Management accounting that also known as managerial accounting that defined as a process to accumulating financial information and resources for the managers in taking important decisions for future growth and enhancement. It is only used for internal team of the organisation and that attribute makes in different from financial accounting. This report is based on Edwards which is an vacuum engineering company headquarter is in London, United Kingdom. This report is based on management accounting and its essential requirement of various kinds of management accounting systems with various methods of it. It also includes various costs and income statement by evaluating its attributes. In it advantages and disadvantage of various kinds of planning tools and techniques for budgetary control, It focus on comparison of management accounting systems to respond financial problems. It also evaluate various practices by comparing and contrasting with management reporting in better way.
P1. Explain management accounting and the important requirement of different types of management accounting systems.
Management accounting is a tool used by the company and managers regarding the formation of strategies which require necessary information so this information can be assessed by them which increases the efficiency of decision making. (Apak and et.al ., 2012.). This refers to a process which is involved in planning and increase value of the performance managing systems which increases the expertise level of financial reporting. Therefore, it control the management strategy.
Management accounting system includes preparation of financial and statistical information for business manger so they can form decisions regarding day to day operations and short term managerial decisions.
The management accounting system has its scope in strategic management, performance management and risk management (Christ and Burritt, 2017 ). The accountant applies this system to look forward and take decision regarding the future of the company. This helps company in building the organisation financial strength through proper use of financial resources.
There are different types of management accounting system are as-
- Cost accounting system- The cost accounting system is also known as costing system which is used to determine the cost allocation of different activity operated in business. This accounting system helps Edwards to manage and control the cost of activities and this tool is used by company to calculate the total cost of the company which incur in performing different activities and it evaluates the cost and the reasons to incur. The calculation of total cost incurred will help the company to calculate their profitability In this type of accounting system the cost is allocated through various approaches such as job-order costing, process costing etc. and these have their own. different structure and benefits. The estimation of cost is necessary for Edward as the fixation of price is totally based on it.
- Price optimisation system- This is the system which is considered as mathematical programs which calculate the demand which varies according to the different price level. The data is combined with the calculated cost and their inventory levels at recommended prices which will increase the profitability (Edwards, 2013.). The Edwards uses this programme to control the level of price by proper calculation of cost and it helps in determination of price of the goods or products of the company. This provides benefits to both company and customers as the cost calculation will lead to company in fixing lower price and it allow customer to buy the product at reasonable price.
- Inventory management system- This is a system which helps the management of company in managing and controlling the inventory level of the company (Farouk, Cherian and Jacob, 2012.). The inventory word includes raw material, work-in-progress and closing stock of the company. The Edwards use this system to control the raw materials of the company which helps in reducing wastage as according to the demand production is required to be take place. The system can be used by the company to control the quantity of raw material by using LIFO and FIFO. These are the techniques which are used by the company to maintain the quality of raw material. The last in first out refers to the system where last produced quantity will be sold first and in FIFO the quantity which is produced firstly has to be sold firstly. This system is used by desktop, barcode scanners and other devices to determine the accurate level of inventory.
P2. Explain different methods used for management accounting reporting.
Management accounting reports helps an organisation to record their actual performance some of them is given below:. These reports in the organisations are prepared as per the requirements. Various types of reports which an organisation uses are as follows :
Budget reports: These reports are prepared for the prediction about the companies future financial condition. Edwards is required to prepare this report in order to compare their actual budget with the estimated one so that the company can evaluate their performance and can determine the amount of expenses to be done during a year. These reports those which provides an overview about the objectives of the companies and are also termed as the future reports for the firms objective.
Inventory reports: This report contain the all the necessary information in detailed about the stock that is currently present in organisation. In Edwards this will helps the management to analysis the cost which is related with the quantity and price of raw material. This document helps the organisation to maintain current level of inventory that helps to achieve their targets. Moreover this helps an organisation to order required stock to its suppliers.
Performance reports: These reports are prepared in order to measure the performance of employees as well as organisation's. The company like Edwards will be beneficial if they prepare this report will provide them blueprint of the performance which can be compared to the standard one (Gond and et.al ., 2012.). It will also help Edwards in identifying the areas which are needed to be improve and will also allow them to take corrective measures. By measuring the performance the Edwards company can enhance their productivity and profitability.
Cost managerial accounting reports: These reports are prepared to know the amount of cost that incurs while performing the task. For The company like Edwards it is importance focus on preparing this report as this reports will provide them the idea of amount that is to be invested and the amount of cost that has incurred in carrying out the operations. It will also help the company to control the overall cost of the operations and will also leads to decrease in their unnecessary expenses .It also provides the detail about the income statement, balance sheets and inflow and outflow of the cash so that the firm can make their investments accordingly.
Account receivable ageing reports: Account Receivables are the expected payments due from the customers (Klychova, Faskhutdinova and Sadrieva, 2014. ). Accounts receivable ageing report is a list of customers of the organization that provides necessary informations about sum of amount due from the customers, due dates for receipts, over due receivables' dates, interest on due amount, contact details of debtors, bad-debt and other important details regarding payments from the customers of selected organization . The management of respective firm Edwards prepares accounts receivable reports on a regular basis so that it can manage records of its debtors and decide the potency of its credit collection period as this will give them a idea of all their debt and credits.
M1 Examine the benefits of management accounting systems with their applications in organisational context.
Management accounting system is to give assistance to the management team for improving the quality of decisions. Management accounting systems proved helpful in planning each and every attribute as per the future demands in market. After prepare financial plans organisation control it with help of management accounting systems that are proved beneficial to get right kinds of output for Edwards. So it proved helpful to deliver right kind of value to their ultimate consumer base. In that aspect management accounting system helps in accumulating cost in better way and price optimisation helps in evaluate prices according to the various attributes.
D1 Critically evaluate management accounting system and management accounting reporting integrated with organisational process.
Management accounting system and management accounting reporting closely related with each other and provide desirable outcomes in organisational growth and enhancement. It proved helpful in providing ERP solutions which are robust in nature. It gives assurance to getting a right response and with it management accounting get full support with complete access to potential outcomes in context of Edwards. Sometimes integration of both these objects hinders self interest of an organisation that it create chaos in organisational managing objects. There are great relation in system and accounting report that after evaluating system organisation can be able to build a suitable accounting report to get right kind of outputs in an organisation.
P3. Computation of costs as per Marginal and Absorption Costing techniques
Costs form an integral part of every organisation and enable the business managers to easily measure the strengths as well as weaknesses in the form of bottlenecks in an effective manner (Moser, 2012. ). Based on the nature, size and type of organisations, costs can be mainly divided in the form of direct and indirect costs, materials and expenses.
Costing techniques have been utilised to indicate optimal transparency as well as exercise effective control for decision-making purposes (Pavlatos, 2015. ). Mainly, organisations employ marginal and absorption costing techniques so as to prepare important financial statements such as Income Statements and Balance Sheet among others. These have been discussed as under:
- Marginal Costing Method:
Under this technique, fixed and variable costs are distinguished in order to determine the additional, or marginal, cost incurred on the production of an additional unit of output. Generally, this costing technique is employed by the organisation in order to ascertain the impact of changes in input as well as output on the overall profit earned by the organisation. The main purpose served through the utilisation of this technique is that the contribution of product cost in terms of one unit is obtained by the business manager (Salterio, 2015 ). It is important to note that under this methodology, fixed costs are not considered. Marginal Costing can be mainly expressed in the terms of contribution earned per unit of output produced. Here, the variable cost is represented by the product cost whereas fixed cost is assumed as period cost.
Income Statement under Marginal Costing Method:
As per this technique, the income statement includes gross sales, calculates variable costs of goods sold as well as selling expenses. The following table indicates the calculation of Net Profit (or Loss) for two products A and B viz. Tables and Chairs relating to two time periods viz. Quarter 1 and Quarter 2:
As per the above table, the net profit earned in Period 1 for Dining Tables and Chairs is £721,000 and £150,000 respectively. Whereas the Period 2 net profit is accounted for Chairs worth £186,500 whereas there is a net loss for dining tables worth £40,000. In the context of Marginal Costing, this means that on the additional production of this product, the difference between fixed and variable costs turns negative. Hence, it is not recommended to produce more number of dining tables till 5,200 units.
- Absorption Costing Method:
Under ths technique, costs are determined once they have been already incurred on the production of goods by the organisation. Contrary to the Marginal Costing Technique, this method takes into account both fixed and variable costs that are related to operations, processes and products. Due to this, Absorption methodology can be classified in terms of production, distribution and Selling Overheads (Spraakman and et.al ., 2015.). The main purpose served through the utilisation of this technique is that a transparent, reliable and accurate depiction of financial information, especially bottom-line profits is obtained by the business manager. It is important to note that under this methodology, fixed costs are not considered, only the additional (or marginal) cost incurred on the production of an additional unit of output is taken into account. Generally, this costing technique is employed by the organisation in order to ascertain the impact of changes in input as well as output on the overall profit earned by the organisation. Absorption Costing can be mainly expressed in the terms of net profit earned per unit of output produced by the business. Here, both fixed and variable costs are represented as product costs. It is important to note that through the implementation of absorption costing cost of each unit of output is identified.
Income Statement under Absorption Costing Method:
As per this technique, the income statement includes gross sales, calculates variable costs of goods sold as well as selling expenses similar to the marginal costing method. However, there is no distinction made between fixed and variable costs while computing Net Profit or loss earned by the organisation for a given period (Stergiou, Ashraf and Uddin, 2013.).
The following table indicates the calculation of Net Profit (or Loss) for two products A and B viz. Tables and Chairs relating to two time periods viz. Quarter 1 and Quarter 2:
The above table indicates a profit earned in Period 1 for Dining Tables and Chairs worth £721,650 and £154,000 respectively. Whereas the Period 2 profit is accounted for Chairs worth £185,400 whereas there is a net loss for dining tables worth £37,150. In the context of Absorption Costing, this means that the profit earned on each unit decreases with the increase in production of Dining Tables whereas it goes on increasing with more production of Chairs . Hence, it is not recommended to produce more number of dining tables beyond 5,000 units.
Working Notes (1&2):
(b) Using ABC Approach:
This approach aims to identify and promote cost assignment, first, to overhead activities and, then to, costs of products. Thus, Activity Based Costing (ABC) Approach helps in identifying the manner in which costs, overhead activities and goods produced by the organisation are related to one another (Strauss, Kristandl and Quinn, 2015. ).
The following calculations depict Product X and Product Y and shows a comprehensive break-up of the costs related to overhead activities, Machine Hours and Cost Driven Rate for each of them:
M2. Application of Management Accounting Techniques and production of appropriate financial reporting documents
It is important to note that the income statements prepared under Marginal and Absorption Costing methods show variations in Profit Computed for the same time-period. One can clearly observe that for Quarter 2, the net loss accounted under both the methods is different. While the profit computed through the preparation of Absorption Costing Income Statement is more than that computed under Marginal Costing, the loss incurred is less in the former too. Thus, it is recommended that the organisation must employ Absorption Costing Technique so as to give a much more accurate and transparent view. Additionally, this technique is also more reliable as it shows Net Profit earned per unit instead of simply stating Contribution earned on each unit.
D2. Production of Financial reports which accurately apply and interpret data for a range of business activities:
From the income statements produced using Marginal and Absorption Costing Techniques, it is clearly evident that there is a difference in Net Profit earned on the same units of products sold for a given time-period (Otley and Emmanuel, 2013.). This is mainly due to the difference in treatment of Fixed Costs under both techniques. The Results signal a net income of £721,000 and £150,000 for Dining Table and Chairs respectively under Marginal Costing whereas £721650 and £154000 for both products respectively. Whereas there is a lower loss accounted worth £37,150 in Q2 for dining table whereas loss of £40,000 is shown as per Marginal Costing.
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P4. Explain the advantages and disadvantages of different types of planning tools used for budgetary control
A budget is that statement which represents the estimation of incomes and expenses for a specific future period of time (Wouters and Kirchberger, 2015.). On the other hand, Budgetary control is that process which assist a manager that how they can control on their cost and business activities for enhancing organisational performance. In Edwards company, this will guide them that how they can proper use of monetary resources and how they can make effective planning and controlling for their operations. Along with this, it also help them to find the reasons behind the estimated and actual figure so they can take some effective decisions for overcoming this situation. There are described below about various kind of planning tools which are used by a company for budgetary control:-
Zero based budget: This budget helps them organisation to start their activity from the zero base. The main benefit of this type of budget is that every year company will make a new zero base budget in which all the figures of ago years will be ignore (Otley, 2016. ). In the Edwards company managers adopting this budget for preparing the budget with transparency. There are mentioned below various advantages and disadvantage of this budget:-
Master budget:Master budget is total of all the budgets which represents the summary of company's future plan which are related to the sales, production, financing etc. By preparing this budget Edwards company is able to find all the details in one budget and take the effective decision according to all the activities. (Parker, 2012.). Although, this budget is beneficial for the company but it has also some disadvantage. There are mentioned below some advantages and disadvantage of this budget:-
Flexible budget- A flexible budget is suitable for all the companies as it helps the business to make changes according to the organizational activities (Renz, 2016.). With the help of this budget Edwards company can cut or increase their spending according to the market conditions. Moreover, it is more beneficial for them as compare to static budget as it help them to avoid suddenproblems and take advantage of opportunities.
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M3 Analyse the use of different planning tools and their application for forecasting budget.
An organisation use various kinds of planning tools and techniques that proved beneficial for forecasting budget to get right kind of outputs in benefits of organisation and deal in positive way. In planning tools consist of master budget, zero budget and many more that play crucial role in forecast or predict budget in better way. Master budget helps in summarise all plans for future in an organisation and helps in forecasting budget in better way. Zero budget, master budget are very important tools for planning that helps in forecasting the overall budget to get right kinds of output in organisational process.
P5. Comparison of manner by which organisations are using management accounting systems to respond financial problems:
Financial problems refer to those circumstances wherein an organization faces problems related to finance or financial resources. Every entity should have adequate amount of funds to allocate them properly so that hard financial times may be avoided (Soin and Collier, 2013.). The plans and strategies implemented by a company may create positive or negative outcomes for it. These are the major challenges in which the importance of management increases. Management accounting may not be related to finances of the company but it has direct impact on taking control of such problems. Furthermore, there are various tools and techniques which can be used in to overcome the financial problems. The financial problems facing by the company are as follows:
Ineffective money management: This problem is related to financial resources which is available in the form of money. The employees charged with the responsibility of managing the money should the required knowledge of principles of accounting, standards and rules which should be followed while making transactions with the money. Furthermore, the management should have the adequate information by which this problem can create (Ward, 2012. ). This affect the books of accounts where by the mismanagement of recording can trouble the company in money management. The staff of the company are not being able to allocate the money due to which money management system gets affected. This can contribute to financial risk impacting the financial position in the marketplace.
Delay in payments by buyers: Every kinds of businesses has credit policy in the company to grow. Customers are the key stakeholder of the company who purchase their products or services. The sales ad profit are dependent on the number of goods sold by the company. Credit is a way to attract a customer. Credit policy allows customers to buy the products at credit without making payment at the time of purchase and giving them a fixed time to pay the amount within that time period. However, there are some customers who fails to make the payment within the specified time. This affect the working of the company resulting in creation of financial problem.
The above-mentioned are the financial problems which is generally faced by an organization. These can overcome with the help with two techniques of management accounting which are as provided:
Key performance indicators (KPI): It is a method or metrics which is used by company to assess and track the factors which can affect the growth and profit of the company. By using KPI, organizations can calculate its performance which can be expressed in quantifiable numbers (Weetman, 2013.). There are software for this wherein it can be distinguished into financial and non-financial aspects. The working of KPI starts from assessing the defects and errors affecting the capabilities of the company. It determines whether the organization is using its resources to the optimal level or not. This is done to identity contingencies. The other use of KPI is to review the activities associated with different departments or units. By this, Edwards can focus on activities which are creating can be made good and the activities which are working properly can be improved in order to increase the efficiency.This system can be used to respond the problem of management of money. This will help the entity in handling the money so that activities can be conducted and flow of money can there in the company. The company can make provisions for unexpected circumstances so that no financial burden has to be faced by it.
Benchmarking: It is a process which is used to measure the performance of company products, services or processes against the best in the industry. This technique is used in strategic management to measure the goals and objectives. Mainly, the exemplary competitor is used as a standard for measuring the actual strategies and plans. This is done to assess the difference which can be reduced with proper strategies and plans (Soin and Collier, 2013.).. There may arise situations in which the processes need to be changed according to the requirement. The company can use this method to assess the problem related to later payment by the buyers in order to implement it effectively. Also, changes can be done in the processes as per the needs.
Financial governance: It refers to main principles which should be considered by the business in making and preparing the books of accounts. The managers of a company should overcome the financial difficulties such as money management and late payments. This will help the company to record the transactions effectively without making any defects. Preparation of books of accounts as per the guidelines and principles can reduce the errors and defects. This increases reliability and accuracy.
Managers use price optimisation system for the purpose of setting appropriate prices for its products and resolve the problem of late payments by clients (Spraakman and et.al ., 2015.). When customers will receive goods on right price then they will be satisfied with the company and make payments on time.
Inventory management system is used by managers in the organisation for the purpose of dealing with inventory related challenges.
Cost accounting system is used to deal with the problem of improper money management system because with the help of it appropriate information will be recorded in books and problem will be resolved.
Job order costing system is used by managers of the organisation so that detailed information of all the activities that are performed according to specification of clients so that problems such as late payments by them can be analysed and they could be asked to pay owned amount as soon as possible.
M4 Analyse how, in responding to financial problems, management accounting proved helpful to get sustainable success.
Management accounting is one of most crucial tool that helps to managers in controlling and evaluating each and every phrase of planning in better way. With help of management accounting organisation can be able to plan in better way by coordinating activities related to future plans and policies in better way (Stergiou, Ashraf and Uddin, 2013.).. In context of Edwards by better planning they easily respond to financial problems to get sustainability in market. They by accumulating necessary knowledge and information to get right kind of outputs.
D3 Evaluate planning tools for accounting respond appropriately for solving financial problems.
For an organisation planning tools are very much important to coordinate each and every attribute by delivering right kind of value by forecasting in better way. Zero budges, masters budget are important for an organisation to coordinate and manage each and every factor in an organisation in better manner by responding in positive manner with financial problems. Financial problems in which resources are not adequate for forecasting budget that hinders self interest of an organisation to deliver right kind of value to ultimate consumers in better way.In context of Edwards by using planning tools they solve their financial problems that are scarcity of resources and many more.
From the above report it has been concluded that management accounting is one of effective tool for planning and coordinating each and every attribute in better way. For an organisation various kinds of planning tools and techniques proved beneficial to manage and coordinate each and every attribute regarding future so that effective results should be accomplished in better way. Organisation faces various kinds of financial problems but effective tools and techniques helps an organisation to get right value to reach at desirable outcomes.
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