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Management Accounting

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Report on Management Accounting

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Introduction

Management accounting is the vast domain that is often used by the managers to take cost control related decisions. In the current report, various management accounting systems that are used by the firms on large scale are defined. Along with this, in the report, management reporting systems are discussed in detail. In this regard, varied ways of reporting like budgeting and accounts receivables are explained. Along with this, the difference that exist between marginal and absorption costing are discussed briefly. At end of the report, varied management accounting systems are compared with each other and best one for the firm is identified.

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TASK 1

P1 Explain management accounting and requirement of different management accounting systems

Management accounting is the one of the branch of accounting that is used by the managers to make business decisions. Cost have a paramount importance for the corporate in respect to improving performance and resuscitating firm when it is continuously facing loss in the business. There are number of tools of the management accounting that are used by the managers to make business decisions. Some of these tools are budget and variance analysis etc. All these tools help managers in evaluating business performance in different ways in terms of cost control of the business (Abdelmoneim Mohamed and Jones, 2014). There are different management accounting systems that are used by the business firms. Management accounting system is basically a mechanism that is followed to record each and every things that is related to cost. In current era, most of business firms are competing with each other in terms of cost. This is because most of the people are price conscious in nature and those wants to buy a products at cheaper price and of good quality. This acts as an opportunity for the business firms because by making available product at much cheaper price firm is successfully creating its positive image among the customers. This lead to enhancement of revenue in the firm business. There are many cost control methods that are used by the business firm to control cost. Some of these methods are process reengineering (Schaltegger and Burritt, 2010). Under this method entire business operations that are related to the manufacturing process are evaluated and then activities whose cost is high is simplified and by doing so cost is reduced. By using management accounting system costs are recorded in systematic way by the business firm varied management accounting systems are explained below.

Cost accounting: Cost accounting is the one of the most important accounting system that is quite popular among business firms. This is because in the cost accounting specific approach is followed to record all expenses in the books of accounts. It must be noted that like other domain in the cost accounting management approach there are some principles that are followed in order to perform all operations under the mentioned accounting system. Cost accounting is basically used to predict the trend in respect to cost that are incurred by the firm in its business. Like other management accounting system there are some requirement of the mentioned system. Under this management accounting system facts and figures that are related to varied business cycles is gathered. Analysis of data reflected the changes that comes in the cost during different business cycle of the business (Roslender and Hart, 2010). By analyzing the data business firm can identify the phases of business cycle when cost skyrocketed and remain out of control. Business firm on the basis of analysis of data can easily identify the ways that can be followed to control cost. Thus, it can be said that there is a huge importance of the mentioned cost accounting system.

Job order: Like other accounting systems job order is another most important accounting system which is used by the firms in their business. Under this job order accounting system a document is prepared in which cost of different products that are produced on order of customers is determined. By using relevant data cost for varied products that comes in the firm product line is computed. Job order costing is also used when firm is operating different projects in its business. The main need of the job order costing system is that under same there is a requirement of gathering facts and figures on daily basis (Youssef, 2013). This is because goods on order to customer is prepared on daily basis up to specific time period.

Process costing: Process costing is another accounting system that is given due importance by the managers. It must be noted that every product is produced under different phases and there is cost of performing each process. Due to this reason in the process costing method cost for each phase of production is computed separately and then same are combined in order to identify the overall cost of product. Process costing is the management accounting system that is used by each and every type of the business firm. The main requirement of the process costing method is to list all sub activities that are performed under specific stage of process. Separate employees are employed for each stage of process for recording expenses on daily basis. By doing so it is ensured that cost of each stage of process will be done in proper manner.

Throughput accounting: It is the new and different accounting system. This management accounting system was propounded by the Goldratt which was the well-known businessman of the Israel. Mentioned entity is credited for transformation of the old management accounting system in to new system which is used for recording of expenses (Macinati and Anessi-Pessina, 2014). The main aim of throughput accounting system is to control expenses and enhancing wealth of the business firm. Main requirement of the throughput accounting system is to gather an information about constrains that are in respect to goals and objectives of the business firm. By taking some steps constraints are removed by the business firm.

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P2 Different methods used for management accounting reporting

Business decisions are taken by the HER Co Ltd which is a shoe manufacturer on the basis of available facts and figures. There are different sort of reports that are prepared by the business firms. Some of them are given below.

Budget report: Budget report on large scale is used by the business firms to evaluate their performance. The main objective of the business firms is to control expenditures in the business. Budget is the tool that is used by the firm successfully to control expenses in the business. In the budget report actual expenses that are made by the firm in the business are reported and along with this standard that were determined by the business firm are also reported in the management accounting report. In the budget report comments are made by the managers about the firm performance in terms of cost control. The areas where performance was poor is identified and communicated to the managers in the report. Further, the reasons due to which such variance comes in existence are also identified and communicated to the managers (Jakobsen, 2012). It can be said that there is a great importance of the accounting reporting for the business firms. It is very important for the managers to review time to time budget reports. This is because by doing wise decision in respect to cost control can be taken by the business firm.

Accounts receivable aging: It is another report that is prepared by each and every business firm. This is because in this report the amount of debt that is given by the firm to its customers is reported on monthly basis. Extent to which business firm give debt to the individual entity and payment received from same is also reported in the accounts receivable ageing. Through this report management comes to know about the bad debt amount that can be observed in the books of accounts (Ossadnik and Kaspar, 2013). Cash management strategy is also prepared on the basis of accounts receivable ageing report. This is because mentioned report reflects whether firm will be able to cover debt amount or debt is extent within the specific limit. If same does not happened then in that case on time managers formulate risk management strategy to handle situation and ensure that there will be less debt and less amount of cash will be blocked in receivables. This lead to availability of huge amount of cash in the business.

Job cost report: Job cost report is the approach of management accounting and under this expenses of different jobs and production activities is recorded in the single document. Same is used to prepare the report. Through job cost report managers comes to known about the costing of different jobs or product lines. They take some steps to reduce cost in respect to product line where cost is every high and new to be controlled. One also come to know about the profitability of the product lines through the job cost report. Thus, comparison of the cost and profit of the product line give better over view to the managers and they successful take prudent decisions to improve business performance. Thus, manager obtain profit profile of each and every product line separately from the job cost report.

Inventory and manufacturing: Inventory and manufacturing report is prepared by the management accountant on daily basis. Inventory report reflects the inventory that was in the previous month and currently firm have in the workplace. Lots of statistics related to inventory are available from the inventory report in terms of amount of inventory purchased by the firm in specific month and remain in hand at end of the relevant time period (Speckbacher and Wentges, 2012). Goods unsold at end of the duration and units of same produced in the specific month is also recorded in the inventory report. This reflects the amount of cash that is blocked in the unsold stock. It can be said that inventory report give better overview to the managers in respect to the way in which inventory is managed and mistakes that are made by the firm in terms of placement of order for purchase of raw material. Moreover, excess units that are produced by the firm in comparison to demand is also revealed by the inventory and manufacturing report and its impact on the firm performance is also reported in the mentioned report. Hence, it can be said that there is significance of the inventory and manufacturing report.

TASK 2

P3. Calculation of net income with the help of marginal and absorption costing method

Profit is the one of the important parameter that is used to measure success or failure of the business firm. There are different approaches in the management accounting that are used to compute profit like marginal and absorption costing method. There are totally a different approach that is followed in the marginal and absorption costing method (Banker, R.D. and et.al., 2014). It must be noted that in the marginal costing method only variable expenses are taken in to account. But in the absorption costing method fixed and variable expenses are taken in to account in order to compute profit. Calculation of profit by marginal and absorption costing method are explained below.

Use of marginal costing method to compute net profit.

Table 1: Income statement according to marginal method of cost

Use of absorption costing method to compute cost

Table 2: Income statement according to absorption method of costing

As mentioned above different amount of costs are taken in to account in order to compute profit in the marginal and absorption costing method. Due to this reason different amount of profit is computed in the marginal and absorption costing method. On review of table it can be identified that in the marginal costing approach profit is valued at £12600. On other hand, in case of absorption costing method profit value stood at £9300. On comparison of these figures it can be said that marginal costing method reflect the higher amount of profit then absorption costing method. There are some reasons due to which under both approaches different amount of profit is computed (Moorthy and et.al., 2012). One of the main reason is that in marginal costing method only variable cost is considered. Variable expenses are those that keeps on changing consistently and never remain same. On other hand, in case of absorption costing method variable and fixed expenses are considered. Fixed expenses are those that remain static and remain unchanged. Thus, HER Co Ltd must try to control its variable expenses because by doing so it can reduced its expenditure and can increase profit amount under fixed and marginal costing method. Expenses in case of marginal and absorption costing method valued at £1800 and £5100. This reflect there is a difference of £300 between costing value that is computed by using marginal and absorption costing.

Differentiate between marginal as well as absorption costing techniques

Marginal costing technique

Absorption costing technique

Marginal costing method refers to variable expenses that are taken in to account to compute cost of the product (Chi, and et.al., 2011).

Whereas, in the absorption costing method both fixed and variable expenses are taken in account.

Material and labor expenses are the major component of the marginal costing method.

In case of absorption costing method major elements are variable expenses and fixed cost like purchase of land and building.

PV ratio which is also known as profit volume ratio is employed to measure the profit under marginal costing method.

In relevant method simple fixed and variable expenses are added and same is deducted from revenue to compute profit.

 

In the relevant approach inventory of the current value is not recorded in the next year financial statements.

In the relevant method inverse happen and inventory of previous year is transferred to current year financial statements (Aksoylu. and Aykan, 2013).

TASK 3

P4 Benefits and drawbacks of different kinds of planning techniques

There are number of planning tools that are used by the firms in their business. It is very important to do proper planning in any business. This is because if proper planning will not be done in the business then in that case effective use of resources cannot be made by the firm in its business. Some of the important planning tools are budget, ratio analysis and project evaluation methods. Budget is the statement under which projection is made about likely amount of cash inflows and outflows and on that basis surplus or deficit in the amount is identified by the business firm. Some planning tools and their merits and demerits are explained below.

Budget

Budget is prepared by the every firm in order to allocate fund among varied business activities in systematic way (Gordon and Fischer, 2011). There are different type of budgets that can be prepared by the business firm like zero based budgeting and incremental budgeting. There are some merits and demerits of these budget methods. Some merits and demerits of the budget are explained below.

Table 3Cash budget

 

March

April

May

June

Opening balance

60000

24700

29400

27300

Sales

10000

22000

24000

26000

 

70000

46700

53400

53300

Expense

       

Purchase

1300

1300

1400

1500

Salary

4000

5000

5000

6000

CAPEX

40000

0

8000

0

Creditors

0

11000

11700

12600

Total

45300

17300

26100

20100

Net balance

24700

29400

27300

33200

Merit

  • Main merit of the budget is that it help business firm in controlling expenses in the business. Thus, cost control is done effectively by using budget.
  • Funds are allocated among varied sources in proper manner. Thus, budget ensured that prudent use of funds will be made in the business (Pollanen and Abdel-Maksoud, 2010).
  • In balanced manner expenditures are made by the firm in its business.

Demerit

  • Main limitation of budget is that too much time need to be spend to determine value of each and every component of the budget. Thus, lots of time is wasted on preparing a budget (Cash budget, 2017).
  • The other main limitation of budget is that if wrong estimation will be made about the business environment then in that case wrong values will be predicted for the components of the budget.

Ratio analysis

Gross profit

19000

Net sales

27000

Gross profit ratio

70.37%

   

Net profit

5000

Net sales

27000

Net profit ratio

18.52%

   
   

Debt

15000

Equity

41000

Debt equity ratio

0.37

   

Current assets

14000

Current liabilities

16000

Current ratio

0.88

Merits

  • Main merit of the ratio analysis is that by using same firm performance is measured. Condition of the business firm is measured and evaluated by using mentioned method. Thus, ratio analysis help business firm in identifying the strong and weak factors of its business.
  • The other main merit of the ratio analysis is that anyone can apply the ratio analysis method to evaluate firm performance in systematic way.
  • Investors take investment decision on the basis of results of ratio analysis and this reflect that there is great importance of the relevant method.

Demerit

  • The main demerit of ratio analysis is that in order to evaluate firm performance standards are determined. When economic conditions are not stable by using standards firm performance cannot be measured accurately. Thus, it is major limitation of ratio analysis method.

Project evaluation method

Table 4 Payback period method

 

Project A

 

Project B

 

Initial investment

 

-8000

 

-9000

1

1700

-6300

1700

-7300

2

1900

-4400

1900

-5400

3

2300

-2100

2200

-3200

4

2500

400

2500

-700

5

2700

3100

2700

2000

Table 5Calculation of ARR

 

Project A

Project B

Initial investment

8000

9000

1

1700

1700

2

1900

1900

3

2300

2200

4

2500

2500

5

2700

2700

Total

11100

11000

Average

2220

2200

ARR

27.75%

24.44%

Table 6Calculation of NPV

 

Project

PV @ 10%

Present value

Project B

PV @ 10%

Present value

Initial investment

8000

   

9000

   

1

1700

0.909

1545

1700

0.909

1545.45

2

1900

0.826

1570

1900

0.826

1570.25

3

2300

0.751

1728

2200

0.751

1652.89

4

2500

0.683

1708

2500

0.683

1707.53

5

2700

0.621

1676

2700

0.621

1676.49

Total

   

8228

   

8153

NPV

   

228

   

-847.38

Table 7Calculation of ARR

 

Project

Project B

Initial investment

-8000

-9000

1

1700

1700

2

1900

1900

3

2300

2200

4

2500

2500

5

2700

2700

IRR

11.02%

-2.97%

Merits

  • Main merit of the project evaluation method is that by using same best option can be selected by the business firm.
  • The other main merit of the project evaluation method is that it reflect value of the project in respect to the current time period.

Demerit

  • Calculation process is very tough in case of project evaluation method and everyone cannot do calculation of mentioned tools accurately.

P5 Comparing different management accounting systems for overcome financial problems

On comparison of different management accounting systems it can be said that process costing is the one of the best option. This is because in the process costing method cost of different stages of production is computed and in this way all expenses are recorded in systematic way by the business firm (Anandarajan, Anandarajan and Srinivasan, 2012). Thus, cost of production is computed accurately by using process costing management accounting system. Cost accounting is also one of the most effective cost accounting system. This is because in this costing system by considering business cycle prediction are made about costing of product and by using same performance of the firm is measured in the proper manner. It can be said that both management accounting systems are equally effective. This is because in one management accounting system simply by using process overall cost of production is accurately estimated. Whereas, in other accounting system better prediction and cost management is done. Thus, there is great importance of the management accounting system for the business firm. Throughput accounting system is another alternative that firm is having. In comparison to other accounting system this method is slightly more effective. This is because in this management accounting system main stress is laid down on the constraints that are related to reduction of cost. Thus, in the mentioned cost accounting system cost is not only recorded and computed but also ways are identified to eliminate same.

Conclusion

On the basis of above discussion it is concluded that management accounting systems are different from each other in terms of the approach that is followed to record expenses in books of accounts. Firm at its own discretion can use any management accounting system and it depends on the positive and negative points of the relevant systems. There are different management reporting system and all of them have significant importance for the firm. Thus, all of them must be used to make better decisions. It is also concluded that there are many planning tools that can be used by the managers to make business decisions. All these planning tools have some merits and demerits and due to this reason same must be carefully used by the business firm.

References

  • Abdelmoneim Mohamed, A. and Jones, T., 2014. Relationship between strategic management accounting techniques and profitability–a proposed model.Measuring Business Excellence.18(3). pp.1-22.
  • Aksoylu, S. and Aykan, E., 2013. Effects of strategic management accounting techniques on perceived performance of businesses.Journal of US-China Public Administration.10(10). pp.1004-1017.
  • Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds., 2012.Business intelligence techniques: a perspective from accounting and finance. Springer Science & Business Media.
  • Banker, R.D. and et.al., 2014. The moderating effect of prior sales changes on asymmetric cost behavior.Journal of Management Accounting Research.26(2). pp.221-242.
  • Chi, W., Lisic, L.L. and Pevzner, M., 2011. Is enhanced audit quality associated with greater real earnings management?.Accounting Horizons.25(2). pp.315-335.
  • Gordon, G.A. and Fischer, M., 2011. Accounting strategy to improve public higher education management.Journal of Accounting and Finance.11(3). p.11.
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