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Overview Of Management Accounting Essentials

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INTRODUCTION

It is generated on a weekly or monthly basis for the company's internal stakeholders like chief executive officers (CEO) and department managers, unlike financial accounting which helps external stakeholders determine the financial condition of the company by annual reports. The reports of management accounting include sales revenue generated, cash availability, accounts payable states, raw materials, inventory, outstanding debts, etc.

The following assignment is based on Pavestone, one of the leading manufacturing companies. It was founded in 1980 and undertakes manufacturing of segmental concrete products to industrial, retail, contractor, residential and commercial businesses. The assessment includes requirements of different types of management accounting systems, different methods used for management accounting reporting, advantages and disadvantages of planning tools for budgetary controls and how organisations are adapting management accounting systems to respond to their financial problems.

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TASK 1

P1.Overview of management accounting and essential requirements of different types of management accounting systems

Management accounting is a detailed process of identification, interpretation, analysis and presenting accounting information of a company which is acquired by cost and financial accounting (Maskell, Baggaley and Grasso, 2016). It helps the managers of the firm to formulate effective policies and enhance their decision-making process.

Difference between management and financial accounting:

There is a huge difference between management and financial accounting which is discussed below:

  • Users: Management accounting is an internal function and is implemented internally with employees and managers of the firm whereas financial accounting is the point of consideration for external users like shareholders, banks, creditors, etc.
  • Regulations: Management accounting does not consider external rules and regulations and no application of accounting standards is imposed. Whereas, various sets of rules and regulations are imposed in financial accounting.
  • Sources: Management accounting undertakes both financial and non-financial data, whereas, only financial data is used in financial accounting.

Role of management accounting in an organisation

In Pavestone, management accounting plays a vital role which is described below:

  • It improves communication within the organisation which leads to better decision-making of the managers.
  • The information produced by management accounting is relevant which helps the managers to formulate effective policies.
  • It helps the firm to exploit market opportunities by generating value through critical analysis of information.
  • Management accounting helps to build trust in the firm as it promotes ethical practices within the organisation.

Different types of management accounting systems:

Organisations use various types of management accounting systems which helps them to conduct their managerial operations effectively (Pavlatos, 2015). Types of management accounting systems used in Pavestone and their requirements are described below:

  • Job Costing System: This system includes the process of assembling information about the costs used for a specific job. Such information helps in reimbursements of the cost in order to submit it to a client under specific contracts (Schaltegger, Burritt and Petersen, 2017). This system is best suited when manufacturing goods are different from one another. It helps the Pavestone managers manage information and monitor and keep a record of the cost required for each job. The cost flow in this system is mentioned below:
    • The cost of direct materials, direct labour and manufacturing overheads is determined.
    • Job cost sheets are prepared to track the inventory of Work In Progress.
    • The inventory of finished goods is determined.
    • Finally, the cost of goods sold is acquired.
  • Cost accounting system: Managers of Pavestone use this system to estimate product costs to conduct a critical analysis of the company's inventory, cost control and profitability. The methods used in the company are process and job costing.
  • Inventory Management System: Management and supervision of non-capitalized assets and stock of the firm is conducted by the Inventory Management System. This system helps Pavestone to attain an effective and efficient flow of inventories both in the firm as well as at the time of sale. The firm applies this system to reduce inventory costs and enhance its profitability. The method used by the firm is ABC analysis. Under this, the inventory is divided into three categories- A: which denotes most valuable items, B: which denotes moderately valuable items and lastly C: which denotes least valuable items. This system helps the firm to categorize and manage its inventory according to the priority of the products.
  • Price Optimisation System: This system determines the impact of price fluctuations on the demand in the market (Smith, Brännström and Jansson, 2015). Pavestone uses this technique to effectively evaluate their price rates and adjust this price according to the demand which could help raise their profitability ratio. It helps Pavestone to decide the price rate of multiple products at one time. It would help the firm to determine the structures of initial, discount and promotional pricing.

P2 Explain different methods for management accounting reporting

Managerial accounting concentrates on internal financial data which is used in an organization for various purposes such as evaluating manufacturing processes (Trucco, 2015). Accounting experts use this data in making budgeting plans and controlling. It includes standard commercial statements, balance sheets, profit and loss reports and so on. Here, narrating the main methods for accounting reports in management:

Budget reports: They assist top management in analysing the internal as well as external performance of an organization. Managers estimate a budget plan on the basis of current expenses from the period of years (Agrawal and Cooper, 2017). Pavestone should consider this accounting report technique to sustain its profitability. This principle helps in determining all financial sources for expenses for further manufacturing procedures. A company tries to attain objectives and goals towards managing accounting reports.

Job cost reports: These show expenditures related to a particular project within a firm. In this process, accounting expert estimates receiving revenue and profitability from specific jobs. These additional efforts help in decreasing extra money during work by supporting high-earning plans. By this report, Pavestone can easily determine the complete cost which will take place in the future and current operational plans.

Inventory and manufacturing: This provides all relevant information about raw or product stock. In respect of Pavestone, the accounting manager should be concerned with this aspect to, maintain manufacturing procedures for increasing efficiency. This report indicates labour costs, raw material wastages, and per-headed costs at the working station. Therefore, if the operation department does generate any related problem, the manager can easily find it along with proper solutions.

Thus, these reports help in executing budgeting plans whether it is operational functions or production activities. It provides better guidance in further financial planning by optimizing all organizational resources (Christ and Burritt, 2017).

M1. Benefits of management accounting system:

System

Benefits

Price Optimisation System

It will help Pavestone in analysing the behaviour of consumers towards different price sets and also help them identify the best price to achieve higher profitability.

Job Costing System

Pavestone can determine many type of costs from production process. It will help in reducing the replication of work and assist in analysing the quality of work.  

Inventory Management System

Pavestone can increase the efficiency of inventory with this system and it will also help them preserve both time and money.

 

D1 Evaluation of how the management accounting system and its reporting are integrated within the organisation process.

  Management accounting report integrated within organisational process:

Types of reporting

 Evaluation

Budgeting Reports

By this Pavestone can complete organizational activities in order to achieve the goals and objectives of the business.

Job costing reports

This will help Pavestone to accomplish goals related to cost and assist in bringing down the cost.

Inventory and manufacturing

With the help of an inventory management system, Pavestone can make attempts to manage the stock in a timely manner and would help in the optimisation of resources.

 

TASK 2

P3. Calculation of costs and preparation of income statement:

Cost refers to the amount used in the production of a product or a service. It also includes a detailed monetary evaluation of resources, materials, risks, efforts and time consumed in the production and delivery of that particular product and service. There are two types of costs mainly which are described below:

  • Fixed Costs: These costs represent those segments of cost that are constant for a certain output level without fluctuating. However, with an increase in production, the product's per unit fixed cost decreases (Christopher, 2016).
  • Variable costs: These costs are variable segments of cost that change according to variation in production. These costs share a direct relationship with production. It increases with an increase in the level of output and vice versa. Labour and Raw material costs can be perfect examples of variable costs.

Marginal Costing: This refers to the system where fixed costs are fully written off for the period and only variable costs are accumulated. Cost per unit in marginal costing also remains constant. In this system, the volume of output is changed with variations in cost.

Absorption Costing: In this costing, all the costs incurred in the production are treated as product costs. This costing focuses on all the expenses and resources used for production. Both fixed and variable costs are taken into consideration for inventory valuation. Direct material costs, direct labour costs, and overhead costs are included in this costing. However, with the variable manufacturing costs, each unit accumulates a part of fixed overhead costs (D'Onza, Greco and Allegrini, 2016).

For instance, Pavestone produces and sells a single product with a selling price of £55. The unit costs are described below:

COSTS

AMOUNT

Direct Materials

£7

Direct Labour

£6

Variable Production Overhead

£ 2

Variable Sales Overhead

 £1

 

Fixed costs for the month are given below

ACTUAL COST

AMOUNT

Production overhead

£3,200

Administration cost

£1,200

Selling cost

£1,500

The sales for a particular month are 600 units. The actual production was 800 units. There is no opening stock. So, according to this scenario, the income statements as per marginal and absorption costing are as follows:

Income statement as per marginal costing: 

Net income = (sales revenue – marginal cost of goods sold) = (contribution – fixed cost)

Particulars

 

Amount

 

 

 

Sales revenue = (no. of units sold x selling price of each = 600 x 55)

 

£33000

Marginal Cost of products sold:

 

£9600

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

12800

 

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

3200

 

Contribution

 

£23400

Fixed cost ( 3200+1200+1500 )

 

£5900

 

 

 

Net profit

 

£17500

 

Income statement as per absorption costing:

Net Incomes = (Sales revenue – Cost of goods sold) = (Gross profit – Selling and Administrative expenses)

Particulars

Amount

 

 

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

£33000

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

£14025

Gross profit

£18975

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

£3300

 

 

Net profit/ operating income

£15675

 

M2 A range of management accounting techniques

In today's era, there is a number of techniques are accessible which assist to an enterprise in collecting internal accurate information. By using such techniques Pavestone' managers can enable for making reports to operating decision making process. Here, some major techniques are explained:

Standard Costing: Accounting managers record all business transactions which assists in analyzing the gap between actual cost and standard in Pavestone.

Marginal Costing:  This technique helps in controlling costs and enhancing the profit level within an organization.  

D2 Analysis and Interpretation of Data

From the above example, it can be interpreted that the per unit cost of a firm's products can be effectively calculated by using tools and techniques of management accounting. Marginal costing takes only variable costs into consideration and fixed cost is written off to the contribution, whereas absorption costing considers all the costs costs in the calculation. Thus, as per example, the net operating income as per marginal and absorption costing is £17500 and £15675  respectively for Pavestone.

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TASK 3

P4 Explain budgeting control and tools for controlling

Budgeting control refers to a process of determining actual income and expenses so that companies can easily coordinate with their departments (Jack, 2015). It compares to earning plans with the existing profitability for making changes in performance procedures. Throughout this function experts act upon achieving outcomes within an organization. This system thoroughly focuses on planning and controlling selling commodities and production efforts. Pavestone can acquire better relief in day-to-day processes according to organizational objectives.

This process plays many significant roles in budgeting plan execution for improving efficiencies. For Pavestone succession, it is essential to prepare and manage administrative budgets to cope with future challenges such as natural calamities. Sound accounting gives adequate and reliable data for estimating future requirements in an enterprise. All employees' participation should be involved in successful budgeting plans. Therefore, the company need to consider budgeting planning tools as described in below statements:

Forecasting planning: Forecasting refers to predicting the activity of the future by analysing past and present activities (Definition of forecasting, 2018). This technique provides proper assistance to predict future uncertain expenditures related to further activities. By using this Pavestone company can analyse cash flow during the manufacturing process which overcomes to shortage of money. Managers can easily identifies funding requirements and  cost for extra efforts which helps in strategic operational planning. Moreover, it has some disadvantages as well as better advantages for executing business plans:

Advantages

Disadvantages

It increases the possibility of accomplishing  Pavestone goals by reducing budgeting

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