Questions- This assessment will cover the following questions:
- Provide the understanding of management accounting systems.
- Calculate costs by using appropriate methods of cost analysis in order to prepare the income statement using marginal and absorption costs.
- Alpha Ltd. Is a construction material company? Evaluate the use of planning tools in the management accounting.
- Make comparison between ways in which Alpha Ltd. could use management accounting to respond financial problems.
Management accounting refer to the various concepts which help the business and it's operations in order to collect financial records or produce financial statements for the further analysis (Bagautdinova, Kundakchyan and Malakhov, 2013). Management accounting used by the managers of the company in order to formulate strategies and make effective decision to achieve organizational goals & objectives. It include the analysis of data which is beneficial for external parties such as inventors to make their decisions regarding investment. This report based on Alpha Ltd which is medium size manufacturing firm and they have 50 staff members which produce a range of Pizzas. It is the small pizza company that established in 2001. This project report cover various topics such as management accounting, different types of accounting systems and accounting reporting. Use costing technique to prepare income statements, evaluate advantage or disadvantage of different planning tools and how they used to resolve their financial issues by using management accounting systems.
P1. Explain the Management Accounting Term and Essential Requirement of Various Management Accounting System
Management accounting is the process which is used by the organization in order produce report which is beneficial for the stakeholders who make further decisions regarding investments. With the help of management accounting, managers can collect financial information for long term as well as short term decisions (Management Accounting, 2019). It is also useful in measuring, analysing, communicating information in the entire organization in order to achieve business goals & objectives.
Inventory Management System:
It is an system or software which is used by the manufacturing organizations in order to manage their stock level for the production. This process include the monitoring as well as maintenance of stored items such as raw material, company's assets etc. Through keeping records of inventory managers able to analyse the availability of stock for the production. In context of Alpha Ltd, managers monitor or keep track the records of raw material which is used for to produce pizzas. It is essentially required in the organizations because they have to manage inventory for the functioning of business operations in well manner (Ball, Grubnic and Birchall, 2014). There are various types if inventory management systems which are mentioned bellow:
- LIFO (Last In First Out): Inventory used for the production that recently purchased and carry out for the operational activities.
- FIFO (First In First Out): In this method, managers uses that material first which firstly bought by the company.
- AVCO (Average Cost): In this system, management use the inventory on average basis for the products or goods.
On the basis of above discussed Alpha Ltd are follow the FIFO method which help the organizations to utilise their available resources in the sequence purchase. It is essentially required for food business to manage their inventory because it is not possible to keep vegetables for long period.
Cost Accounting System:
It is the accounting framework which is used by the organizations in order to estimate each unit cost of their products. It is essential required to calculate the accurate cost because it further influence the profit margin of the company. In context of Alpha Ltd, managers used this system to manage their overall product cost and it beneficial in making future decisions. Managers try to minimise the cost of pizza which helps them to maximise the profit margin of each product.
Price Optimising System:
It is the method which is used to determine the set of price range of the product and analyse that which price of product satisfy the consumers need or meet their objectives. Managers of Alpha Ltd determine the price of pizzas which sold to the customers and also analyse that which price range satisfy the consumers more (Bryer, 2013). This system essential for the company to set suitable price for pizzas or able to meet their goals & objectives through increasing productivity as well as profitability.
Job Order Costing:
This accounting system used when different jobs are working in the same period such as promotions, selling, advertising and marketing. It become very difficult to allocate the cost of each activity as per their requirement. In context of Alpha Ltd, company produce pizzas as well as perform other operational activities. So managers use job order costing in order to evaluate the separate cost for each job. It is essentially required by the organizations to ensure that every activity will be performed smoothly.
P2. Different Method of Management Accounting Reporting
Management Accounting Reporting:
The primary object of management report is to obtain the required information about the operating results of the organisation regularly in order to use them for further planing and control. Another object is to secure understanding and approval of the judgement by the people engaged in various aspects of work of enterprise . The second object is closely related to the first one and is important in terms of efficiency, morale and motivation (Cleary, 2015). A good reporting system is a better guide and effective tool for efficient managerial decision making. It helps in providing better utilisation of available resources and to have further planing and controlling. Managerial accounting provide many facts of accounting aimed at improving the quality of information delivered to management relating to the cost and sales revenue of goods and services.
Job Cost Report:
Job costing is a accounting which tracks the cost and revenue by job and enables standardized reporting of profitably by job. For an accounting system to support job costing, it must allow job numbers to be assigned to individual items of expense and revenues. Job costing may assess all cost involved in a construction job or in the manufacturing of goods done in discrete batches. These cost are recorded in ledger accounts throughout the life of the job or batch and are then summarized in the final trial balance before the preparing of the job cost, or the batch manufacturing statement.
Inventory Management Reports:
To improve the inventory management by accessing inventory reports for accurate real time insights into stock movement. Start tracking the cost of good sold, avoid overselling and underselling, even create custom reports (Endenich, 2014). Similarly Alpha company uses inventory management report for see which items belong to a business , industry, organisation. It provides a comprehensive account of the stock or supply of various items .
A budget report is prepared to compare the actual results with the pre-standard to see how to improve performance in the organisation. The budget report is used to determine which expenditure levels are too high, so that actions can be taken to bring expenditure levels back down to the budgeted amount. This report is one of the most frequently used tools for maintaining control over financial results of a business.
Account Receivable Report:
An accounts receivable is a report that lists unpaid customer invoices and unused credit memos by the ranges. It is a primary tool used by collection personnel to determine which invoices overdue for payment . Likewise Alpha limited is using such report to generates how actual output is defer from standard input. These report is used by management to determine the effectiveness of the credit and collection functions (Fleischman and Parker, 2017). The budget report is used to determine which expenditure levels are too high, so that actions can be taken to bring expenditure levels back down to the budgeted amount. This report is one of the most frequently-used tools for maintaining control over the financial results of a business.
M1. Evaluate the Benefits of Management Accounting Systems along with it's Application in Organizational Context
There various accounting systems which are used by the organizations in order to perform their operational activities. Every management accounting systems have various benefits which mentioned below along with it's application in context of Alpha Ltd. Discussion are mentioned below:
- Job order costing: It help the Alpha Ltd to acquire the benefits through allocating fund for each job which applied in the organization in order to successfully complete the operational activities.
- Price optimising system: It is beneficial in determine the price of product which meet the customer's objectives regarding their spending. In context of Alpha Ltd, manageable set the price of pizzas which are sold by company to attract huge customers.
- Cost accounting system: With the help of this system, manager of Alpha Ltd hey the benefits because it helps in estimating overall expenses and project the revenue for the period.
- Inventory management system: It provide the benefits such as maximise the efficiency and productivity in the operations (Grabner and Moers, 2013). Management of Alpha Ltd use this system to minimise the inventory cost or keep track the availability for the production of pizzas.
D1. Critically Evaluate that how Accounting Reports and Accounting Systems are Linked with Organizational Process
Every organization follow the various accounting systems or accounting reports in order to manage their operational activities or maintain the records for the further use. Alpha Ltd also use various systems such as inventory management, cost management etc. Along with this, inventory management report used to produce for the information regarding inventory level which required for operating activities. In addition, performance report used to evaluate the individual as well as entire organization performance. With the help of these reports, managers of Alpha Ltd able to make strategies or perform their organizational process in well manner in order to achieve their business goals & objectives.
P3. Use Appropriate Technique of Cost Analysis and Prepare Income Statement by using Marginal or Absorption Costing Method
It is the costing method which is used to evaluate the net profit of the company. Under this method, change in the additional production will be consider and what cost it occur for the production (Harrison and Lock, 2017). In context of Alpha Ltd, managers evaluate the additional cost of pizzas which are produce by them because of its high demand.
This costing method used to evaluate the cost of each unit which help the managers to formulate future strategies. It include the fixed as well as variable cost at the time of calculating cost (Havranek, 2017). Managers of Alpha Ltd, use this technique to evaluate the cost of pizza at the time of manufacturing.
M2. Apply the Range of Management Accounting Techniques and Produce Financial Reporting Documents
There are various accounting techniques which are used by the organizations in order to reduce their cost of maximise the profit margin. It further beneficial in achieving their business goals & objectives and it will be possible through implementing various management accounting techniques. Some of them mentioned below:
Standards Costing: It is the traditional cost accounting method that used to determine the differences between actual cost as well as the cost which occur at the time of production. This costing technique used by the managers of Alpha Ltd in order to analyse the cause of variation between standards or actual cost of the products.
Historical Costing: It is the original nominal value of particular item where assets and liability of the company recorded at historical cost (Holsapple, 2013). It helps the Alpha Ltd to understand that, they have to record actual cost of assets as well as liability in the books of accounts rather than recording current market value of goods.
D2. Produce Financial Report that Accurately apply or interpret the data for Business Activities
With the help of costing method Alpha Ltd able to calculate their product cost or generate income statement for the period. By using marginal costing method, net profit of the company is £ 200000 for the end of period. On the other hand, by using absorption costing method company get the results around £ 600000. For the better results , Alpha Ltd use the marginal costing method to evaluate the net profit of the company. This costing methods ignore the losses which impact the profit margin of the company.
Also Read:- Financial Accounting and Management Accounting
P4. Evaluate the Advantage or Disadvantage of Various Planning tools that used in Budgetary Control
Budgetary control: It is the procedure where managers make sure that they perform all the operational activities through managing their expenses. In this context, managers have to set their financial as well as performance goals which required to achieve for better outcomes. There are various planning tools which help the Alpha Ltd to manage their budget or make them able to perform accordingly. Some of the planning tools are discussed below:
Operational budgetary control: It is the budgetary control method which is used for the purpose of managing or controlling the operational activities or build future strategies accordingly (Kumarasiri and Jubb, 2016). In context of Alpha Ltd, they use operational budgeting tools in order to perform their operational activities in well manner or achieve the business goals & objectives. Some of the important elements are required to analyse for the better budgetary control.
- Various analysis: In context of budgeting, it is the difference of standards cost and the actual amount which they get through selling their products. It help the organization to formulate strategies for the future in order to generate high profits. Management of Alpha Ltd use this tool and measure the cause and that are resulting in variation.
- Forecasting: It is the process of making projections regarding future expenses and it will be based on past and present financial information which further affect the operational efficiency. In context of Alpha Ltd, managers analyse the costs as well as other events which can generate the revenue for the company.
- Standards costing: It is the tool which are used by the organizations in order to formulate strategies regarding various and ensure that it will be done accordingly. In context of Alpha Ltd, managers use this method to evaluate the overall expenses of the company regarding each activities.
- Flexible budgeting: It is the budget which can be adjust due to change in the volume of activities of the organization (Maskell, Baggaley and Grasso, 2017). It is used by the Alpha Ltd in order to complete their project which required to change in their budgets as per the requirement.
Advantage or Disadvantage of this planning tool:
- With the help of operational budget manager able to estimate future expenses which beneficial in making future strategies.
- It is advantageous for the company because management can modify their records in order to analyse the actual cost for the period.
- It is very complex process which generate lot of confusion at the time of making budget.
- Managers have to ensure that information should be accurate or specific otherwise it will impact the overall spending of the company.
Capital budgeting: This budget used to make future decisions regarding investment in fixed assets. With the help of this budgeting tool, managers able to identify that company need to invest or not and it will be based on some elements which required to evaluate. Management of Alpha Ltd use this budgeting tool in order to measure that which project should be selected for the investment or it will be profitable or not to. There are various techniques which is used to measure and then formulate strategies accordingly. Some of them mentioned below:
- Accounting rate of returns (ARR): This technique used to measure the rate of return of particular project. So organizations need to evaluate alternatives too and then make decisions on the basis of higher returns (Morden, 2016). In context of Alpha Ltd, management also make their investment decisions through analysing the project returns and then invest accordingly.
- Internal rate of return (IRR): It is the measurement of returns on investments where calculation except the external factors such as risk free rate, inflation etc. In other words, it is the interest rate where net present value of cash flow of any project will be equals to zero. Managers of Alpha Ltd use this technique to evaluate the overall project and analyse that invested money generate some value or not for the organization.
- Payback Period: This technique refer to the time period when organization recover the cost of investment. Lower the period is beneficial for the company so managers need to select project on the basis of payback period. Managers of Alpha Ltd use this budgeting method to select the appropriate project more the investment.
- Net present value (NPV): This technique used to calculate the present value of any investment and it will be calculated through identify the difference between present value of cash inflow or present value of cash outflow (Nørreklit, 2014). With the help of this budgeting technique, Alpha Ltd able to make their decisions regarding future decisions.
Advantage or Disadvantage of this Planning Tool:
- It helps in selecting best option from the alternatives for the investment which maximise the revenue through providing higher returns.
- It will increase the interest of stakeholders in the organizations which provide the higher return through selective best one.
- All the discussion based on the estimation which can be wrong or generate the possibilities of maximum error.
- Individual required professional skills in order to formulate capital budgeting and company have to bear additional cost by recruiting skilled people in the organizations.
M3. Analyse the Different Planning Tools and it's Applications for Forecasting Budgets
There are various planning tools which are used by the organization to make their future decisions and ensure that it help in maximising productivity as well as profitability. These budgetary tools used for the forecasting and making strategies in order to enhance the operational efficiency as well as effectiveness. Managers of Alpha Ltd use the capital budgeting techniques such as accounting rate of returns, payback period, NPV etc. Future investment decisions of the company based on these budgeting methods.
P5. Analyse that how Organizations Implement Management Accounting Systems to Respond Financial Problems
Every organizations face some issues human resources, finance, technical etc. but it is important for them to resolve as soon as possible they can. In context of Alpha Ltd, management face the financial issues which can be resolve by using various management accounting systems. Alpha Ltd face some issues regarding finances which mentioned below:
Errors in the maintenance of accounting records: Accounting information will be recorded in annual basis so it can be generate errors in the final results. Alpha company face the issues of appropriate information funding. It will further affect the business because they are unable to generate accurate records for the company.
Inadequate assets: Organization use various assets which required to perform their operational activities in order to maximise production (Schaltegger, Burritt and Petersen, 2017). It will further cause the issues regarding lack of finance which further impact the operational activities as well as overall profitability of the Alpha Ltd.
In order to resolve financial issues of Alpha Ltd, managers implement the management accounting techniques which helps in maximising the efficiency as well as effectiveness of the operational functions. Some of the accounting techniques are mentioned below:
Key Performance Indicator (KPI): It is the performance measurement tool which used are by the organizations in order to perform their operational activities which make them able to meet business goals & objectives. By using this techniques, Alpha Ltd able to identify the problem which impact the overall production as well as profitability. There are two types of KPI such as financial or non financial. With the help of this tool, managers of Alpha Ltd able to analyse the cause of problems and provide suitable solutions for them.
Benchmarking: It is also one of the performance measurement tool which is used to evaluate that company is able to achieve their goals or objectives through utilizing operational resources. Managers of Alpha Ltd use this techniques for the purpose of reducing error from the accounting at the time of recording transactions.
In order to resolve the issues regarding financial problems managers of Alpha Ltd implement the financial governance for the appropriate solutions.
Financial governance: It is the combination of rules and regulations which formulated for the organizations and it is mandatory to follow by every business. It include the process of recording, observing and collecting financial information and make sure to implement accounting principles at the time of recording each transaction. In context of Alpha Ltd, managers used to identify the errors in the financial information and provide protection to the assets of the company (Siverbo, 2014). In order to resolve their financial issues Alpha Ltd implement the principles of financial governance.
Comparison of organizations:
Cost accounting system
In context of Alpha Ltd, managers follow the cost accounting system in order to resolve the errors in the accounting records. With the helps of this accounting system organization able to identify the each product cost and it will be recorded for the same. Each transactions are recorded on the spot in order to reduce the error.
This company use cost accounting system in order to resolve the issues regarding unforeseen expenses which maximise the overall cost and reduce the profit margin as well. With the help of this accounting system managers of Pizza express able to evaluate their product cost and formulate future strategies accordingly.
Inventory management system
Managers of Alpha Ltd use this accounting system in order to protect assets of the company. By using inventory management system, managers able to mange their stock level and protect from damages which affect the overall production level or create financial issues for the company.
Pizza express face the issues regarding wastage of material in the organizations. In order to resolve this issues, managers have to implement inventory management system to keep maintain the records or take future actions accordingly.
M4. Analyse that how Organization Respond their Financial issues for the Sustainable Success
It is very important for the organizations to resolve their financial issues as soon as possible they can otherwise it affect the production as well as profitability. Alpha Ltd face the two issues which generate financial problem in the organization. These issues can be resolved by using various management accounting techniques such as Key Performance Indicator, benchmarking and financial governance. Effective implementation of these techniques will leads to provide success and make them able to achieve organizations goals & objectives.
D3. Evaluate that how Planning used to Resolve the Financial Problems which leads the Sustainable Success
There are various planning tools which used by the organizations in order to resolve the financial issues of the company which minimise the production as well as profit margin. Alpha Ltd follow the operational budgetary control as well as capital budgeting to analyse the operational activity and find the suitable solutions for this. It will further beneficial to forecasting and ensure to resolve the issues finance.
From the above discussion it has been concluded that use of management accounting is the common thing but it is important to implement its concepts in well manner. By using accounting systems, organization able to perform well their operational activities and it will be evaluated through various reports. Managers of the company used to evaluate the performance of the company with the help of performance report. There are various financial issues which affect the production as well as profitability and it will be resolved through KPI or benchmarking. Company use the operational budgetary and capital budgeting planning tool to resolve financial issues.
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