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Explanation of Management Accounting & Different Types of Accounting

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Management Accounting

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Introduction

Managerial accounting in a profit seeking concern is to be considered as one of the most important factors of financial control. As accounting is considered as an important aspect of financial management, managers are to use suitable cost and financial accounting techniques in order to put control over the financial facts of an organization. In the initial part of the study, the researcher shall act as a Management Accountant and make report to the General Manager of a profit seeking concern in order to describe the essential requirements of different types of managerial accounting. The researcher shall make discussion on the different methods of management accounting in the next part of the study, the researcher shall make calculations of cost in two different methods of managerial costing. Financial budgeting and other planning tools are also to be discussed by the researcher after making calculation of costs. Moreover, the budgetary control and the financial resource allocation will also be discussed in order to select financial management problems.

Task 1

1.1 Explanation of management accounting and essential requirements of different types of management accounting systems

1.1.1 Explanation of Management Accounting

Management accounting could be considered as one of the most crucial financial factors that affects the financial controlling system of an organization as financial accounting is the most essential tool to record all the financial facts and figures. In this context, Vernimmen et al. (2014) stated that the financial accounting records all the quantitative data for particular period of time. On the other hand, the researcher is required to mention that the financial accounting data are used in developing the managerial accounting. In the profit seeking organizations, the management accountants are required to use the accounting information from the financial books of accounts to prepare different managerial accounting statements such as budgetary reports, variance statement and standard costing statements.

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In case manufacturing firms like the company in the case study, the managerial accounting is required to be considered as the most important aspect for putting control over the financial facts of the company. As the company involves in manufacturing of goods, which belongs to FMCG group, the company is required to make management of the financial results and performance on the basis of the market demand. As opined by Micheli and Mari (2014), manufacturing companies are needed to include the managerial accounting tools in order to put control on the different cost centers. In this context, the researcher is required to mention that as the company manufactures a large number of goods, the comopany is required to prepare managerial accounting statements for each of the cost centres. In managerial accounting, the accountant is required to analyse variances and prepare budget. Moreover, the marginal costing is also to be found as important for the management accountants to compute the profitability and breakeven for a product (Cornelissen, 2014). Therefore, the researcher could mention that the managerial accounting helps to make financial planning and this process is heklpful in case of large sclae manufacturers.

1.1.2 Requirements of Different Types of Managerial Accounting System

In manufacturing companies, the managerial accounting is to be considered as the tool, by which management accountants could examine the excessive costs in manufacturing process. On the other hand, service sector companies could also use the management accounting tools in order to compute the cost of service and the loopholes in the process of servicing. In case of The company, the management accountant could use use marginal accounting system to compute the breakeven of the company. Moreover, the profit of the comopany by selling a certain number of outputs could also be ascertained by using this aopproach of the managerial accounting.

On the other hand, Gibson (2014) stated that budgetary costing is the most relevant costing system for the managers in large manufacturing concerns as this managerial accounting system helps the management to set a target to the subordinate staffs. In this same context, Jung et al. (2016) cited that target costing facilitates the management accountants to minimise waste of financial resources. Therefore, the managerial accountant is required to mention that the budgetary costing is required for the large manufacturing firms to minimise erosion of financial resources.

1.2 Different Methods of Management Accounting

Manufacturing firms are required to prepare managerial accounting reports and variance analysis reports in order to examine the feasibility in the production process in terms of finacial figures. In this context, Armstrong et al. (2015) stated that managerial accounting statements are not controlled by any boards, which are internationally approved. In this context, it is also required to mention that the management accountants in manufacturing companies could adopt marginal accounting techniques in order to ascertain profit or loss by selling a particular number of units. On the other hand, the management accountants could prepare the cost schedule by considering the absorption costing, in which the overheads are calculated by considering the machine hours worked. The different methods of managerial accounting are discussed below.

Marginal Costing:

In marginal costing system, the management accountants consider the profit volume ratio as the base of calculation. As stated by Micheli and Mari (2014), management accountants could make the calculation of breakeven points in terms of sales figure or units. In this context, the researcher could mention that The company could consider the marginal accounting system to compute the breakeven of the products that the company manufactures. In this context, the researcher is required to mention that the breakeven point could help the management accountants of the company to compute the the number of units to be sold by the selling manasgers to make no profit and no loss. As stated by Hill et al. (2014), in marginal costing, variable costs are considered as product related cost and the fixed costs are assumed as time specific. Therefore, marginal costing could help the management accountants to eliminate the fixed overheads from the production process of the manufacturing companies.

Absorption Costing:

In case of the absorption costing, management accountants calculates costs by considering the traditional methods as this method considers the machine hours worked in the manufacturing process as the base. As stated by Brown (2013), management accountants could compute the overhead cost by considering the absorption costing system in a scenario, where the manufacturing process is indulged in producing lesser number of outputs. As The company produces large number of goods, absorption costing could not be considered as possible in this context.

Standard Costing:

In standard costing, the management accountants are required to set a target cost for each of the cost items in the planning stage (Cornelissen, 2014). After computing the actual cost of manufacturing, management accountants are required to make comparison of the actual and the budgeted financial figures. In this context, the researcher is required to mention that the management accountants of manufacturing concerns are to put control over the adverse results, which could be ascertained from the standard costing.

Task 2

2.1 Income Statement by Considering Absorption Costing and Marginal Costing

Particulars

Absorption costing (GBP)

Marginal costing (GBP)

1. Selling price

35

35

Costs

 

 

Variable manufacturing costs

 

 

   Direct materials

6

6

   Direct labour

5

5

   Variable production overhead

2

2

2. Total variable cost per unit

13

13

3. Contribution (1-2)

22

22

4. Number of units produced

700

700

5. Total contribution (3*4)

15400

15400

Fixed manufacturing costs

 

 

   Production overhead

2000

 

   Administration cost

700

 

6. Total fixed manufacturing overhread

2700

 

Adjustment for difference in production and sales

-386

 

Profit

12314

15400

Table 1: Income statement by considering Absorption costing and Marginal costing

From the above calculation table, the researcher is to mention that the total contribution of the organisation is the profit under the marginal costing method. Moreover, the variable and fixed selling overhead were required to be ignored as the selling expenses are not related with the manufacturing process of the company (Variable costing versus absorption costing | Accounting For Management. 2017). In case of the calculation of profit as per the absorption costing, the fixed costs in relation to the manufacturing and the administration have been deducted

2.2 Explanation of the Difference Between Absorption Costing and Marginal Costing

In the above calculation of total cost and profit, the researcher has considered absorption costing and marginal costing methods. In this regard, it is required to mention that both methods consider different assumptions and techniques. If the discussion is to be made on the recognision of cost, the researcher is required to mention that marginal costing method consisders the fixed costs as the period cost. On the other hand, absorption costing consdiders the fixed manufacturing costs as the product costs.

On the other hand, Mahadevan (2015) stated that marginal costing method assumes the profit volume ratio as the measurement of profit. But in the absorption costing, profitability depends on the fixed costs related to the manufacturing process. Furthermore, it is to be mentioned that the fixed costs affects the profitability in case of the absorption costing. In the above table, it has been seen that the profit of the company was lower when the absorption costing is considered. In this context, it is to state that the involvement of fixed cost in the financial statement and cost schedule has resulted in low profit.

If the discussion is to be made on the decesion making factors in the marginal costing, the researcher is to mention that management accountants consider the contribution per unit as the most crucial factor for making decesions. On the other hand, the absorption costing considers the profit per unit as the most important factor for making decesions. As the marginal costing method does not consider the fixed costs as the influencing factors in the cost schedule, the contribution per unit couls also be considered as per unit profit. On ythe other hand, the exeistence of fixed costs in the cost schedule makes it compulsory for the cost and management accountants to compute profit per unit by deducting the fixed costs from total contribution.

Task 3

3.1 Advantages and Disadvantages of Different Types of Planning Tools in Budgetary Control

Budgeting process requires various assumptions, through which managemenmt accountants make forecast for the financial fiures and profiutability (Vernimmen et al. 2014). In this context, it is to mention that the manmagers could not make forecast withgout making the required assumptions. Therefore, the managerial accountants could able to compute the forecasted profit by considering the asumption and therefore budgetary control is to be founded as quite helpful for the companaies. On the other hand, it is also to mention that the assumptions of the budget calculation could results in fake profitability reporting, and therefore this is to be considered as a drawback of the budgetary control. The other advantages and disadvantages of the different types are as follows.

Advantages of Different Types of Planning Tools in Budgetary Control

Use of Previous Year Data:

In case of financial budgeting, the management accountants are required to consisdser the previous year data to make forecast of the revenue statement and the profit. As stated by Armstrong and Taylor (2014), financial budgeting is made by considering the financial figures of the past years and therefore, the trend of the financial performance are reflected in the budgetary statement. In the case study given in the problem, the researcher is required to mention that the budgeted data has been calculated by considering the previous year data. Therefore, there is lesser chance of data manipulation.

Cash Flows:

Cash budgets of a company are prepared by considering the planning of the company of generating cash from the different sources. In this context, the researcher is required to mention that as the cash generation planning is done by the financial managers in budgetary controlling, the future cash balances could be easily ascertained by the managers. In this context, if the researcher is to give example of the computation process of the cash budget, it could be mention that if the total cash receipt of the company for a particular period is GBP 10000 and the total payment of cash of the same period of the company is GBP 8000, the company would have a forecasted cash balance of GBP 2000. In this context, the researcher is required to mention that the company could invest the available fund for future benefit. In the present case study, the profit has been computed by considering all the probable expenses and revenue. The sales revenue has been planned to make computation of the closing cash flows.

Production Specification:

In operational budget planning, financial managers are to make computation of the production of a future period. This kind of production specification could be found as helpful for the financial managers and the purchasing managers as the material requirements could be computed with the help of budgeted quantity of sales. For example, the researcher is to state that if the budgeted sales of the company are 1000 units and the available inventory of the company is 400 units, the company is required to make purchase of 600 units of material for meeting the demand in the market. In the case study, closing inventory balance of the company has been mentioned, which was required to be considered as an important factor for determining the production requirement for the current accounting period. Therefore it is to mention that the planning tool helps the management accountants to forecast the production requirement of the organization.

Disadvantages of Different Types of Planning Tools in Budgetary Control

Use of Vague Assumptions:

Financial managers make assumptions in order to make planning through budgetary controlling. As stated by Hayes (2014), sometimes managerial accountants of a manufacturing organization consider that the trend of sales and cash flows for making budgetary statements, which could result in wrong profitability reporting.

Rigidity:

Financial budgeting often faces the problem of rigidity as the preparation of financial budgeting requires firm specific standards. On the other hand, the researcher is required to mention that lack in personal intervention results in lack in flexibility of budgeting.

Lack in consistency:

In financial planning, management accountants ignore the existence of abnormal losses and gains. Therefore, the consistency could not be maintained in financial budgeting. In case of the company, the probability of machine breakdown could not be ignored as the manufacturing process involves heavy machines and plants. As the management accountants of the company considers the regular facts and figures of the manufacturing concern, the abnormal losses and gains are ignored by the management in the time of preparing budget. Therefore, the financial and management accounyt6antds could face the problem of inconsistent result due to the financial planning through budgetary control. In the case study discussed above, the computation over the profit under marginal costing method and the absorption costing method have not been made by considering the abnormal items of the financial year.

The decline in the Quality of the Output:

In the standard budgeting, the managerial accountants set target cost for the subordinate staffs. This technique results in compromise over the quality of the output. Therefore, standard budgetary control tool affects negatively to the production process. As the budgeted costs of the company was given due to the reason of putting control over the activities of the manufacturing officers of the company, there could be a chance of declining in the quality of the outputs.

Task 4

4.1 Comparison Between the Processes, which Organisations Use the Management Accounting to Respond to the Financial Problems

In an manufacturing organisation, financial amanegers use different tools and techniques to put control over the manufacturing processes defined in terms of financial and accounting figures. In this context, the researcher is also required to mention that the management accounting in an organisation helps to assure the financial managers to make the forecasted financial statements. As stated by Renz (2016), future cash flow statement and the forecasted income statements are important reports, which help the financial accountants to address the stakeholders to enhance the investment quantity in the organisation. In this context, the researcher is required to mention that the budgeted income statement and performance budgeting helps the manufacturing managers to to analyse the production of the company.

If the researcher is to make the comparative analysis on the different tools and techniques, which are used by the financial managers, it is to mention that the cash budgeting helps the manufacturing firms as well as the service providers to make forecast about the cash balances after a certain period of time. In this context, it is also to state that the manufacturing managers could coordinate with the investment managers to inform about the availability of the liquid fund. On the other hand, the flexible budgeting process helps the financial managers to forecast the profitability with different level of productions. Flexible budgeting does not facilitate the finance managers to make forecast regarding the cash balances and availability of liquid fund.

In performance budgeting, the financial managers could get the relevant information regarding the production. As stated by Brigham and Ehrhardt (2013), production requirement is needed to be identified as one of the most important problems that the financial managers face in recent times due to the fluctuation in the demand in the market. In this context, the resercher is required to mention that the different budgeting tools are used for different purposes as the intension of financial managers are found as different.

Conclusion

Financial management tools and techniques have been identified as impactful as per as the financial problems of an organisation are concerned. In the initial part of the stsudy, the researcher has identified that the management accounting is one of the most crucial parts of financial controlling for the manufacturing firms. In case of large firms, the requirements of management accounting has been found as more crucial as the number of cost centres are higher as compared to the small manufacturing firms. In the next part of the study, the researcher has found that the profit calculated under marginal costing method is higher than the same calculated under absorption method. Moreover, the researcher has identified that the financial problem regarding inverstment decesion, divident decesion and the financial controlling decesions could be made easily by considering the managerial accounting tools.

References

  • Brigham, E.F. and Ehrhardt, M.C., (2013). Financial management: Theory & practice. Cengage Learning.
  • Renz, D.O., (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
  • Hayes, J., 2014. The theory and practice of change management. Palgrave Macmillan.
  • Clegg, S.R., Kornberger, M. and Pitsis, T., (2015). Managing and organizations: An introduction to theory and practice. Sage.
  • Armstrong, M. and Taylor, S., (2014). Armstrong's handbook of human resource management practice. Kogan Page Publishers.
  • Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., (2014). Corporate finance: theory and practice. John Wiley & Sons.
  • Mahadevan, B., (2015). Operations management: Theory and practice. Pearson Education India.
  • Cornelissen, J., (2014). Corporate communication: A guide to theory and practice. Sage.
  • Brown, A.J., (2013). Whistleblowing in the Australian public sector: Enhancing the theory and practice of internal witness management in public sector organisations (p. 333). ANU Press.
  • Micheli, P. and Mari, L., (2014). The theory and practice of performance measurement. Management accounting research25(2), pp.147-156.
  • Hill, C.W., Jones, G.R. and Schilling, M.A., (2014). Strategic management: theory: an integrated approach. Cengage Learning.
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