Introduction to Management Accounting
Management accounting is the process of preparing management reports and accounts that provides 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 company's internal audiences such as top level managers and middle level managers. Management reports show the amount of sale 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 the 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 accountant, users of the management reports, difference between financial accounting and management accounting and purpose of the costing techniques.
Classification of cost
Cost classification is the process of grouping costs according to their nature and common characteristics. These classification makes the information related to costs meaningful. Cost classification is the first step towards decision making process relating to costs (Vanderbeck, 2012). Following are the important ways to classify costs:
1.Classification of the costs on the basis of 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 finished product and it becomes integral part of the product which can be allocated directly to a specific unit.
- Direct Labour – Direct labor means 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 cost of indirect material, indirect labour and other expenses which cannot be allocated to a specific unit.
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 cost of raw material, labour and other indirect factory costs. For example – power, rent, depreciation etc (Lucey, 2002).
- Administration costs – These costs includes general administration costs incurred by the organization for its smooth functioning such as audit fee, printing and stationary, Rent of office building etc.
- Selling costs – It includes all those costs which are incurred in relation to selling of goods and services such as salesmen salary, packing charges, advertisement, warehousing charges etc.
- Distribution costs – It includes costs incurred at the time of dispatching finished goods to consumer such as agent's commission, carriage outward etc.
3.Classification of the costs on the basis of its nature -
On the basis of 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 center are called as indirect costs (Fullerton, Kennedy and Widener, 2013).
4.Classification of the costs on the basis of its behavior -
On the basis of behavior, costs can be classified into fixed costs, variable costs and semi variable costs.
- Fixed costs – These costs remain fixed irrespective of change in volume of finished product. For example – rent, depreciation, salary etc (Kaplan and Atkinson, 2015).
- Variable costs – These costs change in the direct proportion to the volume of output such as raw material, 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 senior authority of Jeffrey and Son’s can use in order to analyze the actual performance of business against the expected (Maher, Lanen and Rajan, 2006).
Annual report: Through the means of annual report, management can easily evaluate and analyze the financial statements of business so that 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 product 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 quality of product is hampered adversely.
Customer Satisfaction: Lastly, improvement in employee performance can be measured by considering the feedbacks or reviews from the customers. By the means of this, cited firm can bring further improvements as per the requirement of target audience to retain them for 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’s can easily attain 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’s 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 reduction in unwanted inventory of business.
Management Audits: By the means of this approach, Jeffery and Son’s can monitor performance of workforce and ensure the standard outcomes (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013). Furthermore, frequent audits will help in motivating employees in enhancing their performance as per the standards set which directly leads to enhancement in overall production process.
Purpose and nature of budgeting process
Purpose of budgeting:
Budgeting is very important part of the organization's planning process. It is 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 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 performance of the business.
With the help of this, decision making process for the managers becomes easy and they make smart and effective judgment for the future functioning of business. Along with this, it also helps in making comparison between actual and budgeted standard of performance.
Nature of budgeting:
In the budgetary statement of an organization, estimation is made with the help of actual values generated through 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 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 deficit or surplus position of business from operations (Shank and Fisher, 2006). Lastly, the budget is reviewed by the senior authority of Jeffery and Son’s so that they can make decisions regarding 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 company, managers prepare budgets and herein, following are the budgeting techniques used by financial manager of Jeffery and Son Ltd:
Operational budgeting: In this, managers of Jeffery and Son Ltd prepares budgets on the basis of different operations which consist of production, selling and distribution etc (Ifandoudasand Gurd, 2010). However, considering the flexibility of these budgets they can be prepared on the basis of 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 undertakes this type of budgeting approach whenever they have base of previous reporting period. However, this budgetis prepared when there is huge change in the conditions of target market or company is developing a new product. Further, there is no measures of forecasting is done in this budget which indeed leads to generate 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 the use of information from previous reporting period.
On the basis of above identified different methods the most appropriate and suitable technique of preparing the budgets for Jeffrey and Son’s smake is operational budgeting. 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 in accordance with the identified responsibility centres
On the basis of above reconciliation statement, there are various departments of Jeffery and Son’s Ltd has to bring modification in their approach so that variances can be avoided or prevented.
Selling department: In this department, sales manager has to make smart and accurate estimation of sales price so as to avoid the negative variance. In order to do so, management of Jeffery and Son’s Ltd has to carry out market research so that they can identify the demand of products as well as the spending power of target audience so that sales price 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 concern for the senior authority of Jeffery and Son’s Ltd. However, in order to reduce this concern, management has to indulge latest technological equipment’s or machinery so that 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 department. Therefore, it is important for the Jeffery and Son’s Ltd to indulge 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 (Kont, 2013).
In summing up the above report it has been observed that, management accounting plays a crucial role in making smart and effective decisions regarding future contingency. However, it also helps in employing suitable tools and techniques through the means of which management can identify the gap of loopholes within the functioning and accordingly introduce potential measures to improve the further situation. In addition to this, use of performance indicators overall performance of Jeffery and Son’s Ltd has been identified with the means of which management has been recommended suitable and reliable strategies to enhance the overall functioning of business and generate higher profits.
- Drury, C., 2005.Management accounting for business. Cengage Learning EMEA.
- Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control. Cengage Learning.
- Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning.
- Lucey, T., 2002. Costing. Continuum.
- Maher, M., Lanen, W.N. and Rajan, M.V., 2006.Fundamentals of cost accounting. McGraw-Hill/Irwin.