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Management Accounting

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Various Kinds of Management Accounting Systems

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Introduction

Accounting is an integral process of every business organisation which helps to identify, record, classify, measure, summarize, verify as well as interpret various financial transactions and informations of the firm. Further, it is very necessary to manage such financial transactions in order to improve financial performance of the business entity. The study is based on Her Company Limited which is based on the UK country and producing different kinds of plastic products. The report describes about different types of management accounting systems and approaches which are helpful for the entity. Further, the report analyses about methods which are used by Her company limited for managing accounting reports at the workplace. It shows preparation of income statement for determine net income or profit with the help of absorption as well as marginal approach of costing. At the last, present study shows various tools of planning used for control over the budgetary at the workplace of Her company limited.

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TASK 1

P1 Several kinds of management accounting systems and their essential requirements in Her Co. Ltd.

Management accounting systems are important part of the company such as Her Limited which helps to fulfil requirements of business and achieve goals and objectives in effectual way. In the business process various systems of management accounting used by the firm are explained as below:

  • Transfer pricing: Level of price at which a parent company sales its products and services to the subsidiary firm for consume and further production process is known as transfer pricing. When compare with the market price and transfer price amount is always higher in the market. Motive of the companies while selling services and products in the market is to earn and maximize level of profit (Andor, Mohanty and Toth, 2015.). On the other side, the parent company not selling goods and services to subsidiary for maximize profit. The respective management accounting system requires for Her Limited in order to reduce total cost of production and provides goods at the lower prices compare to rivalry firms. Further, more number of users attract towards it and helps to generate higher sales and yield at the end of year.
  • Cost accounting: The approach of management accounting where different kinds of costs and expenditures are to be analysed and helps to Her limited to determine cost of per unit is identified as cost accounting. When the business entity adopt accounting system such as cost at the workplace then highly able to determine total expenditures incurred in the producing goods and services. When the level total cost is higher, then the company able to take corrective actions for overcome such kinds of problems and obstacles. Higher the level of expenses are lead to increase prices of products and services in the market. Ultimately less number of customers will attract and reduce profitability ratios at the end of year.
  • Process costing: According to the respective management accounting system company requires to know every phases of production and operation process (Bierman Jr and Smidt, 2014). Here management of Her Limited can know that at every stage of production there are how many costs is incurred and what is level of output. If at particular stage it can be found by managers that costs incurs higher, then it makes strategies to control over the expenses.
  • Budgetary control: At the last it management accounting approach where Her Limited is easily determined that how many expenses will be incur in the future along with disposals (Venkatesh, 2016). Here it can know net cash balance and financial performance in the overall plastic industry at the end of current and future accounting periods.
  • Job costing system- This is a system for assigning manufacturing costs to an individual product or batches of products. Generally, the joborder costing system is used only when the products manufactured are sufficiently different from each other.
  • Batch Costing system- It is also known a order costing system, in which costing of jobs are implement on the specific orders. There are two type of costs which are used in batch costing such as set up cost and carrying costs. Thus, by using batch costing it help the organisation to make effective control on each unit of cost.
  • Inventory management system- This system of costing is help to track the inventory such as orders, sales and deliveries etc. It also used in manufacturing industry so that it will help to create a work order, bill of materials and various kinds of order document.
  • Price optimisation system- This system is used to analysis the cost by using mathematical analysis. It help to determine the response of the customers at different price. It also used to determine the price that the company determines will best meet its objectives for maximizing their operating profits.

P2 Different method which are used by Her Co. Ltd. In management accounting reporting system

Accounting report helps to the company in order to record various kinds of financial transactions and informations in structured and proper way. Further, when all the financial data are in a structured form then it highly able to determine position of it in overall plastic industry. When there are all the small reports are gathered by manager then it able to prepare different financial statements (Kaplan and Atkinson, 2015). Moreover, methods and reports prepared by Her limited for management accounting reporting are described as below:

  • Payroll report: The report where different kinds of expenses related to the paying, wages and salary of employees are recorded is known as payroll report. Here each and every costs and expenditures which are associated with the people and worker of Her limited are to be recorded. With this it able to determine total cost of employees and included in income statement of Her company limited.
  • Job cost report: Another kind of accounting report is job cost where expenses related to each and every stage of production and operation process are to be recorded and analysed. With help of such report Her company is easily able to know that at which stage or phase costs are higher or lower. When there are level of expenditures are higher in a particular stage then management take corrective actions (Fullerton, Kennedy and Widener, 2013). Total expenses of job cost report are to be treated in the expenses side of profit and loss account as a manufacturing or production costs.
  • Budgeting report: The report where various kinds of financial data are forecasted by the management of Her limited on the basis of analysing past financial performance in the plastic sector. The company able to determine that in the future accounting periods financial performance will be whether increase or decrease. In context to this, when net cash balance in cash budget is higher, then it is good for the firm. On the other hand, when level of net cash balance at the end is poor then it able to make or formulate strategies according to the respective situation.
  • Report of sales and revenue: Apart from the above analysed accounting reports other is related to sales and turnover generated by Her limited within an accounting year. It is base of key financial statement such as profit and loss account. If there are sales or revenue is not available then business entity cannot prepare income statement and balance sheet as well. It included various kinds of cash incomes which are arises in the firm and helps to calculate financial ratios (Schaltegger, Gibassier and Zvezdov, 2013). In this any kind of expenses are not deducting due to which it is base of calculating net profit at the end of a financial year.
  • Report of manufacturing: Other type of report is for the manufacturing where financial transactions are recoded which are related to convert raw materials into finished goods. In this different expenses which are used in the manufacturing process are recorded and at the end of year treated in the profit and loss account of Her company limited. Along with this, manufacturing report includes total number or level of outputs.

TASK 2

P3 Calculation of net profit with the help of marginal and absorption costing

The statement which helps to the company in order to determine profitability position is known as income statement. Here all kinds of incomes, revenue as well as all the expenses are recorded and financial outcome is identified as a net income. Different methods and approaches are used by Her company limited in order to calculate net profit and prepare income statement (Aksoylu and Aykan, 2013). The approaches are such as marginal and absorption costing which are stated as below:

Profit and loss account or income statement on the basis of marginal costing:

marginal costing

Profit and loss account or income statement on the basis of absorption costing:

absorption costing

Interpretation

From the above tables it can be depicted that both the income statement shows different value of net profit at the end of an accounting period. As per the marginal method of costing net income is generated worth of £12600 which is higher as compare to another method. Level of total expenses of production is worth of £1800 in the marginal costing while as per the absorption method of costing total expenditures on production process are worth of £5100. It can be analysed that net income at the end of year as per absorption method is worth of £9300. There is a huge difference between profit and expenses of both method because both considers different kinds of expenses. Marginal approach takes all the variable as well as direct expenses in order to determine net profit of Her limited. On the other hand side, absorption costing considers direct, variable, fixed and all costs which are comes into existence in business. Due to this reason level of net profit differs from each other.

Difference among marginal and absorption costing methods

Marginal costing approach

Absorption costing approach

The method of costing for determine net income is marginal which takes all kinds of variable as well as direct costs for analysing net profit at the end (Jacobs and Cuganesan, 2014).

The method of costing absorption consists all the costs and expenses which are incurred directly or indirectly in production process.

The method is less reliable and used by Her Limited company because here the firm unable to cover all the costs.

On the other side, absorption costing method is used by most of the companies due to including all the costs. Here it able to recover all the expenses by which actual profit is to be calculated.

Various kinds of costs and expenditures incurred in such costing method are such as follows:

  • Direct labour
  • Direct material
  • Variable expenses etc.

List of costs and expenses which are used in absorption method are is such as follows:

  • Direct labour
  • Direct material
  • Variable expenditures and costs
  • Fixed overheads
  • Selling and distribution expenses
  • Administration costs etc.

Level of net profit is higher and expenditures are lower in such kinds of approach of marginal costing.

In the absorption costing approach, net profit lower and total expenses are higher as compare to marginal costing method (Ball, 2013).

TASK 3

P4 Advantages and limitations of various planning tools which are helpful for budgetary control

Plan is a very important and useful aspect of every business organisation which helps in its smooth functioning up to greater extent. With the help of planning Her Co. Ltd able to make different strategies in order to meet with goals and objectives. There are various kinds tools and techniques are available with the organisation which helps to make effective plan which are delineated as below:

Capital budgeting methods:

The methods and tools by which management able to take investment decisions from two or mutually exclusive criteria are identified as a capital budgeting techniques. It shows viability of one project between two or more simultaneous projects and helps to Her company to become higher financially sound. As per the methods the company can take effective investment decisions and generate higher level of return (Muniz K., 2013). Different kinds of tools used in such technique which are like as net present value, internal rate of return, average or accounting rate of return, payback period, profitability index etc. Among all of these net present value is highly reliable and provide effective investment decisions. Hypothetical example of some capital budgeting tools are such as follows:

Internal rate of return

Year

Cash flow

Investment

-56000

1

15640

2

24670

3

29820

4

41890

5

46530

IRR

38.41%

Average or accounting rate of return

Year

Cash flow

Investment

-56000

1

15640

2

24670

3

29820

4

41890

5

46530

Total

158550

Average

31710

Investment

56000

ARR

56.63%

Both the above table shows that initial investment provides IRR and ARR are such as 38.41% and 56.63% respectively which are higher return. Further, the company put sum of money in such investment criteria.

Advantages:

The capital budgeting methods are very helpful for Her limited in order to effectual business decisions. Internal rate of return consider time value of money, cash flow of every year as well as number of years by which it able to gives better decisions. In case, when the company has two or more simultaneous project then with the help of such capital budgeting method it able to make comparison between them (Burritt, Schaltegger and Zvezdov, 2011). By comparing two or more investment avenues the management is highly able to analyse that which one will provide higher return at the end of project life.

Disadvantages:

However, cost of capital remains same for every year while doing calculation of investment up to end of life of project. Further, as growth rate of economy and inflation rate fluctuates then cost of capital also affected. At that time investment decisions get hamper and Her Limited cannot earn return which is calculated earlier. Apart from this, such tools are not providing short term decisions for making an investment. These gives long term decisions and company cannot make effective decisions in business entity.

Budget:

Another planning tool which helps to control over the disposals and cash flows is budget. It is the most helpful, widely used and reliable tool for making effectual financial plan to generate higher sales and revenue. In reference to this, Her limited is easily able to estimate future data and informations related to financial of the company by taking base of past accounting periods (Fullerton, Kennedy and Widener, 2014). When the firm can know that in future how much profit it will generate then able to take corrective actions in case of finding negative returns. Various kinds of budget statements are prepared by Her limited business entity which are like as cash, production, material purchase, sales etc.

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Furthermore, with the help of cash budget Her limited company able to determine future incomes as well as financial disposals in business process. If the enterprise not able to earn more profit, then it able to take corrective actions by formulating effectual strategies. Moreover, production budget provide informations related to level of output that in the current and future year how many units are to be produced. Sales budget gives data related to the number of units needs to be sold at the particular prices and charges. By this, Her limited can determine that specific amount of revenue must be generated from business process in next year.

Some advantages, benefits as well as limitations of budget are analysed as below:

Benefits:

Very primary advantage of the budget tool is to estimate or forecast various kinds of informations and data related to the financial position of business entity (Herman, 2011). When the company determine that in the future what will be situation then can take corrective actions for overcome negative results. In context to this, by using budget Her limited enterprise able to manager various risks and obstacles occurs related to return and financial items. On the basis of budget Her limited highly become able for reduce and control those expenses which are useful and hamper profitability of it.

Limitations:

On the contrary of benefits, budget has different kinds of limitations by which effective business decisions is affects in negative way. It is to be prepared based on past financial informations and data and in reality it is not necessary that growth rate will be same. For this highly qualified and skilled financial employee has to appoint who taking higher charges of his services. Further, profit level of Her limited gets reduce in the overall plastic industry. Apart from this, it is a very lengthy process as well as highly time consuming which lead to reduce efficiency of individuals.

Financial ratio analysis:

Apart from budget and capital budgeting techniques another important planning tool is financial ratio analysis which is used by Her limited. This technique or tool for making financial plan helps to the selected company in order to determine performance of the entity in terms of financial in the overall industry (Jarzabkowski and Kaplan, 2015). Calculation of different financial ratios are to be completed with the help of data provided in various financial statements. By this it able to know level of profit, efficiency as well as liquid position of Her limited in smooth way. By computing such ratios if it found that firm not able to perform well in the industry then it will take actions against it and make effectual business strategies. Various kinds of financial ratios are to be calculated by using financial statements are given as below:

  • Profitability ratios: Net profit, operating profit, return on investment, gross profit ratio etc.
  • Liquidity ratios: Cash ratio, current and quick or acid test ratio.
  • Efficiency ratios: Stock, fixed assets, total assets turnover ratio etc.
  • Gearing ratios: Debt to equity ratio, interest coverage ratio etc.

Advantages:

Key benefit of financial ratio analysis is to interpret financial statements and determine performance of Her limited in overall plastic industry. By this management of entity able to assess that company is financially sound or not and up to which level. If it is not performing well then make strategies which helps to attract higher number of customers and increase profit level at the end of year (Hammad, Jusoh and Yen Nee Oon, 2010). It is very necessary that firm has higher liquid position which is to be derived by financial ratios. In addition to this, strengths and weaknesses in term of finance of Her limited company are to be analysed by the respective planning tool.

Drawbacks:

Financial ratios are to be computed with help of different financial statements and in these adequate data are not available by which performance of entity is not analysed properly. The respective tool is one type of quantitative approach and it ignores all the techniques of qualitative approach by which reliable data are not determined. Furthermore, only one or two financial ratios are not enough to interpret financial performance and make effectual. Management needs to calculate all kinds of ratios which are very time consuming.

TASK 4

P5 Assessing adoption of different management accounting systems by Her Co. Ltd in order to combat shortfalls

At the business environment there are different kinds of problems and obstacles occurs which affect to the financial performance of entity. Different kinds of financial problem comes into consideration at the workplace such as Her limited and in order to reduce such problems different management accounting systems are applied (Weißenberger and Angelkort, 2011). The systems and approaches are analysed as below:

  • Transfer pricing: It is term where company exchange goods and services from parent to subsidiary firm where prices of such products and services are lower as compare to external market. When Her limited purchases services or products as a raw material and unprocessed goods from parent company then it has to pay lower prices in comparison to market. With the help of such accounting system total cost of production reduces which lead to make the firm more financially sound. Hence, problem of enhancing costs and expenses reduces by which it able to charge low prices and attract more number of customers.Transfer of prices make the fairness and accuracy of information, sop that it can represent the positive situation of a company. To transferring then price, it required the complete documentation process, so that all the data which recorded related to the transferring of price is reliable and based on recurrent position of a company. So that transfer pricing plays an important role to identify the financial problem in an organisation.
  • Accounting system of lean: The aspect lean is known and applied in the production process in order to reduce and eliminate wastage products and services. Further, when such kinds of goods eliminated then level of quality affects in highly positive way. Due to this reason, more number of consumers attract and it able to become financially strong. Apart from this, in the production and operation process various kinds of extra and miscellaneous expenses are incurred which can be reduced by using lean accounting approach in Her limited entity (Burritt and et.al., 2011). It can be said that the company will gain competitive advantage by providing better quality and differentiate products to the consumers.It helps that manager that collect the information and check that such information is based on time or not. Lean accounting also make the decision of manager faster and accurate, so that it is beneficial for the company. In this way, lean accounting help to identify the financial problems like availability of fund in an organisation and help to improve the efficiency of an organisation.
  • Control over the budget: Budget shows future financial incomes as well as expenses which will be incur in current and future accounting periods. By this the company can know lack of terms expenses which are in-useful and unproductive for Her limited. Further, total expenditures of production and operation reduces and helps to the entity in order to provide goods to customers by charging lower prices than its competitors. Hence, it can be said that by using budgetary control Her company limited can control over the expenses and reduce financial obstacles.
  • Process costing: According to the process costing system of management accounting Her limited is highly able to determine every information and financial data related to every activity of operation process. By this it can know problems which are associated with the each and every stage of operation process (Håkansson, Kraus and Lind, 2010). Moreover, financial obstacles related to the production process are to be reduced and properly up to higher level.
  • Cost Accounting- Cost accounting is an importance part or element of an organisation to find out the financial problems. In RL Maynard company, many mangers can use the cost accounting to estimate the cost of unit of each products. To preparing the income statements manager need various costing methods such as marginal costing techniques. absorption costing methods. So that they can assess the cost of product and after that they prepare a budget which are beneficial for the organisation's growth. Cost accounting also help to proper utilizing the resources so that there are no chances of wastage of cost. In this way, to solving the financial problem by using costing method, managers need to make proper plan and setting the appropriate procedure and rules, after that by following right decision-making process manager can estimate the cost of each unit in an organisation.

Conclusion

It can be depicted from the above carried out analysis that accounting is key aspect of business entity such as Her Company Limited which helps to make it highly profitable. There are various kinds of systems and approaches of management accounting requires for the company in order to resolve various financial problems. It can be said that different management accounting systems by which financial obstacles resolve are like as process costing, lean accounting, budgetary control, transfer pricing etc. Further, it can be concluded that net profit on the basis of marginal as well as absorption costing approaches are such as £12600 and £9300 respectively. At the last it can be summarized that various planning tools such as budget, financial ratio analysis and capital budgeting techniques are helps in budgetary control at the workplace of Her Company Limited.

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