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INTRODUCTION

Management accounting refers to a process of preparing reports and accounts in a company. It provides necessary information which is used for further planning and controlling decisions. In context with small organizations, this concept helps in monitoring business performance (Kumarasiri and Jubb, 2016). The present report is going to make a discussion about management accounting with its various methods like planning and measurement tools. For this purpose, Aridri is taken, which deals in manufacturing sector and engage business in hand dryer production.

This assignment highlights use of different planning tools for budgetary controls, which further help in preparing and forecasting budget of company. An explanation about different managerial accounting reports like budget, job cost, inventory and more is also given. Along with this, an income statement is prepared on the basis of calculations of costs by using absorption and marginal costing methods. A comparison is also made to show how companies under small sector use management accounting system for resolving financial issues.    

TASK 1

P1 Management accounting and its different types

The concept of Management accounting can be defined as process of preparing reports by which performance of business can be analysed. It provides timely and accurate information to managers of company so that they can take short-term and long-term decisions accordingly. Moreover, it determines, analyses, measures, interprets as well as communicates information that makes an organisation able to achieve their set goals. In an organisation, management accounting plays different role like forecasting the future and cash flows, making decisions, understanding performance variances and analyse rate of return (Pavlatos, 2015). In context with Aridri, as it deals business in small sector of UK so, it is necessary for managers of this company to timely prepare such reports. It will help in managing accounts and preparing budget in appropriate manner.

Aridri is considered as first hand dryer manufacturing company in the world, which receives Quiet MarkTM  from Noise Abatement Society. It uses unique and latest technologies in production field which extend lifespan of hand dryer products. So, to enhance and create more value of business, this enterprise uses management accounting system. In this regard, an explanation of different types of management accounting system and its importance is given as beneath:

Price optimising system: This system is generally used for determining how demand of a product will fluctuate at different-different price strategies (Christ and Burritt, 2017). It is also used to control price of raw materials and other resources for increasing efficiency of production. Therefore, managers of Aridri used this system of management accounting to evaluate how to retain loyal customers. Moreover, it also aids them in determining pricing structures for initial, promotional and discount pricing. Along with this, pricing optimisation also assist Aridri in selling short life-cycle products first which are subjected to seasonal and fashion trends.

Job costing system: This system of management accounting helps in assigning manufacturing to each unit of production (Banker and et. al., 2014). But it is generally used when manufactured goods are significantly different from each other. Managers of Aridri used this system for keeping track record of cost of each job and maintaining data as well. It includes following procedure:-

  • Receive enquiry-For placing order, customer used to look out first on quality of material and price rate.
  • Estimate price-Job costing is usually done by accountant who estimate price of each unit by identifying taste and preference of customers.
  • Order receive-If consumers give assurance for price, then they order will be placed accordingly.
  • Production order-It is placed for starting the process of production.
  • Cost recording-Each and every aspect related to cost is recorded in production process.
  • Completion of job-After completion, report will provide to accounts department of company for final costing of job.

Cost accounting system: This system provides a framework by which Aridri can estimate cost of different products for analysing profitability and inventory valuation. In manufacturing sector, different types of cost contribute for producing an output. Therefore, this concept involves two methodologies of cost accounting that are- job and process costing.

Inventory management system: This concept is concerned with management of stock and inventories in an enterprise. Therefore, organisational process of a company can be integrated by using inventory management system. It will help in achieving efficient and effective flow of inventory. In context with Aridri, it uses this management accounting system with aim to generate high return profitability by minimising the total cost of inventories. This system of management accounting includes many methods like LIFO (Last in first out), FIFO (First-In First-Out) and prioritise with ABC. Managers of Aridri use ABC analysis in order to give more attention on those products which give more profitability to business. In this era, products of A category required more and regular attention because impact of them is financially significant. Similarly, B and C category include moderate and low-value products respectively which have a high frequency of sales.

P2 Methods for management accounting Reporting

Accounting reports are most crucial part in business which helps in determining how company is performing. This concept assists small organizations to monitor the performance of business (Jack, 2015). In this regard, managers of a firm can prepare different reports either in quarterly, weekly or monthly manner. It will help in getting accurate and reliable statistical information through major decisions can be taken. In context with Aridri, different types of management accounting reports and their benefits for business are discussed in following manner:-

Budgeting report: This report sets out the plan for analysing performance of different departments and control costs. Estimated budget of a company is usually based on actual expenses. So, managers of Aridri design this report to analyse and compare how close budgeted performance of business during a financial period was to the actual one.

Job cost reports: It is concerned with determining expenses, costs and profitability of each job in manufacturing process. This report provides crucial information to a company about its current status of a particular job. As Aridri deals in manufacturing field and use a wide range of raw materials for producing high quality of hand dryer products. So, using job cost report, it can control addition expenses so that efficiency of production can be increased.   

Inventory and manufacturing report: This kind of management accounting report is generally used by manufacturing and construction companies (Smith, Brännström and Jansson, 2015). It contains information about labour cost, wastages and per unit overhead costs. Therefore, employers of Aridri prepare this report to see opportunities by which they can make improvement in manufacturing process.

M1 Benefits of management accounting system

System

Benefits

Price Optimisation System

Since price is considered as the most adjustable element in marketing mix (Joshi and Li, 2016). So, using this method of management accounting, Aridri can outline behaviour of customers with different level of pricing.

Job Costing System

Integrated this system in business, managers of Aridri can access the expenses incurred on specific job. Through this process, they can develop strategies for controlling cost in better manner in future.

Cost Accounting System

This concept allow managers of Aridri to fix price of each products on the basis of production cost.

Inventory Management System

Using this system, Aridri can achieve productivity and efficiency in production by maintaining stock of inventories.  

D1 Critical evaluation on management accounting report integrated within organisational process

 

Types of reporting

Integrated within organisational process

Budgeting Report

By preparing this report, managers of Aridri can create a path by which set goals and objectives can be accomplished in given span of time.

Job Cost Report

This report helps in reducing and minimising overall cost of production.

Inventory and manufacturing report

Integrating this report within organisational process aids Aridri in improving the accuracy of inventory orders.

TASK 2

P3 Cost calculations to prepare an income statement

Cost refers to a amount which has to be paid to get something. In context with business, this term usually defines monetary valuation of materials, efforts, risk incurred, time consumed and delivery of a product or service at marketplace (Ji, 2017). In general, cost majorly classified in two forms- Fixed and Variable. A fixed cost is a type of expense which does not change with increase in volume of production. It is defined as predetermined rates that are based on necessities of company. It includes insurance, property taxes and rent of building. While the amount which varies with production or change in total output, termed as variable cost. Direct labour cost related to different level of output, sales commission and more, are some examples of variable costs.

Marginal Costing: This concept of costing is based on variation of cost which changes with volume of output. It is also known as 'variable costing' under which variable cost is accumulated only. While fixed cost is completely written off for the period against contribution. Moreover, in marginal costing, cost per unit remains constant also (Schaltegger, Burritt and Petersen, 2017).  

Absorption Costing: In this costing, on the basis of predetermined level of output, fixed expenses are generally distributed over products. Absorption costing can be defined as managerial accounting cost method where entire manufacturing costs are absorbed. Under this costing, expenses are classified on the basis of function. As comparison with marginal, absorption costing consider both variable and fixed cost for inventory valuation.

Working Notes:

Income statement as per marginal costing: 

Net income = (sales revenue – marginal cost of goods sold) = (contribution – fixed cost)

Particulars

 

Amount

 

 

 

Sales revenue = (no. of units sold x selling price of each = 600 x 55)

 

£33000

Marginal Cost of products sold:

 

£9600

Production = (units produced x marginal cost per unit = 800 x 16)

12800

 

closing stock = (closing stock units x marginal cost per unit = 200 x 16)

3200

 

Contribution

 

£23400

Fixed cost ( 3200+1200+1500 )

 

£5900

 

 

 

Net profit

 

£17500

 

Income statement as per absorption costing:

Net Incomes = (Sales revenue – Cost of goods sold) = (Gross profit – Selling and Administrative expenses)

Particulars

Amount

 

 

Sales = (selling price x no. of units sold = 55 x 600)

£33000

Cost of goods sold = (total expenses per unit x actual sales = 23.375 x 600)

£14025

Gross profit

£18975

Selling & Administrative expenses = (variable sales overhead x actual sales + selling and administrative cost = 1 x 600 + 2700)

£3300

 

 

Net profit/ operating income

£15675

Break-Even Analysis: This tool is used to analyse the relationship between fixed and variable cost of an organisations in terms of revenue. BEP forecast on which point, sales will generate high rate of revenue. In context with  Aridri, this analysis helps in analysing how many units of goods are needed to sell to cover all costs.

  1. The no. of products to be sold to Break-Even

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

 

  1. Break-even point in terms of sales revenue

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

Profit volume ratio PVR = Contribution / sales * 100

30.00%

BEP in sales

20000

 

  1. Number of products to make sold to generate desired profitability of £10,000

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

 

  1. Margin of Safety when 800 products are sold

Formula for MOS

Margin of Safety = Budgeted or actual sales – Sales required to Break-Even

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

Margin of safety (MOS)- It reflects the exact difference between break-even and actual or budgeted sales of an enterprise. In other words, sales revenue that goes beyond BEP is considered as margin of safety. As per above calculation, when actual sales of Aridri is 800 units and break-even sales is 500 units then in that case,  margin of safety will be obtained as 37.5 units.

M2 A range of management accounting techniques

There is a wide range of management accounting techniques are available which helps a company in gathering internal information. So, using such techniques, managers of Aridri can prepare reports which further facilitate in taking proper decisions. Some major techniques used by this enterprise are:-

Standard Costing: It is a technique of recording accounting transactions which further used in analyzing the difference between standard and actual cost.

Marginal Costing: Accountant of Aridri use this technique for decision making, controlling cost and maximizing profitability.  

D2 Analysis and Interpretation of data

It has analyzed from above data that techniques of management accounting use different-different methods for calculating the per unit cost of products. In absorption costing, all costs are utilized for calculation. While in marginal costing, only variable cost is used and fixed cost is written off to the contribution. Thus, in this regard, net operating income as per absorption and marginal costing, come out as £15675 and  £17500 respectively for Aridri Ltd.

TASK 3

P4 Advantages and disadvantages of different types of planning tools for budgetary control

Budgetary control is considered as a process by which a company can control its expenses and finance (Maskell, Baggaley and Grasso, 2016). This concept involves a procedure of comparing budget to actual outcome. It has a potential to aid an organization to reach its specific goal in predetermined time by offering several advantages. It includes coordinating all activities of departments, translating strategic plans into actions and more. With respect to Aridri Limited, concept of budgetary controls helps in regulating its entire activities as per predetermined target and objectives. One of the main advantages of practicing budgetary control is to gain opportunity by which changes in business can be made. It helps in moving business on next level and keeping on track of success as well.

As due to dynamic nature of business, there are different type of risk occurred at workplace which affect budget of a company. It includes natural disasters, failure in technology, global events such as pandemic (swine flu, influenza), climatic changes and more. As Aridri Limited deals in small sector so, controlling budget is its major concern. Therefore, to handle such issues and manage risks as well, there are different type of planning tools available for budgetary controls like:-

Forecasting Planning Tool- Planning is considered as mapping out the direction of organisational for attaining desired goals. In this regard, planning for future refers to a major activity of a company. Therefore, forecasting tool is used for predicting uncertain future demand of a company. In context with Aridri Ltd., using this tool, it can manage risks by developing strategies to recover from situations which might happen in future.

Advantage

Disadvantages

Aridri Ltd. can apply forecasting methods for to anticipate potential risks and issues which might arise in upcoming years.

For small companies, it is rarely possible to forecast future in accurate manner. So, making decisions for forecasting is financially ruin for them.  

 

Contingency Planning Tools- It refers to a course of action which is designed in to aid an organisation in responding to a future situation in an effective manner (D'Onza, Greco and Allegrini, 2016). This plan outlined seven steps to overcome from such issues which may or many not happen in future. It includes developing the contingency planning policy; conducting business impact analysis; identifying preventive controls; formulating strategies; preparing plan; testing plan and last is maintenance the same. Thus, by conducting all these phases, Aridri can prevent itself from future problems easily as well as respond more effectively.   

Advantage

Disadvantages

Contingency tool gives advantage to Aridri Limited to carry out risk management activities in better and appropriate manner. It also minimise loss of production as well.

The major disadvantage of this plan is that it requires much time and cost. Along with this, in case of quick decisions, it is also not suitable plan.

M3 Analysis on use of different planning tool for preparing and forecasting budgets

Management and planning tools provide tools like forecasting and contingency tools. It helps in preventing and preparing a firm to respond to those situations which may happen in their business. These tools provide strategies by which a company can plan strategies and policies for budgetary control. Therefore, using these planning tools, aid employers of Aridri Limited to work in more efficient manner.

TASK 4

P5 Comparison on how organizations are adapting management accounting system to resolve financial problems

Success in business is never come in automatic manner. It requires a lot of efforts and plan by employers to operate their business. In context with small organizations, conducting operational activities is always risky where chance of failure is more. As per statistical review, it has analyzed that more than 50% small sector companies fail in first year and approx. 95% within five to ten years (What Causes Small Businesses to Fail?, 2018). The reason behind this is due to lack of finance, unexpected growth, poor credit arrangement and more. Since Aridri Limited also deals in small business so, it also faces many financial issues due to following reasons:-

Failure in achievement of Sales Target: During an accounting period, every company set proper sales target to achieve and prepare business plan accordingly. For accomplishment of such target, they formulate effective strategies, proper budget plan and other activities. But if set target will not achieve in given period of time then it mostly affect finance system. Along with this, sometime organisation also fails to control budget accordingly (Trucco, 2015). As products of Aridri Ltd. are available in best quality therefore, it requires a lot of investment for manufacturing process. Thus, if company fails to achieve effective sales performance then this will create many financial issues.

Expansion of business: Sometime expansion or growth of business in other sectors also create financial issues. It includes bankruptcy, over credibility, scarcity of resources and more. Therefore,  for small companies, responding on such issues, is not easy process. In context with Aridri, it has launched business in 1974. But now, it has expanded operational activities in many locations of UK. So, this company also faces various issues related to management of finance and lack of resources.

Thus, in order to resolve such financial problems, managers of Aridri Limited use two major techniques as shown below:-

KPI (Key Performance Indicators):  This system refers to a way for companies to quantify objectives of business. It helps in testing the performance of business and determine need of modification in particular field. In context with Aridri, this system helps in addressing issues related to poor financial or non-financial performance. As per present scenario, since this company faces poor sales performance. So, this system identifies indicates key factor due to which it has faced failure in achievement of sales target. Using non-financial KPI, managers of this company measure performance and contribution of employees, frequency of sales, customer turnover and more. It will help in developing strategies through which sales performance can be improved.

Bench-marking: This technique shows whether performance of a company is better or weaker as compared to past experiences. In case of failure, it provides ways through which improvement in business activities can be done. Since Aridri has failed to achieve set sales target so, due to this, company also faces problems related to finance. Therefore, bench-marking technique compare current strategies and processes of this enterprise with its previous performance, where it has earned best profitability (Angelakis and et. al., 2015). So, it will help in recognizing in which era problem has occurred and develop strategies for future performance accordingly.

Comparison of effectiveness of strategies used by Aridri and one of its competitor- Horizon Services:-

Aridri Limited

Horizon Services, Inc.

· Aridri is counted as one of the best manufacturing companies which offers a wide range of hand dryer products to customers on affordable rates. In order to respond to financial issues, managers of this company use KPI technique. It helps in improving sales and performance of business.

· This company also adopt techniques of bench-marking system. Under this process, its managers used to check regular progress of business by comparing with previous one. It aid in developing more effective strategies and controlling budget as well.   

· This company also deals in manufacturing sector and offers services related to air conditioners, plumbing and heating equipments. In order to resolve financial related problems, this firm utilizes available resources first. For this process, its managers prepare proper budget plan and guide employees how to work on. It will help in reducing the chance of failure in business activities.

· Its managers use gap analysis technique to measure difference in performance of business with previous one. It helps in developing policies through which gap between performance can be increased year by year in positive manner.

 

 

M4 Analysis on how management accounting lead to sustainable success

Concept of management accounting plays various role in order to lead sustainability in a company. With respect to Aridri, it can be explained in following manner:-

  • This system helps in formulating different plans and activities as per purpose of business (Agrawal and Cooper, 2017). Through this process, efforts of staff members, managers and all resources can be integrated into success of business in Aridri Ltd.
  • Management accounting system aid this firm in making different type of reports like budget, cost, inventories and more. This would help in carrying out further operational activities of business in effective manner.  

D3 Evaluation of how planning tools respond to solve financial problems

Small organizations use many planning tools of management accounting to address and resolve financial issues. In context with Aridri Limited, this company use both contingency and forecasting plans to respond from such issues which may affect its business in future. These plans help this company in formulating strategies and taking decisions related to finance. It helps in respond future issues and have an adequate control on budget as well. As analysis and interpretation of data is necessary for evaluation of sustainable growth of business. So, these tools also help in making and controlling decisions (Christopher, 2016). Moreover, contribution of management accounting at different level of planning and strategic decisions can be explained in following manner:-

Planning and controlling: It is a crucial element of management accounting under which managers of Aridri requires to prepare plans. It will help in giving direction to all workers and staff members to achieve set target as per desired of business.

Implementation of plans: In order to execute a plan successfully, through management accounting methods, managers of Aridri can gather information related to budget, performance and cost. It will help in allocation of resources as per requirements of departments so that success of business can be gained.

CONCLUSION

From this report, it can be concluded that management accounting is an important concept in a company. It helps a firm in forecasting the future and making proper decisions by providing necessary information related to business activities. As various discrepancies are occurred in business which show variance between estimated and actual outcomes. So, techniques of management accounting help managers of a firm in building on positive variance as well as managing the negative ones. Along with this, it also provide techniques by which a company can resolve financial issues and make strategies through which occurrence of such problems can be reduced.

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REFERENCE

  • Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance. 7(01). p.1650014.
  • Angelakis, G., and et. al., 2015. Traditional and Currently Developed Management Accounting Practices-A Greek Study. International Journal of Economics & Business Administration (IJEBA)3(3), pp.52-87.
  • Banker, R. D., and et. al., 2014. The moderating effect of prior sales changes on asymmetric cost behavior. Journal of Management Accounting Research. 26(2). pp.221-242.
  • Christ, K. L. and Burritt, R. L., 2017. Water management accounting: a framework for corporate practice. Journal of cleaner production. 152. pp.379-386.
  • Christopher, M., 2016. Logistics & supply chain management. Pearson UK.
  • D'Onza, G., Greco, G. and Allegrini, M., 2016. Full cost accounting in the analysis of separated waste collection efficiency: A methodological proposal. Journal of environmental management. 167. pp.59-65.
  • Jack, L., 2015. Future making in farm management accounting: The Australian “Blue Book”. Accounting History. 20(2). pp.158-182.
  • Ji, X.D., 2017. Development of accounting and auditing systems in China. Routledge.
  • Joshi, S. and Li, Y., 2016. What is corporate sustainability and how do firms practice it? A management accounting research perspective. Journal of Management Accounting Research28(2), pp.1-11.
  • Kumarasiri, J. and Jubb, C., 2016. Carbon emission risks and management accounting: Australian evidence. Accounting Research Journal. 29(2). pp.137-153.
  • Maskell, B. H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
  • Pavlatos, O., 2015. An empirical investigation of strategic management accounting in hotels. International Journal of Contemporary Hospitality Management. 27(5). pp.756-767.
  • Schaltegger, S., Burritt, R. and Petersen, H., 2017. An introduction to corporate environmental management: Striving for sustainability. Routledge.
  • Smith, D., Brännström, D. and Jansson, A., 2015. Redovisningens språk. Studentlitteratur.
  • Trucco, S., 2015. Financial accounting: development paths and alignment to management accounting in the Italian context. Springer.
  • Online
  • What Causes Small Businesses to Fail?. 2018. [Online] Available Through :<http://www.moyak.com/papers/small-business-failure.html>.

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