Analysis of Management Accounting Tools for AB Limited's Performance

This report delves into the application of management accounting principles within AB Limited, a company providing business equipment solutions. It examines key tools such as standard costing, balance scorecards, and benchmarking to evaluate performance. The report details how standard costing aids in budgetary control, performance evaluation, and cost reduction, differentiating its application in manufacturing versus service businesses. The balance scorecard is analyzed across four perspectives – learning and growth, internal processes, customers, and financials – to assess AB Limited's strategic alignment and operational efficiency. Furthermore, the report explores the benefits of benchmarking, including competitive advantage and improved product quality, while also highlighting the importance of financial reports in assessing profitability and overall financial health. The conclusion emphasizes the contribution of these tools to enhancing productivity, identifying problem areas, and improving overall organizational efficiency, contributing to better strategic decisions and competitive advantages.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................3
REFERENCES ...............................................................................................................................4

INTRODUCTION
Management accounting is refers to method of collecting financial and non-financial
information and preparing reports on the basis of this information. These reports assists to
management in taking decisions on daily basis. AB limited has been taken to explain concepts of
management accounting which is formed ten years ago. It is involved in providing business
equipment solutions to local businesses.
In this report, analysis of balance scorecard, standard costing, benchmarking and
financial reports have been done for performance evaluation.
MAIN BODY
Standard costing
(a) It is a technique in which actual costs are compared with standard or estimated costs
to find variances and then corrective actions are taken to reduce them. Uses of standard costing
for AB limited are:
 It helps in utilising budgetary control system in business operations.
 Standard costing assists in evaluation of performance as well as motivating employees for
improving it (Standard costing, 2018).
 Various decisions are taken on the basis of this system such as price fixation, decisions of
make-or-buy etc.
 Improving cost control system
 Simplifying stock valuation techniques
 It is flexible in nature as it is easily adjust with changing conditions
Standards are need to be reviewed periodically because standards are established by
taking reference from past performance (Parker, 2012). Standards are close approximation of
actual costs. Also variances will be accurate if standards will be accurate. Standards can be also
be changed if needed to get better results and to change them, review is needed.
(b) AB limited is engaged in providing solutions and services to other businesses. But
now it also manufacturing business equipments. According to this context, standard costing can
be applied to both service and manufacturing business. In a manufacturing business it is more
useful as compared to service business. This is because standard costs is generally related to
manufacturer's budget of direct material, direct labour and manufacturing overhead costs
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involved in production of goods. Variances can occur in manufacturing process such as
inefficient production, increasing input costs etc. These can be reduced by management through
increase in selling prices (Wickramasinghe and Alawattage, 2012). But in case of service
business, standard costing can be used only in area of budgeting. A service company can prepare
cost of goods sold account in which description of overhead costs, labour wages and little
quantity of direct material is provided. For a service business, cost of delivering a service is
considered as manufacturing cost. Salary of professional are considered as direct labour costs in
service business.
(a) Balance scorecard
This tool is generally used in strategic management for improving different internal
operations and their expected outcomes. It is used in measuring performance as well as providing
feedback to AB limited. To measure performance, information or data is collected in quantitative
form and then this is interpreted by senior management for efficient decision making. There are
four perspectives of analysing performance through balance scorecard:
 Learning and growth: In this overall culture of AB limited is measured in terms of
technology, employee satisfaction, and competitive advantage etc.
 Internal business processes: Efficiency, ideas, innovation, effectiveness of internal
functions are looked up and it is assured that business run in a smooth way.
 Customer: From perspective of customer, AB limited should ensure that they should
always be happy and satisfied. Because ultimately they will contribute to success.
 Financial: To measure financial performance, data related to revenue, sales, expenses
should be collected and analysed.
Balance scorecard is used by AB limited in implementing strategies and in developing strategy
objectives.
(b) Benchmarking
Managing director of AB limited believes that benchmarking is a useful way to measure
performance. Benchmarking is a tool of performance measurement in which measures are
obtained from competitors or peers (Maas, Schaltegger and Crutzen, 2016). These concentrates
on best practices adopted by companies in same industry or different industry. After that, these
practices or principles are applied in AB limited to improve performance. There are many types
of benchmarking such as strategic, performance or competitive, process, functional, financial,
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internal, external, international benchmarking etc. Benchmarking provides competitive
advantage to AB limited. There is a huge process involved in this tool. When problem areas have
been identified and solved according to benchmarks or standards prevailing in competitors'
business, then automatically performance will enhance (Lambert and Sponem, 2012). Benefits of
benchmarking are improvement in product quality, reduction in labour costs, increase in sales
revenue as well as in profit. For instance, AB limited has many separate divisions for marketing,
research, product design, communication services, technology etc. Now it is also involved in
manufacturing and supply. So, to measure performance of each department as it become
complex in nature, one needs to adopt benchmarking tool to improve efficiency.
Financial reports
AB limited manufactures and supplies business equipments such as copiers, printers,
scanners, fax machines etc. So for analysing profitability of a particular type of equipment,
financial reports are prepared on monthly basis. Financial reports disclose financial information
and overall financial health about an organization. These are prepared to reveal strengths and
weaknesses of AB limited. Financial reports includes balance sheet, income statement, cash flow
statement etc. Financial benchmarking can prove to be an effective tool in financial analysis.
With the help of this tool, AB limited can compare financial outcomes for assessing productivity,
competitiveness and efficiency. In financial benchmarking, performance is evaluated by focusing
on certain indicators (Shields, 2015). Indicators can be financial ratios, per unit cost, profit per
unit. Skills and knowledge of employees of finance department will be improved as they would
be able to take decisions faster.
Main focus of financial benchmarking is to grab opportunities from external
environment. Goals and objectives can be established and achieved with the help of this tool.
CONCLUSION
From above discussion, it is concluded that various performance measurement tool are
developed for organizations to assist in enhancing productivity and identifying problem areas.
Benchmarking helps in developing better strategies than competitors. Balance scorecard adds
value to company by successful implementing strategy. Standard costing proves better in a way
that it replaces traditional costing system in which a large amount of historical data had been
required. Lastly, all these tools contributes in increasing efficiency of organization.
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REFERENCES
Books and Journals
Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1). pp.54-70.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Lambert, C. and Sponem, S., 2012. Roles, authority and involvement of the management
accounting function: a multiple case-study perspective. European Accounting Review.
21(3). pp.565-589.
Shields, M. D., 2015. Established management accounting knowledge. Journal of Management
Accounting Research. 27(1). pp.123-132.
Online
Standard costing, 2018. [Online] Available through
<https://www.accountingtools.com/articles/2017/5/14/standard-costing>.
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