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This report develops an understanding of management accounting and the implementation of management accounting systems in manufacturing companies. The principle and role of management accounting will be discussed in this report. Variable costing information will also be provided in this report and calculate variable cost incurred in Rio Tinto company in 2020. How management accounting systems are implemented in business will be discussed and at the end of the report critically discuss the application of management accounting in an organization.
Principle of Management accounting:
Compiling and designing: Accounting information, statements, report, records and other financial evidence must be developed and compiled for meeting the need of the business. The system of management accounting should provide relevant information.
MBE (Management by exception): This principle is followed when information is presented to management. Budgetary control and standard costing method are used to find the unfavourable variances by comparing the actual performance with budgetary performance.
Inflation accounting: The inflation rate is considered in accounting. Profit of company cannot be correct if capital is not valued properly so capital contributed by the owner of the company is valued through the revaluation accounting and consider the real value of capital.
Control at source Account: Cost control is very important in every organization so the performance of the employee, information of purchase and sale of stock, maintenance, repair etc. all are prepared quantitatively and qualitatively so that control could be possible.
Usage of Return on Investment: Return on investment is used in the business as it shows the efficiency of the business.
Utility: Utility is also a principle of management accounting. This principle state that things should be used if it is useful for business purpose. It means there should be a utility of that thing for business purpose.
Overhead cost absorption: Overhead cost means indirect expenses, which is incurred in the business. So suitable method must be used for overhead cost calculation.
Resource utilization: This principle state that the resource of the company must be utilized properly.
Uncontrollable and controllable cost: Management accounting system provide a method to control the cost (Tappura et al, 2015)
Role of Management accounting:
Management account assists the manager in making an important decision for the company.
Management accounting also called cost accounting. It is a process of analysing, identifying, interpreting and communicating the information to management, which helps in attaining the goals of the company.
Cost analysis in the main role of management accounting helps the manager in ascertaining the expenses and the Manager will provide a suggestion for decreasing the expenses of the company.
Management accounting system helps in forecasting for the future as all the data related to income and expenses analysed by the manager so that they can do forecasting for the future.
Management accounting system helps in make and buy decisions. Management accounting includes all the data related to the production of a product like cost, profit etc. so the manager analyse all the data to decide to make and buy a product.
Another role of management accounting is preparing a budget of sale, purchase, etc. So that manager can identify any variations that occurred by comparing the actual data with budgeted data. It helps in planning and decision-making. If it is unfavourable, variations occur then the manager will take corrective steps for that.
The management accounting role is planning for the business operations. It is a bit different from financial accounting. The financial accounting role is to collect information for making a financial statement and the management accounting role is to do internal processing of business and plan for business operations.
The management accounting role is using the cost information of goods and services so that manager can decide the procurement of raw material.
Management accounting system focuses on every accounting and has a role to provide all information to management about business operations (Kastberg & Siverbo, 2016)
Variable costing calculation:
Portfolio of income statement:
Particulars
$m
Revenue
44611
Net Operating cost (Variable cost + Fixed cost)
(26254)
Impairment charge
(904)
Exploration cost
(625)
Profit of underdeveloped project
1
Operating profit
16829
Sharing profit after tax to equity
652
Impairment of investment
(339)
Finance items
(1751)
Profit before tax
15391
Taxation
(4991)
Profit after tax (net profit)
10400
Variable cost means that expenses changes as per the production unit produced. It increases when the production unit increases and vice-versa. Some variable costs in the manufacturing business are:
Raw material
Labour
Packaging
Transportation fees etc.
Variable cost can be calculated by multiplying the total quantity with per unit variable cost.
Rio Tinto, which is a mining company. In the income statement, 2020 of Rio Tinto shows the operating cost that includes variable cost and fixed cost both.
Variable costs are:
Raw materials, repairs and maintenance,>
The total quantity produced by company is $100000
Variable quantity* Per unit variable cost
per unit variable cost
Variable costing calculation is very important as it informs about the cost per unit and how much quantity produces and sold by the company. It helps in managing the production activity. It also helps in forecasting the demand for the product so that production of the product will be resume. It also helps in cost management, reducing wastage. If correct data is available regarding production activity then the manager can manage it easily. It helps the manager in planning about procurement of raw material, labour so that production will never stop. It increases the profitability of the company and reduction in the cost. Variable costing used by the company to analyse the break-even point of the product. It helps in evaluating the profit and cost of the company. An investor uses the income statement report to identify the operating efficiency of the manufacturing business so it helps the same (Riotinto.com, 2020)
Integration of management accounting in the company:
Management accounting deals with preparing the business operations report which helps the manager in taking a long term and short term decision. Management accounting system facilitates in achieving the goal of business by identifying issues, measuring them, analysing them, interpreting them and information to managers. The main objective of management accounting is to provide non-financial and financial information to the management of the company and other members who take decisions in business. The main role of a manager in the organization is planning, controlling & evaluating.
The management accounting system can be integrated into business by using the different accounting techniques in business for decision-making like budgeting, cost accounting, variable analysing, cash budget etc. Managers monitor all the data provided by using these techniques and decide on a business. It helps in improving the efficiency of production by analysing all the cost and budget information. The incorporation of management accounting is very important for every manufacturing business. Management accounting is different from financial accounting. Financial accounting is done for preparing financial statements of the company. It provides all the financial data to managers and management accounting provides financial and non-financial data to the manager. The manager takes decisions in financial and non-financial matters. The manager plans for the business operations and mostly manages the operating activities. Management accounting consist budget report, cost management report. This report shows all the details related to costing and performance of employees and company so manager uses this report for evaluation purpose (Oboh & Ajibolade, 2017)
Benefits of the management accounting function:
Management accounting helps in deciding on business operation.
Management accounting helps the manager in planning for procurement of resources like inventory, human resource and other material used in business.
Management accounting helps the manager in cost analysis. Analysing the cost helps in controlling and saving the cost of production.
Management accounting helps in reducing the wastage of resources by monitoring them from time to time.
Management accounting helps the manager in inventory management, human resource management by reviewing the data.
Management accounting helps the manager to strong internal control of the business.
Management accounting helps the manager in finding the problem areas of business so that they can take corrective measure or make a plan for reducing these business problems.
Management accounting helps the manager in controlling the operation of the business.
Management accounting help manager in analysing and evaluating the performance of the business by monitoring the performance of employees and cost accounting data (Abdusalomova, 2019)
Management accounting helps the manager in making policy and procedure regarding business.
Management accounting helps the manager in internal audit.
Management accounting helps the manager in improving the efficiency of the business by eliminating the wastage in production activity.
Management accounting helps in deciding on promoting and demoting the employees. It maintains the morale of employees as the business report is prepared monthly and it will submit to the top management team and then will make a decision regarding demotion and promotion of employees.
Management accounting helps in increasing the profit of a business. The manager set the standard of production and these standards compare with the actual performance and identify unfavourable variances. If these variances in controllable then corrective action will take by the manager so that it will help in increasing the profit of the company.
Critically analyse the application of management accounting:
Management accounting can be implemented in every business whether it is manufacturing, service, retail, and restaurant. It provides a piece of information about business operations. So it assists managers in making important business decisions. Planning and decision-making are very important for every business growth. It helps in running the business activity effectively.
Importance of Management accounting in business:
Cost analysis: Analysis of cost is possible by implementing management accounting in business. It helps in determining the expenses of production and provide suggestions about future activities.
Budgeting: Budgeting helps in identifying the unfavourable variations so that corrective action can be taken for that. It can be possible by implementing management accounting in business.
Controlling: Controlling is also a part of management accounting. It helps in evaluating the financial performance of the company. If there is a loss that occurred then it can identify and control it ASAP.
Planning: Management accounting helps in identifying financial and non-financial patterns so that prediction for the future will get easy.
Buy and make a decision: Management accounting helps in make and buy decision by evaluating the data regarding production activity.
Limitations of Management Accounting:
Personal Biasness: The analysis of financial accounts depends on the interpreter and the interpreter can be biased. So it may be subjective.
Less knowledge: Management accountant must know financial accounts, cost accounts and others. Sometimes there is a lack of understanding so it produces the wrong result.
Installation is costly: The implementation cost of management accounting could be very high.
Conclusion:
This report has been discussed the management accounting system in a manufacturing company. It is concluded that management accounting is very important to implement in every business for planning and decision-making purpose. This report discussed the role, principle and importance of the management accounting method. Variable costing and limitations of management accounting have also been discussed in this report.
Part B:
Introduction:
This report develops an understanding of planning tools used in management accounting as planning tools is very helpful in every business for planning and decision-making. Three planning will be discussed with advantages, disadvantages and effectiveness of these planning tools in the business. A case study will also analyse the application of management accounting for solving business problems. At the end of this report, recommendations will be provided about the best method of management accounting used in an organization.
Planning tools used in management accounting are: Company – BHP
Budget of cash flow: Cash plays a very important role in running a business. Without cash to run a business is not possible. The manager needs to know about the inflow and outflow of cash in the business and they prepare a budget for that and compare it with actual cash flow in the business. So that they can identify variations. It helps in planning for working capital and in other matters of business.
Advantages
Disadvantages
Manager can estimate cash shortage in future by preparing a budget
It is estimation so it does not always provide a reliable result.
It helps in planning the working capital and helps in the distribution of cash in the department of business according to budget
There is a possibility of theft.
Effectiveness of Cash budget:
A cash budget is effective to prepare for the management of cash. Cash budget provides details related to inflow, the outflow of cash, availability of cash, allocation details etc. This budget informs the manager about cash needs and the availability of funds in future. It helps in cash management and reduces the issues in business.
Cost Variance analysis: Cost variance analysis is also an important planning tool in business. The manager can identify deviation in cost by comparing the budget cost with actual cost. It helps in reducing the cost of production. The manager does planning about cost allocation and cost reduction techniques by analysing the cost.
Advantages
Disadvantages
Cost variance analysis helps in cost management.
Sometimes manager takes a long time to analyse the variances so it delays taking corrective measures.
It helps the manager in reducing the wastage of funds and optimum utilization of funds.
It considers only financial terms.
Effectiveness of cost variance analysis:
The manager found it a very important planning tool because it informs about the business operations efficiency by monitoring the variances of cost. Cost management is very important in every business. It helps in increasing profitability.
Investment technique: It is also a very important planning tool in business. The manager decides on investment of funds so investment techniques help the manager in identifying the best investment option, which provides high returns and has less risk. Some investment techniques are NPV, Payback method, IRR etc.
Advantages
Disadvantages
By using investment technique manager can able to evaluate the investment project correctly
The manager must have high knowledge about the usage of investment technique.
Some investment techniques consider the time value of money which provide correct results
Some investment techniques do not consider the time value of money so it does not provide the correct result.
Effectiveness of Investment technique:
It is useful for managers because it helps in selecting the best investment plan for projects. It indicates high returns from investment and has less risk. If the manager considers the time value of money then it will be effective more (Ismail et al, 2018)
Effectiveness of Management accounting in the organization:
As per the case study management accounting has applied in the business for making an important business decision. Management accounting plays a significant role in solving business-related problems and take future decisions. Management accounting information provides insight for forecasting about future. It shows the growth of the business. As it is manufacturing business and management accounting techniques and planning tools helps in solving business problems. Like inefficiency in production, inefficient workforce, fewer resources. So these issues can be solved in business by implementing a management accounting system and by using best planning tools like budgeting, cost accounting, marginal costing, standard costing, financial planning, Return of investment etc. If these planning tools of management accounting is not used in the business then management of the company is not possible. It reduces the profit of the company and increasing the cost and value of the company will get down.
There is four main part of management accounting that is Budgeting, cost management, performance management and risk management.
Budgeting helps in identifying unfavourable variations in the business so that it is easy to take a corrective step without any delay.
Cost management helps in saving the cost of production. A cost accounting technique is implemented in the business that is standard costing. A standard is set by the company and it compares with the actual cost of production so that variations in cost can be found out so the manager will take decisions by analysing the cost variations.
Performance management: Performance management states the performance of business and performance of management and employees. The performance report is prepared in the business and it is evaluated by the manager for taking decisions.
Risk Management: Risk is also identified by implementing the management accounting system in the business as a manager have to take day to day decision against working capital and also have to take the long-term decision of investment so there is a risk in short term and long term investment of funds. Management accounting helps in taking effective decision regarding investment which have less risk and greater returns (Fullerton et al, 2014)
Recommendations of application of methods for business success:
As per the findings, it is recommended that organization should apply modern management accounting method as it is designed according to today’s era. As in this modern era, competition is very high so every organization wants to reduce their cost and increase their profit so the best method should adopt by an organization that allocates the cost correctly and provide correct information so that it helps the manager in taking important business decisions. The modern technique of costing is Activity-based costing. It is suitable for manufacturing and service organization. It provides reliable information to manager and it is very easy to implement in the organization so the company should adopt this method of cost calculation. Cost is playing a very important role in every business as profit is dependent on the management of cost. So management accounting best tools and techniques help in reducing the cost and increasing the profit (Drury, 2018)
Conclusion:
This report has been discussed planning tools that are used in management accounting. It is concluded that it is very important to apply in every business. Three important tools are cash flow budget, variance analysis and investment technique has been discussed in this report. Its advantages, disadvantages and effectiveness have also been discussed. The case study has been analysed about management accounting method implemented in an organization. Lastly, it is recommended that organization should use modern management accounting method to compete in this modern era.
References:
Abdusalomova, N.B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT OF A MANAGEMENT ACCOUNTING SYSTEM. Economics and Innovative Technologies, 2019(3), p.6.
Annual Report 2020, Riotinto.com, viewed 13 May 2021, <https://www.riotinto.com/invest/reports/annual-report>.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.
Ismail, K., Isa, C.R. and Mia, L., 2018. Evidence on the usefulness of management accounting systems in integrated manufacturing environment. Pacific Accounting Review.
Kastberg, G. and Siverbo, S., 2016. The role of management accounting and control in making professional organizations horizontal. Accounting, Auditing & Accountability Journal.
Oboh, C.S. and Ajibolade, S.O., 2017. Strategic management accounting and decision making: A survey of the Nigerian Banks. Future Business Journal, 3(2), pp.119-137.
Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management accounting perspective on safety. Safety science, 71, pp.151-159.
