reports are the health of the
organisation (Hopper & Bui, 2016).
M1 Benefits of management accounting systems and application
Management accounting provides information related to management; it helps you in planning to
achieve the desired goals. Many kinds of reports are made in management accounting to get a
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clear review of the performance of the organisation for this we can select any method to get
desired goals. It’s also providing the current financial status of the organisation. Help to timely
decision making, it also helps to keep an eye on available resources. There are various benefits of
management accounting system to an organisation increases the efficiency of the organisation,
increasing the profit of the company, helping in quick decision making, and many more.
D1 management accounting systems and management accounting reporting
Performance reports Performance reports are the reports that are
prepared by the companies in order to analyze
and review the performance of the business
organization. There is a link between this
reporting tool and management accounting
system, and that facilitates the company in
planning for future anticipations and
forecasting that leads to the reduction in costs
and increasing the profits (Malina, 2018).
Accounts receivable aging reports An accounts receivable aging is a report that
outlines the unpaid customer invoices. The
aging report is the key tool that is used by the
personnel that conducts the activity of
collection to determine which invoices are
overdue for payment. This linkage or
integration can be achieved by making efforts
for the collection of accounts receivables and
creating appropriate policies for the collection
(Warren Jr, Moffitt, & Byrnes, 2015).
Budgeting report Budget report are the essential management
accounting reports that are used to measure the
performance of the business organizations and
are produced for the departments, in case of a
large organization and on the other side, in
case of small companies, it is generated as a
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whole. The link between organizational
processes and the reporting is highly concerned
with the company and it can be explained in
such a way that the budgeting reports creates a
way for the activities and functions of the
organization to emphasize on the target results
(Maas, Schaltegger, & Crutzen, 2016).
Lo2
P3 Income statement using marginal and absorption costing
Cost is the sum of amount that is spent by any business for the manufacturing, production, and
purchase of anything. Cost is segmented into various categories such as direct cost, indirect cost,
labour cost, material cost, inventory cost, etc. There are numerous cost analysis techniques such
as marginal costing, ABC costing, batch costing, absorption costing, job costing, etc (Ax &
Greve, 2017).
Marginal costing a popular method of costing that is used for decision making in internal
reporting. Apart from this, it is also known as contribution costing, direct and variable costing.
Marginal costing does not consider fixed costs; it only uses variable costs to make decisions.
Income statement under marginal and absorption costing
£ £
Sales revenue 1,20,000
Marginal cost of sales -
Opening inventory 7,500
Add- Cost of production 20,000 27,500
Less: Closing inventory -
Less- Administration cost -
Contribution
Less- fixed costs 40,000
Profit of the year 107500
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Sales revenue 1,20,000
Cost of sales -
Opening inventory 7,500
Add- production costs 20,000
Less- closing inventory -
Gross profit 1,47,500
Under/over absorption (32,000)
Gross profit (actual) 1,15,500
Less- administration and
distribution cost
-
Net profit 1,15,500
Marginal costing is a useful tool for the evaluation of the various types of decisions. Thus, the
key areas where it proves quite beneficial are cost reporting, customer profitability, internal
inventory reporting, profit-volume relationship, outsourcing, cost control, maximum return to the
business, etc. The biggest advantage associated with this kind of costing is that it helps in
determining which customer is beneficial for the business organization and which should be
kept. Apart from this, in the process of internal inventory reporting, this costing analysis is
useful. In the plotting of the changes in the profit volume and sales volume the cited costing
technique is advantageous (Van der Stede, 2017). Also, it helps in deciding whether it is
beneficial to produce a particular item in the house or to outsource it. Apart from the advantages,
the major disadvantage associated with the marginal costing is that it is quite difficult to classify
and separate the variable cost and fixed cost. Also, the closing stock of the company considers
only variable cost, and it totally ignores fixed cost, thus in this way, the clear and true picture of
profit cannot be revealed. Another disadvantage is that it can be used for external reporting
(Messner, 2016).
Absorption costing is again a popular cost analysis tool. The key strengths of this costing
technique are that it takes fixed overheads into account and also includes this into the final cost
of the product so that the clear picture of the product or service can be identified. Also, another
advantage is that it shows the decreased cost of sales and increased revenue of the business.
Apart from the advantages, there are some disadvantages too of this method, and the key demerit
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is that it cannot be considered as an effective tool to analyze the profitability of the company.
Further, it also makes it quite difficult to do the cost volume profit analysis.
M2 management accounting techniques and produce appropriate financial reporting documents
There are several tools and techniques of management accounting such as financial statement
analysis and planning, cash flow analysis, fund flow analysis, cost accounting, budgetary control,
etc (Nielsen, Mitchell, & Nørreklit, 2015).
Adoption of these techniques makes it possible for the chosen organization to generate financial
reporting documents. The documents are income statement, balance sheet, and cash flow
analysis. These financial statements and documents are needed to generate in a proper manner
and order. The cost accounting technique is used to outline the cost on various bases like process,
branch, product, department, etc. This further helps in analyzing costing and hence enables
identification of deviation and gaps. A management information system is that method or
technique of the management accounting system which provides the free flow of communication
or open communication which facilitates the easy access of information by every employee so
that it becomes possible to accomplish the duties and take quality decisions (Bobryshev,
Tatarinova, Grishanova, & Frolov, 2015).
Furthermore, cash flow analysis is useful in the identification of the flow of cash. Moreover, the
major reasons and causes for the changes in the cash within the time period can find out for the
selected company. Hence, it can be said in a summarized form that there are various
management accounting techniques, and these enable the generation of the financial reporting
documents by providing reliable and authentic data as well as information within the required
time.
D2 Financial reports that interpret data for business activities.
Financial reports are the documents that present the true picture of the company and it also helps
in further analysis and taking decisions. The financial reports are made on the basis of the
activities and functions of the company. These reports are also useful for the interpretation of the
financial information and statements of various business activities. Hence, it can be said that the
financial reports must be accurate and reliable so that the business decisions can be taken in an
effective manner.
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Lo3
P4 advantages and disadvantages of planning tools used for budgetary control
A budget is a kind of financial plan that is drafted in order to keep an estimate of the expenses
and the revenues for a certain future date. The forecasting of the expenses that are going to be
incurred within the organization is required to be estimated. The budgetary control is that
technique which is used to compare the actual income and expenses with the budgeted income
and expenses. This is effective in the identification of the deviations in the budget so that the
necessary actions can be taken. The budget can be of various types such as master budget, capital
budget, sales budget, operational budget etc (Turner, Way, Hodari, & Witteman, 2017).
The key three techniques of budgetary control are goal setting, auditing and monitoring. In order
to have effective budgetary control, the main essentials are the effective organization, quick
reporting, support of top management and rewards or punishment.
There are numerous benefits of the planning tools of the budgetary control. Forecasting is the
key advantage of the budgeting that helps in the identification of the costs. After that another pro
associated with this concept is the setting up of price. Generally, the competitors are the main
parameter, which is used to setting up the price, but evaluation of competitors is not only
enough, the analysis of own manufacturing unit, its costs and overhead costs is also important.
The planning tools of the budgetary control will help in the projection of the wages, rent,
marketing, etc.
Apart from all these, another major merit associated with the planning tools of budgetary control
is flexibility. This can be elaborated by taking an example for instance the chosen organization
can enhance the budget associated with the advertisement when the sales volume is going down
and also the costs of the company can be reduced as the sales volume is reducing. This can be
done with the help of planning tools of the budgetary control in order to gain competitive
advantage in the marketplace. Apart from the merits, there are some disadvantages too of the
technique. The major factor is that it only considers financial aspects or outcomes. As it is a
well-known fact that the budget is of overall numerical in nature and therefore, the qualitative
aspects are not considered in this. Usually, customers are not at all interested in the sales volume
and revenue of the company; they only want quality products and services at affordable prices.
Hence, it has been identified that the concept of budgetary control does not emphasize on the
needs of customers. Also, it can also be a reason for interring departmental conflicts. For
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instance, if in case the budget cannot be achieved due to any reason then there are chances that
the functional units can blame each other. Moreover, it requires a lot of time as well as costs and
various problems emerges regarding the allocation of the budget (Chenhall & Moers, 2015).
M3 use of different planning tools and their application
In order to prepare and forecast budget, various planning tools are used such as YNAB, Quicken,
Buxfer, etc. YNAB or you need a budget is the budgeting tool used to encourage the savings.
This planning tool is based on earned revenue, and it offers various graphs and reports. This is
the tool of the budgeting that can be used by the selected organization. This is because this tool
helps in keeping a track where the money is going, and then it becomes quite easy to find the
deviations and make necessary adjustments. Another tool is Quicken that is made or designed to
handle the financial aspects including the investment, reporting, budgeting, etc.
Apart from these two, Buxfer is another planning tool which can be used by the cited
organization to monitor the spending and keeping the entire track of the upcoming bills. With the
help of this tool, the company can project the earning and saving into the future and thus the
generated information can be used in an effective manner to plan the finances. Also, this tool
helps in managing the group expenses, and different bills can be split.
Lo4
P5 Use of management accounting systems to respond to financial problems.
In every type of organization, the systems associated with management accounting plays most
crucial role and through this the business practices can be carried out efficiently. Management
accounting is mainly applied in the organization in order to deal with the financial problems
arising within the workplace. Further, considering the case of one organization it has been found
that with the assistance of management accounting proper decisions are taken well in advance
like how to manage financial resources and this in turn contributes a lot in avoiding the
unfavorable situations that are not at all managed in the business. With the assistance of this
concept planning is done in the most effective manner and the best part is that business resources
are managed in the most effective manner that is very crucial for the business in the market
(Shields, 2015).
On the other hand, in case of another business it has been found that through management
accounting financial strategies are developed that supports a lot in dealing with the financial
issues efficiently. With the presence of effective financial strategy, it becomes quite easy to deal
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with the financial problems that take place in the workplace. Hence, this is also actual
effectiveness of management accounting that can assist in avoiding unfavorable consequences.
Cost volume profit analysis
No of units sold * price per unit = No of units sold * variable cost unit + fixed cost + profit
To achieve the profit, all cost i.e. fixed and variable to be covered. Information available:
Estimated fixed costs £120,000.00
Variable costs per unit £10.00
Proposed selling price per unit £40.00
Desired profits £60,000
From the above information, the contribution per unit can be derived as:
Contribution = Sales- Variable cost
= £40-10
= £30
Total number of units that is required to be sold for earning the desired profits will be:
= Fixed cost + desired profits/ Contribution per unit.
= (120,000+60,000)/30
= 6,000 units.
Thus, the number of units that needs to be sold for the desired profits is 6000.
Further, it is a well-known fact that different financial problems are faced by the firms at the time
of conducing operations in the market and in order to handle the different problems in the best
possible manner it is necessary to undertake the practices of management accounting in a
positive manner.
Every firm whether it may be operating in any particular sector prefers to adopt management
accounting systems such as inventory management system, price optimization system, process
costing etc. In case of one organization the firm adopts process costing system where the main
stress is on computing the cost of all the processes that are crucial for the firm (Cowton, 2018).
With the help of this practice it has become quite easy for the firm to know whether all the
accounting related practices are carried out efficiently or not. This is the actual effectiveness of
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