Detailed Analysis of Management Accounting for Sollatek Ltd.

This report provides a comprehensive overview of management accounting principles and their application within Sollatek Ltd, a company specializing in electrical and electronic equipment. The report defines management accounting, contrasting it with financial accounting, and emphasizes its role in decision-making and strategic planning. It explores various management accounting systems, including price optimization, inventory management, cost accounting, and job costing, detailing their benefits for Sollatek Ltd. The report also highlights essential management accounting reports, such as performance reports, accounts receivable reports, job cost reports, and inventory management reports, explaining their significance in providing valuable financial information to stakeholders. The analysis includes a discussion of costing methods and their impact on profitability. Overall, the report underscores the importance of effective management accounting in achieving organizational goals, improving efficiency, and maintaining a competitive edge in the market. This report is a valuable resource for understanding the practical application of management accounting in a real-world business context.

Management Accounting

INTRODUCTION
Management accounting is a technique of identifying the financial position of company
through preparing financial statements such as Profit & Loss a/c, Balance sheet, Cash flow
statement etc. This will enable management of an organisation to make decision and plans for
future sustainability and profitability. Management is liable to translate financial data into
valuable information which further help in making an effective and profitable decision for an
organisation. Due to this, the management are able to bring company ahead than their rivals.
The present assignment is based on Sollatek Ltd. company which deals in providing
electric and electronic equipments with an objective of power control and voltage protection. The
project describe the different types of management accounting system and their essential need in
an organisation so as to bring efficiency in their performance. Along with this, types of
management accounting reports are also discussed under this project. There are mainly two types
of costing methods which are also briefly described under this report with a calculation of net
profitability of company. Apart from this, there are several aspects as well which are briefly
explained under this report in the context of Sollatek Ltd (Agyemang and Broadbent, 2015).
TASK 1
P1:
Definitions of Management Accounting:
According to the Institute of Management Accountants (IMA): Management is such a
profession which includes decision-making process, implementation of policies, preparation of
accounting reports etc. to facilitate an organisation to achieve sustainability and profitability.
According to the Institute of Certified Management Accountants (CMA), management
accounting with the help of using specialised skills and knowledge help in preparing financial
reports in order to stable financial position of company in competitive market.
Meaning: Management accounting refers to the provision of financial data which help
manager to bring useful information for the purpose of formulating an effective plans and
policies in order to achieve competitive advantage in market.
Difference between management and financial accounting:
Basis Management accounting Management accounting
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Meaning It is such a profession which
gives valuable information to
the management which assist
them in making an effective
decisions and suitable plans. It
ill help company in operating
business operations more
successfully.
Such account ting mainly
focuses on preparing financial
reports which includes Balance
sheet, Profit & Loss, Cash
Flow statement. It facilitate
stakeholders to know the
company's actual financial
position in market.
Mandatory Not mandatory Mandatory
Information Provides information both in
monetary and non-monetary
terms.
Provides only monetary
information
Time frame The reports are made
according to the needs and
requirem4nts of business
Financial reports are required
to prepare on annual basis.
User The reports are useful for
internal parties.
Both internal and external take
interest in financial reports.
Therefore, management accounting is an integral part of an organisation which assist
company in achieving sustainability and profitability through maintaining financial reports on
annual basis. It require to adopt various management accounting system which includes
inventory management system, price optimisation system, job costing system etc. Through using
such system, the management are able to know actual market trends and company's actual
financial position at present times (Christ and Burritt, 2013). Sollatek Ltd. can able to achieve its
desired goals and objectives within given time frame only when their management prepare its
financial statements on annual basis. For example, preparation of cash flow statement help
company in identifying the cash inflow and cash outflow. This will direct the management to
make changes in current policies in order to maintain stable position in competitive market. To
help company in this, various management accounting systems are essentially used by
management. Here are the some importance of management accounting systems:
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Increase in efficiency: Adoption of different accounting systems help in analysing the
current market trends and buying behaviour of targeted customers so that an effective decision
are able to made by management to fulfil all needs and requirements of market. For example,
Price optimisation system direct management in setting an effective pricing policies after
analysing the perception of targeted customers towards company's pricing policy.
Measurement of performance: Management accounting system help in measuring the
financial performance of company through maintaining financial reports on annual basis. This
will enable management to identify which department are performing well and which are below
the mark. For example, Preparation of budget through using cost accounting system for each
department help in analysing their expenses and their effectiveness (Contrafatto and Burns,
2013).
Effective management control: The management of Sollatek Ltd. are able to analyse
business and operation cost which direct them to make changes in their current plans and policies
in order to minimise cost of operation. This will make positive impact on the profitability of
company.
Different management accounting systems:
Price Optimisation system: Such system is more helpful for an organisation in order to
identify the buying behaviour of targetted customers and what they think towards the pricing
policy charged by Sollatek Ltd. for their products and services. This will enable management in
setting an effective pricing policies so as to maximise the satisfaction level of targeted customers
and achieve huge customer base. For example, charging high prices on electricity equipments as
compared with their rivals may shift loyal customers towards rivals company. Thus, using such
system will help management in making decision regarding reduction of cost after analysing all
costs incurred in producing and selling products.
Inventory management system: It is considered as an effective accounting system which
enable company in identifying the actual inventory level available with company at present and
accordingly make decision regarding ordering inventory from suppliers. This will help Sollatek
Ltd. to meet customer needs and requirements on time due to which the chances of achieving
their loyalty are more. For example, if demand of electricity equipments rises, then it must
required for company to have sufficient amount of stock. Thus, this can be possible through
using such system (Cuganesan, Dunford and Palmer, 2012).
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Cost accounting system: It refers to such accounting system which facilitate management
in identifying the total cost involved in the business activities of an organisation. Sollatek Ltd.
uses such accounting system in order to determine expenses and costs which are invested during
an accounting period. Such method is considered as more reliable and accurate due to estimating
future costs investment and analysing current expenditures. Sollatek Ltd. Is engaged in selling
electricity equipments thus it is essential to determine overall cost incurred in manufacturing and
selling it to the targeted customers.
Job costing system: Such accounting system is used to identify the cost incurred in
producing certain product or bunch of products so that an appropriate budget are prepared
considering all the activities performed in production process. The manager of Sollatek Ltd.
Identifies all the activities on the basis of their nature and level of skills required in performing
activities and accordingly adopting such system to identify actual cost incurred in each of the
activity. There are different methods which are used under job costing systems such as Batch
costing, process costing and contract costing. Sollatek Ltd. Uses batch costing due to engaging in
providing electricity equipments.
P2:
It is essential for management to manage and control all business function in an effective
and efficient manner so as to achieve better possible outcomes in near future. Therefore, it
requires to prepare financial reports and other documentation which help management in getting
sufficient valuable information so as to make an effective and profitable decision for the
betterment of an organisation. The main objective of reports is to provide accurate and reliable
information to the interested parties to an organisation such as investors, creditors etc.
Sollatek Ltd. Deals in providing electricity equipments with an objective of power
control and voltage protection thus requires to prepare accounting reports such as inventory
reports, account receivable report and many more. Such reports facilitate management of
company to make an effective decision, suitable planning, assigning roles and responsibilities to
employees. Preparation such reports requires high knowledge and skilled due to which Sollatek
Ltd. Should required to hire individuals which are more trained and experiences to prepare such
reports. Such reports includes Profit & Loss a/c, income statement, cash flow statement etc.
which are prepared by company on annual basis in a financial year (Herbert and Seal, 2012).
Here are the some managerial accounting reports which are essential required to be prepared by
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Sollatek Ltd. For the purpose of formulating an effective plans and strategies in order to achieve
desired goals and objectives:
Performance report: It is a physical document which contains the information regarding
the overall performance of an organisation. Therefore, it is essential for manager to prepare such
report in regular basis which includes income and expenditures affects the functioning of
business. Sollatek Ltd. Prepares such report with an objective of attracting investors with the
hope of getting huge investment from them through showing them true and fair financial position
of company.
Account receivable report: Such report is a document contains all information related
with account receivables. It help in getting sufficient information about what amount to be
recovered from their debtors on what date. This will direct management to make changes in their
credit policies so that the chances of facing losses due to default of debtors are minimised. Such
report is known as primary tool which is more helpful in collection of amount. This will direct
the management not give credit to such person whose repayment are in doubt in future (Lavia
López and Hiebl, 2014).
Job cost report: Such report is also required to be prepared by Sollatek Ltd. In order to
get sufficient information about the effectiveness of particular activities and accordingly
allocated cost in the budget. The main aim of preparing such report is to identifying the cost
involved in different job orders. Preparing such reports brings benefits to company in terms of
ascertaining profitability of various job separately.
Inventory management report: This is the report which communicates management in
identifying the actual inventory the company have at present time. On the basis of which, the
management are able to decide whether to place an order to inventory or not. It help company in
minimising the storage cost through ordering stock from suppliers only when the company feel
shortage. Inventory includes raw material, stock of work in progress, finished goods and
warehoused stock. Sollatek Ltd. should required to prepare such report by recording continuous
opening and closing stock. This will help in identifying the requirement of inventory so as to
meet market needs and requirements. EOQ, ABC costing technique and inventory system are
such methods and techniques with the help of which inventory reports are prepared.
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M1:
Sollatek Ltd. May take advantages through using above mentioned accounting system
which ate given as below:
Management accounting systems Benefits
Cost accounting systems It is used in ascertaining costs required to
invest in process of different business
activities. Thus, it help in maximising revenues
and controlling expenditures using product line
and distribution channel.
Inventory management system It help company to manage and control
inventory through using techniques such as
ABC costing and EOQ. The management may
uses different tools such as LIFO, FIFO and
AVCO to record all the inventory available
with company.
Price optimisation system It facilitate management to allocate cost to
produce and market different products of
Sollatek Ltd. It affects profitability in positive
manner.
Job costing system It helps in ascertaining costs invested in
particular job activities. Using such system,
management of Sollatek Ltd. Are able to
determine batch number and date on which
particular job as performed.
D1:
There are various divisions of Sollatek Ltd. which supports an association to achieve
desired goals and objectives with their valuable contribution. Thus, getting information from
each department help management in preparing different types of reports which help company in
analysing past experiences with an objective of predicting future events. For example, account
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receivable reports are prepared with an objective of ascertaining all outstanding payment which
are not yet collected by company from their debtors (Maher, Stickney and Weil, 2012).
TASK 2
P3:
Sollatek Ltd. Is a manufacturing business thus essentially required to determine costs and
profitability through using certain costing techniques such as marginal costing and absorption
costing. Such costing methods help company in determining the net profitability of company
through considering cost incurred in production process. These costing methods are briefly
described as below:
Marginal costing: It is mostly used by small sized company as it support them in
increasing their revenue by including only variable cost and ignoring fixed cost at the time of
calculation (Noreen, Brewer and Garrison, 2014). Therefore, Sollatek Ltd. uses such method to
increase revenue which help them in achieving strong position among their rivals in competitive
market.
Formula of marginal costing: Sales revenue – marginal cost = contribution – fixed costs = Net
profit or income.
Absorption costing: Under such costing method, all cost whether fixed or variable are
included in the calculation of finding out net profitability of company. Due to adding such
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costing method, the profitability of company are decreased as compared with marginal costing
method thus less adopted by companies.
Formula of absorption costing: Sales revenue – cost of goods sold = gross profit – selling and
administrative cost = net profit
Break-Even – It indicates the situation at which the company neither earn profits nor
incurring losses. This will assist managers to decide the number of units the company required to
sell in order to prevent any losses.
a. The number of products to be sold to break even
b. The break even point in terms of sales revenue
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c. The number of products that need to be sold to make profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety:
MOS refers to the safety level which are essential required to be maintained by company
in order to earn certain amount of profit. It can be calculated through making difference between
actual sales revenue and break even sales revenue.
d. The margin of safety if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
M2:
There are mainly two methods to calculate net profitability through considering all costs
and expenses. Such technique are given as below:
Standard costing: It is an effective method in which an estimated cost has been adopted
which drives management to allocate cost to different divisions with an objective of incurring
cost less than standard cost. It reduces the cost of business operation which makes positive
impact on the profitability of Sollatek Ltd..
Marginal costing: It is mostly used by small companies with a motive of earning huge
profits by including variable cost and ignoring fixed cost. Therefore, it is most suitable method
for Sollatek Ltd. to adopt to increase their revenue.
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