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Management Accounting System And Its Types

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INTRODUCTION

Management accounting is a tool which is used by managers to determine organisational goals and objectives. It helps to make financial and non-financial decisions which is required to deal with uncertainties that may occur in future. It is a process of recording business information which is provided to the internal stakeholders of the company to gain their trust. In management accounting, various reports are generated to analyse the performance of the company. Its main objective is to get insider and actual information about the business so that weak areas are identified and managers can plan for improvements in those areas (Abdelmoneim Mohamed and Jones, 2014). SDK Jewellers is a manufacturing company and its headquarters is in the UK.

This project report covers various topics such as management accounting systems and their reports, planning tools used in budgetary control, various costing techniques etc. Various techniques to deal with financial problems that an organisation have to face are also covered in this report.

TASK 1

P1 Management accounting system and its types

Management accounting is the process of examining financial data that facilitates the strategic decision-making process of managers. It helps to formulate policies that help to lead the organisation toward success. It directs the managers to perform various functions such as planning, organising, controlling etc. Managers of SDK Jewellers use a management accounting system to determine customers' needs and provide them such products that may fulfil their demands. Stakeholders can get various information such as cash in the company, its total sales, its account receivables and payables. The management of SDK Jewellers follows a management accounting system to maintain the proper status of the company in the market. There are four types of management accounting system, which are explained below:

  • Cost accounting system: It is used by various companies to determine the actual cost which is involved in the manufacturing process. It is very useful for manufacturing companies because it can provide detailed information on the cost of different departments. It helps the managers control the cost of production (AlMaryani and Sadik, 2012). Management of  SDK Jewellers uses this system to analyse the cost of each segment of Jewellery.  The managers analyse the production activities with the help of this method. It is very beneficial for the management department, as it can provide transparent information about cost which is used to minimise cost.
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  • Price optimisation system: It is mainly concerned with the pricing strategy of the company. Managers use this system when they are looking for accurate prices for their products that can maximise profits as well as attract customers to fulfil their demands.  SDK Jewellers use this system when they want to analyse customers' reactions toward price-changing strategies (Arjaliès and Mundy, 2013). The major objective of the managers of  SDK Jewellers is to determine the best price for their products that will help to meet their organisational goals and mission. It is very advantageous for the company because it provides the ideas to set appropriate prices for the products.
  • Inventory management system: It is used to track the products in the supply chain of the company. It is mainly concerned with the information on inventory which may be in a warehouse or transportation (Bennett, Schaltegger and Zvezdov, 2013). Management of  SDK Jewellers uses an inventory management system to determine the quantity of the inventory within the company. It is very important for the organisations like SDK Jewellers because it helps the managers and owners to keep a track record of inventory whether it is, inside or outside of the company. It is very beneficial for the managers because it provides the information of inventory. There are three types of inventory management systems, LIFO, FIFO, and AVCO. LIFO stands for Last in first out, it is a method which is used to evaluate the most recently received units first. FIFO stands for first in first out, it is a method which is used to evaluate the earlier received units first. AVCO stands for Average cost method, in this method units are recorded on the weighted average basis to calculate the cost of the units.
  • Job costing system: It is concerned with the examination of the cost which is involved in the job that is performed by the company or its employees. It is mainly used when the jobs are totally different from each other. Managers of  SDK Jewellers use this system to analyse the cost of each task of the company. The job costing system helps the management of SDK Jewellers to determine the manufacturing cost in incurred in various jobs of the organisation. Managers make decisions to control the cost of the company if the cost is comparatively higher than competitors (Bovens, Goodin and Schillemans, 2014). This report is very important for manufacturing companies because it helps to get the exact information of cost involved in various jobs.

P2 Management accounting reporting and its types

Management accounting reporting system is a method of generating various management reports that help to analyse the actual position and performance of the company. It provides various information to the managers that help them with decision-making (Cardoni, 2012). It contains information on budgets, owed amounts by clients, performance of each employee and business, inventory status, manufacturing process etc. These reports are prepared by the management department of  SDK Jewellers to make decisions, formulate strategies and policies, and set organisational as well as individual goals that are based on above mentioned information. It facilitates the decision-making process with the help of various reports. The types of management accounting reports are described below:

  • Budget reports: These reports are mainly concerned with the comparison of forecasted budgets and the actual performance of the company. It helps the managers to identify the budget for each department and control them accordingly. Financial data is recorded in budget reports, which are analysed by managers of the company to identify fields where the cost can be controlled (Carlsson-Wall, Kraus, and Lind, 2015). The management of  SDK Jewellers designs budget reports to identify how the organisation is performing in the market with available resources. The managers try to find out the reason behind the variation in actual and budgeted figures. These reports are very important for the business because they help the management to form strategies according to the requirements of the company.
  • Account receivables reports: These reports are mainly generated to analyse the owed amount of clients. It is a tool that helps managers determine the actual receivables of the company and to whom it relates (Fourie, M. L., Opperman, Scott and Kumar, 2015). Account receivables reports are formed by the managers of SDK Jewellers to get the information of those customers who fail to pay their amount on the due date of payment. It helps to get detailed information on the actual owed amount of various clients, hence it is very important for every organisation. These reports are very important for the company as well as its managers to determine the total receivables of the company.
  • Performance reports: It is generated to analyse the performance of company and various individuals within the organisation. The main objective of these reports is to determine the performance which helps to run the business in an effective way. It is very important for every organisation to keep the idea to its business operations to ignore future consequences (Hall, 2016). In SDK Jewellers performance reports are created to analyse the execution capability of a business and its market image. It is a detailed document that provides internal and confidential information on business operations and their performances to the managers and stakeholders of the company. These reports are very important for the business because they help the managers to get the knowledge of the performance of each individual who is working in the organisation.
  • Inventory and manufacturing reports: Inventory reports consist of information on the inventory of an organisation and manufacturing reports are concerned with the process of product manufacturing. It provides detailed information related to the stock which is kept by the company to produce products (Leitner,  2013). These reports are generated by the management of SDK Jewellers to keep the actual information related to the material which is used to make jewellery. It also helps the managers to reduce the waste in the manufacturing process by keeping information on actual inventory. It is very important for companies like  SDK Jewellers because they have little inventory whose value is very high.

M1 Benefits of management accounting system

Management accounting system

Benefits

Cost accounting system

· It is implemented to analyse and modify the effectiveness of the company.

· It is very important for the company as it helps the managers in strategic decision-making.

Price optimisation system

· It is used to record customers' reactions toward price changing strategy of the company.

· This system is essential for organisations because it helps to set appropriate prices for the products that can help to generate profits for the company and attract more customers.

Inventory management system

· It helps to gather actual information on inventory.

· Helps to the managers by providing them idea, when to order inventory for the business.

Job costing system

· Helps to improve productivity of the company.

· It provides information of the actual cost which is involved in various jobs.

D1 Integration of management accounting system and its reporting in organisational success

Management accounting systems and their reporting help the managers and stakeholders to analyse the performance and market image of the company. It contributes to organisational success by preparing various reports that show the actual and running condition of the company. It is very important for the company to properly form management reports to achieve organisational goals and to lead the organisation toward success. Managers of an organisation are concerned with the improvements in various fields of the organisation to make the strategies that are implemented by them. Account receivable reports help the managers to determine the actual receivables of the company from different clients which helps the managers to tighten the credit policies. Performance reports help to analyse individual as well as organisational performance which helps to improve the efficiency of operations.

TASK 2

P3 Calculation of cost using appropriate techniques

Cost: It is the monetary value of a product, it includes various expenses like material, overheads, labour etc. It is an amount which is used to manufacture a particular unit. If a company is willing to acquire more market share then it is suggested to the managers to set lower costs for the product so that it will help to attract more and more customers for the company and increase the market share (Schaltegger and Burritt, 2017).

 SDK Jewellers is a company that deals in jewellery and is a producer of different jewellery items, it is mainly based in the UK. If managers of the company want to maximise profits then they should set lower costs as compared to their competitors. It will help the company to increase profits and set a positive image in the minds of customers.

Marginal costing: It is a costing technique which is used to analyse the increment or decrement in cost because of extra production units. The cost for an additional unit of production is known as marginal cost. These costs are variable costs that are related to labour and raw materials. In this technique, the managers try to determine the actual cost of additional production units (Shields, 2015).

Calculation of net profit by using the marginal costing method:

Particulars

    

Amount

Sales revenue = (selling price * no. of goods sold = 55 * 600)

    

33000

Marginal Cost of goods sold:

    

9600

Production = (units produced * marginal cost per unit = 800 * 16)

12800

    

closing stock = (closing stock units * marginal cost per unit = 200 * 16)

3200

    

Contribution

    

23400

Fixed cost ( 3200 + 1200 + 1500 )

    

5900

Net profit

    

17500

Absorption costing: It is a costing method which is used by various companies to assure that the cost involved in the production of various units is going to be absorbed from the sales of the same units. This method is used by managers of  SDK Jewellers to determine actual manufacturing costs.

Calculation of net profit by using absorption costing method:

Particulars

Amount

Sales = (selling price * no. of units sold = 55 * 600)

33000

Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600)

14025

Gross profit

18975

Selling & Administrative expenses = (variable sales overhead * actual sales + selling and administrative cost = 1 * 600 + 2700)

3300

Net profit/ operating income

15675

Break-even analysis: It is a method which is used to analyse the break-even point where the company earns a profit which is equal to the cost incurred in the production of the units. In this situation, the company is earning no profits and bearing no loss. It is calculated with the help of fixed cost, variable cost and total sales of the company.

The total number of products sold:

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

  1. Calculation of break-even point in accordance to sales revenue:

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

Profit volume ratio PVR = Contribution / sales * 100

30.00%

BEP in sales

20000

  1. Calculation to reach desired profits of 10000:

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

The margin of safety: It is the difference between actual sales and BEP sales. It is very important for businesses because it can help the management to predict how much reduction in sales will result in breaking even (Van der Meer-Kooistra and Vosselman, 2012).

  1. Calculation of margin of safety when 800 units are sold:

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

M2 Various management accounting techniques

Management of  SDK Jewellers use their types of management accounting techniques to produce suitable financial reporting documents. These techniques are standard, marginal and historical costing techniques. The standard costing technique is used to analyse the variation in actual and forecasted budgets, which helps to analyse the actual performance of the company. Marginal costing techniques are used to measure the increment or decrement in costs for producing extra units. In other words, it is used to analyse marginal costs that occur when the company is producing extra units. Historical costing technique is used to analyse the actual amount of assets and liabilities that are recorded in the balance sheet.

D2 Data interpretation

As analysed from the above calculations, managers of  SDK Jewellers find that the marginal costing technique is the most relevant option for the company to determine net profits. While calculating net profits from marginal and absorption costing techniques, it shows a difference of £1825 in profits. Net profits from the marginal costing technique are £17500 and from the absorption costing technique, the profits are £15675. The break-even sales of the company are £20000 when the sales is 500 units. As  SDK Jewellers is willing to earn a profit of £10000, to reach the profit it has to sell 1333.33 units. If a company is selling 800 units then the margin of safety will be 37.5

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TASK 3

P4 Advantages and disadvantages of different planning tools used for budgetary control

Budgetary Control: It refers to how appropriately the managers utilize, monitor and control the costs to run the business operations smoothly. Budgetary control helps the managers compare actual figures and budgeted figures of the organisation. There are various steps to follow while preparing budgets for the company (Helden and Uddin, 2016). The budgetary control process involves setting objectives, measuring budget outcomes, preparing budget manuals and forming a budget committee. Managers of SDK Jewellers are liable to control the budgets of the organisation because it helps to make plans and reserve funds for future risks or events that may occur. Management of  SDK Jewellers uses three planning tools in budgetary control:

  • Forecasting tools: As its name describes these tools are concerned with the forecasting process of the company. It helps the managers to forecast future expenses such as promotional expenses and, reserve funds for those expenses so that it helps to ignore major crises that might occur in future.  It helps the management to predict future events that are based on past events and current trends.

Advantages

Disadvantages

It helps to forecast future expenses.

It is totally based on past data, hence it is not fully reliable.

It helps the managers to reserve funds for future expenses.

It is not possible to forecast the future accurately.

 

  • Contingency tools: These tools are mainly concerned with negative events that may occur in future. It is used by managers of SDK Jewellers to determine any unfavourable event that has the possibility to happen. It helps the managers to pre-plan for the events that can affect the operational activities and execution process of the company.

Advantages

Disadvantages

Provides the idea of possible future events that may affect the operations.

It is only useful at the time of contingency and provides guidance to deal with the same.

It helps the managers to be ready to face possible negative events in future.

The process of implementing these tools is very complicated.

  • Scenario tools: This tool is concerned with the identification and evaluation of possible future events and then makes a professional framework to explore those events. The managers of SDK Jewellers make assumptions on the basis of past and current data for upcoming events that impact the business environment. It is used in SDK Jewellers to identify a specific set of consequences that might happen in future.

Advantages

Disadvantages

It helps the managers to identify critical issues that may affect the operations of the company.

It is not useful for small companies like SDK Jewellers.

It facilitates long-term planning and decision-making processes.

It is very difficult to implement this tool because the market trends change rapidly.

M3 Uses and applications of planning tools for preparing and forecasting budgets

The managers of SDK Jewellers use three planning tools, that are forecasting, contingency and scenario tools. These tools help the managers to forecast future events and consequences. Planning tools are used to determine favourable and unfavourable events of the future. It also helps the managers to be ready to face any kind of uncertainty in future. These tools help while preparing and forecasting budgets because they provides valuable information to the managers that help them to make decisions according to the situations.

TASK 4

P5: Responses of management accounting system to deal with financial problems

Financial problems are related to a lack of funds for a company's activities or operations. Many organisations are facing several financial issues like high debt levels, insufficiency of funds, improper money management, insolvency etc. in their operations. SDK Jewellers is a small-scale company that wishes to expand in future. So, for expansion company needs more finance. It is also suffering from financial issues like inadequacy of funds, a large number of creditor and too much of unnecessary expenses. These problems are discussed below in detail:

  • Large number of creditors: Continuous credit sales lead to more credit customers. SDK jewellers offer credit options to buyers but are not able to recover the due amount.
  • Inadequacy of funds: As company wants to expand but does not have sufficient funds for expansion. Therefore, they need finance in order to increase their capital.
  • Unnecessary expenses: The marketing manager of  SDK jewellers spent unnecessarily on promotional activities. It amount of expenses is more than revenue which negatively impacts on company's income.

Companies follow key performance indicators, benchmarking and financial governance techniques to deal with their financial problems. These tools are explained below:

KPI(Key performance indicator): A company's performance is examined and measured under this tool within a specific time period which assists in decision-making. SDK jewellers evaluate its production and financial performance which negatively influence its operations. The company is facing financial problems related to unnecessary spending over expenditure. SDK jewellers use types of key performance indicators for resolving this issue (Wouters, and Kirchberger, 2015).

  • Leading KPI- In this tool organisation estimates future events and evaluates changes in the marketplace. SDK jewellers use leading indicators for identifying and measuring unnecessary expenses on promotion which are unrelated to the present period. The company control this expenditure and estimates related expenses accurately which assists in enhancing income.
  • Lagging KPI- With this tool company increases its jewellery sales in a way to generates revenues. SDK jewellers use lagging indicators for measuring their output in order to achieve success.

Benchmarking: This approach helps in comparing a company's performance with other organisations in similar industries. Many companies are using this technique in order to increase productivity and performance. SDK jewellers follow benchmarking to compare its performance with competitors and resolve issues related to customers. The company set credit standards as its successful competitor is using and recovering the due amount from the creditor (What is Benchmarking, 2018).

Financial governance: This technique assists in collecting, managing and controlling financial information of an organisation. SDK jewellers follow financial governance in order to respond to financial issues i.e. inadequacy of funds. Management prepares a report with detailed information about its performance, financial data, production and sales practices. This information helps in attracting investors which improves the company's financial status and resolves the problem related to the inadequacy of funds. This tool assists in the future expansion of business.

SDK jewellers

Airdrie

Company follow the KPI tool for resolving issues related to spending on unnecessary expenses.

Companies use benchmarking techniques to compare its performance with competitors.

Benchmarking techniques help in minimising the number of creditors by establishing credit standards that successful competitors adopt.

It follows key performance techniques for measuring its employee's performance in order to generate revenue.

It uses financial governance tools to increase the flow of funds in an organisation.

Just in time technique is used for inventory valuation.

M4: Management accounting leads to sustainable success in responding to financial problems

SDK jewellers face financial problems such as unnecessary expenses, a large number of credit customers and inadequacy of funds that impact the company's performance. The company follow Key performance indicators for resolving problems related to unnecessary expenditures. It uses benchmarking techniques for reducing its credit customers with the help of establishing credit standards. At last, the company follow a financial governance tool for solving issues related to the insufficiency of funds. These three tools assist in improving the company's financial problems.

D3: Planning tools respond appropriately to resolve financial problems

 SDK jewellers use forecasting, contingency and scenario planning tools which assist in resolving financial problems that might occur in coming years. Companies use forecasting tools for estimating jewellery future demand in order to generate revenue. It also uses scenario planning tools for analysing market trends which affect on company's working. At last, the company is using a contingency tool for evaluating uncertainties that occur in future and negatively impact its operation.

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CONCLUSION

In the above report, it is concluded that several management accounting systems such as inventory management, price optimisation, cost accounting and job cost system and their reporting are important for the organisation because they can help to evaluate the performance of the company, the cost involved in the manufacturing process and it also helps in strategic decision making. Companies can use marginal and absorption costing techniques to evaluate net operating profit. Organisations can use planning tools like forecasting, contingency and scenario tools to deal with financial issues and also use them in budgetary control to forecast various future events. Manufacturing companies can use three techniques to resolve financial problems. Those techniques are benchmarking, key performance indicators and financial governance.

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REFERENCES

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