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Management Accounting

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Introduction to Management Accounting

Management accounting’s role has increased with the increasing business complexities of an entity. Nisa retail store has been selected by an entity which is located in the United Kingdom which is a small-scale enterprise that deals in the grocery business in generating higher business outcomes in the near future. This project is all about defining the concept of management accounting along with the management accounting reporting systems in conveying important relations related to the business enterprise. This report also stresses preparing income statements using marginal or absorption costing.

P1 Explain management accounting and different types of management accounting

Nisa retail store is located in the United Kingdom which falls under the retail sector as it is one of small scale entity. This entity operates at a narrow level as the initial investment is less their main motive is to capture the overall market share and various aims and objectives of the business. The aims and targets of the external market are imposed on an entity to be completed within a given time frame as they are held liable for achieving the goals to improve their performance. Small-scale entity has more enthusiasm as they are new in the industry and aspires to accomplish all the tasks in fewer periods in order to get success. The study has revealed that small entrepreneur who started their business from zero have gained higher market share due to their current skills, talent and patience to stay for a long time struggling in the market. The challenges of small-scale entities will be managed by using various techniques and tools of management accounting. Budgets used by an entity will help in predicting its future performance after considering the current financial resources held in the business for a longer period.

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A major concern of the management is to recognize its current costs in the business as their major objective is to cut down its available costs. Cost-cutting strategies are prepared in order to generate higher amounts of sales and revenue for an enterprise as this helps in improving the overall performance of an entity. Management accounting is regarded as one of the important processes which includes several steps in improving the overall business performance with the passage of time. It includes sourcing, analysis, and communicating. Certain areas of the business are identified which require help in accomplishing the desired aims and objectives of an enterprise. The information is classified into two major categories such as financial as well as non-financial information analyses by the management accountants in an enterprise which will be conveyed to the management. Top management is highly concerned with knowing its financial condition along with the performance of all the employees working in an organization.

Alignment among financial performance and all the employees will be created that helps in reaching the final outcome in terms of reasons to rectify the current performance of an entity. Employees working in an enterprise will accomplish the desired tasks of the firm which helps to generate higher sales and the revenue of an entity which indirectly increases the profit and stabilizes the financial performance of Nisa Retail Store Ltd located in the United Kingdom.

Types of management accounting systems

Cost accounting systems

Every business wants to earn profit as their basic aim of establishing the business is profit element. Reducing costs in an enterprise in turn increases the income and profit of the business. Cost reduction strategies are prepared by an entity in order to improve the quality of all the services delivered by an entity to end consumers. Cost can be ascertained by an individual by using various techniques like marginal and absorption costing systems which will consider all kinds of costs of an entity in improving the business practices. The focus of these statements lies in ascertaining costs in order to generate higher sales and the revenue of an enterprise. Marginal costing stat will emphasize only variable cost in developing the price of products supplied by an entity to its variety of customers. Absorption costing sheets on the other hand used to determine the actual cost incurred by the business enterprise. This kind of costing considers both kinds of costs such as variable as well as fixed costs while developing all the products or services of an entity. Being a small-scale enterprise, Nisa retail store is required to know its current level of costs in order to devise various strategies for improving the quality of services offered by its different customers. Initial investment made by an entity is less which shows its inability to handle the heavy pressure of all kinds of costs in an enterprise.

Inventory management systems

Inventories are an important part of an organization that needs to be managed in order to achieve the desired aims and objectives of an enterprise by utilizing all inventories in the business to generate higher sales and revenue for an entity. Current inventories of Nisa retail stores need to be tracked as it helps an entity owner in order to utilize their idle inventory without purchasing new ones. Proper stock ledgers will be prepared which will keep a record of each and every inventory Sold or purchased by an entity. Wastage of inventories will be avoided in order to increase the performance of an entity as customer satisfaction will be improved with the passage of time.

Inventory management software will be used by an entity in which inventories are prioritized according to their nature in an organization to help an individual purchase the right products according to their own choice and tastes and preferences of all the customers of Nisa Retail Store Ltd. The FIFO method will be used which stands for the first in first out method in which inventories purchased firstly in the firm are sold first in order to reduce the warehousing cost of saving all the inventories in the organization for a long time till get sold. Another method of evaluating the inventory is LIFO which stands for the last in first out method in which lastly purchased materials are sold first to sell the stock without piling up in the firm for the long term in order to avoid future consequences. Weighted average cost will be used as one of the inventory management software in managing the current inventory in which the sales price will include the combination of all sale prices on the weighted average cost to be charged from the customers.

P2 Explain different methods used for management accounting reporting

Top management keeps track of all its business practices included in its firms in order to achieve its desired aims and objectives within a given time frame. Reports are supplied from lower management employees to the top management in order to convey important announcements or any kind of default that occurred in the business. Managerial accounting reports will be helpful for small business owners like Nisa retail stores which are small retail stores located in the United Kingdom in order to fulfill the desired needs of its regular as well as potential customers in an enterprise. Managerial reports are prepared in order to keep track of all the activities taking place in an entity as this is regarded as the monitoring and supervising tool in order to ensure higher productivity of the business organization.

Being a small-scale entity Nisa retail store is required to emphasize all its business activities in order to generate higher outcomes within a given deadline as time sensitivity will determine the success or failure of an entity which needs to be improved with the passage of time. The performance of an entity will be determined by an entity owner in various time frames such as monthly, quarterly and yearly in order to take advantage of its external market. There are various kinds of management accounting reports prepared by an entity owner in the overall tenure of a business:

Budgets

Traditional systems of an enterprise are budgets which will includes all kinds of financial resources in these statements to predict the future performance of an enterprise. The performance of the Nisa retail store will be analyzed using various parameters such as quality, services offered by an entity, and customer satisfaction as all these parameters define the nature of the business in relation to external market aims and targets that need to be completed in a given time frame. The manager of Nisa Retail State classifies all their stores into various departments which helps in keeping track of the individual performance of singular departments such as the product department, financial head, inventories ledger. All the components of an entity are assessed at the year's end according to the external market aims and objectives as their desired motive is to accomplish all the tasks and duties in order to enhance the overall performance of an entity. There are various categories of budgets prepared in an entity like the Nisa retail store in order to improve its overall performance by recognizing all its weaknesses in a given time period along with the application of various tools and techniques to rectify the weaknesses of an entity. Budgets play a dual role in the business as it is act like a forecasting tool as well as acting like a monitoring and controlling business function to keep track of all business activities in order to identify the deficiencies in the system. The recognized deficiency is essential in order to take corrective action in order to enhance the overall performance of an enterprise.

Sale budget

It is prepared by an entity in order to ensure its higher productivity as in this particular stage sales units are predicted by an entity owner along with a specific sale price to ensure its increased capabilities. The decision taken in the budget is assessed on the current market performance of an entity on this basis its future performance is evaluated by determining the sales units. The sales units are decided after analysis of the current capability of the Nisa retail store in order to think about its future sales.

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Inventory and manufacturing

Inventory plays a significant role in the business as raw materials are transformed into finished goods which will be sold to all the customers in the external market. An entity owner is required to keep track of all its business activities in order to generate higher market returns in the future as current inventories kept in the business for utilizing overall business functions. Alignment is formed among available inventories in the organization with the tasks and duties of an entity that helps in improving the quality of all the inventories in an entity. Physical inventories are checked by an entity owner by observing all the inventories in order to ensure its idleness in a firm as without utilizing current resources an entity will not be able to use newly purchased resources which increases the overall expenditure for an enterprise. The inventory management software is used by an entity which will be monitored by an employee appointed in the organization to analyze the effectiveness of all the inventories included in the business (Ball, Kothari and Robin, 2000). All these inventories included in the firm are further utilized by an enterprise with the passage of time in accomplishing various tasks and duties. For the Nisa retail store inventories are regarded as input which will be processed in order to generate higher outcomes for an entity owner. Inputs are sold to customers using various marketing tools and techniques which helps in generating higher outcomes for an enterprise in terms of increased profits of an enterprise.

Labor efficiency reports

Workers and employees are appointed in an organization in order to accomplish the desired aims and the objectives of an enterprise in less period as compared to all the competitors of the business. The performance of all the labourers is assessed in various factors such as hourly wages, and unit wages as the efficiency of all the labour is regarded as the important factor in generating higher revenue for an entity like Nisa retail store which is small scale entity operating in the external market needs to improve their overall business. Costs given to all the labourers are analyzed in relation to their contribution to selling all the products in the business.

P3 Prepare income statements using Absorption and marginal costing

Marginal costing

This costing is renowned as variable costing which consider each and every change that takes place in the external market in the current business of an enterprise. Variable costs are only considered by an entity which is the reason behind the increasing profit of an entity. These costs are considered only variable costs that help enhance the current market share enjoyed by the firm by offering a variety of products or services in the external market. Marketing costs incurred in the business fall under the category of variable costs as it is done to increase the sales and the revenue of the firm in this approach customers are attracted towards the business in order to generate higher outcomes for the business entity.

It is usually preferred by this entity owner who gives more emphasis on the variable cost of an entity which is affecting the overall performance of the corporation. Variable costs are highly related to the sales and the revenue of the organization which need to be reduced in order to enhance the current sales and the revenue of an entity. This is one of the important concepts of managerial accounting technique that enhances the role of current business in relation to the external market aims and objectives. Manufacturing overheads are considered in the current statements in which production overheads are used by the business in utilizing all the concepts that suit certain business areas. In this costing, the efficiency of the overall business will be increased by following all the hidden aspects of organizations.

Absorption costing

It is that kind of costing system in which both kinds of cost will be considered by an entity such as fixed as well as variable cost in order to determine the actual cost incurred in the business. The ascertainment of actual cost is essential as this helps in improving the overall business of an entity as the main motive of an enterprise is to reduce its overall costs by increasing the income of the business.

In absorption costing fixed costs are absorbed on the basis of sales units included in the firm in order to bring the true effect on the financial performance of an entity in relation to the external market threats and challenges faced by an entity currently. This is also regarded as the complete and full costing systems which are highly efficient methods in developing the prices of goods or services of an entity. The pricing of all the products or services of an entity is developed by using appropriate techniques that help in improving the current performance of an entity in order to grab a larger market share by enhancing overall customer satisfaction. Various factors that increase customer satisfaction are utilised in designing the prices to create a good brand image for the business in the external market. The profit generated by an entity under the absorption method is less than compared to the marginal cost. The reason behind less profit is the inclusion of both kinds of costs considered by an entity in the development of prices of products or services.

P4 Explain the advantages and disadvantages of different types of planning tools

One of the important functions of the management is planning in which all the existing financial resources are analysed in order to generate higher outcomes by an entity owner. Management accounting tools and techniques are used by an entity owner in order to analyse its current resources by predicting the future performance of the business. The future performance of an entity is important to know in advance as this would help in generating higher outcomes in the future by enhancing the existing skills and capabilities of an organization. Planning is a rough plan prepared by an entity in order to guide its actions in moving ahead in the near future to facilitate its variety of users. There are various planning tools and techniques adopted by an entity owner in management accounting especially used for planning purposes...

Financial statements analysis

This is regarded as one of the important planning tools which is a particular tool used to review and analyze the financial statements of an entity. An entity determines its financial performance in a particular year by preparing particular financial statements. Standard limits of the financial statements include income statements, balance sheets and cash flow statements of an entity to determine the financial performance of the business organization to maintain good financial position in an enterprise.

Advantages

Evaluating financial risks

Financial risks will be ascertained by an entity as it helps in getting a good position in the external market.

Assessing financial position

The business health of an enterprise can be improved with the passage of time by adopting two important techniques such as horizontal as well as vertical analysis of all kinds of financial statements of the business. In this particular method, each and every component is compared with the previous year of an entity.

Disadvantages

Historical information

Financial statements prepared using historical information will deflate an entity's actual performance

Standard costing

The focus of an entity is on framing new standards which are used to compare the actual performance of an entity. This kind of costing is highly similar to the important function of the management that is controlling the function of the management of Nisa retail store. Being a small-scale entity Nisa retail control of all business activities is essential as without controlling activities conflicts will be created in an entity that creates lots of problems for an enterprise. It is regarded as one of the important processes under which standards are prepared by an entity owner in order to judge its current business performance. It has various categories such as materials, labor and overheads that are common aspects of an organization. The efficiency of each and every component of the business in order to get a competitive advantage over its variety of competitors takes place in the external market. The benefit of using standard costing is to recognize the capabilities of an entity in advance in order to improve the overall performance of an entity. This technique is also useful in formulating the price of all the products or services offered by an entity to its variety of customers located in the external market.

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Marginal costing

It can be also regarded as another name for performance costing as this places more emphasis on the performance of an entity. This kind of costing is a useful approach for ascertaining the marginal cost incurred in an entity for using additional units in the business.

Advantages

Ascertaining marginal cost

Marginal cost in an economic concept that shows how an additional unit manufactured by an entity can affect the overall performance of an enterprise by affecting overall sales and the revenue of the business.

Value generation

The focus of an entity is on the value generated by an enterprise by increasing current sales volume.

Showing cost relationship with final outcome

This kind of costing reflects the two important costs which are both fixed and variable costs incurred in an enterprise in order to determine the final outcome generated by every entity to earn higher profit for the business enterprise.

Disadvantages

Over-dependence on assumptions

Marginal costing depends on several assumptions in order to achieve the desired aims and objectives of the corporation determined in the initial phase of the business. These assumptions include total variable cost directly proportional to the sales units of an enterprise. The selling price per unit remains the same and things produced by the firm will be fully sold by them in a particular financial year.

Budgetary control

Budgets are prepared by an entity in order to predict the future performance of an entity after analyzing all the current financial resources held in the business for a long time as one of the assets of the business. Budgetary control needs to be emphasized by an entity owner in regulating the current financial resources of an enterprise that helps in generating higher outcomes for the corporation within a given time frame. Budgets are prepared by middle managers in order to ensure higher productivity of an organization as this would help in generating higher outcomes in the near future. Budgeting is one of the important tools used by an entity owner in order to monitor the current financial resources of an enterprise which are controlled in the business in order to ensure higher performance of an enterprise. All costs and income are enhanced by an entity as the major aim of an entity is to reduce the current cost incurred in the business by increasing the available income of an enterprise. Various ways of income are increased by predicting the future performance of the corporation such as quality of services, and higher level of customer satisfaction gained by an entity in the future by delivering its variety of products or services.

Cash Budget

It is that particular statements prepared y an entity in order to determine the position of cash in the business to meet all kinds of short-term market obligations.

Advantages

Liquidity

It helps in maintaining a higher level of liquidity by using various sources of cash to improve the overall performance of an entity.

Increasing investments

A higher surplus generated in cash in an enterprise will be invested into the business in order to generate higher outcomes in the near future.

Disadvantages

Data manipulation

  • Cash budgets prepared in an entity can be manipulated as mangers will not want to reflect their negative performance in front of all the shareholders in the external market.
  • P5 Compare how organizations should adapt management accounting systems to respond to financial problems.

Financial problems of an entity are the biggest threat for an entity that creates lots of problems for an enterprise that needs to be improved with the passage of time as it is essential to keep on track with the current business activities. There are various ways used by the management in order to rectify the financial problems of an entity which are given as below:

Benchmarking

It is regarded as one of the important performance metrics used by an entity in order to overcome all the financial problems currently faced by an entity like Nisa Retail store. This particular process is used to improve the performance of an entity as this approach to higher standards of the overall retail industry is used to compare the overall performance of all the employees of an entity. This kind of method gives preferences to several parameters such as quality, time factor and cost incurred in the business. In this kind of tool, the singular productivity of an employee is improved by aligning their performance with the best retail sector companies who have performed better in the tough times which inspires all the employees working in the same industry to reach that status and try to surpass that level in order to maintain their own record.

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BPR

It is an acronym that stands for Business process re-engineering in which the whole process is demolished from the beginning till the end of the process in order to improve the current weaknesses in the process. The consent of all the employees working in an entity is taken in order to realize the problems faced by them while working and then the owner will decide to radically re-redesign the overall process by considering each and every problem currently faced by an entity in the business in rectifying all the weaknesses to generate higher sales and the revenue for an enterprise.

KPI

Key performance indicators used by an entity owner in considering all the weaknesses of the business as targets to be achieved in order to secure a strong position in the external market to capture a higher customer base and competitive position among all the market rivalries. Customers are given more preference by meeting their desired aims and targets which is the major outcome of the business in getting higher customer satisfaction.

Conclusion

It can be concluded from the above assignment that an entity needs to emphasize various tools and techniques of management accounting. Nisa retail store being a small-scale entity puts more emphasis on knowing its actual performance in order to take important financial decisions in the business such as rectifying all the variances incurred in the business activities. This project is all about explaining how various management accounting systems and reporting are used in supplying both qualitative as well as quantitative information included in the business enterprise. This states that an entity has earned higher profit by preparing an income statement under marginal costing as compared to the statement prepared under absorptio

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