Management Accounting


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Introduction to Management Accounting

Management accounting is the process of preparing management reports and accounts that provide timely and accurate information (financial and statistical) which is required by the manager to make short-term or day-to-day decisions. Management accounting generates periodical reports for the company's internal audiences such as top-level managers and middle-level managers. Management reports show the amount of sales revenue generated, available cash, trend charts, variance analysis and other statistics (Kont, 2013).

Organizations operate in a very dynamic and in a competitive environment. So effective decision-making is important for organizational success and survival. Therefore reports provided by the management accountant to the managers will help them in making timely and appropriate decisions. The present report emphasizes on nature and role of management accountants, users of the management reports, the difference between financial accounting and management accounting and the purpose of the costing techniques.

Classification of Cost

Cost classification is the process of grouping costs according to their nature and common characteristics. This classification makes the information related to costs meaningful. Cost classification is the first step towards the decision-making process relating to costs (Vanderbeck, 2012). Following are the important ways to classify costs:

1. Classification of the costs based on its element -

On the basis of the element, costs can be classified into material, labour and overhead.

  • Direct Material - Direct material includes raw materials which are used to manufacture the finished product and it become an integral part of the product which can be allocated directly to a specific unit.
  • Direct Labour - Direct labour means the cost incurred in relation to those employees who are engaged in the manufacturing process (Zawawiand Hoque, 2010). These costs can be easily traced to a specific unit.
  • Overhead - Overhead includes the cost of indirect material, indirect labour and other expenses which cannot be allocated to a specific unit
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2. Classification of the costs on the basis of its function -

On the basis of function, costs can be classified into production costs, administration costs, selling costs and distribution costs.

  • Production costs - These costs are incurred in the course of manufacturing finished goods. It includes the cost of raw materials, labour and other indirect factory costs. For example - power, rent, depreciation etc (Lucey, 2002).
  • Administration costs - These costs include general administration costs incurred by the organization for its smooth functioning such as audit fees, printing and stationary, Rent of office building etc.
  • Selling costs - These include all those costs which are incurred about selling goods and services such as salesmen's salary, packing charges, advertisement, warehousing charges etc.
  • Distribution costs - It include costs incurred at the time of dispatching finished goods to consumers such as agent's commission, carriage outward etc.

3. Classification of the costs based on its nature -

Based on nature, costs can be classified into direct costs and indirect costs.

  • Direct costs - All those costs which are directly attributable to a specific unit are called direct costs.
  • Indirect costs - All those costs which cannot be identified with a specific unit or individual cost centre are called indirect costs (Fullerton, Kennedy and Widener, 2013).

4. Classification of the costs based on its behaviour -

Based on behaviour, costs can be classified into fixed costs, variable costs and semi-variable costs.

  • Fixed costs - These costs remain fixed irrespective of the change in volume of the finished product. For example - rent, depreciation, salary etc (Kaplan and Atkinson, 2015).
  • Variable costs - These costs change in direct proportion to the volume of output such as raw material, and labour.
  • Semi-variable costs - These costs remain fixed up to a certain level of output and vary if output crosses that certain limit. For example - telephone bills (Hansen, Mowenand Guan, 2007).

Various performance indicators

There are several performance indicators that the senior authority of Jeffrey and Son can use to analyze the actual performance of the business against the expected (Maher, Lanen and Rajan, 2006).

Annual report: Through the means of annual reports, management can easily evaluate and analyze the financial statements of the business so that the actual position can be evaluated. Furthermore, in case of decreasing business volume and profitability and increasing costs of sales, management can undertake potential measures by employing suitable operational strategies.

Quality of products and services: By constantly monitoring the production process at each level will assist in analyzing and evaluating the quality of products and services (Popeskoand Novak, 2008). Further, through the help of this management can identify loopholes in operating performance due to which the quality of product is hampered adversely.

Customer Satisfaction: Lastly, improvement in employee performance can be measured by considering the feedback or reviews from the customers. Using this, the cited firm can bring further improvements as per the requirement of the target audience to retain them for the long term.

Different ways to reduce costs, enhance value and quality

At present, there are several tools and techniques through the help of which Jeffery and Son can easily attain the objective of reducing costs and enhancing value for the business:

Total quality management: With the help of this technique, management can ensure improvement in the quality of operational activities conducted by the business. The main purpose of TQM is to enhance the overall production process of Jeffrey and Son by resolving different loopholes (Balakrishnan and Cheng, 2005).

JIT and EOQ: The main purpose of both these tools is to help the firm in minimizing its storage and carrying costs of products and services. Employing JIT and EOQ will help in purchasing raw materials as per the demand in the market so that wastage or dead stock can be reduced which leads to a reduction in unwanted inventory of the business.

Management Audits: Utilizing this approach, Jeffery and Son can monitor the performance of the workforce and ensure standard outcomes (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013). Furthermore, frequent audits will help in motivating employees to enhance their performance as per the standards set which directly leads to enhancement in the overall production process.

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Purpose and nature of the budgeting process

Purpose of budgeting:

Budgeting is a very important part of the organization's planning process. It is a basic need in the budgeting process that managers or budget holders should be able to predict that whether the organization will generate profits in future or not. The purpose of budgeting is to know the performance of the business in financial terms if certain plans and strategies are carried out. It also includes three aspects.

  • Forecasting of income and expenditure.
  • It is a decision-making tool (Blocher, Chen and Lin, 2008)
  • It is a tool to monitor the performance of the business.

With the help of this, the decision-making process for the managers becomes easy and they make smart and effective judgments for the future functioning of the business. Along with this, it also helps in making comparisons between actual and budgeted standards of performance.

Nature of budgeting:

In the budgetary statement of an organization, estimation is made with the help of actual values generated through the previous accounting period. However, with this estimation managers of Jeffery and Son's can compute the expected amount of cash from the sales and other primary activities of the business. In doing so, managers have to consider three major aspects which are material, labour and production expenditure. Further, the amount of expenditure is deducted from the estimated profit to evaluate the deficit or surplus position of the business from operations (Shank and Fisher, 2006). Lastly, the budget is reviewed by the senior authority of Jeffery and Son so that they can make decisions regarding the practical applicability of business operations.

Selection of appropriate budgeting methods

There are various types of budgets prepared by the firm to adequately allocate financial resources and make optimum utilisation to generate desired results and outcomes. Furthermore, as per the needs and wants of the company, managers prepare budgets and herein, the following are the budgeting techniques used by the financial manager of Jeffery and Son Ltd:

Operational budgeting: In this, managers of Jeffery and Son Ltd prepare budgets based on different operations which consist of production, selling distribution etc (Ifandoudasand Gurd, 2010). However, considering the flexibility of these budgets they can be prepared based on annual, monthly or quarterly. Furthermore, through the means of these budgets strategies are employed by the firm to carry out the operations.

Zero-based budgeting: Managers undertake this type of budgeting approach whenever they have a base of the previous reporting period. However, this budget is prepared when there is a huge change in the conditions of the target market or the company is developing a new product. Further, there are no measures of forecasting in this budget which indeed leads to generating a high possibility of variances (Berger, 2011).

Incremental budgeting: It is a budgeting technique which is based on slight changes from the preceding period's estimated results or actual outcomes. However, it is considered as the traditional means of budgeting because in this budgets are prepared by making use of information from the previous reporting period.

Based on the above-identified different methods, the most appropriate and suitable technique of preparing the budgets for Jeffrey and Son's smake is operational budgeting. The rationale behind this is that it will help in preparing different budgets for different operations so that activities can be carried out in effective manner (Zimmerman and Yahya-Zadeh, 2011).

Management report by the identified responsibility centres

On the basis of the above reconciliation statement, various departments of Jeffery and Son's Ltd have to bring modifications in their approach so that variances can be avoided or prevented.

Selling department: In this department, the sales manager has to make smart and accurate estimations of sales prices so as to avoid negative variance. In order to do so, the management of Jeffery and Son's Ltd has to carry out market research so that they can identify the demand for products as well as the spending power of the target audience so that sales prices can be set accordingly (Lucey, 2002).

Production department: According to the current situation, wastage of raw materials during the production process is one of the major concerns for the senior authority of Jeffery and Son's Ltd. However, in order to reduce this concern, management has to indulge the latest technological equipment or machinery so that the production process can be enhanced and optimum utilisation of available resources can be made.

Human resource department: Considering the present position, labour variance is showing positive results as compared to other departments. Therefore, Jeffery and Son's Ltd need to indulge in more training and development sessions so that employees can be motivated to improve their skills and abilities and carry out work in effective and efficient manner (Ko

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