BTEC HND Business: Management Accounting System and Techniques Report

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This report provides a comprehensive analysis of management accounting systems and techniques. It begins with an introduction to management accounting, explaining its role in organizational decision-making, using the Innocent Drinks company as a case study. The report details various management accounting systems, including cost accounting, inventory management, and job costing, along with their essential requirements. It then explores different management accounting reporting methods, such as budgetary reports, accounts receivable aging reports, and cost and performance reports. The core of the report focuses on cost analysis, specifically marginal and absorption costing, with detailed calculations and income statements for Innocent Drinks. The report also examines planning tools and their advantages and disadvantages, and concludes by comparing how organizations adapt their management accounting systems to respond to financial problems. The report includes financial statements and reconciliations to illustrate the practical application of these techniques.
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Management
Accounting System and
Techniques
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Table of Contents
INTRODUCTION...........................................................................................................................3
Task 1...............................................................................................................................................3
P1: Explanation of Management Accounting and Essential requirements of different types on
Management Accounting System...............................................................................................3
P2: Different methods used for Management Accounting Reporting.........................................5
Task 2...............................................................................................................................................6
P2: Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption cost. ..........................................................................6
Task 3.............................................................................................................................................11
P4. Advantages and disadvantages of planning tools...............................................................11
Task 4.............................................................................................................................................13
P5 Comparing how organisations adapting management accounting system for responding to
financial problems.....................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
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INTRODUCTION
Management Accounting is a segment of accounting that aids the business to make
necessary decisions related to its functionality and management (Alsharari, 2016). This includes
decisions like price determination, number of units to be sold in order to earn profit or how much
of a bonus can the business afford to give its employees. Management accounting helps the
business to form a report that further helps in the use of planning tools and determining costs.
This facilitates the business to work smoothly with and extensive opportunity of growth and
expansion.
Management accounting is a combination of Management and Accounting, management
is an art of getting things done through people by influencing and motivating them in the right
way on the other hand accounting is a process of identifying, recording, analysing and presenting
data in an effective way. Management accounting is accounting of such data which can make
people do the required tasks and take important planning decisions.
For better understanding of this concept, Innocent Drink company has taken. It is an
organisation of medium size. This report has defined various types of management accounting
system which is important while making decision for an organisation. Various techniques are
explained which is useful in determining costs. It also explains the types of planning tool that is
used to predict the problems that are going to arise in future. The relevant information is
described in a proper manner.
Task 1
P1: Explanation of Management Accounting and Essential requirements of different types on
Management Accounting System.
Management accounting termed as process of identifying, measuring and analysing and
providing information to the managers and focusing on all accounting metrices. This is will be
very useful in relation to the cost of goods and products that is being purchase by the
organisation (Choi and Byun, 2018). Management Accounting System and analyse the situation
of a company Innocent Drinks, that makes smoothies and juices sold in supermarket, coffee
shops and other outlets. Management accounting will enable Innocent Drinks to get
organisational reports and these reports will help it to make necessary changes and take required
decisions in the organisation itself and the management.
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Management Accounting will provide the organisation with information about
manufacturing which can further help in preparing budgets which will aid in improvement of
management. This includes various system that is used by company and following requirement
are as follows-
Cost Accounting System: It is one of the essential system of management accounting
system. This system consists of various accounting techniques by which the business can
find cost of certain tasks and projects, with this they can compare their profits with their
costs and take necessary decisions and plan accordingly. In context to Innocent Drinks,
the company uses Cost Accounting System with which they are able to manage all their
relevant cost like that of raw material, processes and of distribution of products. The
essential requirement of cost accounting system in the Innocent Drinks is that it creates
sense of efficiency and effectiveness in the organisation and maintaining the reliability is
done by this method.
Inventory Management System: This system has techniques that help the management
to maintain the level of stock (Christensen and Himme, 2017). This system involves the
process of stocking and restocking the organisation's inventory so as to increase overall
sales as stock will be available when needed. Innocent Drinks uses this system with its
various techniques to manage its inventory. Techniques may include LIFO, FIFO, JIT
and ABC analysis. This is important for the Innocent Drinks to use this system as it
facilitates in maintaining the stock requirement in the organisation and that builds the
efficiency in the management.
Job Costing System: Job costing system is a type of management accounting system
which is generally used by manufacturers because accountant can easily estimate the cost
of performing a every job. This system will help the accountant in assessment of the costs
of every department separately. The organisation assesses the cost required for every job
and running business activities. This information is of crucial use for the managers to
formulate trading strategies. The importance of this essential requirement in the company
facilitates the organisation to develop this system as it gives an idea to properly defined
the job that is being performed in the organisation to identify the cost of each department
that is being done in Innocent Drinks to analyse the overall cost to the company.
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P2: Different methods used for Management Accounting Reporting.
Management accounting reporting will aid the accountant to represent management
accounting information in an operative form which helps in taking important strategic decisions
for the smooth working of the organisation. This helps in highlighting the profitable operations
of the business so that they are easily visible to the stakeholders. This segment has various
techniques like inventory report, budgetary report, job costs report, account receivable ageing
report.
Budgetary Reports
Budget reports are important in measuring performance of company. Basically it is made for
small companies but it is also used in large organisations by department wise. It is made on the
basis of past experiences and it has the power to overcome future unfavourable situations.
Budgets are prepared on the basis of current expenditure and costs as compared to expected costs
and expenditure. Accounting reports that are related to budgeting helps managers to provide
better incentives, lowers cost and give a chance of negotiation with suppliers and vendors. It will
enable Innocent Drinks to evaluate current performance with the expected performance. With the
budget report Innocent Drinks estimates the value of future profit and filter out activities that can
become the cause of failure of business. It also help in finding out the value of opportunities that
come to businesses in near future.
Account Receivable Ageing Report
Business that are dependent on extending credit, then account receivable ageing report are very
important to it. It helps managers in identifying those people who are defaulters and finding
problems in process of collection. If it is founded that there are many defaulters then the need of
tightening the policies of credit arises. It will help the manager to keep an eye on the credit
period of account receivable and the cash inflow and outflow of the business. This will enable
the manager to take decision of increasing or decreasing the credit period. Innocent drinks
company forms policies that will enable them in collecting amount from their debtors.
Costs Reports
Procurement of raw materials, labours, overheads are the costs for a company. The total of these
costs are divided by the amounts of product produced. The cost report has the information about
the cost of items with the selling prices of the product. Through this report companies makes
profit margins for their products. It will help the manager to evaluate critical expenditure areas,
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and have a systematic analysis of total costs involved in specific projects. Innocent drinks
department of management forms report in identifying the reason of cash outflow or costs which
are not beneficial for a company.
Performance Reports
These are the reports that are made to review the performance of an organisation and the
workforce of a company. In large organisations performance reports of departments are also
made. These reports are made to make decisions for the future of a company. Over achievers are
appreciated for their performance in an organisation and under performers are given warning or
lay off has done. Innocent drinks form performance report to identify departments which are not
working effectively and efficiently.
Task 2
P2: Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption cost.
Cost: This is payment that is made by company and it gives an idea that require lots of
resources and accordingly satisfied different methods. This deal by management of organisation
and there many techniques that comes in various forms and add to the budget of company.
According to this Innocent Drinks has decided their certain activities and functions that impact
the profitability of organisation. There are two types of cost such as Marginal costing and
Absorption costing is discussed are as follows-
Marginal costing: It refers to the increase and decreasing in the cost of producing one
more unit or it can be more than the customer (Fischer, 2016). This are based on production
expenses that are variable or direct such as labour, materials and equipment and this does not
increase with the increment of production. The main efforts are need to be developed by
covering the fixed cost of production. This is important for the Innocent drinks to evaluate the
cost of Marginal in the management. Some necessary decision needs to be taken while taking
this cost fluctuate because of scarcity issues and could be calculated when items have been
produces to cover the fixed cost and when production is at break-even point.
Absorption costing: This concern with manufacturing accounting that uses to absorb the
cost that uncured on product and it involve the direct cost and indirect cost. Following cost that is
covered in this costing are Variable cost, fixed cost and semi-variable cost. It is the part of
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accounting methods and procedure and helps in determining the cost of inventory and that
involves the fixed cost (Frick, Birt and Waters, 2020). It is full costing that include the all
production cost and this enable the accounting to do precise accounting and maintaining the cost
of production in effective manner. In the Innocent Drinks this facilitates in improvement in the
cost of production at minimal level and helps in analysing the way that could be reduce. This
also useful in accounting principle implication where it follow all the accounting procedure and
principles that helps in achieving the desired objective and goal.
Innocent Drinks Marginal Cost Statement of Profit of Super Smoothies for the month of
April 2020
Workings(£) Amount for April
2020(£)
Sales 4000*14 56000
Cost of Sales
Opening Inventory - - -
Variable
Manufacturing cost
6000*5 30000
________
30000
Less: Closing
Inventory
2000*5 -10000
________
-20000
________
Contribution 36000
________
Less: Fixed
Manufacturing Cost
-18000
Less: Fixed non-
manufacturing cost
-5000
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________
Actual Net Profit 13000
Innocent Drinks Marginal Cost Statement of Profit of Super Smoothies for the month of
May 2020
Workings(£) Amount for May
2020(£)
Sales 5000*14 70000
Cost of Sales
Opening Inventory 2000*5 10000 -
Variable
Manufacturing cost
6000*5 30000
________
40000
Less: Closing
Inventory
3000*5 -15000
________
-25000
________
Contribution 45000
________
Less: Fixed
Manufacturing Cost
-18000
Less: Fixed non-
manufacturing cost
-5000
________
Actual Net Profit 22000
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Innocent Drinks Absorption Cost Statement of Profit of Super Smoothies for the month of
April 2020
Workings(£) Amount for April
2020(£)
Sales 4000*14 56000
Cost of Sales
Opening Inventory - - -
Finished Goods 6000*8 48000
Less: Closing
Inventory
2000*8 -16000
________
-32000
________
Actual Gross Profit 24000
Less: Fixed non-
manufacturing Cost
-5000
________
Actual Net Profit 19000
Innocent Drinks Absorption Cost Statement of Profit of Super Smoothies for the month of
May 2020
Workings(£) Amount for May
2020(£)
Sales 5000*14 70000
Cost of Sales
Opening Inventory 2000*8 16000 -
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Finished Goods 6000*8 48000
Less: Closing
Inventory
3000*8 -24000
________
-40000
________
Actual Gross Profit 30000
Less: Fixed non-
manufacturing Cost
-5000
________
Actual Net Profit 25000
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Innocent Drinks Absorption Cost and Marginal Cost Reconciliation
April 2020(£) May 2020(£)
Profit using Absorption Costing 19000 25000
Less: Closing Inventory*Fixed Overhead Rate -6000 -9000
Add: Opening Inventory*Fixed Overhead Rate - 6000
________ ________
Profit using marginal costing 13000 22000
Break-even point Analysis of Dairy Free Range of Smoothies
We'll need Total Variable Cost, Total Fixed Cost and PV Ratio to find out break-even
point and margin of safety.
Total Variable Cost = Variable Material + Variable Labour + Variable Manufacturing
Overhead + Variable Administration and Selling cost.
= £ 400000 + £ 280000 + £ 240000 + £ 60000
= £ 980000
Total Fixed Cost = Fixed Manufacturing Cost + Fixed Administration and Selling
Cost
= £ 80000 + £ 60000
= £ 140000
PV Ratio = [(Sales – Total Variable Cost)/Sales]*100
= [(1200000 – 980000)/1200000]*100
= 18.3333333333 % or 18.34 %
Actual Amount (£) Break-even Amount(£)
Sales 1200000 763359
Less: Total Variable
Cost
980000 623359
__________ __________
Contribution 220000 140000
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Less: Total Fixed
Cost
140000 140000
__________ __________
Net Profit 80000 0
Break-even point Sales = Total Fixed Cost/ PV Ratio
= 140000/18.34%
= £ 763359
Break-even point Units = Break-even point sales/ Price per unit
= 763359/60
= 12723 units
Margin of Safety = (Current Sales – break-even point sales)/ Current
Sales*100
= (1200000-763359)/1200000*100
= 36.38675 %
Task 3
P4. Advantages and disadvantages of planning tools
Budget is a document of finance which officially plan the future expenditure and incomes
of the term plan (Goddard and Simm, 2017). Budget carried out at different levels in an
economy, at corporate level even in family also. Mainly the budget are categorize in three type of
budget “Surplus Budget, Balance Budget and Deficit budget”. Budgetary Control is a
technique in which we compare the planned budget and the actual results and provide the
suitable amendment to the budget to carry out all task smoothly without generating any other
source of fund and It also show how well the manager is optimized the budget. There are many
types of budgets in the markets which helps in work efficiently:-
Cash flow Budget :- Cash flow Budget provide an overview for the term plan with all the
cash income and cash expenditure which will going to incurred in future.
Advantage :- The very first benefit of the cash budget is it brings unwanted spending to
zero, so concerned person do not have to lookout for further borrowings (Karimi, Dastgir and
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