This sample will answer the following questions:
- Types of management accounting systems and its essential requirements
- Differences between Management and Financial accounting
- Types of management accounting
- Advantages and disadvantage of various planning tools
INTRODUCTION
Management accounting is a profession which facilitate an organisation to know their actual financial position in company through preparing financial accounts on annual basis. Such financial accounts includes profit & Loss a/c, balance sheet, cash flow statement etc. It will be helpful for management to make better plans and policies regarding maintaining financial stability of company. An organisation are also liable towards its stakeholders to communicate their actual financial position in order to get maximum support from them. Sollatek Ltd a small-sized company which deals in providing electrical equipments with an aim of protecting consumers and businesses from power problems. The project includes various aspects related with the management accounting that comprises different management accounting and reporting system, costing methods to calculate net profits, planning tools used to control budget, financial tools used to resolve financial issues etc. These all aspects are briefly described under this report in the context of Sollatek Ltd (Cadez and Guilding, 2012).
TASK 1
P1: Types of management accounting systems and its essential requirements
Definitions of Management Accounting:
- Management accounting is the process of measuring, gathering, examining, preparing and communicating the information which facilitate management in formulating an effective decision and suitable plans in order to achieve growth and desired objectives of an organisation.
- Management accounting is also defined as the process of preparing management and financial reports which provides correct and on-time statistical and financial details that are required by the management to make short as well as day-to-day decisions for the betterment of an organisation.
Management accounting systems:It includes those frameworks which assist in management to maintain useful information related with daily basis transactions so as to acquiring knowledge about present financial position of company. Price optimist on inventory management, cost accounting and job costing system are the some accounting systems which are adopted by almost all companies in the business world (Chiwamit, Modell and Yang, 2014).
Importance of management accounting systems:
Increase in efficiency: Using various accounting system facilitates a company in identifying and analysing current market and preferences of targeted customers which directs management to make further actions in order to meet customer as well as market need within limited period of time. For example, the perception of customers towards the price charged by Sollatek Ltd. On their electrical products can be easily identified through using price optimisation system. This will enable company in setting optimum pricing strategies which maximises the satisfaction level of targeted customers (Contrafatto and Burns, 2013).
Measurement of performance: Management accounting system is the process of preparing financial reports which shows the actual financial position of company. Thus, it become easy for management to identify the deviations which affect their performance and thereafter, company can make a suitable decisions in order to maintain financial stability of company. For example, cost accounting system facilitate management in preparing budget for each department after analysing their needs and outcomes that will be received in near future.
Effective management control: Management accounting systems assist management of Sollatek Ltd. to evaluate business cost and operation due to which they are more capable in making plans and policies with an objective of reducing cost of operation. This will help in eliminating wastage of cost and increases profitability of company as well.
Role and Principles of Management Accounting:
Management accounting included all aspects related with accounting designing all information of business operations which includes reports of budgeting, trend analysis, sales forecasting, product costing etc. on daily, weekly or monthly basis. Following are the some management accounting systems which assist company in achieving growth and desired objectives within pre-determined time period (Dillard and Roslender, 2011).
Price optimisation system: Such system is more useful for Sollatek Ltd. as it help them in identifying the actual perception of targeted customers i.e. customers and businesses regarding the pricing policy set by company on their electric and electronic products. This will direct the management to think about changing current pricing policies in order to attract new and retain loyal customers. For example, charging higher amount on their electric products as compared to their competitors may forces customers to shift to rival's products. Thus, with the help of such system the management can change their pricing policies in favour of customers so as to restrict them from shifting to rivals.
Inventory management system: Such type of management accounting system assist company in meeting needs and requirements of targeted customers through maintaining required inventory to produce demanded products in large quantity. It help company in reducing storage cost of inventory as the managers placed an order of inventory only when the demand of particular products rises. For example, if the demand of electronic products frequently rises, then it is essential for company to have sufficient amount of inventory which can be possible through using such system (Garrison and et. al., 2010).
Cost accounting system: Such accounting system assist management in identifying total cost involved in the process of executing business activities which includes production and marketing activities. Sollatek Ltd. is engaged in producing electric equipments, therefore, it is important for company to allocate cost to different departments on the basis of their requirements to reach their products to the targeted customers.
Job costing system: Such accounting system facilitate management in allocating cost to the production of specific product or group of products. For this, it is essential for management to prepare budget considering all the activities required in the process of producing and selling specific products and services. Batch costing, process costing and contract costing are some different methods which are used under job costing systems. Sollatek Ltd. uses batch costing due to providing electrical equipments.
Differences between Management and Financial accounting:
Basis
Management accounting
Financial accounting
Meaning
It refers to a profession which facilitate company in getting useful information to compete with their rivals in market in an effective and efficient manner.
Such accounting are only related with preparing financial reports which includes Balance Sheet, Profit & Loss a/c, Cash Flow statement etc. so as to facilitate stakeholders in acquiring knowledge about actual financial position of company.
Mandatory
Not Mandatory.
Mandatory
Information
Providing details about monetary as well as non-monetary terms.
Includes only monetary information.
Time frame
Depends on the requirements of business.
Prepared on annual basis.
User
Internal parties
Both internal as well as External parties.
Types of management accounting reports and its importance to managementThe management of an organisation always put their maximum efforts in achieving desired goals and objective through formulating an effective plans and policies. It can be made after analysing the current business conditions and capability to meet market needs. It can be done through preparing management accounting reports and other documents which contains all information regarding daily business transactions. Such information easily gives direction to the management and employees to perform in a desired way to bring profitable outcomes received in near future. The main aim of preparing such reports is to make easy for management to make an effective decisions suitable plans for the betterment of an organisation (Herzig and et. al. 2012).
Sollatek Ltd. is engaged in providing electrical equipments with a clear aim of protecting customers and business from power problems. Thus, it is essentially required for them to maintain accounting reports which includes account receivable report, job cost report and many more. It is also important for Sollatek Ltd. to acquire skilled and knowledgable employees who are more capable to prepare and maintain reports for longer period of time in order to bring useful information to company. There are various types of reports which is necessary for company to prepare such as Profit & Loss account. Balance Sheet, Cash flow statement etc.Here are the some management accounting reports which are essential to prepare by Sollatek Ltd.
Performance report: This is the report which provides sufficient information regarding the performance of different departments through getting all details from their individual managers. It help management in getting knowledge whether an organisation are able to achieve desired objectives successfully within pre-determined time period. Sollatek Ltd. Should also required to prepare such report in order to present it towards its stakeholders so as to ensuring them about giving maximum return to them. New investors are also attracted towards an organisation if they believe in company to provide maximum return on their investment.
Account receivable report: Such report is essentially required to prepare as it helps in disclosing the name of debtors which are not paid to company till yet for the products and services they received from company. It discloses all the information related with recovery amount, date of recovery, interest amount etc. which direct management to make an effective plans and policies to recover the same. This may also forces management to re-think their credit policies in order to eliminate the chances of facing losses due to default debtors (Maher, Stickney and Weil, 2012).
Job cost report: Such report is required to prepare by Sollatek Ltd. in order to identify the effectiveness of specific products and accordingly make decisions regarding allocation of cost in execution of producing such product or group of products. This will help management in ascertaining profits earned from specific product or batch of products.
Inventory management report: It is the report which contains all details regarding the amount of inventory the company have with them at present. This will increases the capabilities of an organisation to avail their products into market so as to meet market needs and requirements. It facilitate management in ordering inventory at right time at right place in right quantity. It helps in reducing storage cost which makes positive impact on the profitability of company. Sollatek Ltd. Is required to prepare such report by recording continuous opening and closing stock. There are different techniques such as EOQ, ABC costing technique and inventory system etc. with the help of which inventory reports are prepared (Messner, 2016).
M1: Benefits and application of management accounting systems
Sollatek Ltd. may get several benefits by using various management accounting systems which are given as below:
Managing accounting systems
Benefits
Cost accounting systems
It is used to ascertain cost which are incurred in execution of various business activities such as production and marketing activity.
Inventory management system
It help company in maintaining inventory level in order to meet customer's needs and requirements. ABC costing, EOQ etc. are such technique which are used under such system.
Price optimisation system
It facilitate management in setting up an effective pricing policies which maximises the satisfaction level of targeted customers. Such policies can be made after analysing the perception of customers regarding the price charged by company.
D1: Critical evaluation of various reporting and accounting system
There are various reporting systems which includes account receivable report, inventory management, job cost etc. which gives valuable information to the management which help them in making an effective decisions and suitable plans for the betterment of an organisation. For example, Account receivable report help in identifying the list of unpaid debtors which are not yet paid to company for the products and services purchased from the company.
TASK 2
P3: Calculation of cost using an appropriate techniques
Sollatek Ltd. Is a manufacturing company which produces electric and electronic equipments in order to facilitate customers and business to protect from power problem. Therefore, it is essentially required for company to determine total cost incurred in producing electrical products and on the basis of which net profitability of company will be determined through using different costing methods. Such costing methods includes marginal and absorption costing method which are stated under below:
Marginal costing method: Such costing method considers only variable costs and ignore fixed cost due to which the net profitability of company are increases. Under this method, profitability of company is calculated through determining variable cost against sales revenue which brings contribution and fixed cost are charged against contribution in order to ascertain net profit and income. Due to increment in net profitability using such costing method, Sollatek Ltd. May adopt such method (Nørreklit, 2014).
Formula of marginal costing: Sales revenue – marginal cost = contribution – fixed costs = Net profit or income
Particulars
Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600)
33000
Marginal Cost of goods sold:
9600
Production = (units produced * marginal cost per unit = 800 * 16)
12800
closing stock = (closing stock units * marginal cost per unit = 200 * 16)
3200
Contribution
23400
Fixed cost ( 3200+1200+1500 )
5900
Net profit
17500
Absorption costing: Using such costing method, both variable and fixed cost are considered while calculating net profitability of company. Due to adding both costs, the net profitability of company decreases thus adopted by less number of companies. Therefore, such costing methods are less preferable as compared to marginal costing method (Pipan and Czarniawska, 2010).
Formula of absorption costing: Sales revenue – cost of goods sold = gross profit – selling and administrative cost = net profit
Particulars
Amount
Sales = (selling price * no. of units sold = 55 * 600)
33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600)
14025
Gross profit
18975
Selling & Administrative expenses = (variable sales overhead * actual sales + selling and administrative cost = 1 * 600 + 2700)
3300
Net profit/ operating income
15675
Break-Even – It refers to the situation where an organisation neither earn profit nor facing losses. It identifies the number of units which are necessary to sold in market so as to incur no losses.
The number of products to be sold to break even
Sales per unit
40
Variable costs VC = DM + DL
28
Contribution
12
Fixed costs
6000
BEP in units
500
The break even point in terms of sales revenue
Sales per unit
40
Variable costs VC = DM + DL
28
Contribution
12
Fixed costs
6000
Profit volume ratio PVR = Contribution / sales * 100
30.00%
BEP in sales
20000
The number of products that need to be sold to make profit of 10,000
Profit
10000
Fixed costs
6000
Contribution
16000
Contribution per unit
12
Sales
1333.33
Margin of safety:
MOS refers to the optimum level which are need to be maintain by an organisation in order to generate certain amount of profit. It can be calculated through differentiating the sales revenues and break even sales revenue (Quinn, 2014).
The margin of safety if 800 products are sold
Actual sales in units
800
Break even sales in units
500
Margin of safety
37.5
M2: Various types of accounting techniques
There are mainly two methods which are used to calculate net profits after considering all expenses and costs. Such methods includes:
Standard costing: It is a method which is used to calculate future profitability through considering various elements which includes sales revenue, costs and demands. Sollatek Ltd. May adopt such method in order to ascertain future profitability.
Marginal costing: It is adopted by almost every organisations including Sollatek Ltd. So as to determine the net profit through considering only variable cost.
D2: Data Interpretation
As seen from above calculation of net profitability, there are two costing methods such as marginal and absorption method. While using marginal costing method, the profit is 17500 whereas using absorption costing method, the profit is 15675. There is differences in profits while calculating through using marginal and absorption costing method. Such differences are arises due to additional of fixed cost in the calculation.
TASK 3
P4: Advantages and disadvantage of various planning tools used for budgetary control
Budget- This is one of the most important elements which help to plan business operations and
perform activities to achieve targets. In budget, manager set some benchmarks are future and perform actions accordingly (Budgetary Control. 2017).
Forecasting technique
This is the best technique which is used by association to know what can be dome through which future activities are estimated. There are some benchmarks set by managers and it must be achieved by subordinates. In case of negative results reasons must be analysed and take corrective actions. There is difference in forecasting of managers a per their skills and experience.
Advantages
Disadvantages
This sets some frame work which is significant for growth of company. It gives an benchmark for future related activities.
This is time consuming activities. As there is difference in perception of person, so this creates difference among managers.
Scheduling tools
This is the tool which is essential to set plan for future activities. This is effective for making changes in plans and policies. This tool gets base to business operations.
Advantages
Disadvantages
This sets business operations for operating business in effective way.
Due to change in business environment this tool is not effective and affects business operations.
Production budget
This budget is important for knowing how much has to be produced through which they can plan resources accordingly. This tool is effective for purchasing, storing of raw material (Management Accounting,2016).
Advantages
Disadvantages
This helps to produce goods which are significant for satisfaction of customers.
In case demand gets high or low, then this affects business operations are prediction may become wrong.
Sales budget
Sales budget is predicting sales for future. This is effective for increasing sales and profits for the company.
Advantages
Disadvantages
This helps to satisfy demand of customer on the time and resources are utilised in proper manner.
There are various methods through which sales can be forecasting, so there are possibilities of difference between actual and standards.
Process of budgetary control:
Consult with manager: In the first step of budgetary control, managers of all departments of the organisation come together and discuss about business operations which can result in long term profitability.
Do assumptions: Various assumptions are drawn by the managers of Sollatek Ltd. after collecting all the data from accounting reports and financial statements of the organisation (Vaivio and Sirén, 2010).
Fix data to attain business targets: This step is considered as the most important step as this involves setting the targets from the information collected from financial books of Sollatek Ltd.
Compare actual data with budgeted information: Under this step, manager Sollatek Ltd. considers all the previous years data on which budgets are prepared.
Review analysis: Review analyses is the last step as it involves review of all the above steps so that deviation and mistakes can be identified.
M3: Use of different planning tools and their applications
Budget is essential for company to made in order to allocate cost and roles and responsibilities to each and every department of an organisation. In order to control budget, there are various planning tools which includes forecasting, scenario, contingency etc. which are required to be used by company. For example, Forecasting tool assist managers to estimate the expenses that will be incurred in future business activities. This will help in controlling expenses and achieve huge profits as well.
TASK 4
P5: Comparison how organisation are adapting management accounting system to resolve financial problems
An organisation can sustain in market for longer period of time only when the business has attained good financial position. But due to lots of financial issues and problems which may arises due to missing accounting reports, lack of performance, product related issues etc. affects the financial stability of company thus required to be resolved by company within limited period of time. To resolve such issues, there are various financial tools and techniques such as KPI, Benchmarking, Financial governance etc. which facilitate management in maintaining the overall performance of an organisation (Robalo, 2014). Such financial tools are briefly described as under:
Key performance Indicator (KPI): It is an effective tool which help in analysing the performance of employees and their capabilities in order to identify the deviation if any, which affects their performance in adverse manner. This will direct management to adopt an advanced technologies and modern systems which facilitate employees in enhancing their efficiency level in their performance.
Financial governance: It is a tool which directs employees to perform according to the rules and regulations formulated by the management of an organisation. It restricts employees not to indulge in any illegal activities which harm the financial position of company. As Sollatek Ltd. Is operated at small level thus to expand its business and improve financial position, it must required to follow all guidelines made by the management.
Benchmarking: It is an effective tools which assist management to set target or deadline towards their employees in order to bring motivation and commitment to complete work as soon as possible. It increases the efficiency and performance level of workers which gives guarantee to an organisation in achieving their desired goals and objective within given time frame. Such tool measures the current performance of an organisation through comparing actual with desired performance (Soin and Collier, 2013).
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Comparison of Sollatek Ltd. with other companies
Sollatek Ltd.
Vacon Ltd.
It is the company which deals in offering electrical equipments with a clear aim of saving energy consumption.
It is a company which is engaged in offering variable speed AC drives for adjustable control of electronic motors and inverters.
It is operated at small scale thus KPI and Benchmarking brings more beneficial result to company in managing and monitoring performance of employees as well as departments of company.
It is operated at large scale thus financial governance may brings positive outcome to company. Such tool guides employees to perform business functions in a desired way.
It has wider scope.
It has narrow scope.
M4: Role of management accounting in analysing financial problems
Cash unavailability, missing accounting reports, products related issues etc. are some financial problems which may harm the financial stability of company. Thus, it requires management to adopt several financial tools to resolves such issues as soon as possible. Such financial tools includes KPI, Benchmarking etc. which will brings beneficial outcome to Sollatek Ltd. Which are operated at small scale level.
D3: Evaluation of planning tools for respond financial problems
KPI and Benchmarking are such two financial tools which facilitate company in handling financial issues through measuring the performance of employees at each stage. This will increases their performance which will brings profitable outcome to company. For example, KPI help in enhancing the performance level of workers through giving them right direction at each level of activity.
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CONCLUSION
It has been concluded from the above project report that management accounting brings valuable information to the management about the actual financial position through preparing financial reports on annual basis. It includes Profit & Loss a/c, Balance sheet, Cash flow statement etc. which determines the actual financial position of company. The management also required to adopt costing methods which includes marginal and absorption costing methods in order to ascertain net profitability of company. Various financial tools such as Balance Scorecard approach are required to be adopted in order to resolve financial issues which can harm the financial stability of an organisation.
REFERENCES
- Cadez, S and Guilding, C., 2012. Strategy, strategic management accounting and performance: a configurational analysis. Industrial Management & Data Systems. 112(3). pp.484-501.
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- Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research. 31.pp.103-111.
- Nørreklit, H., 2014. Quality in qualitative management accounting research. Qualitative Research in Accounting & Management.11(1). pp.29-39.
- Pipan, T. and Czarniawska, B., 2010. How to construct an actor-network: Management accounting from idea to practice. Critical Perspectives on Accounting. 21(3). pp.243-251.
- Quinn, M., 2014. Stability and change in management accounting over time—A century or so of evidence from Guinness. Management Accounting Research.25(1). pp.76-92.
- Robalo, R., 2014. Explanations for the gap between management accounting rules and routines: An institutional approach. Revista de Contabilidad.17(1). pp.88-97.
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