Unit 5 Management Accounting

Task 1

a. Defining management accounting and its essential requirement

Management accounting is the process which includes wide range of activities such as identification, measurement, analysis, interpretation and communication of information. In the context of business unit, MA is highly significant as it provides accurate and timely information to the managers for short-term decision making. Management accounting systems may be served as a confidential reports related to the internal operations which in turn aid in business decisions and thereby overall growth. Tech Ltd can attain success by taking into account different types of management accounting systems.   

1. Difference between management and financial accounting

Both management and financial accounting is the main parts of finance but significant difference takes place between such two in the following manner:

2. Significance of management accounting information for the managers as a decision making tool

Management accounting implies for the process in relation to preparing accounts and reports which furnish statistical & timely information for decision making purpose. MA assists managers in taking both long as well as short term business decisions and thereby helps in meeting goals. MA contributes significantly in the organizational growth and assists in building competitive edge over other. In the context of Tech Ltd, significance of MA can be presented as a decision making tool in the following manner:

• Assists in future forecasting: MA helps company in making evaluation whether it should invest money in equipments or not. Further, it also provides deeper insight to the management team that strategy regarding diversification of operations will prove to be beneficial or not. Hence, MA field assists in making forecast about future trends and thereby decision making.
• Helps in taking make or buy decisions: Manufacturing companies also face issue in deciding whether they should produce product inside or make focus on outsourcing. Hence, using MA manager of Tech Ltd can take suitable decision regarding make or buy aspects.
• Facilitates cash flow forecasting: It enables manager to make proper forecast about future expenses and revenue streams. Hence, by undertaking MA business unit can make appropriate prediction about future cash position and thereby becomes able to develop strategic plan.
• Assists in understanding performance variances: Using MA, Tech ltd’s manager can assess and analyze causes take place behind deviations (Management accounting and its importance, 2018). Hence, by understanding performance variances suitable strategies can be formulated for future improvements.
• Evaluation of rate of return: Manager of the company can analyze rate of return which in turn associated with the future investment opportunities. Further, using MA firm can determine when it will attain the position of no profit no loss.

3. Cost accounting system

This accounting system is usually used by the manufacturing firms for recording information about production related activities. Hence, Tech Ltd also comes under the category of manufacturing unit so it should focus on undertaking the system of cost accounting. By using such system, manager of Tech Ltd becomes able to track the flow of stock continually through the various stages of production. Further, using the system of cost accounting firm can make proper estimation about cost and do profit planning (Messner, 2016). Thus, from the perspective of cost assessment, profitability planning and stock valuation such system is highly significant.

4. Inventory or stock management system

In relation to Tech ltd, stock management system is vital for better management and functioning. Such system clearly entails the level of stock which business unit must have at any point of time. By undertaking inventory control methods such as just in time, economic order quantity etc firm can ensure uninterrupted functioning and thereby becomes able to exert control on cost such as holding & ordering (Fullerton, Kennedy and Widener, 2014). Along with this, inventory management system helps in tracking orders, sales level and deliveries. Thus, by employing inventory management system firm can achieve goals to a great extent.

5. Job costing system

Tech Ltd, a manufacturing business unit, can use job costing system for the purpose of effective management. Job costing system of MA focuses on collecting information about cost which is related to the specific production or service. In other words, by employing job costing system business unit can ascertain cost associated with specific production in terms of material, labour and overhead (Job  costing, 2018). Hence, considering such system manager of Tech Ltd can take pricing decisions and track or monitor the level of expenses.

b. Presenting financial information 

1. Different types of managerial accounting reports

Managerial accounting reports include budget, job costing, accounts receivable aging and manufacturing framework. Such reports are prepared by the business owners for monitoring company’s performance and developing framework for future success. As per the requirements manager of Tech Ltd can prepare managerial reports for decision making purpose.

• Budget report: It contains information about departmental performance and helps in ascertaining whether goals are met or not. Hence, budget or performance report provides assistance to the manager in assessing the causes due to which deviations are occurred within the specified time frame. Referring the causes of deviations manager of Tech Ltd becomes able to take remedial measure for improvement. Further, using such report manager can set suitable goals for the near future or upcoming time period (Otley, 2016). However, on the critical note, it can be depicted that if firm fails to set suitable budgeted figures then it may result into high deviations and thereby leads inappropriate framework.
• Job costing report: This report communicates information regarding expenses related to specific projects. Job costing report helps in determining profitability by making comparison of expenses with estimated revenue. Such report is highly prominent in the context of Tech Ltd as it gives clear indication about profit earning areas and helps in improving areas before cost escalation.
• Accounts receivable aging report: By using such report Tech Ltd can manage its cash flows in the best possible way. Through undertaking accounts receivable report manager can assess or identify customers who are unable to pay their due balances. Accounts receivable reports provide deeper insight about the timeframe within which debtors are making payment. Thus, considering such report manager can take decision whether there is a need to tighten credit policies or not. In this way, such report helps in managing both cash flow and working capital.
• Inventory and manufacturing report: Tech Ltd can make its inventory process more efficient by using such report. Stock report provides information about inventory waste, hourly labour and per unit overhead cost (Perin and et.al., 2016). This in turn offers opportunity to the manager in doing comparison of different assembly lines and thereby helps in ascertaining best performing departments.

All the above depicted aspects show that managerial accounting reports help in tracking the performance of departments and taking actions for improvement.

2. Stating reasons why information must be presented in a understandable manner

Managerial reports can said to be significant when it contains characteristics of reliability, accuracy, comparability and understand-ability. There are several reasons due to which Tech Ltd should prepare report in an understandable manner such as:

• Considering managerial reports manager formulates strategies and policies
• Helps in taking decision about cost reduction and  profit planning
• Future planning is also based on managerial reports (Reome and Sinclair, 2017)

Hence, all the above depicted decisions are the based on managerial accounting reports. Thus, for the achievement of goals emphasis should be placed on preparing reports in an understandable manner.

Task 2

Preparing income statement on the basis of absorption and marginal costing method

Absorption costing: This method implies for the one where all the manufacturing costs are absorbed by the number of units produced. On the basis of absorption costing method, cost of  finished stock include both fixed and variable expenses including material, labour as well as  overhead. Accounting standards also lay focus on using such full costing method while valuating inventory (Suomala, Lyly-Yrjänäinen and Lukka, 2014). Moreover, such method treats both fixed and variable expenses as product cost which can be recovered through selling prices.

Marginal costing: Under such method, variable cost is charged to the unit cost, whereas fixed cost completely written off in against to the contribution. Marginal costing method helps in assessing additional cost which is associated with the production of an extra unit of output. Such costing method classifies expenses in terms of fixed and variable. Further, by using this method manager of Tech Ltd can do stock valuation, determine price and ascertain profitability aspect.

Absorption costing

Computation of manufacturing cost per unit 

Marginal costing

Computation of variable cost per unit

Variable cost per unit: 5 + 8 + 2

                                    = £15

Reconciliation statement

The above depicted table shows that on the basis of absorption costing method Tech Ltd will incur the loss of £375. In accordance with the full costing method manufacturing cost implies for £20 respectively. On the other side, marginal costing method presents the loss of £2875 significantly. Hence, for the attainment of profit margin company is required to exert control on cost level. Further, it is recommended to Tech Ltd to make focus on undertaking absorption costing method because it presents suitable view of cost and profit margin by taking into account both fixed and variable expenses.

Task 3

a. Presenting different kinds of budgets along with their benefits and drawbacks 

Budget may be served as a quantitative tool which contains information regarding income and expenses pertaining to the near future. By preparing budget manager can persuade personnel about the manner in which they need to spend money. Hence, there are several types of budget and budgeting tools which can be employed by Tech Ltd such as:

Fixed or static budgets: This implies for the financial framework which does not change as per the sales and other business activities. Hence, fixed budgets are not changed throughout the budget period (Tucker and Lowe, 2014).

Advantages:

• Helps in assessing business activities which are highly important.
• Provides high level of assistance in reducing cost and increasing profit margin
• Time saving exercise

Disadvantages:

• Fixed budgets do not help in tracking and monitoring expenses
• It avoids future pattern and fluctuations

Flexible budget: In the modern business environment, flexible budgeting framework is considered as high prominent over others. Moreover, in this, manager makes changes in the variable cost according to actual revenue.  Hence, in this, budget  varied according to sales revenue so it is considered as highly realistic.

Advantages:

• Gives input for budgetary control
• Facilitates change management and adaptation
• Enables manager to monitor expenses and thereby take measures for improvement

Disadvantages:

• Includes more complications
• Inappropriate information affects the accuracy and suitability of flexible budgeting framework

Zero based budgeting: ZBB is considered as highly effectual technique which in turn provides high level of assistance in setting appropriate financial framework. In this, manager starts with zero bases and evaluates every line of item related to revenue and expenses. Hence, as per ZBB, manager makes effort in relation to finding alternative ways of performing activities (Ward, 2012). Thus, it helps in preparing competent plan for the upcoming time period in monetary terms.  

Advantages:

• Assists in avoiding redundant activities
• Facilitates efficient allocation of financial resources 
• In this, employees are involved in decision making aspects  which in turn ensures high level of co-ordination and communication among the personnel

Disadvantages:

• Time intensive exercise
• In ZBB, it is highly difficult for the manager to explain every line of item. Thus, for enhancing the ability of employees in such field manager needs to conduct training session.
• For preparing budget as per ZBB high manpower is required because it needs involvement of personnel work at every level.

b. Budget preparation process and pricing methods 

Tech ltd can set suitable budget by taking into consideration following steps:

• In the first stage, manager makes assessment of cash inflow and outflow by taking into account activities which need to be performed in the concerned time frame.
• At this stage, higher management team reviews financial plan or budget. Hence, by evaluating activities, resource availability and priority budget committee makes some modifications in the existing plan as per requirement.
• In the third stage, final budget or financial plan approved by higher management team is communicated to each respective department (Bogsnes, 2016).
• Once budget has provided at each level thereafter the same is executed by the personnel. In other words, personnel implement budget at this stage while carry out activities.
• Under the last stage, manager makes comparison of actual performance with the budgeted figures. Hence, considering deviations and taking feedback from personnel manager makes changes in the existing plan.

Pricing methods: There are several methods which can be used for setting prices such as marginal & absorption costing, competitive, cost-plus pricing etc. In the context of Tech Ltd, marginal costing method proves to be highly suitable. Hence, considering such method firm can assess variations which will take in the cost on the production of one extra unit of output. Thus, using such cost related information firm would become able to set appropriate prices. Along with this, business unit should also consider demand and supply factor while taking decision about pricing aspects.

c. Significance of budget tool from the perspective of planning and control

Budgeting tool is highly significant which in ensures effectual planning and control. Moreover, budget offers input to the manager for making comparison of actual output and expenses with planned figures. By using budget manager of Tech Ltd would become able to assess reasons due to which specific department pertaining to sales and expense failed to perform according to the budget. Hence, by taking into account the causes of deviations firm can take corrective action within the suitable time frame (Granlund and Lukka, 2017). Further, assessed deviations also help in setting realistic and achievable financial plan for the near future. Thus, referring all such aspects, it can be depicted that budgeting tools aid in planning and control to a great extent.

 Task 4

Comparing the manner in which different business units adapt management accounting tools for dealing with problems

Management accounting tools provide high level of assistance to the business unit in responding monetary issues. On the basis of given case situation, problem of loss is suffered by Tech Ltd.  Thus, using balance scorecard strategy business organization can make evaluation of performance from four perspectives such as financial, customers & stakeholders, internal process, learning and growth. (Dekker, 2016) Hence, using such approach management team of such manufacturing business unit would become able to understand customer’s expectation and deficiencies take place in the financial, internal proves as well as learning & growth aspects. By keeping all such aspects in mind it can be depicted that balance scorecard approach helps in developing suitable strategies and policy framework. However, on the critical note, it can be depicted that for executing balance scorecard approach prominently business unit requires skilled personnel.

From assessment, it has found that to cope with the financial issues other manufacturing companies undertakes following techniques:

• Benchmarking: By setting benchmarks in relation to the income and expenses manufacturing firms evaluate potential as well as performance of each departmental personnel (Menifield, 2017). Hence, through periodical assessment manager becomes able to identify training need of personnel and other changes which need to be made in the existing framework for getting the desired level of outcome or success.
• Key performance indicators: As per such technique, by setting key indicators regarding sales, expenses, market share etc firm can respond monetary problems. Comparing current performance in against to such indicators business unit would become able to take suitable measure for further growth.

Conclusion

In conclusion to this report, it can be presented that management accounting systems are highly prominent as it helps in monitoring internal operations. Tech Ltd can do effectual planning by using MA systems namely job costing, inventory management etc. It can be seen in the report that managerial accounting reports offer opportunity in relation to making evaluation of departmental performance. Hence, by getting deeper insight about the performance of each department manager of Tech Ltd would become able to develop competent strategic and policy framework. Further, it has been articulated that absorption costing method is highly effectual over marginal because it considers both fixed and variable expenses while determining cost. It can be stated from the evaluation that budgeting tools makes vital contribution in financial planning and helps in making optimum use of resources. It can be depicted from evaluation that balance scorecard technique helps in making appropriate decisions as it focuses on considering both monetary and non-monetary aspects.  

References

• Bogsnes, B., 2016. Implementing beyond budgeting: unlocking the performance potential. John Wiley & Sons.
• Dekker, H. C., 2016. On the boundaries between intrafirm and interfirm management accounting research. Management Accounting Research. 31. pp.86-99.
• Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7). pp.414-428.
• Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting. 45. pp.63-80.
• Menifield, C. E., 2017. The basics of public budgeting and financial management: A handbook for academics and practitioners. Rowman & Littlefield.
• Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research. 31. pp.103-111.
• Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research. 31. pp.45-62.
• Perin, M. G. and et.al., 2016. Network Effects on Radical Innovation and Financial Performance: An Open-mindedness Approach. Brazilian Administration Review. 13(4). p.1.
• Reome, C. and Sinclair, T. A., 2017. Better Budgeting Is Good Governance. Shared Governance in Higher Education, Volume 2: New Paradigms, Evolving Perspectives. p.121.
• Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research. 25(4). pp.304-314.
• Tucker, D. and Lowe, R., 2014. Practitioners are from Mars; academics are from Venus? An investigation of the research-practice gap in management accounting. Accounting, Auditing & Accountability Journal. 27(3). pp.394-425.
• Ward, K., 2012. Strategic management accounting. Routledge.

Related Samples You May Find Useful:

• Types and Scope of Management Accounting
• Management Accounting in Budget Preparation
• Role of Management Accounting in an Organization
• Management Accounting for Business Enterprises
• Management Accounting Systems and their Reporting

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