Introduction to Management Accounting
Management accounting is accounting techniques used to identifying, measuring, analysing, interpreting and communicating information for achieving organisational goals. It is process of analysing interpretation an presentation of accounting information collected with the help of various techniques like cost accounting, auditing, budgeting and in order to assist and help in taking managerial function and help management to take decisions and making plans and policies. So this project is regarding Management accounting reporting Imda Tech Ltd. So in this report function of management accounting, its importance and decision making tool for department manager, different type of management accounting system like cost accounting system, inventory management system, Job costing system and price optimisation system are explained in study. Further income statement is made for Imda tech Ltd. using Absorption costing and marginal costing method and different types of budget and their advantages and disadvantages are explained. The process of preparing budget and pricing strategies, companies balance score card and its effectiveness and development of effective strategies are made.
1.1 Management Accounting definition and difference between management account and financial account
Management Accounting is process of interpreting analysing, presenting of accounts related information and collected with help of Cost and financial Accounting in order to help management in taking decision, making policies and help in day to day operations of running business. As per Institute of management accounting "Management accounting is professions that involve partnership and helps management in decision making, and provide expertise financial reporting and control to assess management in formulation and implementation of organisational strategies".
Difference between management and financial accounting
Management accounting gives information to its employees within its internal management organisation while Financial accounting is made for general outsiders like shareholders and investors.
Law is required in Financial accounting (FA) while Management accounting (MA) not require law. Special formats and standard are set for FA by IAS (International Accounting Standard) in Europe.
FA cover whole organisation while MA may cover departmental function related to cost centric product.
1.2 Importance of Management Accounting for decision making tool for department manage
Small business owner face many decision everyday. Managerial accounting provide data to come on decision of output on basis of decisions which can improve decision making over long term. Imda tech Ltd can use this tool to make their business more successful by understanding how management accounting benefits their business decision process.
Relevant cost analysis
MA information is used by company management to determine what should be sold and how it should be sailed. For ex. a small businessman may be confuse whether he need to focus on marketing activities. To execute this accounting manager analyse the cost that varies between advertising alternative ignoring common cost for each product. This is called relevant cost analysis that taught in management accounting subject.
Activity based costing techniques
Once company made decision which product going to sell, then they decide to whom they sell product. By Using ABC Imda Tech can determine the activities require to produce and service the product line. ABC is costing technique that finds the activity in organisation and assign cost for each activity by using resources in all product and service.
Make or buy analysis
A main use of management accounting is to provide information used in manufacturing. By using this information they can decide the buying cost and compare to manufacturing cost. So if cost of manufacturing is less then buying then they can take decision.
1.3 Different type of Management Accounting System
Cost accounting is process of collecting, record keeping, classify, allocate, summarise and evaluation of various alternative course of action and controlling cost. Main type of costing is used in managemet accounting are
It is used to find value of manufacturing goods with actual cost of material, direct labour cost, and manufacturing overhead. These cost are referred to production cost and used for cost of goods sold for evaluating of inventories
It value the manufactured product with planned material cost, planned direct labour and overhead.
Inventory Management system
Inventory management is direction or supervision of non capitalisation assets , inventory or stock item. Component of supply chain management, inventory management supervises the flow of goods from manufacture to warehouse and from these facilities to pint of sale.
Job costing System
Job costing assigns overhead cost such as depreciation on assets and production equipment t one or more cost methods. At the end of each period the total amount in each cost is assigned to various opens jobs based on some allocation methods that general apply.
It is mathematical tool used by company to know how customer will respond to different price for the product and service through different channel.
In above diagram sales is 1500 unit and per unit coist is 52500. Cost of goods sold are direct material 2000 @8 per unit 16000. Direct labour 2000 @ 5 total 10000. variable production overhead 2000 @ 2 is 4000 and fixed production overhead is 2000 @ 5 is 10000. So gross profit is 12500. Selling and distribution overhead In fixed is 10000 and variable is 52500*15% 7857 and net loss is - 5357
Absorption costing: Absorption costing is type of marginal costing method of expensing all cost associated with manufacturing a particular product and is required for generally accepted accounting principle external reporting. Some direct cost that associated with manufacturing a product include wages for worker physically manufacturing a product and raw material used in producing goods and all of the overhead cost, such as all utilities cost, used in producing the goods as a cost base.
2.2 Marginal costing
Marginal costing is the change in the total cost when the qunatity produced is incremented by one. This is cost of producing one more unit of goods. An increasing and decreasing the total cost of production run making additional unit of an item. It can be computed as situation where the break even point has been reached and fixed cost have already been absorbed by already produced items and only direct cost have been accounted. Marginal costing are variable costing consist of labour and material cost, plus an estimated portion of fixed cost such as administration and selling expenses and overhead. In companies where large cost are fairly constant required heavy capital investment like auto mobiles plants, airlines, mining that have high average cost it is comparatively very low.
In marginal costing after calculating direct material, direct labour, variable production and calculating with Administration and selling overhead like fixed and variable Net profit is gained 4625.
3.1 Different type of Budget and their advantages and disadvantages
Master budget is the aggregation of all lower level budget produced by the companies various functional areas and also include budgeted financial statement, cash forecasting and financial planning for business. It is presented in either monthly of quarterly format and usually cover entire financial year. The budget that include in master budget are Direct labour budget, Direct material, finished good, Manufacturing overhead, production, sales and Administration overhead budgets.
- Functional budget are given in one and available in one report
- It can be checked with cross verification of information in master budget
- It gives overall estimated profit of the organisation.
- It gives information related to forecast balance sheet.
- Time consuming in producing such budget.
- It can not be made if company is small and having small staff.
It is budgeting process under which those people are highly involved who are impacted from budget and with help of them budget is created. So Imda Tech ltd senior managers have more involvement in taking responsibility of departmental budget. This is bottom up approach to budgeting tends to create budget that are more achievable then compared to top down budget that are imposed to achieve target.
Advantages: Increase in productivity, Job satisfaction, Motivation t o employees, Improved quality.
Disadvantages: Make decision making slow down, Securities issue
Zero based budgeting
Is a method of budgeting in which all expenses must be justified for each new period. Zero based budgeting starts from zero base and every function of organisation is analysed for its need and cost. Budget are then made around for upcoming time related to budget is higher or lower compared to previous period. It allows top level strategy to be followed in budgeting process by adding all functional area of organisation.
Advantages of Zero based budgeting
- It is highly useful for non profit or service organisation
- Cost may be saved in inefficient operation
- Though resource is allocated on cost benefit analysis it helps in better utilisation of resources
- It ensures careful planing for utilisation of resources
Disadvantages of Zero based Budgeting
- It is time consuming processors
- In large scale business organisation number of decision panned tools are made and prepared which involved expenses
It is also called as static budget is financial plan based on assumption of selling specific amount of goods and during period. In other word fixed are based on volume of sales or revenue. This is an easy way to plan for management for expenses and operations when they assume that sales revenue and total revenue set amount in during period.
Advantages of Fixed Budgeting
- One advantages of static budget is it teacher organisation prioritise. It measures performance of profit for both short and long term
- Fixed budget keep cost down as long as the business abide by strict financial limits planed on entire business.
- Tax simplification, easy to use etc
One problem with static budget is it does not account for life's unpredictable events, variable expenses are difficult to predict. So exceeding a budget can cause stress. It is not accurate way to track expenses. It is difficult to follow if business income varies.
Incremental budgeting is budgeting tools or technique based on slight variation from previous period budget result or actual cost. This is common approach of management where management does not want to involve in much time in formulating budget of where it does not receive any need to evaluate business. This type of situation occur where there is not great competition in market and profit expected year to year.
- Simplicity: Simplicity of incremental budgeting is either based on recent financial results that can be verified.
- Funding Stability: If company require funding for multiple year in regard to certain outcome incremental budgeting is made to keep flow in business.
It also provide operational ability to make stable all functions of all department in long term and stable manner.
Disadvantages: Incremental in nature, Variance from actual result, Perceptual resource allocation, Risk taking etc.
3.2 Process of preparing budget
It review the companies business environment that where used as the basis of last budget and updated as necessary.
Estimation is obtained
Estimation obtained of sales, production, expected cost, capability of each sub division, unit or department source. The manager are require to provide estimated of future condition and economy that will empact on company.
Estimation of proper coordination
In most companies budget committee evaluates the different plans submitted by various companies and its unit to get the potential of plan with interest of company and to estimate what resources are available for proper allocation.
Communicating budget to affiliated manager and related department. After individual plans have been approved related to organisational goals and available resources the budget is communicated to related department. Changes and modification made should be informed to responsible manager.
Implementation of planed budget
The final budget is presented to manager related to planed adopted for operational department for upcoming period. The different service unit are required to facilitate the material, labours, and other resources to cary out budget.
Reporting Interim process toward budgeted objective
Final step in budgeting process is performance report are prepared to inform top managers about performance achieved in term of budgeted figure. For ex. if sales are low because of reduced production it is advised to increase production.
3.3 Pricing Strategies
It refers to method companies use to price their product and services. So following are price strategy companies follow
A small company that uses penetration pricing set low price of product or services in hope of building market share. Primary objective is to gain lots of customer with low price and then us various marketing strategies to retain them.
Another type of pricing strategies in which company set high price of product to quick recover cost of production or advertising cost. Profit is key objective of Price skimming.
Product life cycle pricing
All product have life span. A product generally grow in different stages like introduction, growth, maturity and decline stage. During growth small company keep price high. For ex. with every launch of Apple product it priced high as it have unique technology and demand.
Price based competitive advantage
Some times happen when company have to lower the price to of competitors. A competitive based strategies is adopted when there is a little difference between product in an industry.
Temporary Discount Pricing
Small companies use temporary discount to attract customer like, coupons, percentage discount on sales, volume purchasing or seasonal price discounting.
4.1 Balance Score card and performance measure
Balance score cared includes financial measures and non financial measures- related to future financial performance. It include external as well as internal information. It allows managers to look around all business from four important perspective
How do they look to share holders. Encourage the identification of a few relevant high level financial measures. In particular, designs were encouraged to choose measures that help inform the answer of question. How do Imda Tech company look to their shareholders. For ex, cash flow, sales growth, operating income return on equity are measured.
Internal Business Process
Encourage the identification of measurement of performance that answer the question what must be produce execute like, cycle time, per unit cost, yield new product introductory etc.
Innovation and learning
Encourage the identification of measurement that answer the question how can company create value, improve product and innovation. In doing this new product creativity and design is responsibility of research and development department.
Encourage the identification of measurement that question what is important to customer, investor or shareholders. Like Percentage of sales of new product to distributors, time delivery, important customer share, purchase and ranking by important customer.
Help in improving Financial problem
By balance score card technique it can improve financial problems by improving sales growth, which was targeted in sales budget and found in strategic planning. So Imda tech can improve sales by keeping low price of mobile charger and equipment and increasing sales in retail outlet. It can increase operating income by cash inflow and outflow by circulating manufacturing material supply and minimising overheads. By giving discount also it can increase sales. Attracting new investor can improve financial problem by giving giving return and percentage of profit.
4.2 Improvement in financial governance and development of strategies
Starting point of producing a balance scorecard is to identifying the strategic requirement for the success of the firm. More importantly those strategic requirement will related to product, market, growth and resources and human, intellectual, and capital structure. Imda tech might want to below cost producer of mobile charger by achieving competitive advantages and selling undifferentiated product like mobile components at low price than those competitor or business may have product development strategy to become leader in technology and command a premium like Apple. For developing strategies and good financial governance Imda tech need to follow following steps...
- Identifying overall objective of Businessman
- determine a way to create value
- Identify financial strategies and financial perspective
- Clarify customer oriented strategies is related to customer perspective
- Identify internal process that support strategies is internal related perspective
- Identify skill and competencies related to learning growth and perspective
From the report, it can be concluded that departmental managers and executives must analyse their internal business reports and financial statements, so that, proper policies and strategies can be devised for fuelling successful growth. Besides this, it is founded that participative approach of budgeting is really suitable and appropriate for the Imda Tech to create highly realistic budget by welcoming all the divisional managers in budget creating process. Lastly, it is considered that balance score card (BSC) is of vital importance for the firm to examine their financial as well as non-financial performance and thereby suitable strategies can be constructed to overcome financial difficulties and other business problems, which in turn, leads to drive success to the entity.
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