Management Accounting for Optimisation of Financial Resources
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Management Accounting for Optimisation of Financial Resources

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  • Level: High school
  • Pages: 26 / Words 6573
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Question :

This assessment will cover following questions:

  • Discuss an understanding of management accounting system.
  • Define various management accounting techniques and methods used to make effective decisions.
  • Explain the benefits of Management Accounting systems and their application within an organisational context.
Answer :
Organization Selected : NISA

INTRODUCTION

In recent times, every business unit has placing emphasis on employing a management accounting (MA) system with the motive of making optimum utilization of financial resources. Moreover, such a system focuses on cost control as well as profit maximization and thereby contributes to organizational success. For this project, NISA has been selected which offers retail products or services to the customers. This report will shed light on different systems that can be used by the firm for evaluation and reporting purposes. Besides this, the report will shed light on the tools that assist in planning as well as solving monetary problems effectively.

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TASK 1

Explaining The Principles of Management Accounting And Stating Its Importance Pertaining to Integration Within An Organisation

Management accounting may be presented as a process of offering financial information and resources to managers for decision-making aspects (Weetman, 2019).

Principles of management accounting

  • Cost reduction
  • Presents solution considering both controllable and non-controllable cost
  • Optimum utilization of resources

Importance of management accounting

  • Helps in setting budgets or financial plans for upcoming time period
  • Assists in setting prices for the products or services
  • Provides management team with timely information for planning & decision-making purposes (Otley, 2016).

Explaining Different Techniques And Methods Used For Management Accounting Reporting

The manager of Nisa prepares managerial reports to provide the team of higher management with suitable information about internal performance. This in turn helps in several aspects regarding planning, decision making as well as measuring and evaluating performance. Reports which can be prepared by Nisa for decision making purposes are enumerated below:

Job cost report: This report furnishes information about expenditures incurred while performing a specific job. It helps in doing evaluation of existing performance over estimated revenue and thereby highlights profitability related to each job. Through this, the business unit can make efforts in the profitable areas and thereby improve performance levels.

Budget report: It assists the manager in doing an assessment of departmental performance and controlling costs. Further, variances found in the actual performance also help in setting a budget for the near future (Types of Managerial Reports, 2020). In addition to this, the owner of Nisa can also use this report to offer incentives to the employees.

Inventory report: By preparing and using this report manager of Nisa can make the manufacturing process more efficient. It contains information about wastage, cost level, and overhead expenses in relation to inventory usage and management (Cooper, Ezzamel, and Qu, 2017). Along with this, an inventory report also helps in doing a comparison of different assembly lines and thereby helps in setting bonuses for the best-performing areas.

Accounts receivable aging report: By this, cash flow can be managed and monitored by Nisa prominently. Moreover, it presents time period from which the debtor's payment is due. Through this, managers can ascertain customers who are facing difficulty in paying their balances. In this way, such a report helps in assessing problems that take place in the company's collection process. Referring to all these aspects, the firm can make decisions pertaining to allowing credit extension to the customers.

Evaluating the Benefits of MA Systems And Their Application Within an Organisational Context

Applicability And Benefits of Varied MA Tools in The Context of Nisa is Enumerated Below:

Job costing

According to this, the cost of production is determined by referring to the number of completed jobs. By applying this, the manager of Nisa can identify whether production cost exceeds overheads and the price of material. Thus, referring to this, resources can be used in profitable areas to improve overall performance.

Advantages

Disadvantages

  • Profitability can be determined pertaining to each job.
  • Helps in doing the estimation of cost (Job Costing Advantages and Disadvantages, 2020)
  • Requires clerical work
  • Time-consuming process
 
Cost Accounting

Such a system of management accounting assists in determining the cost of production (both fixed & variable). In other words, by accumulating both direct and indirect expenses manager of Nisa can assess production costs. Further, by adding markup or desired profit margin in the unit cost product's price can be ascertained (Maas, Schaltegger, and Crutzen, 2016). By using the following formula manager of Nisa can set suitable prices:

Price = unit cost + (cost * profit%)

Advantages

Disadvantages

  • Facilitates elimination of wastage, losses, and inefficiencies from operations.
  • Ensures cost reduction
  • Helps in identifying reasons behind profit or loss (Advantages and Disadvantages of Cost Accounting, 2020)
  • Assists in setting suitable prices for product
  • Offers a framework for decision making by taking into account previous figures, whereas management is concerned about the future.
  • This leads problems of under and over-absorption
 
Inventory management system

Companies can track stock levels more effectively by using inventory management software or systems. Moreover, it furnishes information about orders, sales and deliveries aspects. Further, it also helps in preparing documents in relation to work orders, materials, etc. The manager of Nisa can do an appropriate valuation of stock by taking into account various methods such as LIFO, FIFO, etc (Hopper and Bui, 2016). In addition to this, methods such JIT (just in time), EOQ (economic order quantity), etc is highly significant and assist in maintaining enough stock within an organization and reducing cost level.

Advantages

Disadvantages

  • Ensures savings of both cost and time
  • Increases operational efficiency
  • Optimum utilization of stock
  • Facilitates uninterrupted production
  • Highly expensive
  • Involves high complexity
  • Elimination of business risk to a limited extent
 
Price-Optimization \System

In the context of Nisa, by using this system manager of Nisa can monitor or track customers' responses or behavior at varied prices eve. Hence, by taking into account price optimization system manager can set suitable prices for the products or services in line with the customer's expectations.

Advantages

Disadvantages

  • Facilitates optimal price fixation
  • Helps in enhancing customer base
  • Requires a greater understanding of the concepts
  • Time intensive practice
 

TASK 2

Calculating Cost And Preparing Profitability Statements as Per Absorption & Marginal Costing

Specifically, absorption and marginal costing are the two methods that Nisa undertakes for assessing profitability aspect.

Cost Assessment, as Per Absorption And Marginal Costing, Pertaining to Alpha is Enumerated Below:

Particulars

Marginal costing

Absorption costing

Direct material

5

5

Direct labor

8

8

Variable production overhead

2

2

Fixed production overhead

-

5

Total cost per unit

15

20

Profitability Statement as Per Absorption Costing:

Particulars

Unit

Per unit figure

Amount (in £)

Sales

1500

35

52500

Less: cost of goods sold

 

 

3000

Gross profit

 

 

20000

Less: indirect expenses

 

 

 

Fixed selling & distribution expenses

 

 

10000

Variable S&D expenditure

 

 

7875

Net profit

 

 

2125

 

Computation of COGS

Particulars

Unit

Per unit figure

Amount (in £)

Opening stock

0

20

0

Add: purchases

2000

20

40000

Less closing stock

500

20

10000

COGS

 

 

30000

The income Statement According To the Marginal Costing Method Is As Follows:

Particulars

Unit

Per unit figure

Amount (in £)

Revenue

1500

35

52500

Less: variable expenses (COGS

 

 

22500

Less: variable selling & distribution expenses

 

 

7875

Contribution

 

 

30375

Less: fixed expenses

 

 

 

Fixed production overhead

 

 

15000

Fixed selling & distribution expenses

 

 

10000

Profit

 

 

5375

Particulars

Unit

Per unit figure

Amount (in £)

Opening stock

0

15

0

Add: purchases

2000

15

30000

Less closing stock

500

15

7500

COGS or total variable cost

 

 

22500

By doing the assessment, it has been found that the business unit should follow an absorption costing system for cost and profitability assessment. Moreover, the absorption costing method presents a highly suitable view of production cost as it considers both fixed and variable expenses (Geddes, 2020). This in turn gives a clear indication of the profitability aspect.

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TASK 3

Explaining The Advantages And Disadvantages of Different Types of Planning Tools Used For Budgetary Control

There are several tools that Nisa can employ for the purpose of budgetary control including investment appraisal tools, cash, and operating budget. By undertaking such budgeting frameworks organization can monitor or compare expenses and thereby take suitable measures for improvement (Ax and Greve, 2017).

Cash Budget

It may be presented as a financial framework that includes both estimated cash inflows and outflows pertaining to the specific time frame (Weetman, 2019). By preparing cash budget manager of Nisa would become able to know whether the company has enough funds for performing business activities or not.

Advantages

Disadvantages

  • Facilitates quick identification of potential deficit and surplus
  • Debt can be avoided significantly
  • Less effective in comparison to modern budgeting tools namely ABB, ZBB
  • Highly relies on estimations for meeting future needs
 

Operating Budget

It implies the forecast of both revenue and expenses with regard to specifically one or more future periods. At the beginning of the year, the manager of Nisa can draft an operating budget which in turn exhibits expected activity levels for the concerned period (Burney and Malina, 2019). Thus, by undertaking this budget manager of Nisa can monitor operational performance.

Advantages

Disadvantages

  • Assists in tracking the performance of the entire business
  • Ensures flexible budgeting
  • Focuses only on financial outcomes while preparing a budgeting framework
  • Time-consuming exercise
 

Investment Appraisal Tools

Nisa can undertake this tool for planning purposes when it has investment or growth options. It mainly includes the payback period, net present value, average, and internal rate of return. This helps in analyzing the viability of capital projects and thereby aids in ineffectual planning.

Advantages

Disadvantages

  • Presents a suitable framework for decision making by considering the time value of money concept.
  • Clearly indicates return associated with the project
  • Not helpful when the initial investment varies
  • The payback method does not highlight the profit that will be generated after the recovery of the initial investment.
 

Analyzing The Use of Different Planning Tools And Their Application For Preparing And Forecasting Budgets

The cash budget for the period of 6 months is enumerated below:

Particulars

January

February

March

April

May

June

Cash inflows

 

 

 

 

 

 

Opening cash balance

3000

8500

14325

20491.3

27015.8

33916.6

Sales

15000

15750

16538

17364

18233

19144

Other income

2000

2000

2000

2000

2000

2000

Total cash inflows

20000

26250

32862.5

39855.6

47248.4

55060.8

Cash outflows

 

 

 

 

 

 

Material

5000

5250

5513

5788

6078

6381

Labor

3000

3000

3000

3000

3000

3000

Other expenses

3500

3675

3859

4052

4254

4467

Total cash outflows

11500

11925

12371.3

12839.8

13331.8

13848.4

Cash surplus or closing cash balance

8500

14325

20491

27016

33917

41212

The above-depicted cash budget shows that the sales and profitability of the firm will increase significantly in the upcoming time period. The manager of Nisa can undertake a cash budget for evaluating and monitoring performance levels. On the basis of this, deviations can be assessed timely which helps managers in taking corrective measures for performance improvement.

Applicability of Investment Appraisal

For instance: Nisa has two investment proposals with varied initial investments. In this regard, the company can select the most suitable option over the other one by employing the investment appraisal technique. Through evaluation, it has been assessed that managers should focus on investing funds in Project A. Moreover, it shows a higher and positive net present value or return as compared to option B.

Computation of NPV

Year

Cash inflow (project A)

PV factor @ 10%

Discounted cash inflow

Cash inflow (project B)

Discounted cash inflow

1

20000

0.909

18182

18000

16364

2

25000

0.826

20661

23000

19008

3

21000

0.751

15778

19000

14275

4

26000

0.683

17758

24000

16392

5

32000

0.621

19869

28000

17386

Total discounted cash inflow

 

 

92248

 

83425

Less: initial investment

 

 

70000

 

70000

NPV

 

 

22248

 

13425

Comparing How Varied MA Tools Can Be Used For Responding to Financial Problems

With regards to business units, bottleneck in performance is usual which in turn directly impacts organizational performance. Thus, there are several tools that can be undertaken by Nisa for dealing with financial problems pertaining to reduction in productivity, profitability, market share, and increase in cost.

Benchmarking: Now, for assessing and getting information about performance trends business unit emphasizes setting benchmarks. It offers input to Nisa for performance evaluation in the context of sales etc.

Key performance indicators: In recent times, the company lays emphasis on setting KPIs pertaining to sales, profit, market share, etc. Thus, by comparing actual performance in against to the KPI's manager of Nisa can identify reasons takes place behind performance deterioration.

Variance analysis: This is another effective tool that assists in responding to monetary problems. Moreover, it clearly exhibits deviations that take place in the existing performance over standards along with the causes (Quattrone, 2016). Thus, referring causes manager of Nisa can take significant measures for performance improvement.

Balance scorecard: It measures a company's performance by taking into account both financial and non-financial measures. This includes mainly four aspects pertaining to customers, financial, internal business, innovation, and learning. In this way, a balanced scorecard offers an opportunity in relation to evaluate performance from such perspectives and enables one to take measures for performance enhancement.

By doing the assessment, it has been identified that Nisa undertakes benchmarking techniques for identifying and resolving monetary problems. In the case of a decrease in productivity and profitability business unit can do a comparison of existing performance over benchmarks. Referring causes Nisa can take action pertaining to practicing intense promotional strategies and cost control measures. By this, Nisa can maximize sales and thereby profitability as well (Ax and Greve, 2017). On the other side, Qbic Hotel undertakes a balanced scorecard model as it assists in measuring performance from several perspectives. Moreover, to gain a competitive edge over rivals firm is required to monitor performance from all perspectives. However, in comparison to Qbic, the MA technique undertaken by Nisa is highly effective. Moreover, it clearly indicates both variance and causes associated with the same.

Also Read:- Importance of Finance Management in A Company

Analyzing How Management Accounting Can Lead Organizations To Sustainable Success

Management accounting tools such as benchmarking, variance analysis, etc give a timely indication to the firm about the areas where improvement is required. For instance: the variance analysis system provides Nisa with suitable reasons pertaining to the non-achievement of predetermined goals or objectives. In this way, by doing modifications to the existing strategic framework within a suitable time company can avoid deficiency takes place in performance and thereby lead to sustainable success.

CONCLUSION

By summing up this report, it has been articulated that through undertaking MA systems manager of NISA can get suitable information about cost, profit, stock level, etc. Besides this, it can be inferred that by preparing reports management team of the organization can make strategic decisions and thereby get the desired level of outcome or success. It can be summarized from the evaluation that MA tools are highly significant which helps in doing and making financial forecasts effectually. It can be seen in the report that by using benchmarking NISA resolves monetary problems and thereby ensures sustainable success.

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