The concept of management accounting is referred as the procedure of preparation of report and accounts that possess the responsibility of providing suitable and timely financial and statistical information which the manager need for making day to day as well as short term decisions. Management accounting plays essential role in the firm as it assist in making generation of monthly or weekly reports for the business. Management accountant of the firm possess the responsibility to follow all the rules in relation with accounting system. The management accounting aspect is taken into account for collection of data that is associated with all the managerial aspects. In the present report small business that is being considered is Unicorn Ltd. The company is small scale retailer. The report includes essential need for varied types of management system. Further it is comprised of several tools that can be used for management accounting system reporting. The study presents the advantages and disadvantages of varied kinds of planning tools that can be utilized for budgetary control.
P1 Explaining management accounting and providing essential need of varied kind of management systems
Management accounting is referred to as the procedure of making preparation of management reports and accounts which offers accurate as well as timely financial and statistical information that managers need for the sake of making day to day and short term decisions. Unlike financial accounting that makes production of annual reports mainly for external stakeholders, management accounting generates monthly or weekly reports in relation with business such as Unicorn internal audience. This is comprised of department managers as well as chief executive officer. The reports reflects the amount in relation with cash available, sales revenue generated, amount of order in hand, accounts payable, outstanding debts, raw material as well as inventory. Further it is comprised of trend charts, variance analysis and other statistics (Romano, 2015). It has been assessed that financial accounting as well as cost accounting are regarded as bases of management accounting. There is presence of several kind of management accounting systems. These are enumerated in the manner as below:
- Traditional cost accounting: The cost accounting is regarded as one of the traditional approach that is utilized by several organizations. The computation such involves direct cost or material, labour as well as overhead. Under such kind there is cost driver that results in occurrence of cost like direct material hours, labour hours and machine hours.
- Lean accounting: Such is considered as the new concept within management accounting that is generally being utilized for alterations that are being made within accounting, controlling, management procedure as well as measurement of business such Unicorn (Fullerton, Kennedy and Widener, 2013). It lay emphasis on lean manufacturing as well as lean thinking.
- Throughput accounting: It is a kind of accounting that is comprised of determination of constraints in the system of production in organization. It is based upon the principle and approach of simplified management. With respect to enhancement in the profitability Unicorn is supported in terms of decision making.
- Transfer pricing: It is the price in which movement of products and services is being done. In the calculation of cost the expenses in transfer of goods are also involved (Zimmerman and Yahya-Zadeh, 2011).
Beside this there is presence certain more examples that are associated with management accounting system. This includes the following:
- Cost accounting system: Such is considered as the framework that is being utilized by the organization towards making estimation of the cost of their products in order to make analysis of profitability, inventory valuation as well as cost control. Estimation of the accurate product cost is considered crucial for the profitable operations.
- Job costing system: It is the system that is comprised of assigning the manufacturing costs to the individual product or batches of products. Usually this is being utilized when manufacturing of the product is done in adequate manner varied from one another.
- Batch costing system: This is considered as the system in which the cost related with development of the product is being computed in terms of batch instead of individual item, including comparison of costs of several sized batches that is made under several conditions.
- Inventory management system: It is considered as supervision of non capitalized asset as well as stock items. This is component of supply chain management that makes supervision of the flow of the goods from manufacturers to warehouses as well as from such facilities to the sales point.
- Price optimization system: It is the utilization of the mathematical analysis by the firm in order to make determination regarding the manner in which customer would respond towards varied prices for its products and services through varied channels.
P2 Varied methods utilized for management accounting system reporting
There is presence of several methods that can be used for management accounting system reporting. These are stated in the manner below:
- Financial planning: In order to perform in an effective manner financial planning offers direction to every activity of business. With sound financial planning organization can attain greater amount of profitability.
- Financial statement analysis: The comparative analysis of the financial analysis is done that involves profit and loss account as well as balance sheet in order to gain insight to the financial position of the firm. Such analysis can be done on yearly basis (Bhimani and et.al., 2013).
- Cost accounting: This is being done in order to determine the cost related information. It reveals the data related with cost of product, process, department as well as branch of the firm. The actual cost borne is compared budgeted one. Further deviation are determined in order to enhance the performance.
The are several examples related with management account reports. Such are enumerated in the manner as under:
- Job cost reports: It is considered as the accounting that tracks the costs as well as revenues by the means of job and assist in standardizing reporting of profitability related with the job.
- Sales reports: It is regarded as the report that is comprised of data regarding all the sales that is being made by the company during a specific period of time.
- Accounts receivables reports: This is considered as the money which the the firm possess the right to receive as it offers customers with goods and services.
- Inventory management reports: This report is comprised of detail regarding stock with the company, the amount sold and requirement of stock for the business.
M1 Benefits and uses of management accounting systems
The benefits associated with management accounting systems are enumerated in the manner below:
- Traditional cost accounting: The major merit in adoption of such system is that it is easy to implement and assist in determining the direct cost of the product. It act as an aid in effective allocation of cost that is associated with material, labor as well as overheads. This has importance in making determination of the final price for selling (Zimmerman and Yahya-Zadeh, 2011).
- Lean accounting: The main benefit associated with such is that it is less complex and costly in comparison with traditional accounting. Through application of such Unicorn's level of performance can be enhanced that offers sound impact on its market position.
- Throughput accounting: Such system in controlling the constraints that takes place in the system of production of Unicorn. Such includes inadequate level of material, labour or capacity of product from facilities of the organization (Quattrone, 2016). Through such firm can minimize it cost and enhance the profitability as well.
- Transfer pricing: Such kind of management accounting system is effective in determining the cost related with movement of products. The cost incurred in transferring goods is involves in total cost. Through this system Unicorn cam assess the total product cost that involves all the expenses borne.
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D1 Critically evaluating the use of management accounting system and reporting within business
MA system is really helpful for the Unicorn to integrate and summarize the result of financial business activities in a meaningful manner for making decisions for the prospective growth using computer technology. It helps to detect the areas where Unicorn’s mangers must put focus to bring improvement in operational areas, which in turn, results in declining operational cost at greater return (Christ and et.al., 2017). In contrast, management accounting reporting like job report, cost report, budgeting etc. helps to evaluate the firm’s performance to create the best planning for the betterment. Internal organizational reports of Unicorn present the result for a specified duration whereas MA system helps to present reports for more than one durations at a single time which is extremely useful for the trend analysis and forecasting as well. MA system is helpful to work on the lean management principle to minimize wastage for the cost-effectiveness purpose and business success.
P3 Calculation of cost using marginal and absorption costing
Cost determination is one of the vital important aspects of the managerial accounting practices, it is because, inaccurate cost identification adversely affects the Unicorn’s pricing decisions or vice-versa. There are distinctive techniques that can be used for the cost determination such as marginal costing, absorption costing and others, described underneath:
Marginal/variable costing:This method charges only the variable cost to the per unit of goods produced by Unicorn to compute the total contribution and then fixed cost are charged in full against the contribution to reflect the net return (Saladrigues and Tena, 2017). Thus, it considers TFC as a periodical cost and do not allocate it to the total production. It is of great importance to determine the total expenditures that firm will have to incur on one additional unit of production.
- Eliminate under or over absorption of fixed cost hence, eliminate necessary adjustments
- Charge fixed expenditures as a periodical cost
- Helps in short-term business planning and decision-making
- Difficulties in segregating fixed and variable cost
- In real world, semi-variable cost also incur which are totally eliminated
- Under/over recovery of overheads is a main problem
Application of marginal costing
Marginal costing profitability statement
less: variable cost of sales(13*700)
Less: Closing inventory (100 units *13)
GP(sales-cost of sales)
Less: fixed Administration expense
Absorption/Full costing:Unlike the above, it treats TFC distinguish as it traced fixed overheads to the total production cost just like to the variable expenditures (Banerjee and Das, 2017). It considers all the expenditures i.e. fixed, variable, direct and indirect to find out Unicorn’s total cost of production.
- It values inventory considering the closing inventory item
- It makes required adjustments for under/over absorption of overheads to control cost
- It is the best way to determine total cost and profitability on a specific job
- Not useful in pricing decisions
- Not helpful in cost controlling
Difference between marginal & absorption costing
- Marginal costing technique value inventory at variable production cost, whereas absorption costing measures inventory value at full costing. Therefore, under variable costing, inventory valuation is understated (Deegan, 2013).
- With the high inventory, absorption costing delivers larger return whilst at less volume of closing inventory, marginal costing gives less return.
Application of absorption costing
Absorption costing profitability statement
less: Cost of production (16*700)
Less: Closing inventory (100 units *16)
Less: over absorbed fixed production overheads
Cost of sales
Gross profit (sales-cost of sales)
Less: Administration expense
Over absorbed fixed overheads
Actual fixed overheads: 2000
Overhead absorbed (700*3) = (2100)
Over-absorbed fixed overheads = (100)
As per the derived results, it is clear that actual cost of production under variable and full costing/unit has been determined to 13 and 16 respectively. However, net profit has been computed to 9,300 and 9600 comparatively greater in absorption costing. Unlike this, GP under marginal costing is measured at 13200 which is above than the gross profit in absorption costing to 11500 because variable costing considered only those expenditures which vary according to the output whilst full costing method considers all the production expenses either fixed or fluctuating.
M2 Applying a range of management accounting techniques
As per the above techniques, it has been identified that marginal costing and variable costing are the two methods that can be adopted by the Unicorn. Variable costing ascertains total cost of production just by considering variable cost. In opposed, full costing recognize cost by measuring total fixed & total variable cost. Profitability is quantified by the profit volume ratio (PVR) whereas it includes TFC in cost determination which directly affects the net profitability (Chenhall and Moers, 2015). MC measures profit through contribution per unit, in contrast, it measures return in terms of net profit each unit. Out of both the techniques, marginal costing is considered more appropriate because it measures contribution and overall net profit and helpful in short-term managerial planning (Marginal and absorption costing, 2016). In this, break-even point analysis, cost-volume-profit analysis and margin of safety are also assist Unicorn to make excellent plan for deriving success.
D2 Producing financial reports and interpret data
To: Unicorn’s Board of directors
From: Management Accountant officer
After computation of cost under both the techniques, it can be reported to the Unicorn that under the marginal costing, actual profitability is quantified to the higher level to 11,300, in opposed, under full costing method; it is valued at 9585.71 which are comparatively lower. It is because, in the first, only those expenditures has been considered which vary according to the changes in production or output. However, later considers both the fixed & fluctuating expense in cost of production determination, hence, reported less profitability. Due to this, closing inventory valuation has been reported differently under both the methods, in variable costing, stock has ben valued at 1300, in contrast, in full costing, it has been reported at 1585.71. Its responsible reason is that full costing method taken into account fixed production overheads worth 2000 which has not been included in the cost of production identification under marginal costing, as a result, both the method computed manufacturing cost at 11,100 & 7,800, less cost in later is the reason for higher contribution worth 12,600.
P4. Explaining the advantages and disadvantages of different types of budgetary planning tool
Budgetary control is a process whereby Unicorn’s management will construct future period’s budget through projection and compare it with the actual performance to detect variances for taking corrective actions without delay. There are different methods and techniques which might be useful for making budgets for the forthcoming years that are discussed here as under:
This technique is based on making small amount of changes in the already existed budget to prepare a new budget for the prospective years (Deegan, 2013). It is very simple way as every year, incremental amount are added to the previous year’s budget and ensure regular funding need, in contrast, it promote expenditures and do not provide any incentive to the managers for cost curtailment.
- Simple to create budget
- Ensure smaller or little deviations
- Maintain equality among all the departments of Unicorn
- Promote unnecessary spending
- No incentive for cost controlling
- Perpetual resource allocation system
Unicorn’s managers can construct budget taking into account zero as a base and analyze the need and associated cost of every function with the proper justification through market research. It provides realistic figures about the potential operations because mangers analyze external market conditions and then forecast the future (Horngren and et.al., 2010). Therefore, unnecessary activities are eliminated which promote saving.
- Realistic figures with judgement
- Helpful in effective planning
- Focus on cost curtailment
- High funding need
- Manager must be highly skilled to analyze market trends and challenges for budget preparation
Fixed budgeting: It is financial plan that does not vary according to the actual volume of Unicorn’s production and provide budgeted targets for a fixed activity level (Hecht, 2016).
- Helps to measure and examine performance
- Helpful in strategic decisions and growth plans
- It keep cost at minimum level for larger return
- It does not provide any help to compare the result if standard and actual output is different
- It cannot be change according to the actual activity level
Flexible budgeting: In contrast to the fixed, this budgeting plan pays attention to more than one production output and moreover, it can easily adjust according to the actual output of Unicorn (Fullerton, Kennedy and Widener, 2014).
- It helps to adjust target according to the actual production volume of Unicorn
- It provide assistance in optimum fund allocation as per the requirement
- It make necessary adjustments regarding market volatility i.e. inflation & others
- It requires continuous monitoring to track changes in the external market environment which is a time-consuming process
- Difficulties in finding accurate information may leads to arise complexities in the budget construction
Activity based budgeting
In the modern period, activity based budgeting (ABB) is used by the enterprises to prepare their budgets. As per the method, Unicorn can construct budget, in which, every activities that incur any cost in the routine functionality has been reported. The most important aspect of this is that income is allocated to the related activity’s cost.
- It is the best technique because it allocates revenue generated from every activity to its related expenditure.
- It focuses on controlling overheads through taking distinctive cost-controlling measures
- It requires managerial training to train people for utilizing the method
- It need extensive managerial skills and knowledge to have deeply understanding of the budgetary planning
M3 Analyse the use of different planning tools and applications for forecasting budget
Out of the above discussed planning tools, it can be suggested to the Unicorn to use Zero based budgeting which present realistic projected figures about the future period. In this, budget must be constructed for more than one activity volume means it must be flexible in nature in order to adjust the budgeted results in accordance with the actual volume of production for making comparison of the actual business performance with the target set (Kaplan and Atkinson, 2015). As per this, Unicorn’s departmental managers can compare their operational effectiveness successfully and make variance analysis. Identifying causes for the failure helps to bring out positive changes and streamline regular functionality for bringing success.
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D3 Evaluation of the planning tools to solve financial problems
Unicorn’s financial manager can utilize variety of MA tools for making viable decisions and derive success in the market, that are discussed below:
Variance analysis: Budgets are mainly constructed to examine the effectiveness of business functions by comparative analysis and examination of the set standards with the actual results. Deviations may be either favourable or adverse, later indicates negative result of actual firm’s performance. With the help of such, Unicorn’s management can determine the cause of unfavourable variance i.e. high price, less demand, ineffective control and so on, and make good quality of decisions for sustainability.
Ratio analysis: Financial success and operational performance can be examined using different kind of ratios i.e. profitability, liquidity, solvency and others. It is the best way of financial statement analysis that helps to formulate effective strategies, growth & expansion plans for the deriving success.
Capital budgeting: In order to make qualitative decisions regarding investment in non-current assets, Unicorn must use project evaluation methods i.e. payback, Accounting rate of return, net present value (NPV) and internal rate of return (IRR). Before investing in any project, Unicorn’s management must determine the NPV of the project after making time value adjustment and put funds in highly profitable and viable investment opportunity.
P5 Compare the adoption of management accounting system to respond financial problems
MA system focuses on tracking different types of costs linked with the production and manufacturing functions. The most common and most often used MA system that Unicorn must use to overcome the possibility of any financial consequences are pointed below:
Key performance indicators: It is a quantitative measurement technique that Unicorn can utilize so as to examine their business performance and financial position as well. There are different type of KPIs which assist managerial team of the retailer to measure their profitability, liquidity, solvency and efficiency to use business assets. With the help of computing various ratio, they can evaluate the success of their business operations and financial health, this in turn, assist firm in rationalized planning and decisions i.e. cash management, credit decisions, liquidity management, capital structure decision, cost-control measures, sales maximization decisions and so on (DRURY, 2013). They can also compare such ratios to find out that whether performance of the Unicorn’s operations got increase or decrease and devise suitable policies and financial decisions.
Benchmarking:In this, Unicorn can compare their KPIs with the set industrial benchmark. In this, they can compare their performance with the leading retail establishments in the industry which is performing extremely well. It helps to set targets which company wants to achieve to become a leader in the industry by making appropriate strategies, right plans and policies accordingly.
Budgetary targets:Budgetary technique is very common and plays a significant role in the success of an enterprise. With reference to the Unicorn, managers set targets by making budgets and communicate it to all the divisions whose managers make decisions, policies and monitor regular business activities to accomplish their target goals. Every business managers continually keep their eye on the actual results and evaluate it with the target so as to make corrective measures on the right time to fulfil the goals.
M4 Responding financial problem through management accounting to bring success
Ratio analysis provides high level of assistance to the managers to examine that whether Unicorn has attained success or not through their regular operations. Profitability ratios determine that whether it has gained good return or not and helps in overcome financial problems through right pricing decisions, cost-curtailments strategies and effective & closure supervision. Liquidity analysis helps to maintain a right balance in the current assets and current liabilities by having sufficient quantum of working capital. On the other side, solvency analysis provides assistance to design capital structure effectively for the management of financial cost and leads to bring success.
Another technique investment appraisal examines the profitability of different projects comparatively to identify that which of the existing investment opportunity will drive maximum return by having highest NPV. Thus, it helps to minimize financial risk and eliminate the risk of enviable decisions. Variance analysis also facilitates managers to make strategies and policies in relation with the cost-cutting and higher revenues for achieving success and competitive strengthen.
Report bring out the fact that Unicorn’s top managerial staff can use various techniques & tools like ratio analysis, variance analysis, cost determination, budgeting and capital budgeting techniques to make better quality of business decisions and ensure sustainability. Moreover, it is gained that MA system lean manufacturing, throughput costing, cost accounting system etc to eliminate waste, cut cost and profitability enhancement. By getting benefits of cost-curtailment, effective strategies and growth plans, firm will be able to maximize their return and success.
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