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Management Accounting System Case Study

Answer :
Organization Selected : Agmet company

INTRODUCTION

Management accounting refers to the function of planning, directing and, controlling etc. The term management accounting is consisted of two words management and accounting. This report is consisted of all the managerial tools which provide the efficiency for decision making. The assignment provides an essential requirement of management accounting system of Agmet company. Project has also given the management accounting reports of Agmet company. The report provides deeper insights of absorption and marginal costing. Further, in the report income statements has also been prepared. This project has discussed the advantage and disadvantage of the planning tools and its application. Report will give the information about the management accounting techniques which are helpful to the Agmet for further decision making.

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A. Enumerating meaning of management accounting and essential requirements of management accounting and types

Accounting is an integral part of the company in recording and classifying it in that manner which are easily understandable to management. It is essentially required so as to provide management and stakeholders' important information for taking better decisions. The whole process includes various activities such as recording, classifying and summarizing accounting related information is known as financial accounting (Brausch, 2017). It serves as a base for management, as managerial reports are provided by taking such information supplied by accounting and as such better decisions are made. On the other hand, management accounting is a summarized way of information derived from financial accounting which is imparted to management of firm internally and not disclosed to the external parties. It is useful for Agmet Company which is engaged in chemical manufacturing and production business For attaining profits in large quantum, it is required that internal operational activities may be strengthened in a better way. This task is accomplished by management accounting information which analyses costs of production and other related elements needed to be streamlined in that way by which maximum output can be generated with minimum cost of input. The essential requirement of different types of management accounting systems are as follows-

Basis

Management accounting

Financial accounting

Information

All monetary and non-monetary information is supplied

It records all monetary transactions.

Users of information

Only management team of Agmet Company uses it.

All stakeholders use the information.

Reports

Reports are in summarized manner.

Complete information is provided in the report.

Example

Cost accounting report, accounts receivable report

All financial information such as journal entries, ledger, trial balance is used to prepare financial statements.

1. Cost accounting system-

The costs are required to be controlled in a better way so that maximum production can be achieved with minimum cost. Such system is important in management accounting as through this, various expenditures are effectively minimised so as to increase production. The costing system are-

Actual costing- As the name suggests, actual costs incurred on quantities of production is being used by Agmet Company to assess cost of particular item. For instance, total production expenses are to be find out by management (What is Actual Costing?. 2018). Labour costs can be calculated by analysing how much production is made in hours and employees are paid accordingly.

Normal costing- This method allocates cost to items on the basis of actual raw materials, labour and overheads in the manufacturing process. For instance, depreciation on equipments utilised for producing commodities.

Standard costing- The costing method is used to identify whether actual costs that have incurred to produce output is known as standard costing. If deviations are there between actual and budgeted costs, then corrective actions are taken. For example, management of Agmet Company has made quarterly budget regarding cost and if costs of production are more than budgeted than corrective action is required to be taken for reducing expenditures (Ax and Greve, 2017).

2. Inventory management system-

Stock is required for attaining desired production. In relation to this, it is required to be managed in a better way by which no wastages may occur and organisation attains production. There are usually two types of inventory management system like perpetual and periodic system. Perpetual inventory system implies that stock is immediately updated in the computers using asset management software whether inventory is bought or sold. On the other side, periodic one means that inventory is updated on a periodical basis and not updated regularly as when stock is purchased or used. LIFO method implies stock which is purchased lastly should be used first so that production can be accomplished. While, FIFO means inventory bought firstly must be used by the firm. JIT approach is useful for minimising wastage of resources, as only required inventory is received for meeting production and unnecessary stocks are not received leading to increase efficiency (Chiarini and Vagnoni, 2015). For example, raw materials are to be managed by production department of Agmet Company to produce chemical products by way of JIT approach in required quantity only to minimise wastage.

3. Job costing system-

Job costing system is another essential requirement of management accounting system as costs incurred on jobs with reference to production process is evaluated quite effectually. This helps Agmet Company to effectively analyse various expenses incurred on manufacturing jobs. The unproductive and productive jobs can be assessed and as a result, unnecessary expenditures are reduced for attaining more production at low manufacturing cost (Otley, 2016). For example, tracking cost of labour on per day basis required to complete manufacturing of particular commodity.

B. Discussing management accounting reports and justifying significance of reports

Management accounting is summarized way of producing information to the management so that decision-making can be ease off. Costs can be controlled in a better way as cost reports are published and management initiate control over it. Hence, all such information is summarized which is provided to managerial personnel to take decisions.

1. Accounts receivables report-

Credit is required to be provided to customers with a view to make payment for the same afterwards and thus, certain credit terms and conditions are given to them. Accounts receivables report is prepared by Agmet Company in order to identify how much credit remain outstanding to be paid by debtors. In addressing this, management is provided with all information and the amount outstanding needs to be collected. Hence, such report is provided and debtors are analysed. If more amount is outstanding, then credit policies needs to be strict.

2. Inventory management report-

Inventory is an integral part of production process as business has to met demands of customers within stipulated time for enhancing satisfaction (Hopper and Bui, 2016). JIT approach is useful, so as to minimise wastage by only receiving raw materials desired for particular production. This leads to optimum utilisation of stocks and Agmet Company is able to attain manufacturing of chemical products in a better way. If inventory is not available then production is hampered. On the contrary, if adequate stock is not provided on time, then also production suffers. In order to overcome the same, inventory management report is prepared and supplied to them and as a result, needed stock is ordered and production is met.

3. Cost accounting report-

Cost accounting report in which manufacturing of raw materials, labour and overheads are computed in a better way. It helps in assessing total production costs in a manner to effectively arrive at production of goods. The cost price of each products is calculated in order to determine selling price in the best possible manner. This is essentially required so that costs can be reduced and maximum production may be attained. Cost accounting report is prepared in which profit margin is determined and costs are estimated which helps to scrutinise expenditures in an effective way. Hence, Agmet Company is able to initiate control over manufacturing expenses to achieve maximum quantum of production (Tucker and Lowe, 2014).

4. Budget report-

The budgetary report is used to achieve targets which are being inscribed in it. Organisation is able to analyse various schemes which will be useful in attaining desired objectives with much ease. The budget report is prepared in which estimated expenses and revenues are listed for the forthcoming period. This helps management to make effective analysis of actual performance in order to achieve budgeted targets. It leads to minimisation of expenditures and maximisation of revenue in such a manner through which actual performance may be improved and estimated sales can be accomplished. Apart from this, budget report helps to set workers' incentives, amount for raw materials and measures to reduce overall cost of production.

C. Evaluating benefits of systems in the business

There are enough of benefits of management accounting systems in the organisation. It is evident from the fact that cost accounting is used to determine cost of each of the item in manufacturing process which leads to increase in efficiency as cost minimisation can be made on unproductive elements. It automatically leads to more production at least possible expense. Furthermore, it helps to initiate control over various types of costs such as direct, indirect, fixed, variable and semi-variable in the best possible way (Taleb, Gibson and Hovey, 2015).

On the other hand, inventory management system has immense benefits to Agmet Company as through this, spoilage of resources is alleviated up to a high extent and as such, maximum production can be achieved. Furthermore, no excess inventory is ordered leading to incur no extra handling cost in the warehouse. This eventually minimises unnecessary expenses in effectual manner. It is required so that business may be able to attain maximum production of items and fulfilling customer's orders with much ease.

The job costing system is also an effective method to analyse cost incurred on various manufacturing jobs. It is essentially required to assess costs so that it could be minimised and desired production can be accomplished. It helps firm to control costs and supports management in allocation of tasks can be made in accordance for injecting production. This effectively helps to reduce costs; business is able to accomplish production in the best possible manner. Hence, all management accounting system has plenty of benefits to company in achieving production and met demand of customers quite effectually (Nash, 2018).

D. Critical analysis of management accounting systems and management accounting reports are integrated in company

The integrated management accounting system is helpful because it reduces duplication of work, saves time and expenditures are controlled. Delaying of information will not prevail and management would get complete data on time. Computerized accounting is helpful leading to quick and efficient work. Accounting procedure is summarized in the best possible manner and costs are minimised too. Entire head of operational tasks is taken in step-by-step way on cost of operations, operational job done by labours etc. Hence, management accounting system and reports are integrated so as to supply adequate information for decision-making to management.

TASK 2

A. 1) Absorption and marginal costing

Marginal costing

Marginal costing is a technique used in decision making to find out the total cost of production. It is a technique that distinguishes the fixed cost and variable cost. The marginal costing methods presents the data of where fixed and variable cost are shown separately for managerial decision making. Marginal costing is not the method of costing like process costing or job costing. It is a method or technique for analysing the cost information which is to be provided to management which tries to trigger out an effect on earnings due to change in volume of input (Chiwamit, Modell and Scapens, 2017). The word marginal involve additional cost implies in producing an extra unit of output. In marginal costing the valuation of stock is done by taking the variable cost into account while valuing the finished goods and work in progress. The profitability of the firm has great impact on cost behaviour. Marginal costing is used by the manager for taking managerial decisions; it gives the basic understandings of cost data.

Absorption costing

It is a conventional technique of recognizing cost and profit. Absorption costing is a practice under which all the cost whether fixed or variable are included in the price of products or services. Therefore, it also known as full costing and total costing. In absorption costing all the production cost are absorbed by the unit produced. It is a process for collecting the cost linked with production process and distributing them into individual parts. Under this absorption costing first of all prime cost is obtained by adding the direct material direct labour and direct expenses. Then the manufacturing expenses are added to find out the manufacturing cost, administrative expenses were added to find the cost of production (Van der Stede, 2016). Finally, selling and distribution expenses were added to obtain total cost. Profit is ascertained either on the basis of variance between total cost and sales or by computation as per desired rate of profit or cost on sales.

2. Producing income statements by utilising costing methods

Marginal costing

Particulars

Amount

Amount

     

revenue

33000

33000

material

5600

 

labour

4800

 

Variable production overhead

1600

 

Variable sales overhead

800

12800

Less: ending inventory

   

Direct material

1400

 

Direct labour

1200

 

Variable production overhead

400

 

Variable sales overhead

200

3200

COP (per unit)

 

9600

   

23400

Less: Fixed cost

   

Overheads (Production)

3200

 

Fixed administrative expense

1200

 

Fixed selling expense

1500

 
   

5900

Net income

 

17500

Absorption costing

Particulars

Amount

Amount

     

Total revenue

33000

33000

Direct material

5600

 

Direct labour

4800

 

Variable production overhead

1600

 

Variable sales overhead

800

12800

Less: Closing inventory

   

Direct material

1400

 

Direct labour

1200

 
     

Variable sales overhead

200

 

Less: Variable sales overhead

600

3400

Less: Absorption of Overheads (Fixed)

   

Cost of production

 

9400

Per unit contribution

 

23600

Less: fixed cost

   

Overheads (production)

3200

 

Fixed administrative expense

1200

 

Fixed selling expense

1500

5900

Net Income

 

17700

B. Computation of Break-Even analysis

TASK 3

A. Explaining merits and demerits of planning tools in the business

Different types of planning tools of budgetary control used by Agmet company are as follows

Zero based budgeting

Zero based budgeting is one of the most important planning tool. It is also known as 'De nova budgeting '. According to name sound, its starts from zero or clean state. In zero based budgeting the preparation of budget is done with new analysis, fresh data and new estimates also it is not linked with figures of previous budget. Zero based budgeting is the traditional way of budgeting. In this techniques of zero based budgeting each budget is estimated in every time. If while preparing budget any shortcomings or inefficiencies occurs, They are dropped or deleted. All the activities in the zero based budgeting is ranked according to their priorities and they are undertaken accordingly. Activities those have higher priorities are taken first according the sources available (Hall, 2016). The manager or accountant of the Agmet company begins the preparation of budget from scratch each time and justifies each dollar depended on strategic objectives of the company. It will give a fair chance to Agmet to work on inefficiencies and to find the creative ways to reduce costs. ZBB assures that resources are utilised effectively and returns are generated from the same.

Advantages of ZBB

ZBB has its one greatest advantage, that it has the efficiency to initiate control over the cost and thus, better control can be found.

It helps in allocation of resources according to their priorities, which helps in systematic evaluation of cost related to various operation.

It provides the justification of each activity I.e. And ensures that all the activities executed are essential for the organization.

Disadvantages of ZBB

  • Zero based budgeting is the time consuming technique of budgeting because it becomes very intensive exercise for company to prepare budget every year against incremental budgeting.
  • ZBB requires involvement of large number of manpower for making the entire budget
  • Lack of expertise: as it requires the expert-ism in the field of ZBB, it becomes difficult task for managers to implement the same in company.

Variance analysis

It is very important tool of standard costing. Variance analysis identifies the difference between the standard level and the actual performance. It shows the major difference between what the company has planned to achieve its goals and objective and actually where it is stated. To maintain the control over the business the variance analysis is used. It is also described as a ANOVA. The company Agmet is the recycler of metal-bearing industrial products which requires the financial operations on daily basis, so the variance analysis plays a vital role as it is a tool applied to financial and operational data in order to identify the cause of variance. This variance analysis helps a company to spot the trends, issues, opportunities and threats to long term and short term success.

Advantages of variance analysis

  • The cause behind the overall variances could be easily find out, so that remedial action can be taken.
  • For the department or section or an individual fixing the responsibility is highly useful
  • It is used for the cost control (Chiarini and Vagnoni, 2015).

Disadvantages of the variance analysis

  • It provides the time gap which can affect the alterative action.
  • If there is any inefficiency in process of budgeting, so it can deviate from the actual numbers, then analysing the variance may not be of any use.

B. Application of planning tools for preparation, forecasting and analysing budgets

The application of the planning tools for preparing, forecasting and analysing budgets is discussed under

Planning tools helps in forecasting, analysing, and preparing of budget as zero based budgeting enables an efficient allocation of resources under which systematic evaluation of various operations and program is done which enhances the budget. It enables the management to approve the budget for various projects or department on the basis of cost analysis. Preparation of budget with the help of planning tools gives the fair idea to bring forth the cost. Moreover, zero based budgeting is prepared every time to get ability to enhance the power to think and foresee. This enables them to forecast future operational problems difficulties and to arrange for suitable corrective actions in advance.

While every organization works for profit their one and only objective is to ascertain the earning. It could only be possible when the planning, forecasting, analysing is done in an effective manner. In variance analysis manager uses comparison between actual result and the set budget for performance evaluation (Hopper and Bui, 2016). While comparing the actual with set benchmark decreases the possibility of errors. Which further enhances the planning, forecasting and analysing of budget.

C and D. Comparing management accounting systems of different organisation for resolving financial problems

Key performance indicator

KPI stands for key performance indicator is the technique used to determine the performance of employees and the organization. Key performance indicator is value that tells how effectively a company is achieving its set objectives. KPI focuses on the financial requirement of management performances to identify or implement the problems occurring. In assaulting the financial problem KPI measures the performance of the financial data such as

 Operating cash flow

In operating cash flow KPI analyses your ratio of operating cash flow and compared with the total capital employed which gave the deeper insight of the business financial health.

 Working capital

KPI indicates the situation of the business in the context of its available operating funds which helps to cover the short term financial liabilities.

Therefore, many more financial key performance indicator responds the various problems.

Financial governance

Financial governance helps in responding the financial problems as it is full with the rules and regulation which helps to resolve the financial problems. There are some rules which have to follow while doing the financial activity in an organization. Financial governance monitors the financial problems through rules and regulations which inhibits the problems and if any shortcoming occurs it can be resolved easily with in a time (Chiwamit, Modell and Scapens, 2017). Through financial governance, business can restrict the financial problems.Itcan help company to achieve goals and objectives

Balance scorecards

Balance scorecard is used for the performance measurement to be followed in strategic management to find out and improve various internal function of the company and their outcomes. It measures and provide the feedback to the organizations. It responds to the financial problems by gathering the data, interpreting them and providing with the solution , so that manager can easily trigger out the solution of the problems to make the best decision for the company.

Bench marking

An organization is consisted of the product, policies, programs strategies, etc . While running business every organist sets a benchmark of every activity whether it is financial or managerial. It is very essential that in an organization working should be in the periphery of the set benchmark (Granlund, M. and Lukka, K., 2017). If it goes beyond the set criteria will affect the business negatively. Benchmark is a measure of the quality of organizations with all the aspects of the business and their comparison with standard measurement.

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Academic and Research Skills

E. Following are the benefits and drawbacks of planning tools which responds to the financial problems.

Name

Advantages

Disadvantages

Key performance indicators

  • It shows the shortcomings, strengths, and effectiveness of institutions.
  • Key performance indicators useful for exchanging relevant outcomes which are generated by the organization.
  • Key performance indicator provides particulars for the comparative judgement and decision making. 
  • It does not take any reference to external parties and bench marks while intending to improve.
  • There is a limited ability of key performance indicator to reflect objective reality.
  • It does not provide the information about causal relationship (Fullerton, Kennedy and Widener, 2014).

Balanced score cards

  •  It is a broad approach which is used for the judgement of performance.
  • Balanced score cards promotes the communication and understanding of business objectives and strategies.
  • It provides the structure of the organization 's strategy.
  • It needs the powerful leadership support in order to be successful.
  • It is impossible to retain everyone on same page.
  • Overly balanced score cards goals are easy to reach but difficult to manage.

Bench marking

  • It only focuses the area which should be given the special attention. This helps to set the base of improvement.
  • It helps the organizations to adopt the changes for the progress.
  • It can be done without investing big price. 
  • Bench marking simply help in those areas which need improvement.
  • It does take the external factors into account that leads the competitor succeed.
  • Every time it is not possible to go with set benchmark.
Finance governance 
  • Finance governance ensures the economic growth
  • Finance governance helps to minimize the wastage, mismanagement and risks (Renz, 2016).
  • It reduces the cost of capital.
  • Formation of finance governance is not easy.
  • It requires some legal formalities which is relatively expensive .

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CONCLUSION

From the above report, it has been concluded that management accounting tools & techniques are highly significant which helps in exerting control on expenses and thereby enhances profit. It can be summarized from the evaluation that financial reporting contributes in effectual decision making. It has observed in the report that using ZBB and variance analysis tool Agmet can do proper financial forecast and will able to prepare the suitable budget. Further, it can be depicted from the evaluation that KPI, financial governance etc helps in responding to monetary problems prominently.

REFERENCES

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  • Brausch, J., 2017. The path forward in accounting: Lev and Gu propose a new vision that begins with simplified accounting regulations. Strategic Finance. 98(9). 
  • Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years on. Management Accounting Research. 
  • Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with Toyota production system from a strategic management, management accounting, operations management and performance measurement dimension.International Journal of Production Research. 
  • Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with Toyota production system from a strategic management, management accounting, operations management and performance measurement dimension. International Journal of Production Research. 
  • Chiwamit, P., Modell, S. and Scapens, R. W., 2017. Regulation and adaptation of management accounting innovations: The case of economic value added in Thai state-owned enterprises. Management Accounting Research. 37. 
  • Fullerton, R. R., Kennedy, F. A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7-8). 
  • Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting.
  • Hall, M., 2016. Realising the richness of psychology theory in contingency-based management accounting research. Management Accounting Research. 
  • Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research. 
  • Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research. 
  • Nash, P., 2018. Financial Accounting Entries. Effective Product Control‐Controlling for Trading Desks, First Edition. 
  • Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research. 
  • P. Tucker, B. and D. Lowe, A., 2014. Practitioners are from Mars; academics are from Venus? An investigation of the research-practice gap in management accounting.Accounting, Auditing & Accountability Journal. 27(3).
  • Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
  • Taleb, M. A., Gibson, B. and Hovey, M., 2015. Fifty years of Sustainability Accounting: does accounting for income in business sustainability really exist?. International Journal of Accounting and Financial Reporting. 
  • Van der Stede, W. A., 2016. Management accounting in context: Industry, regulation and informatics. Management Accounting Research. 
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