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Management in Accounting

University: CECOS College London

  • Unit No: 5
  • Level: High school
  • Pages: 14 / Words 3485
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 259
Question :

This sample will let you know about:

  • What is Management Accounting?
  • What is Role of costing in setting price?
  • Discuss Cost of inventory.
Answer :
Organization Selected : Prime Furniture

INTRODUCTION

Management accounting (MA) refers to the system in which all the relevant data is collected by the management which helps in decision-making process. It is mainly used by the internal management teams for the purpose of decision making. In this, all the financial information is shared by the finance team to the internal management team of the organization. The present report is about Prime Furniture which is London based company. This report covers meaning and benefits of management accounting and its integration into the organizational process. It also covers different techniques of management accounting and comparing the ways in which company can use management accounting to face challenges.

Management accounting techniques

Cost: In accounting, cost implies for the figure that a company spend to produce something valuable. It does no include any profit. From the customer's point of view, the cost is known as price. It includes both production cost and mark up value.

Cost analysis: It is process of measuring the cost and output relationship. It determines the cost incurred in procuring input and how it can be arranged so that it will help in increasing the productivity of the firm.Need Assignment Samples.Talk to our Experts!

Types of cost

Cost are of different types, a detailed description is given below.

Fixed cost: It includes rent, insurance, salaries etc which remains same at each level of output or level of production.

Variable cost: It changes with the change in the output level (Collis and Hussey, 2017). If there is no production then variable cost will be zero.

Direct cost: It is the cost that is directly or completely assigned to the specific product or service. It includes direct labour, direct material etc.

Cost volume profit

It helps in analysing the effect of change in cost and volume on the company's operating income. It is based on several assumptions such as sales price per unit, variable cost per and fixed cost is constant, everything is sold etc.

Flexible Budgeting

It is the more sophisticated budget that adjusts itself with the changes in level of activity. It is an estimated financial plan of revenue and expenditure.

Cost variances

It refers to the deviation between the set budgeted outcome and the actual outcome of the organization. These variances can be of two type’s positive and negative variances.

Cost allocation

It refers to the process of identifying and assigning cost to cost objects. It is used in financial reporting and also useful in knowing the profitability.

Normal and standard costing

The method of cost allocation in which cost is assigned to the product based on material labor and overheads is known as Normal costing. Standard costing involves creation of estimation for each activity. It helps in comparing the actual cost and revenue with the standard cost and revenue.

Different types of costing methods

Marginal costing

This method refers to the ascertainment of marginal cost by charging variable cost per unit and written off the fixed cost against the contribution (Collis and Hussey, 2017).

Absorption costing

In this method, all the manufacturing cost is assigned per unit in the cost of production irrespective of fixed and variable. It is used in external financing and for tax reporting (FIMYAR and TURCHENYAK, 2017).

Activity-based costing

In this method, overhead and indirect cost is assigned to the products in a more logical manner to the related product or services. It is mostly used in the environment where there are many machines and products.

Role of costing in setting price

Costs never determine price but plays a crucial role in pricing strategy. Other than price there are two other factors that is required to be taken into consideration which are demand and supply. Price decides what and for whom to produce. Moreover, usually with the motive to enhance both sales and customer base producer emphasizes on charging lower prices. A high cost producer will target customers who are willing to pay premium prices. So, change in cost affect the producer to change its price.

Cost of inventory

Inventory cost: It refers to the expenses that associated with the management of inventory namely procurement and storage (Birt, J., and et.al, 2020). The different types of cost associated with it are stated below.

Ordering cost: It is the cost that firm incurs while ordering inventory. It covers purchase cost and inbound logistics cost.

Carrying cost: It implies for the expenses incurred for handling and maintaining the inventory. It includes rent of warehouse for storing the inventory.

Shortage cost or cost of replenishment: These cost are incurred in an unusual circumstance. For example, damaged inventory, stock depletion etc.

Benefits of reduced inventory cost

  • It will lead to reduced material maintenance cost.
  • Ordering in small lots will help in reducing the ordering cost and also reduces inventory wastage.
  • Reduced cost will help in increasing profitability of the organization.

Different inventory valuation methods

Some widely used inventory management methods are stated below.

FIFO: In this, cost of the good purchased is charged when that good is sold out. It assumes that first good purchased will be sold first.

LIFO: In this, the cost of last purchased good are the first cost charged at the time of selling the goods.

Weighted average: In this, ending inventory is measured using the weighted average unit cost.

Overhead costs

It refers to the business expenses that cannot be directly attributed to the specific product or services. It includes three types of cost which are indirect material, labor and other expenditure.Want to get Assignment help? Talk Our Expert Now!

Calculate cost using appropriate technique of cost analysis

Income statement as per marginal costing:

 

 

 

Quarter 1

(Amount in £)

 

Quarter 2 (Amount in £)

Sales

 

(1*66000)

66000

(74000*1)

74000

Marginal cost of sales

 

 

 

 

 

Variable Costs

 

(0.65*78000)

50700

(0.65*66000)

42900

 

 

 

50700

 

42900

Add: Inventory at the starting of period

 

0

 

7800

 

Less: Closing stock

(12000/78000)*50700

7800

-7800

2600

5200

 

 

 

42900

 

37700

Contribution

 

 

23100

 

36300

Fixed prod. overhead

 

16000

 

16000

 

Fixed Sell. & Adm. cost

 

5200

21200

5200

21200

Net Income

 

 

1900

 

15100

Profitability statement according to absorption costing method is enumerated below:

 

 

 

January (Amount in £)

 

February (Amount in £)

Revenue

 

(1*66000)

66000

(74000*1)

74000

Marginal cost of sales

 

 

 

 

 

Variable Costs

 

(0.65*78000)

50700

(0.65*66000)

42900

Fixed Cost

 

 

16000

 

16000

 

 

66700

 

58900

 

Add: Opening inventory

 

0

 

10261.54

 

Less: Closing stock

(12000/78000)*66700

10261.54

56438.46

3569.70

65591.84

GP

 

 

9561.54

 

8408.16

Sell. & Admin cost Fixed

 

5200

 

5200

 

 

 

 

5200

 

5200

NP

 

 

4361.54

 

3208.16

 

Reconciliation Statement

 

 

Quarter 1

 

Quarter 2

Profit as per Absorption costing

 

4361.54

 

3208.16

+ opening stock @ FOH rate at op. date

 

 

 

2461.54

- Closing stock @ FOH rate at cl. date

 

2461.54

 

970.00

Profit as per marginal costing

 

1900.00

 

4700

Types of budgets and its methods

Budget:

A budget is a forecast of organization's revenue and expense for a specific time frame.

  • Capital budget:It is a budget in which business evaluate their major investments. It consists of capital receipts and payments.
  • Operating budgeting: It refers to the estimation of the sales and expenditure for the future period. It is prepared prior to the beginning of the year (Rosanas, 2016). It is mostly for short term period.

Other methods of budgeting

  • Zero based budgeting: In this method, everything starts from the scratch and every department is analyzed based on it needs and cost. This modern budgeting technique is highly effectual in which each and every line of item is clearly justified.
  • Activity based budgeting: In this budget is prepared using activity based costing and cost are associated with different tasks. It will help in reducing cost.
  • Dysfunctional behavior:Budget helps in bringing positive behavior among the employee and when employees participates in the budgeting process they feel happy and excited. But if the budget is not properly implemented the reaction of the employees will be found negative which adversely affect the organization's operation.
  • Participative budgeting: In this, the plan is prepared using bottom up approach and includes all the people affected by the budget. This method motivates employees.

Behavioral implication of budget

Pricing strategies

It is used by the organization in setting price of the product with the objective of maximizing profits. There are different types of pricing strategies such as price skimming, competitive pricing, cost plus pricing etc. Get Best Time Management Assignment Help from our management experts!

Competitors determine prices

The prices are mainly determined by the demand and supply but at the same time different pricing strategies are used to set the price. Competitive pricing method is mostly used by the competitors to set their product prices. It is used when other competitors sells similar products and services. In this organization sets the price of its product lower than its competitors to take competitive advantage.

Different types of job costing system

Job costing: It implies recording the cost of the job rather than the process. With this system managers can monitor the cost of the relevant job.

Process costing: It determines the cost of the product at different stages of production. It is adopted in manufacturing concern.

Batch costing: In this cost of the product is calculated by batch not individual wise and each batch consists of specific number of products.

Competitive analysis of the organization

Strength

  • Large customer base
  • diversified products

Weaknesses

  • Inadequate market research
  • Lack of technological advancement

Opportunities

  • To expand in other markets
  • Implement technology

Threats

  • Tough competition

 

Political

  • Political instability
  • Impact of Brexit

Economic

  • Change in interest rate
  • Increase of cost of material

Social

  • Change in trend and culture
  • Increasing education level of consumers

Technological

  • Implementation of analytical technology
  • Automated technology

Threat of new entrants

Bargaining power of customers

Bargaining power of suppliers

Threat of substitutes

Competitive rivalry

  • Prime Furniture is facing high threat of new entrants as there are less barriers to entry.
  • The customers are driving more power as the number of customer base is small.
  • This threat is low as large number of suppliers are available in the market.
  • Prime Furniture is facing less threat of substitute products as products are highly differentiated.
  • The company is facing tough competition as large number of competitors are available.
       
           

 

Balanced scorecard: It is a tool that managers employ to keep track of the activities of the staff.

Identifying financial problems

Benchmarking: In this, the performance of the organization is compared to its competitors which helps in recognizing the area of improvement.

Key performance indicators: It is a measuring tool used by the managers to analyze the success of the organization in which it engages (Vaes, 2018).

Budgetary targets: It is the amount that is assigned for a particular period within which the organization has to carry out its activities and achieve goals.

Financial governance

It exhibits the way in which company gathers, evaluates and control the data. It implies how company monitor financial transactions and activities (Gruin, Knaack and Xu, 2018).

Financial governance prevent financial problems

It assists in assessing the expense that can be reduced, it also increases the awareness for spending and also creating a monthly plan will help in solving and preventing financial problems.

Characteristics of effective management accountant

  • To be competent enough to manage the things.
  • Should keep information confidential.
  • Should show integrity in the work and avoid conflicts.

Skills required to deal with the problem

  • Planning and reporting skills
  • Decision making skills
  • Leadership skills
  • Technological skills

Strategies and systems

To ensure effective and timely reporting its is essential that proper procedure is followed. For example, setting strategic objectives, picking the right KPIs, timely measurement and evaluation of performance is essential. Also, ensuring that all the statutory requirements are complied with.

CONCLUSION

It can be summarized from above that MA is very essential for the organization. Besides this, it can inferred that Prime Furniture can employ job costing, cost accounting system etc for making appropriate decisions. Further, it can be seen in the report Prime Furniture can undertake absorption or marginal costing systems to prepare relevant reports and budgets. Also, analysis the ways through which Prime Furniture can solve or prevent its financial problems. The skills which are essential by the MA to work effectively to achieving organizational objectives.

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