Management Accounting Report: Dell's Financial Strategies

This report provides a comprehensive analysis of management accounting principles, focusing on their application within Dell, a multinational technology company. It explores various accounting systems, including traditional, lean, transfer pricing, and throughput accounting, highlighting their roles in cost reduction and business strategy. The report delves into different management accounting reporting methods such as budget reports, account receivable aging, job cost reporting, and inventory management, illustrating how these tools support financial decision-making. Furthermore, it compares marginal and absorption costing methods, providing income statements under each approach to demonstrate their impact on financial outcomes. The report also discusses the advantages and disadvantages of planning tools used for budgetary control and examines the adaptation of management accounting systems during financial challenges. Overall, the report offers valuable insights into how management accounting practices can be effectively utilized to enhance a company's performance, reduce costs, and improve financial reporting.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and its different accounting systems:...........................................1
P2 Different methods used for management accounting reporting:............................................2
TASK 2............................................................................................................................................4
P3 Marginal and Absorption costing:.........................................................................................4
TASK 3............................................................................................................................................6
P4 Advantages and disadvantages of different types of planning tools used for budgetary
control:........................................................................................................................................6
TASK 4............................................................................................................................................7
P5 Adaption of Management Accounting System during financial problems:...........................7
Conclusion.......................................................................................................................................9
REFERENCES..............................................................................................................................10
.......................................................................................................................................................11

INTRODUCTION
Management accounting is analysing financial and non-financial decisions so that an
organisation can maintain and enhance their value. Most of the accounting systems focus on one
or two departments but in management accounting, concentration is kept on improving the
overall performance of company (Christ and Burritt., 2013). In the present report, as per given
scenario, the firm, Dell will be chosen which is a multinational company and known for making,
repairing and selling personal computers. They are also investing in cameras, high definition
television and printers. Their mission is to provide top quality goods and services so that
customers can get the best value for price they have paid. They believe in optimum utilisation of
the available resources so that efficiency and effectiveness of company can be maintained for a
long time. This report will give information about management accounting and its different
methods. It will also include different planning and budgetary tools which can help company in
cost reduction and in increasing the sale of products.
TASK 1
P1 Management accounting and its different accounting systems:
A company has to keep record of various data and information which can be related to
internal or external work of organisation. When a firm needs to take some important decisions,
they need reliable content which can be gathered by using management accounting systems and
its different tools and techniques. This type of accounting method plays a crucial role in the
formation of different business strategies and in minimising the risk that in many parts of
business operations. One of the most important functions of management accounting is to reduce
the cost of manufacturing and expand business so that ultimately, net profit can be increased.
Dell is known for minimising various costs like inventory as they make a system in which they
do not keep their resources idle for a long time. There are mainly four types of management
accounting systems, that is, lean accounting, traditional system, transfer pricing and throughput
accounting (Busco and Scapens., 2011).
Traditional system – It mainly deals with process and job order costing methods. They work in
order to find cost related to labour material and other overheads. This process is important for
Dell because it is majorly related to manufacturing products. By using these methods, company
has made a sound system process of making various goods and this also provides a great
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assistance to the firm in terms of improving quality. Job order costing is basically used in large
projects where finding cost of individual project is easy. This system assist Dell in allocating the
areas where cost occurred is higher than revenue earned. They minimised some of these tasks so
that their overall cost of production can go down. In process costing, cost is find on the basis of
number of processes involved in a system. Individual cost is difficult to find in this activity
because goods are similar in nature.
Lean accounting – It mainly focus on minimising the waste, by using various strategies of cost
reduction. Accountants of Dell measures the profitability by using financial information so that
extra cost and waste can be avoided and there will be optimum utilisation of available resources .
(Bennett, Schaltegger and Zvezdov., 2013).
Throughput accounting – It is not related to reducing cost or minimising wastage as it mainly
focuses on lack of supply of labour, material and capacity of production. This is bit new
approach in which those factors are found who play crucial role in stopping organisation towards
reaching their goals.
Transfer pricing system – Cost of goods is measured when they are delivered in different
departments. Most of the transnational organisation use it approach for internal distribution of
goods. Their are various regulation that are needed to be followed while using this method
because this system can assist in tax evasion.
Definition of management accounting varies from person to person, similarly its types also differ
because some organisations consider cost accounting system and inventory accounting system a
part of management accounting. In first method cost of a product is ascertained and it
profitability is analysed, it is mainly used at the time of launching of new product. Dell is known
for launching many new products and services every year and so, for them, it has major
significance because they do not like to keep their production resources idle for long or short
period. Inventory management system assists in maintaining proper demand and supply chain
which is essential in the manufacturing sector.
P2 Different methods used for management accounting reporting:
Accounting is necessary to measure the performance of a company and find areas where
business is not performing well. It is essential to report the activities and changes that are
happening in an organisation.
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Budget report – In this report, the expenses done by company in the last year are taken into
account. Every department has to provide details regarding expenditure they have done and so,
overall expenses made by company can be calculated (Baldvinsdottir, Mitchell and Nørreklit.,
2010). By analysing previous year’s budget, Dell can find the areas where they have done over-
expenditure. It also provides great assistance in finding the funds which are not properly utilised
by various departments. Another advantage of this report is that managers will have performance
of different teams and departments that will help them at the time of distribution of incentives.
Account receivable ageing – Dell has to provide credit to their distributors. This tool plays an
important role in managing cash flow of company by showing credit status of distributors. Dell
made a credit policy which is for short and long term both. They have categorised their
customers according to the period of credit but this system cannot be adopted at every place
where firm is operating as Dell is a multinational company and they have to adopt the policies
which are there in a particular country. This method supports in finding out many problems
which are related to collection of payment that is essential in reducing the hindrances present in
whole process. In general case, accounts are made according to the name of distributor but this is
not a rule as in some places, credit is given on the basis of time period or may be according to the
remaining amount.
Job cost reporting – This report has given information about the profitability of a task which is
done by employees of company (Zimmerman and Yahya-Zadeh, 2011). All the jobs that are
performed in manufacturing process are analysed on individual basis. All the jobs that are
performed in manufacturing process are analysed on individual basis. The revenue that they
generate is compared from the cost involved in the process. This method is mainly used when
changes in production and manufacturing process is possible. Dell can do changes in their
products according to the need of customers but the condition is that they have to place
minimum order according to the policy of company. The biggest advantage of taking these kinds
of orders is that firm can charge more price and make extra profit.
Inventory and manufacturing – Dell has done a lot of in managing their inventory efficiently. In
normal case, when competitors of Dell were having inventory of 3-4 months, they were only
keeping stock for 15 days. This gave them extra advantage on other players because their cost of
maintaining inventory is less. They can invest remaining fund in technology which will help
them in enhancing their revenue. This report supports company in maintaining proper supply
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chain so that demand of every customer can be met within less time. In some countries, Dell is
operating at high level but there are also some nations in which they do not have much presence
(Ward, 2012.). This report is made on monthly basis in countries where they have sound
presence but at some places where they do not have strong presence, this report is made on
quarterly basis.
TASK 2
P3 Marginal and Absorption costing:
When a company produces an extra unit, at that time, the cost incurred on extra unit is
known as marginal cost. There are three types of costs involved in the process i.e. labour,
material and fixed cost. Labour cost is related to the money paid to employees who are involved
in the manufacturing process. Material cost is related to the amount paid to purchase raw
material and other equipment. Fixed cost is to the sum required for purchasing of machinery and
other fixed assets involved in the production of goods. Along with that, absorption costing
consists of indirect cost like overheads and direct cost involved in production process. Many
organisations use this this method to reduce their cost because it does not involve cost of utility
and salary paid to the workers of factory (Macintosh and Quattrone, 2010). Cost is taken in
account on per unit basis. Adoption of outlay method is based on size and structure of
organisation where some competitors of Dell follow marginal approach where others follow
absorption costing. Difference between these types of methods is as follows:
First basis of difference can be recognition of cost, in marginal costing, fixed cost will be taken
for a specific period of time. The variable cost is taken as a product cost which helps in reducing
the price of product. But in case of absorption costing, fixed as well as variable costs both are
taken in account to decide the price of product. Another basis of difference is profitability which
says that profit is the first approach that is measured on the basis of profit volume ratio but in
other approach, it is less as fixed cost is involved in this type of costing. This is one of the main
reasons because of which most of the firms adopt marginal costing approach. Cost per unit is one
more basis on which differentiation can be done. In marginal costing, cost per unit will be less
and if there is any opening or closing stock available then it will not make any impact on the cost
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of goods per unit. But in absorption costing approach, opening and closing stock makes a huge
difference in cost per unit (Lukka and Modell, 2010). In marginal costing contribution of every
product is taken into account but in absorption costing, old way is used in which cost is decided
by adding all the expenses that company has done.
Income Statement of Dell under Marginal Costing and Absorption Costing
PARTICULARS £ £
Sales (40000*67.5) 2700000
less:
Cost of Production (50000*32) 1600000
Less:closing stock (10000*32) 320000 -1280000
variable selling overheads (45000*6) -240000
variable cost -1520000
Contribution 1180000
less:
fixed manufacturing overheads 500000
Fixed Admin & selling cost 600000
NET INCOME AS PER MARGINAL
COST 80000
NET INCOME AS PER ABSORPTION
COSTING: £ £
Sales (40000*67.5) 2700000
less:
Cost of Production (50000*42) 2100000
less: closing stock (10000*42) 420000 -1680000
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Gross Profit 1020000
LESS:
Fixed and variable cost:
variable sales overheads (40000*6) 240000
Fixed Admin & selling cost 600000 -840000
NET INCOME AS PER ABSORPTION
COSTING: 180000
From the above figure, it can be interpreted that net income ascertained by using absorption
costing method will be higher if it is compared to marginal costing method. 180000 will be profit
earned by using earlier process and 80000 will be attained by using later one.
TASK 3
P4 Advantages and disadvantages of different types of planning tools used for budgetary control:
The process in which difference between actual performance and targets are compared so
organisation can make progress in future, is known as budgetary control. Every company sets
their target so that they can have a path to follow which will reduce confusion in teams and they
will not get distracted by targets of others firms. When a company has a rough idea about the
expenditure they are going to do, at that time, they try to keep various expenses in their control
so that they would not exceed their limit. Budgetary tools provide a great assistance to the
manager in deciding future strategy and targets as when they will have an appropriate data their
confidence in setting high targets and more risks will increase (Li and et. al., 2012). There are
many planning tools that Dell is using and some of them are as follows:
Master budget – It is considered as one of the most expensive tools because it provides a great
assistance in making policies for the whole organisation. Main aim of this planning is related to
long term goals as most of the decisions taken in this budget are related to capital expenditure,
production, sales and capital investment. One of the major benefits of this planning tool is that
most of the important decisions are made by top management in advance which saves time at the
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time of their execution as there is no need to make any decision in middle of the job.
Disadvantage of this technique is that it involves a lot of cost which made a huge impact on the
net profit of company (Cinquini and Tenucci, 2010).
Operating budget – This planning is done mainly for the execution of strategies. It includes
income and expenditure that organisation is going to do in the operations of business.
Cash flow budget – Maintaining proper cash flow is necessary for every company because in
case of inappropriate management, organisation can face big problem in short run. This planning
assist is maintaining right amount of cash that is needed in business. It also address problem
related to shortage of cash as well as idle cash, because both are unfavourable for business
(Herzig and et. al., 2012). Advantage of this planning tool is that firm will have proper detail of
money that is needed in firm, which will help in smooth outflow and inflow of cash. But there is
big question mark on the preparation of this budget as many organisations feel that it is not
possible to find the right amount of cash that is needed in business.
Calculation of actual cost incurred and standard cost:
Actual Standard
Material Quantity = 11000 feet Material Quantity = 10000
Total price = 37400 Price 3.6
Per feet = 3.4
1. Direct material price variance = (SP-AP) * AQ
(3.6 – 3.4) * 11000
0.2 * 11000 = 2200
2. Direct material usage variance = SP * (SQ-AQ)
3.6 * (10000-11000)
-3600
3. Total material variance = (SP-SQ) – (AP-AQ)
36000 – 37400
= -1400
From the above calculation, it can be analysed that direct material price variance is 2200 and
direct material usage variance is in adverse which 3600 is. Sum of both of above mentioned
variance is total material variance which is also adverse and amount is 1400.
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TASK 4
P5 Adaption of Management Accounting System during financial problems:
Accounting did not have much importance earlier because people in the past days use it
just to check if any employee is misusing cash that is present in business or to keep a record of
how much cost is involved in making a product and what profit they earn from selling it
(Garrison and et.al., 2010). But after introduction of new accounting systems, especially
management accounting, many organisations changed the way of doing business and adopted
tool and techniques that are present in this accounting system. They understood its importance as
doing business has become complex because of various rules and regulations and introduction of
new technology. Management accounting plays a crucial role in making long term decision
which is considered as one of the most important parts in business. Different organisations use
distinct approaches of this type of accounting. Difference between methods adopted by Dell and
HP is as follows:
Dell mainly uses lean accounting approach which is a modern tool when it is compared
with traditional approach (Contrafatto and Burns, 2013). However, HP does not follow this
method as they believe in adopting traditional approach which is also known as an old method.
Modern tools provide great assistance in the reduction of waste and checking various leakages
that are present in business. But old approach is very simple and it does not include many areas
of operations present in company (Burritt and et.al., 2011). Another difference between
techniques adopted by Dell and HP is that various information and data in modern approach
travel at a fast pace and so, it becomes easy for a manager to take decision in a short period of
time. Also when they have more time probability of making correct decision also enhances. It is
a big advantage in this industry because technology in this era changes very fast, so wasting time
in not a good strategy in current market. In traditional accounting, information and data do not
get deliver in short period which decreases the speed of making decision. In old approach, it was
not sure that right data or information will reach to the manager. Another difference between
modern and old method is that first one is expensive which is adopted by Dell but old tools are
not expensive because of which HP saves a lot of money as they still follow the old technique.
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Technology is another big difference between these two organisations as Dell believe in using
the latest and advanced planning tools while HP takes time in adapting new changes.
Most of the long term decisions are related to finance as many of them are in relation
with investing in future technology and expanding business in new regions. Management
accounting is not related with day to day operations and it involves major decisions which can
make a huge impact on business in the long run. Shortage of cash is one of the problems which
can be solved by using techniques of management accounting where cash flow tool helps in
finding appropriate amount of cash needed in business (Baldvinsdottir, Mitchell and Nørreklit,
2010). Debt is also the major problem which not only there in Dell but many organisations
suffer with this issue. This accounting technique helps is analysing available data by which
correct decision can be taken.
Conclusion
From the above report, it can be concluded that management accounting plays a
significant role in managing major operations of company by providing correct and reliable
information to the manager that helps in taking right and fruitful decisions for business. It is
essential in reducing various financial risks through which company can make its process smooth
and fast and can sustain in the market for longer span of time. It has been assessed from the
report that nowadays, most of the organisations adopt various techniques and tools to maximise
their profit and for also for the optimum utilisation of their resources. Minimising wastage in one
of the most significant aspect gained by this type of accounting.
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