This sample will let you know about:
- What is the main objective of management accounting?
- How can Key Performance Indicators (KPIs) be used to identify in an organization?
- Why is benchmarking is a useful tool for organizations ?
- What is the purpose of a cash budget in organizations?
Management accounting means a process and procedure which is related to providing financial information and resources, helps to run a business by making decisions. This is only used by internal team of business corporation where it helps to keep proper records of function and financial information. The main objective of management accounting is to use statical and financial data by taking a better and accurate decision (Abernethy and Wallis, 2018). This report is based on Katie Walker Furniture UK that is British furniture designer company that provides designing and creative furniture items to customers. The management of company uses management accounting to keep information and make right decision that can help to increase the organizational productivity. Topics are going to be cover in this report are essential requirement of management accounting, methods that are uses in accounting reports, income statement through absorption and marginal costing, planning tools and its merits, demerits as well. Apart from this cover comparisons of accounting system that are used to respond towards financial problems.
About Management Accounting and its requirement in Organization
Management accounting system- It is the internal system of organisation, which is concerned with provision of information to provide better decision making. It is essential for decision- making and identifying the innovative ideas to run company more effectively and efficiently. The management's information includes capital budgeting, break- even charts, product cost analysis, etc. Managers analyse information to advise business strategy and drive sustainable business success. Different types of management accounting systems are described below:
Inventory management system:- It is a systematic approach to source, store and sale raw materials and finished products. The manager of Katie Walker Furniture are applying this system to maintain detailed record of each new or returned product as it enters or leaves warehouse at sale (Coyne, Coyne and Walker, 2016). It is essential for managers to examine inventory management and procurement practices and their impact on organisational performance. This system is further sub-categorised in the three parts, they are:-
- First In First Out (FIFO):- It is an asset-management and valuation method in which assets produced first are to be sold first.
- Last In First Out (LIFO):- It is also theasset valuation method which involves the assets produced last has to be disposed off first.
- Average Cost (AVCO):- In this asset valuation method, the assets are valued at different rates are being averaged with the number of stocks to identify the accurate cost per unit.
From the above descriptions of inventory management, it is essential for Katie Walker Furniture to adopt the FIFO valuation method for the optimum utilisation of scarce resources.Need Help With Management Assignment Help ? Talk to Our Experts.
Cost accounting system:- This system consists enterprise's cost information related to the manufacturing processes. It is beneficial for estimating the accurate price of products which is critical for profitable operations. The manager of Katie Walker Furniture; has implied this system for simplifying the work of manufacturers, who need to track the flow of inventory. It is essential for the Katie Walker Furniture to keep a tab on production activities using perpetual inventory system (Jinga and DUMITRU, 2015). This is essential for Katie Walker to get the proper cost of its products and services that can help to get profits by running business activities.
Job order costing:- It is a system for assigning and accumulating the manufactured costs of an individual unit of output. The implication of it can be analysed when there are various items produced with different speciality and significant cost. Managers of Katie Walker Furniture use this system to treat every customer uniquely and deliver products specifically to fulfil their individual needs. It provides the firm to usually receive orders for customized products and services.It is mostly required by Katie Walker Furniture to have an overview on their cost control and unit of output. This is essential for Katie Walker to allocate the cost of products in different sections so it can be recognised easily and smoothly in order to make profits.
Price optimisation system:- This system determines the customer's responses on different prices of products and services through different channels. It also evaluates best price for the organisation to meet it's objective of consumer satisfaction with maximisation of operating profit. The managers of Katie Walker Furniture apply this system as it leads to determine the pricing structures for initial, promotional and discounted pricing. It is advantageous for Katie Walker Furniture to examine the best price of product which will increase sale for profit maximisation (Dauth, Pronobis and Schmid, 2017). This is essential for Katie Walker to set the prices of its provided products and services which are important to make profits and increase productivity.
P2 Description of management accounting reports
Management Accounting Reports:- In all the organisations managers prepare different types of reports to track business performance which are known as management accounting report. In Katie Walker Furniture some of them are generated by managers so that they can analyse that company is performing well or not. Description of all of them is as follows:
Inventory management reports:- The manager of Katie Walker Furniture use this report for reducing the risk of spoilage, theft, damage and change in demand of stock. It is mandatory for managers to keep non-capitalized assets (stock) insured, as if it is not sold in particular duration, than it has to be disposed of at clearance prices- or simply destroyed (Elmassri, Harris and Carter, 2016).
Budget report :- This report is used by management to identify the difference between the budgeted performance as compared to the actual performance during an accounting period. The manager of Katie Walker Furniture uses this report to enhance budget control, create compatibility with other reporting applications etc.. This is beneficial for them to evaluate the performance, on track to meet its business objectives. It also guides them to take corrective action where it is required.
Cost accounting report:- It is a report with systematic set of procedures for recording and reporting the costs and comparing them with set standard. It provides the detailed cost information to management to control current operations and plan for future. The Katie Walker Furniture's managers apply it to determine the manufacturing cost of each product of company for optimum selling prices. It is most beneficial for Katie Walker Furniture to identify that business is able to earn more than its total cost incurred or not (Florio and Leoni, 2017).
P3 Calculation of cost by using absorption and marginal costing
Definition of management accounting - Management accounting is the way of presenting accounting information that assist management in creation of policy and run day to day operations (Golyagina and Valuckas, 2016).
Management is the need of all department where all accounting information and activities are managed by managers in order to attain the business goals and objectives. In other words, this is a process of providing financial information and resources to management so, decisions can be made accordingly (Qian, Hörisch and Schaltegger, 2018).Take Examples of Assignments Now!
Role of management accounting:
Every organization wants to make profits by running is activities and functions that also increases brand image. It is managed and control by a manager which is known as management accountant. This manage all activities and functions effectively and improve organizational profitability. The role of management accounting are as defined:
Maintaining optimum capital structure – The management accountant of Kaite walker are playing a role of managing capital structure in raising funds and their applications. In this, it decides about maintaining a proper mix between debt and equity.
Developing management information system – In this, organization get prepare a report with the help of managers who make long term decision and take corrective actions to run a business successfully. In Katie walker, accountant is responsible for using and developing a management information system effectively (Roles of management accounting, 2019).
Decision maker – This is important role which is played by management in order to make decisions and increase profitability. In Kaite walker, management accountant are playing decision maker role where all function and accounting information are controlled by managers. And if organization is facing through problems so it suggest the idea and perform business effectively (Fallan and Opstad, 2014).
Stewardship accounting – This role is played by management accountant by designing the framework of cost and financial accounts that helps to make routine report. With the help of this manager become able to make decisions.
Long term and short term planning – Management accountant plays an essential role in running and forecasting business future. In Kaite Walker, future plans are prepared by managers that helps to complete the target and attain business goals (Roles of management accounting, 2019).
Control – The management accountant play this role in management accounting where it analyses the accounts and prepares reports such as standard cost, budgets, variance analysis and cash flow analysis used to control cash liquidity and increase business performance (Richardson, 2015).
Marginal costing - This method is used to calculate the profitability in organization by deducting all marginal cost from revenues. Marginal cost is relied on production's volume where as fixed cost is consider as separate that is used to determine the profits (Seal and Mattimoe, 2014).
Absorption costing – This method is states all production cost are variable and fixed are absorbed cost that uses to assess the profits. This helps to increase the productivity and profitability in organization (Golyagina and Valuckas, 2016).
Inventory management - This is the process which is used by management in order to track the inventory and increase business performance. It system is mainly used in manufacturing company where number of products are produced in a bulk and needed to manage them. In Kaite walker, this is used by managers in order to track inventory and run a business successfully (Saleem Salem Alzoubi, 2016). The main aim behind this to keep proper record and maintenance of stock which is available in market. This involves different types such as:
EOQ – This means economic order quantity which is used by an organization in order to purchase stock and inventory at minimum cost. The cost which consider are shortage cost, order cost, holding cost etc. In Kaite walker, this is using by management in order to minimize the cost of inventory and increase business performance.
ROP – This means re ordered point which is based on assumptions that the item ordered are certain and to be consumed in immediate future. This is used by organization while assuming there will be always demand of product. It states a point from where manager make decision to re order the material and keep continue their business (Golyagina and Valuckas, 2016).
JIT – It is considered as a inventory management system that aligns raw materials orders from suppliers directly with production schedules. This method requires producers to forecast demand accurately. Kaite Walker uses this system to increase efficiency and decrease waste by receiving goods that increases business performance. It is needed producers to forecast demand appropriately (Florio and Leoni, 2017).
Advantages and disadvantages of different planning tools which are used to control budget
Planning tools are consider as instrument which are used to guide and control over budget in organization. This provide detailed descriptions regarding budget plans and states how it is developed in order to make profits. Katie Walker Furniture is using planning tool that supports in budgetary control by tracking cost and activities. It consider kind of budgets that directly related to process and procedure of budgets. Different types of planning tools and budget are defined below:
Master budget - It is consider as superior budget by involving all budget and financial information. This includes documents expected future sales, capital investment, future expenses and cost of products which helps to improve the organizational productivity. Katie Walker Furniture's management uses this budget for expansion planning and keeping records of all detailed information (Saleem Salem Alzoubi, 2016).
Benefits – This is important planning tool which is used by top management to discusses about overall profitability and productivity. Katie Walker Furniture taking advantages of achievement of goals by maintaining inter divisional coordination between all division of company.
Drawbacks – Master budget leads low revenues estimations and higher expenses estimates that reduced organizational profits. This budget is not easy to modify and update therefore, it may be problem for Katie Walker Furniture to make changes in budget (Fallan and Opstad, 2014).
Zero based budget – The basic planning tool of organization is zero base budget that involves preparation of budget by zero base. This does not involve any previous data and financial information to get the budget. Katie Walker Furniture is using this budget to make the quick decisions without concluding any prior figures. In this, fresh assumptions and data are taken by managers that helps to control over excessive budget and maintain the performance.
Benefits – In Katie Walker Furniture, managers are applying this tool to make the quick decisions and complete the information effectively. There is proper coordination and communication which helps to get profits accordingly.
Drawbacks – There is lack of expertise that can create problem to prepare the budget. It can create wrong decision because it does not involves any past data and information.
Cash budget: An estimation of cash flows for a business which is prepared by management is consider as cash budget. This budget is used to know the do enterprises has sufficient fund and cash to operate business. Katie Walker Furniture is using this budget to know the availability of cash in their organization and run business effectively. With the help of cash budget chosen organization forecast sales and production and states account receivable collections (Richardson, 2015).
Benefits – This tool is advantageous for Katie Walker Furniture to avoiding the debts and making business more resourceful. It helps to maintain the proper records of cash and receivables which increases profitability (Seal and Mattimoe, 2014).
Drawbacks – Cash budget is easiest assets for any organization that can be steal because it is easy to trace. This can limits the spending power of Katie Walker Furniture while buying raw material and other goods. Moreover, cash budget includes budgeted inflows and outflows that relies on future needs and meeting of them. Finding Online assignment help UK ? Talk to Our Experts.
P5 Comparison between corporation that are adopting management accounting system to respond towards financial problems
The key problem of business is related to finance which is facing by any corporation while running its business. To operate and run a company there is need to solve financial problem that helps to increase the productivity and profitability. Such problem creates many doubts and confusions to survive in the market, so there is need to identify the problem and respond it properly to manage business activities (Qian, Hörisch and Schaltegger, 2018). Katie Walker Furniture is preparing design furniture by using various process and functions. It faces different types of issue in its business which are related to finance that are as defined:
Rising inventory cost: This means cost of raw material and other inventory is increasing continuously that is increasing overall cost of organization. Katie Walker Furniture is facing such problem sue to increasing cost of raw material, designs and others that is reducing overall profits. This cause arises in organization because of improper management of inventory and lack of control over production.
Poor cash management: It is another crucial problem of organization where it faces money related problems because of mismanagement of cash in corporation. Katie Walker Furniture is having lack of management on its funds which is creating problem and reducing profits margin. The management has identified that there is mismanagement of cash where is creating problem to operate the business.
High spending than income: When high spending is done by corporation than income then financial problem is faces by business which need to respond by management in order to get solution. Katie Walker Furniture is spending money on designs, structure and other activities that are not useful and creating problems (Giacomini, Sicilia and Steccolini, 2016).
The entire system of MA involves some tools and techniques that are used to identify the problems and get them solution. Following key techniques are used by Katie Walker Furniture to find out the financial problem, as defined:
KPI - This means key performance indicator that is used to analyses financial and non financial performance. This involves financial and non financial indicator that are used to measure and track the organizational performance. Katie Walker Furniture is using KPI tool to measure and track progress in important areas of company performance. Financial indicator of selected company are gross margin, operational margin, cash flow and net profit margin that states the health of business. While non financial indicator are brand value, structure, nature and customer relationship which helps to improve the organizational profitability. With the help of this managers allocate activities and control the budgetary operations (Mizikovsky and et.al, 2016).
Bench marking – This is the process, uses to measure the performance of organization's product and services. In Katie Walker Furniture, manager are using this tool to measure the results against other's performance. With the helps of this, performance is evaluated by management that helps to control all performance and standards which are creating financial problems. This is effective tool that can be used by organization to improve the organizational performance by comparing with other entity. This suggest and helps to make strategic planning what steps need to be taken for increasing business activity and taking competitive advantages.
Financial governance: This refers as direction, policies and different ways through which organization capture financial information, records, process and control it appropriately. It encompasses how a corporation track financial information, business activities, productivity and monitoring the performance that helps Katie Walker Furniture to solve problems. This also supports management and staff to control over operations and make a list of current financial problem. Therefore, financial governance make policies for organization to get solution of financial issues.
Comparison between Katie Walker Furniture and Wow fabrics
Katie Walker Furniture
This is furniture design organisation that offers variety of furnitures with different designs and encourage customers to buy them. This is facing issue high spending than income which increases cost of operational activity and ultimately impacting profit margin.
This is cloth manufacturing company that provides different types of clothing designs to customers. This organisation is facing low productivity and profitability due to increasing cost inventory and improper management of raw material.
Detection of problem
Katie Walker Furniture is applying KPI tool detecting the problem and root causes in spending that can help to get a solution.
Wow fabrics should apply benchmarking to detect the problem and getting core reason of facing financial issue.
Uses of system
Such corporation should adopt cost accounting system to access the cost and recording data of expenditure that will help to respond financial problem accurately (Nimtrakoon and Tayles, 2015).
This organisation should use inventory management system that can assist managers to monitor and control over inventories and reduce the irrelevant activities in order to respond towards problem.
From the above it has defined that Kaite Walker identify the problem in relation to cost accounting because its cash flow are are not matching properly so managers has decide to use cost accounting system that will help to find out the income and expenses of company and would also defined cost where expenses are occurred. With the help of this system, all cost will be managed and will reduce the wastages that will help to match the cash flow and reduce irrelevant spendings (Elmassri, Harris and Carter, 2016).
On the other hand, Wow fabrics is facing inventory management issue as it is unable to track produced material properly because it was not using inventory management system. Due to this, there is no record of inventory that increased cost and reduced profitability. To overcome this, management has decided to use inventory management system that will help to record the inventory and would track properly. This will help to make profits effectively.
From the report it can be articulated that accounting management is important for organization where small, medium and large as it helps to keep records and track the financial information. This mainly used to make right business decision by evaluating all activities and matching all financial statements. The involvement of multiple system and reports are effective which helps to complete the task and process in order to gain profitability. Different planning tools are used by management which helps to control over excess budget and make a clear conclusion. There are different types of accounting system that are used to make right business decision and improve organizational performance.