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The Process of analysing, interpreting and then processing is called Management Accounting. This report comprises of various different criteria and terms related to management accounting. It contains the different methods and types of Management accounting systems. The various methods which are used in the reporting process are also discussed in the report. It also includes the various methods of Management Accounting which helps the management to grow and sustain in the business for the long term. The report also emphasis on the various cost that is being incurred on the activities and which are of utmost importance. Management Accounting affecting the financial performance is discussed later in this report containing the various measures which the company can take to increase its efficiency. The Absorption costing and marginal costing both are also being analysed in this report and both of them are compared and the best option is then taken into consideration afterwards. The report highlights how management reporting is integrated with management accounting and how it is beneficial for the management or the organisation as a whole. Various advantages of budgetary control and disadvantages of budgetary control are studied here.
Task 1
LO1: Understanding Management Accounting Systems
Management Accounting:
It is a term that is combined of two terms which are in the word itself that are “Management and Accounting”. It is a way through the top management does its work efficiently and effectively. In other words it can be said that it is the study of managerial aspect of accounting. It mainly concentrates on the techniques to redesign the policies which are effective for the top management to run the business( Busco and Scapens,2011). It includes various things such as formation of policies, control of executed methods and appreciation of this effectiveness.
The essential requirements of different types of management accounting systems are:
The style of Management which could be democratic or an Autocratic style.
The Organisation Structure also gives managers a fair idea how the activities will be carried by using the various forms of reports.
Another factor which is also very much responsible is the information required by the organisation and depends upon the internal and external use also
Apart from this it should also concentrate on the relevant information and not on the inaccurate one
The most important requirement for MAS are the cost which are involved here
The inventory management also plays a major and important role in the Management Accounting Systems
The Management Accounting Systems should take complex tasks and then it can help in making decisions(Li et al, 2012).
Different methods used for management accounting reporting are:
Budget Reports: It facilitates the management in attaining the company’s performance and usually shows all future expenses with having a reserve too for each one. This also helps in indentifying the areas where the company can trim its costs in future ahead.
Account Receivable Aging Report: This is very useful for the managers in identifying the defaulters in the overdue payment. In other words it is a critical tool in measuring the cash flow in the organization. All the organization needs less time period to convert the account receivables into the cash itself and by that only the firm is able to earn more profit in the future ahead.
Variance Analysis: It is a process of comparing various budgeted statements and analyzing the gaps between the costs and actual data. The variance is other way called the Marginal analysis because they keep on changing from time to time.
Performance Reports: It states the differences in the actual budget and the projected budget and help management take decisions accordingly. These reports also show what the areas in which improvement are and changes are needed and then corrective measures can be taken for that.
Cost Reports: This report contains various information relating to the cost of labor, materials etc and also tell managers in ascertaining the cost of manufactured process and also provide internal report systems.
Inventory and manufacturing Reports: It is also helpful in the manufacturing process which includes materials, labor etc. Various things like these affect the manufacturing costs which affect the Gross Profit are taken into consideration here.
Job Cost Reports: These costs evaluate the costs involved when the project is in the progress till its final end. There are various costs which are either incurred in between the projects because every cost is useful in this area(Maas et al, 2016).
The benefits of management accounting systems are very crucial to understand which certainly includes these:
The company’s operations are usually reflected by the money in hand at the last day of the financial year
It also helps in planning the management processes and taking corrective measures if needed.
It helps in communication of various important details across various departments.
It generally helps in motivating the morale of the employees as by that they will be working more efficiently
It provides the perfect coordination among the various departments such as sales, purchases, finance, personnel etc
Through the help of Management accounting systems the company can prepare the plans and drive the workforce towards the achievement of the goals
The most important aspect here which is considered here is the profit earned towards which all the activities through these systems take place.
The management accounting systems help to eliminate the amount of wastes through which efficiency is increased.
The major thing which these systems give from the organization side is the best customer service and satisfaction
The management systems also help in organizing various things in the organization such as the most importantly the work which is carried out.
The regulation of activities is also there with the help of the management systems in the way of planning, organizing etc.
It will also help in the price optimizing system as there will be no duplication of efforts and wastage of money in the organization.
Various activities and drives are in accordance to this only
The management works in accordance to the systems which leads to the optimization of the resources and achievement of goals.
All the departments are interlinked so there are no communication gaps too.
All the departments of work are depended on each other for the workings and any mismatch of the information or the gaps can lead to the disturbance of the whole company (Bernardo et al, 2015).
Management accounting systems and management accounting reporting is integrated within organizational processes:
Budgeting Reports- It is the combination of the enterprise activities and the budget reports also makes the business to think and move towards the targeted objectivities and targets in a far better and good way.
Account Receivable Aging Report- It is another union of the enterprise activities and the ARAR report help in the proper collection of the funds from all the receivable and generating revenue for the business and it also help in the maintaining the accuracy and the flexible nature which help in collection of amount too.
Job Cost Report-The activities should be meant towards the reduction of the costs and all the strategies related to the cost of the products are also taken care of by this report only aiming to the best reduction as far as possible.
Inventory and Manufacturing Reports: The merger among the all reports and process helps in maintaining a appropriate report which helps in the management of inventory which includes the number of inventory stock that needs to placed and cleared.
Performance Reports: The merger between the reports and management organizational activities will help managers to plan for future productions and cost increases leading to cost reduction and high profitability. It helps to keep track of all the performance across the departments in the organization(Bernardo et al,2015).
Other Information Report: The reports which are not a part of the above reports they usually contain the information related to the analysis of these reports above and usually contain the information about the revenue generated through various means and keep a track on them on achieving the targets and sustainability. . Information should be communicated individually as well in groups time to time so that the workings could be smooth.
Business situation or opportunity reports:The merger between the organization processes and these type of reports will allow management to critically analyze and then actions could be made accordingly to the situations. These are the reports through which various actions are defined in the organization which are accordance to these reports only.
LO3: Use of Planning Tools in management Accounting
Budgetarycontrol is the process of identifying the differences or the variances among the actual budget and the expected budget which helps the management to take the corrective decisions. The planning tools also help in keeping an eye on the organizational achievements of goals and activities which all are inclined towards it. ( Bobryshev et al, 2015).
Various advantages of different types of planning tools used for budgetarycontrol are:
These tools act as an essential one for the management to plan and make sure that the company goes in accordance to the future goals and objectives.
These will help the business to go far from the view of short term to the view of long term
The standard costing also helps in the evaluation of inventory and preparation of budget
These tools will help the enterprise to see its competitive advantage when compared with others through these
These also help in standard bookkeeping
With the help of these the internal audit can also be done conveniently.
They also ensure the deadlines which the employees follow for the effectiveness in the company.
The capital budgeting tools helps in the long term strategic investments.
Proper financial analysis is done with the help of these tools while drafting the budget.
Various disadvantages of types of planning tools used for budgetarycontrol are:
The employees know that these planning tools are implemented by the organization which can or maybe have the negative impact on them
By the help of this there may be some chances to overestimate the costs which can have a bad impact on the future growth
They are not always correct when the prices go high in the future
These tools generally ignore the external environment which is the macro importance of due importance.
They are made out of assumptions for the future and are generally irreversible in nature.
It generally takes a lot of time of the managerial level.
These tools are sometimes not acceptable by all the employees in the organization
This can sometimes lead to difficulty in motivating the employees.
There are different planning tools which help in application for preparing budgets and forecasts.
Standard Costing: It involves an estimation of the costs and what all expense will be bearded by an enterprise in the future and to plan a budget for the same. This is also helpful in the organisation controlling which is a need nowadays. It also simplifies the cost in the bookkeeping process and helps in the preparation of the budget in the organisation. It is an internal measure planning tool which helps the organisation in maintaining the inventory control. The standards are set according to the previous data and forecast of the future understanding the macro environment so that correct projections could be made.
Capital Budgeting: It is the process of identifying, analysing and selecting the most appropriate investment projects whose flow of cash are to be assumed for more years and apart from this it shows the future projections too.It helps the company to make long-term strategic investments and choose the strategic investments wisely through this. This will directly help the management not to under invest and over invest. These are irreversible in nature so the management needs to take care of these decisions wisely.
Operating Budget: It is prepared to show all the income and expenses over a specific period of time and which is generally of month, week, and quarterly base. Operating Budget is sales as income is lifeblood for the firm. It is the most common type of budget which includes the sales which is the lifeline of the organization.
Sales Budget: It is one of the planning tools for preparing the budgets and is of utmost importance because it states that it is directly concerned with the efficiency of sales efficiency and reducing costs.A sales budget cannot effectively forecast the future trends of events. Various other budgets also depend upon Sales Budget such as Production Budget, Direct Labour Cost, Direct Material Budget etc.This is clearly important in forecasting and generating revenue in the firm. It is also called the lifeline of the management because through this only all the activities are formulated within and then are executed after wards(Shim et al, 2011).
Planning tools for accounting respond appropriately to solving financial problems to lead organizations to sustainable success
Financial analysis is the most important tool when it comes to solving problems and investment purpose. These include various things such as different types of ratios which help in identifying and making plans accordingly in the future ahead. These tools help the business in the decision making process and can improve the financial performance. Planning tools also help the organization in providing solutions to the financial problems of the business unit in different functions of the business and making these functions of the business more future oriented.(Moynihan et al, 2010). Some of them are being discussed here:
Planning - The planning tools help the organization in various ways in the business as all the activities are aligned towards the achievement of the goal by the formulation of different strategies and activities. Planning also makes the work life balanced and also helps in directing the activities. Without a good plan no enterprise can grow when compared to the competitors also. All these planned activities are future oriented and gives direction to sustainability.
Controlling and monitoring - The controlling and monitoring of the business become more easy and good as these activities are controlled by the planning tools which helps the business to keep an eye on the activities.
Competitive advantages - The business also seeks the competitive advantage over the competitors as it is efficiently using all the resources to make best use out of it and try to monitor all the activities so that the business can grow in the future.
Strategic Planning- It includes various activities such as applying PEST, SWOT,Porter’s Five Forces of balance scorecard analysis which help in the business financial position and persists the management to understand what is needed by an enterprise to grow in the future aspect.
Using Budgets- It states the operating and the costing one and this helps in solving the financial problems because the budgets help in comparing and taking decisions accordingly. It also helps in defining the various type of budget and then compares the actual budget with the original one.
LO4: Ways in which organizations could use management accounting to respond to financial problems
Management accounting systems to respond to financial problems in different Organizations
Today in this dynamic era all the companies face dynamic changes and face difficulties in formulating various plans, strategies etc.There are so many challenges related to the macro economic factors such as economical, political, social etc and different organizations work differently interpreting these. It includes modifying the business outlay for analyzing and sustainability, and then giving feedback on the effect of social and environmental aspects on organization performance.
There are various Financial Problems which affect the functioning and the organizations take various meas25ures to resolve these problems(Soudani,2012).
Like in the organization Called HSBCthe main problem was to tackle the amount of cash inflows and the cash outflows, so they use various different reporting system for all the daily activities like its subsidiaries, units, centers of responsibility, KPIs, management information blocks, contractors and IT support systems. There with the help of this they manage the amount of cash in the organization. Here the company has a separate accounting department which tries to formulate various different activities in accordance with the reports also. This organization is known for its smooth functioning and no glitches so to ensure the same these systems are used.
Just like the above company another company which is Unilever also makes use of the Management Accounting Systems because here also it face a lot of difficulty such as here the inventory is also managed by the systems. The company also uses activity based accounting to respond to financial problems because it is the easiest form of the system. It makes use of the strategic planning and price optimization principle to ensure smooth functioning in the financial department leading to the organization as the whole. It makes use of the budget reports so that it can easily target the profit for the next quarter or the financial year. Apart from all these it has also focus on the cost accounting system because the cost will ultimately define the profit afterwards. These systems help the organizations to identify the various problems related to planning, organizing, etc and then taking corrective measures in the future and strengthen its performance. All these help the company in strategic planning and making corrective decisions for all the projects and upcoming needs( Alawattage and Wickramasinghe, 2012).
Responding to financial problems, management accounting can lead organizations to sustainable success as
It is rightly said that all organizations do not succeed in the long run and gain sustainability unless they adapt their different strategies, business outlay, and organizational practices according to the environment. There are several ways through which the organization can do so:
Identifying the various social and environmental trends which will in future create the differentiation of the company over time.
To produce reports that will include different aspects related to the budget formulation strategies, different decisions on pricing techniques and other activities related to decision making.
It should also think to develop the KPIs for strategic and sustainable goals in the future
The organization must also look into the performance outlook which will show all the financial problems the company has faced beforehand
Apply all the accounting tools and techniques related to the management, which shall include the availability of the mother earth’sresources, and also the decision making process which helps in achieving sustainability.(Laszlo et al, 2010).
Trying to get in compliance with the reports for effective and efficient functioning of the origination.
They should also try to look for future and consistent managers and financial analyst who know in and out of the organization.
The decision makes should be experienced using the management accounting so that they can lead the organization in the future.
It should look into all the risk factors keeping in mind the financial problems which could be caused due to this.
The management accounting focuses on the business models decreasing the financial problems and increasing the performance and sustainability of it
The enterprise risk management is also a part of management accounting to increase long term
It also includes the external reporting decreasing the financial performance(Hoque et al, 2011).
Task 2
LO2- A range of Management Accounting Techniques
Cost Calculation using Two Different Methods:
Marginal Costing Method
Cost of 5000 chairs manufactured
Calculation
Cost Per Unit
Direct Material
>
30
Direct Labor
>
40
Marginal cost per unit
70
Absorption Costing Method
Cost of 5000 chairs manufactured
Calculation
Cost Per Unit
Direct Material
>
30
Direct Labour
>
40
Fixed Production Overheads
100000
20
Absorption cost per unit
90
Marginal Costing is a process where all the variable costs are taken into consideration and is determined as the product cost. Absorption Costing is a type where not only the variable costs are taken into account but also fixed costs also are. Here, it has been clearly seen that costs has been determined to figure out which method will suit the organization more. In absorption costing it has been clearly observed that the cost incurred is somewhat high than the marginal costing but it gives a fair and true idea about the business or the enterprise.
With the help of these it is easy to know which method the company will use in maintain the books of accounts. The case here also the variable cost which is the marginal one is less reliable as it keeps on changing( Nawaz, 2013).
There are many management accounting techniques which help the business to grow and prosper in the future. The income statement has been prepared below using absorption and marginal costing. Margin Analysis, Trend Analysis, Inventory Valuation, Capital Budgeting al comes under this. These are the techniques which are used by the management in every aspect and then all of them are critically evaluated. The financial documents such as Income Statement, Balance Sheet, Cash Flow Statement and all the reports are prepared with the data and studied to run efficiently. The two types of costing are studied by which we can see that which method to use for the business.
Income Statement using Absorption Costing
Qty
Unit Price
Total
Sales
4500
110
495000
(Marginal Cost of Goods)
Direct Material
5000
30
150000
Direct Labor
5000
40
200000
Fixed Overhead
100000
Net Contribution
45000
Closing Stock
4500
Gross Profit
40500
Income Statement using Marginal Costing
Qty
Unit Price
Total
Sales
4500
110
495000
Direct Material
5000
30
150000
Direct Labor
5000
40
200000
Contribution
145000
Closing Stock
14500
130500
Fixed Overhead
100000
Gross Profit
30500
The income Statement comprises of the most importantly Revenue which is the foremost thing in any organization and then deducting all the variable and fixed costs giving the value of contribution It has been clearly seen while analyzing the gross profit when using Absorption Costing Methods is more than the profit when using the Marginal Costing Method. The difference among the profit is somewhat around 10000. The main difference in both the methods of calculation of profit is the amount of Closing Stock.
The fixed overhead plays a vital role here because that will tell the exact contribution which will tell the Gross Profit and the net profit. The profit will determine the effectiveness and the company will obviously choose that method which will yield higher profitability(Drury, 2018).
Other financial reports need to be critically analyzed after determining the cost so that the planned activities are in the direction of the achievement of the goals. The planning tools also help in analyzing various aspects such as these reports tell the financial performance and growth in this. The techniques which are used in the management accounting are blended in the books of accounts to give a fair picture of the business. The variable costs which keep on fluctuating in the business and which is taken into account in marginal costing more importantly keeps the costs changing. A cost which changes the profit has been in both the methods of accounting but in Marginal Costing it changes the Gross Profit Value. The particular format has been taken and then calculated both the costs and Gross Profit. These facilitate the decision making process in the organization because the financial analyst now have valid points to approve or reject a method. Here, in this scenario also it has been clearly observed that this only help in taking the effective decisions for the company. In today’s era there are many complex activities which needs the planning tools need to be taken care(Collis et al, 2017).
CONCLUSION
The critical Evaluation of the report tells us first that what management accounting is. The various methods which are involved in the Management Accounting are studied in the report thereafter. All this is included in the first phase of the report above. Later both the costs are discussed and the best alternative is taken in the second phase. The costs are analyzed and then the best decision has been taken by analyzing the costs and which is the most suitable one. The Management accounting planning tools has also been studied above and the financial problems which have direct impact by these are also studied. Different Organizations have different financial problems which need to be solved. This report has also put the various tools to lead the organizations for sustainable development in the future. It also has shown the various methods and benefits of management accounting thereafter. The management techniques which help in decision making process are also studied above. All this gives a fair idea what all essentials are there for an organization to run smoothly and efficiently with these methods and tools. The report has also shown budgetary control and how these budgets help in the management process.
References
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Li, X., Sawhney, R., Arendt, E.J. and Ramasamy, K., 2012. A comparative analysis of management accounting systems’ impact on lean implementation. International Journal of Technology Management, 57(1/2/3), pp.33-48.
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.
Bernardo, M., Simon, A., Tarí, J.J. and Molina-Azorín, J.F., 2015. Benefits of management systems integration: a literature review. Journal of Cleaner Production, 94, pp.260-267.
Bobryshev, A.N., Yakovenko, V.S., Tunin, S.A., Germanova, V.S. and Glushko, A.Y., 2015. The concept of management accounting in crisis conditions. J. Advanced Res. L. & Econ., 6, p.520.
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Alawattage, C. and Wickramasinghe, D., 2012. Management accounting change: approaches and perspectives. Routledge.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
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Hoque, F., Walsh, L., Mirakaj, D. and Bruckner, J., 2011. The power of convergence: linking business strategies and technology decisions to create sustainable success. Amacom.
Laszlo, A., Laszlo, K.C. and Dunsky, H., 2010. Redefining success: Designing systemic sustainable strategies. Systems Research and Behavioral Science, 27(1), pp.3-21.
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