Management accounting is crucial to determine various aspect of business which has a impact on profitability and production. The report will cover management accounting importance and its essential requirements. Management accounting reports to make decisions and income statement using absorption and marginal costing system will be discussed in this report. Finally, the report will demonstrate budget preparation process and techniques to respond financial issues within Tech.
P1 Management accounting and the essential requirements of management accounting system
Management accounting: Management accounting is important for Tech managers in order to acquire financial and non-financial information regarding various business operational activities in order to increase the profitability and production. The system also works as a decision making tool for managers as it utilises information, cost techniques and data analysis in order to make effective decisions regarding operations. The system helps to determine performance level and metrics as well as provide information to compare various department performances with business expectations effectively (Jones, 2015). It is a process of identifying, evaluating, measuring, analysing and interpreting financial information in the pursuit of Tech objectives and goals. Management accounting reports will help managers to establish day to day and short decisions by providing accurate financial and statistical information.
Difference between management and financial accounting
Management accounting provides useful and important information regarding business activities in order to make manager’s decisions more effective.
Financial accounting will help to collect financial information of business and prepare statements that help to take financial decisions.
Monetary and non-monetary information.
Only monetary information.
Management accounting reports are made by managers according to the needs and requirements.
Financial statements and reports are made at the end of accounting year effectively.
Detailed, accurate and complete information are provided by management accounting reports.
Financial information of business resources and activities is considered by financial statements.
Cost-accounting system: Cost-accounting system will help managers in Tech to determine cost of products and services offered in the market towards customers effectively. This will include normal, actual and standard costing. The cost of various resources will help managers to make strategies and plans in order to manage profitability and production. For an example, costs for inventories, management and strategies. This will also help to take benefits of future advantages by managing a specific part of savings. This will be done by reducing extra costs from resources (Labro, 2015).
- Cost-accounting system will help Tech managers by providing actual selling cost of products and services.
- Evaluation of profitability is done by cost-accounting system to meet with the competition.
- It will also help to make effective decisions to manage and control the costs of different resources.
Inventory management system: Inventories for business are raw materials, work-in-progress and finished goods. In addition to this, various items or resources used in production process are also included in inventory management. Inventory management system will help managers to determine the quantity of stock available in storage and quantity required for production. Management of inventories will reduce the extra costs and expenses such as capital, transportation, facility and insurance costs.
FIFO is an acronym for first in, first out, a method for organizing and manipulating a data buffer, where the oldest (first) entry, or 'head' of the queue, is processed first. (LIFO) is an asset management and valuation method that assumes assets produced or acquired last are the ones used, sold or disposed of first.
PERPETUAL INVENTORY- it is a method which helps to towards accounting of inventories which record sales and purchase of inventories using computerised point of sale system effectively.
Periodic inventory is a system in which inventory updates are made on a periodic basis effectively.
- Inventory management system helps Tech managers to protect against shortage of resources, materials and uncertainties effectively.
- The system supports strategies and plans to take advantage of economic scale.
Job costing system: Job costing system is a method of cost recording and accumulation in which Tech managers are able to determine the cost of present work which can be easily controlled and managed while work is in progress. This will also help to assess manufacturing costs for an individual product (Burritt and Christ, 2017). The job order costing system is used only when the products manufactured are different from each other’s effectively. For an example, direct labour.
- Job costing system will help to establish the cost of decision-making, planning and controlling.
- This will help the managers to evaluate selling cost of products and services to determine profitability.
P2. Financial information
Management accounting reports will help managers by providing useful financial and non-financial information regarding business resources. Different types of managerial accounting reports are discussed as below:
Operating budget reports: Operating budget reports will help to determine performance of different departments in business in order to compare the estimated and budgeted projections with the actual performance number achieved during a period. This will help to manage and control operational activities to enhance its effectiveness which increase profitability and production effectively (Kaminska and Kolesnikova, 2014). This will also help to provide rewards and incentives for the best performance at workplace which motivate other employees to work hard.
Accounts receivable ageing reports: It can be described as a critical tool which breaks down customer’s balance and manages cash flow activities within Tech effectively. Such reports help managers to determine that invoices are overdue for the payments. In simple words, managers are able to identify previous debts by managing accounts receivable ageing reports. This will help to enhance the working capital and cash for business.
Inventory management reports: Such reports will help Tech managers to control various levels of inventories in order to keep the records effectively. Quantity of stock available in storage and quantity required for production is also determined by the managers by preparing inventory reports. This will help managers to drive productivity and profitability in order to achieve the desired goals and objectives efficiently.
Performance reports: Performance report is an overview of overall performance managed by employees and other members at workplace. This will help the managers to evaluate and determine performance level, skills and knowledge of workers in order to manage training and development programs accordingly. This will provide the benefits to workers to achieve individual goals and objectives to receive rewards and incentives effectively.
Job cost reports: It can be said that job cost reports provide cost of work or project performed by employees within Tech. This will help to identify the work done by employees according to their task that is usually combined with estimated revenues effectively. The reports will also provide cost of work while it is in progress which helps to make changes in order to keep profitability up (Kaminska and Kolesnikova, 2014).
It is important for the information to be presented in a manner that must be understandable in order to make decisions regarding financial and non-financial activities in Tech which helps to improve efficiency of operational activities. This will also help managers to make strategies and plans that help to enhance production and profitability. The main role of management accounting system is to provide complete information regarding business that help managers to take decisions for each department to increase effectiveness (A Adams, Muir and Hoque, 2014). The information presented in an understandable manner will help managers to evaluate factors affecting business activities in order to reduce them and increase efficiency of operations and employees effectively. This will help managers to control various resources that help to achieve both individual and organisational goals and objectives. Thus, it can be said that management accounting and reports are important for Tech managers to determine information regarding operations to make strategic changes that help to improve the productivity and profitability of business.
There are many advantages of management accounting system as these help to enhance the efficiency of firm, increase bar of profitability, make decision making simple for managers, cost transparency, freedom and flexibility as well as to assist in goal completion such as objectives and targets effectively.
Management accounting system and reporting; both are crucial for Tech and have their own importance. The system works as a decision making tool for managers that it utilise information, cost techniques and data analysis in order to make effective decisions regarding operational activities (Farewell and Pinsker, 2015). In addition to this, management accounting reports provide useful financial and non-financial information regarding business resources.
P3 Income statement
It can be concluded from the above table analysis that marginal and absorption costing methods are used by managers in order to calculate net profit amount effectively. Both methods are showing different amount that marginal costing method is showing 4625 and absorption is showing 22125. There is a slightly difference between these two methods that marginal costing system includes only variable expenses in order to calculate the net profit amount. Apart from this, absorption costing method takes variable and non-variable expenses to calculate actual net profit amount effectively. In respect to this, it is crucial to evaluate and determine what is expenses and their types.? Expenses are divided in three parts such as variable, fixed and semi-variable. Fixed expenses are those which is fixed for the business such as salary paid to employees and managers is a fixed cost for Tech in order to run business smoothly and effectively. In addition to this, variable expenses are those which changes consistently according to the demand and requirements such as raw material from suppliers etc. The firm should determine all the expenses in order to calculate net profit amount that helps to measure profitability and production (Tanc and Gokoglan, 2015). Semi-variable expenses are those in which some part of expenses remains same and some changes consistently. The business and manager should use both methods that both are important to calculate net profit amount effectively.
It can be said that fixed expenses are also not directly connected with production of product and service. Marginal costing system consider only those elements which are used in the production process effectively. In addition to this, absorption method is crucial for managers to determine various expenses to make effective decisions. This will help to improve and develop operational activities which lead towards business success.
P4 Budget for planing and control purpose
It can be said that budget management is crucial for business in order to manage and control cost of various resources used in production. There are five types of budget such as master, operating, cash flow, financial and static budget. These are as follows:\
Financial budget is managed by Tech, managers in order to improve cash revenue and actin plan to be spent as a benefit effectively. There are three types of financial budget described below:
Cash budget: In cash budget, managers are responsible for managing cash activities within business which can be incoming or outgoing effectively. This will help to determine cash availability in order to manage resources accordingly. Cash budget helps to take advantage of future opportunities.
Capital and expenditure budget: The budget create focus on major assets such as machineries, lands, plans etc. The necessary equipments and tools should be used managers which can be done y managing capital expenditure budget (Janke, Mahlendorf and Weber, 2014). The main advantage of this budget is that it is useful for managers and Tech in present and future as well. This will be acquired from long term securities and bonds.
Balance sheet budget: Balance sheet should be equal in terms of liabilities and assets in order to meet all the requirements and demands of budget. This will also help to control and manage budget mesh effectively. This will help to determine current assets and liabilities for business.
Operating budget is a detailed projection of all estimated expenses and income which is based on forecast sales revenues during a specific time period effectively. The budget is settled by managers in order to achieve targets and goals in a particular times period.
Sales and revenue budget: Revenue and sales budget is mainly focused on income which is earned by firm through products and services in the market. The manager should evaluate sales budget in order to keep production and profitability effective.
Expense budget: Expense budget underline the anticipated expenditures in a particular time. The manager should have a effective control on expenses to prepare for future uncertainties and advantages. This will help to increase profitability and production effectively.
Project budget: The project budget is a difference between sales, expenses and profitability. For an example, if the anticipated profits are low for Tech, then manager should implement strategies and plans to keep profits up. This will help to increase sales and reduce expenses effectively.
Fixed and variable budget
Fixed and variable both are different budget that fixed budget is managed to fixed expenses within business and variable budget is managed on the basis of assumptions (Islam, Miah and Fakir, 2015).
Fixed cost: Fixed cost or expenses are those which is necessary and important to run business operational activities. For an example, salary paid to manager and employees is a fixed cost for business. These are the the fixed cost for company which is necessary to run business smoothly and effectively.
Variable cost: Variable costs are those which changes consistently. It can be said that suppliers, raw material prices and production is a variable cost for managers and business that it changes to be more effective in a specific way. Variable costs should be managed by firm in order to manage cash flow effectively.
There are various factors should be considered by managers while preparing budget for all operational activities within firm effectively.
Obtaining estimates: The budget process starts with obtaining estimates which is very important such as department cost, estimate of sales, production cost and resources availability. It is the duty of managers in Tech to provide future estimated for budget which has a impact on business operational activities. Communication in terms of formal and informal should be reported to budget department for an approval.
Coordinating estimates: Coordinating estimates will help managers to make strategies and plans in order to coordinate various estimates and find best between them effectively (Mueller, 2018). This will also help to determine profitability and availability of resources.
Communication: The budget should be communicated to employees and other team members in order to make relevant changes. Workers and other team members will provide suggestion and recommendations to make necessary changes in budget.
Implementing plan: The final stage where the budget is implemented for the first time for business operational activities. This will help to manage cost of various resources under the budget which will also reduce extra expenses effectively.
Importance of budget
Budget is a strategy that helps managers in Tech to achieve financial goals by managing resources and costs under control. An effective budget reduce wastage and make production effective that helps to drive profitability (Tanc and Gokoglan, 2015). Managers are also able to control the coordination of resources in business.
Cost based pricing: Direct cost pricing and full cost pricing are the two basic form of cost-based pricing which will help to manage the products price in order to enhance the profitability. The main advantage of this budget is that it is useful for managers and Tech in present and future as well. This will be acquired from long term securities and bonds.
Cost-plus pricing: The strategy will help to determine cost of direct labours, materials and manufacturing overheads which is added in final price of products and services effectively.
Profit pricing: Profit pricing strategy will help managers to make profits and money from operational activities by making them more effective. For an example, costs related to products such as manufacturing is added to the final price. This will help to improve profitability and production.
Transfer price: In transfer pricing strategy business transact with each other in order to run operational activities such as production. This will be done by suppliers, labours and departments to increase production and profitability.
P5 Management accounting to respond financial-issues
Tech managers should have better control, planning and management of financial and non-financial activities in order to improve and develop cash revenues. This will help business to increase profitability and production which helps to respond financial issues (Farewell and Pinsker, 2015). According to the case study, Tech has a financial loss of £1.5 million. The company is facing financial issues because of ineffective management of financial activities such as cash flows and other expenses. This will affect production process which decrease productivity and profitability for business. Customer relationship management is a easy and effective way from which the managers are able to boost their sales and production which lead towards profits and help to respond financial issues effectively. Customer satisfaction will help to achieve loyal consumers in the market which increase market share. There are different techniques and tools are used to respond financial issues such as Balance scorecard approach, Just in time etc.
Benchmarking: It is a method where organisation compare its present data and information to any other firm from the same sector which helps to determine strategies and requirements in order to increase sales and profitability effectively.
Balance scorecard approach: Balance scorecard approach will help as a performance metric in strategic management in order to improve different internal functions of business and their resulting outcomes effectively. The approach is also used to measure and provide feedbacks to Tech. This will help to manage day to day financial activities from which the manager is able to reduce and respond financial problems efficiently. The traditional method of balance scorecard evaluate the initiative with the help of different perspectives such as financial, growth and learning and process of firm.
Just in time: Just is time is also a effective strategical management which helps managers to increase efficiency of inventory by decreasing wastes and receiving goods that are necessary and important for business production process effectively (Muir and Hoque, 2014). The method will help to forecast demand and reduce inventory costs which helps to respond financial issues by increasing working capital and cash.
Thus, it can be said that there are various methods and approaches available for managers in order to respond their financial issues in business. In respect to this, price optimising, inventory management are some further methods from which the managers are able to increase profitability and production which lead towards effective financial management.
Attributes of products, such as functions, price, quality (derived from Product leadership strategy). Customer relationships (derived from Customer Intimacy strategy).
A business process is a collection of linked tasks which helps to find out the end of the date of delivery for customer towards products and services.
Financial governance: These are the rules and regulations formulated by government in order to ensure all the financial process of businesses.
In addition to this learning and growth will also help to improve financial position by improving profitability and production effectively.
It can be concluded from the above analysis that Management accounting is important for Tech managers in order to acquire financial and non-financial information regarding various business operational activities in order to increase profitability and production. Management accounting reports will help managers by providing useful financial and non-financial information regarding business resources. It is important for the information to be presented in manner that must be understandable in order make decisions regarding financial and non-financial activities in Tech which helps to improve efficiency of operational activities. The business and manager should use both methods that both are important to calculate net profit amount effectively. Balance scorecard approach will help as a performance metric in strategic management in order to improve different internal functions of business and their resulting outcomes.