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INTRODUCTION

Management accounting also known as managerial accounting is a system which helps to analyze the business costs and helps in preparing financial reports for achieving the target for the company. It gives accurate and timely financial reports of the company. These reports generally shows the budget of the company, revenue generated from the products raw material stock, outstanding debts, etc. This report will focus on the management accounting system of Tech (UK) Limited, like they are producing charger for mobile telephone and other carry-on gadgets for the retail outlets in UK. In this report we will discuss about the management accounting of the company, and why there is an essential requirement of management accounting system. This report will also be discuss different types of management accounting, difference between management and financial accounting, types of systems like cost accounting, inventory management and job costing system and types of managerial accounting.

TASK 1

P1. A) Explaining management accounting of management accounting system:

1) Distinguishing Management Accounting and Financial Accounting: Key difference between management accounting and financial accounting are:

Points

Management Accounting

Financial Accounting

Definition

Used by the managers of the company to evaluate the companies operations to plan strategies and make relevant decisions.

The company is concerned with the stockholders and other company outside the organization.

Objective

To manage the company by giving new ideas for planning.

Providing Financial information

User

Within the company i.e. internal (Hilton and Platt, 2013)

Both internal and external parties.

Regulatory Requirements

Non-mandatory

Mandatory

Rules

Does not have to follow any rule

Have to follow GAAP ( Generally Accepted Accounting Principles)

rule

Reports

These generally focuses on the detailed analysis of company's profile.

They make reports on the company's financial position (Ward, 2012).

 

b. Importance of management accounting information as a decision making tool:

Process of preparing reports on the accounts and management of the company giving the information regarding financial and statistical status is known as management accounting. It plays a very important role in taking long-term decisions for the company. It helps managers with decision making. It uses varies tools and plans in strategic decision making. It helps the department managers in many ways, such as:

  • Preparing future plans: Before applying any plan to action the manager should understand the present and future scenario of the company. Management accounting helps to answer the questions which arise during the planning and forecasting the future trends in business.
  • Increase Efficiency of the business: Having planned strategies will have the management to increase its efficiency in the business (Parker, 2012).
  • Understanding Performance Variances: It is defined as variances between what is planned and what actually achieved. Management accounting helps to build positive variances using analytical techniques.
  • Helping in Forecasting Cash Flow: Management accounting helps in designing of budgets and trend charts for the company which the manager can use to plan how the company's money and resources are going to be used to generate good revenue growth of the company.

c) Cost accounting systems:

A cost accounting systems is a system in which the company estimates the cost of their products by checking the profitability by evaluating cost control of the company. The company should have the knowledge of which product is profitable for them (Salvo, 2015). Cost accounting systems works by summing up the total labor, material and overhead costs to the company. Different types of cost accounting systems are there, such as:

Actual Costing: In actual costing system, they use actual costs for the labor and material components. Any budgeted amounts or standards amount is not included in it. This is the simple cost method available in the cost accounting system, which does not require any pre-planning.

Standard Costing: Standard costing system is the process of substituting the expected cost of an actual cost in the accounting system and occasionally checks the variances by showing difference between expected and actual costs.

Normal Costing: It includes actual direct cost of the product and standard overhead rate.  It is basically used to derive the cost of any product. It is design to generate product cost by using long-term estimated overhead rate.

Advantages

Disadvantages

·       Helps in setting prices.

·       Helps to eliminate losses and inefficiencies.

·       Helps in cost reduction and cost control.

·       It helps in identifying profit or loss percentage.

·       Helps to give advice on make or buy decision for the company.

·       Helps in price fixation of the company.

·       Helps in marginal analysis of cost and in preparing financial reports.

·       Cost is ascertained.

·       Only past performances are available in the costing system.

·       It requires high maintenance for installation of cost accounting system.

·       It does not include financial expenses .

 

d) Inventory Management Systems:

It is the software system which involves monitoring and maintenance of stocked products in the company. This system ensures the floe of products from manufactures to warehouses to their customers. They have to keep a detailed record of all the products which are going out of the company's warehouse (Wickramasinghe and Alawattage, 2012). They check that whether  company has enough amounts of raw material and suppliers or finished products that are ready to be sent to consumers.

e) Job costing systems:

To assigning the manufacturing costs of individual product or group of products, job costing system is used. It involves material, labor, and overhead costs for a specific job. This can be an excellent approach for tracking specific costs of the individual jobs.

P2 Financial information

Tracking of the financial activities and position of a business, person, or other entity of the company is done by making Financial report or statement of company.

a.Types of managerial accounting reports:

The main aim of the management accounting reports is to help the company in planning, monitoring and in decisions-making. There are basically 4 types of managerial accounting reports which can help in decision making tool for department managers.

  1. Budget Report: Budget report is the most fundamental report. It plays a great role in understanding and controlling costs across the company (Fullerton, Kennedy and Widener, 2014). They are created from the previous years' data available to calculate the future outcomes of the company. It helps the owner of small business to evaluate their performance.
  2. Job Cost Report: This report helps in analyzing the total cost which has been arisen from a single project as compared to the expected revenue from that project. This helps the manager to evaluate the profit percentage of the specific jobs type and focusing on the jobs which are more profitable for the company.
  3. Accounts Receivable Aging: This is important for any company which is giving credit to their customers as these reports help the managers to check the customers credit balances and how long they have been using it. It is crucial for managing cash flow of the company. Most of the account receivable aging report has separate columns for items such as 30 days, 60 days and 90 days late or more. Checking the accounts periodically will help the company to find problems with the company's collections process.
  4. Inventory and Manufacturing: To centralize data on costs, labor, and other overhead involved in the processing, optimizing assembly, providing raw material or machining, inventory and manufacturing report helps a lot. It is useful for small business to maintain a physical inventory or producing products.

b. Importance of the managerial report

It is most important for a company to present its report in such a manner which is understandable to all. It has to be related to the given topic in which it is described in detail. The report should be very precise so that the related person to that report will understand its faster and better way (Renz and Herman, 2016). If the report is having too irrelevant matter in it, it will definitely make problems. As these reports plays an important part for the company because by analyzing these report, the management system of the company will make future plans and take decisions according to it.

TASK 2

P3 Preparing income statements according to marginal and absorption costing method:

  • Absorption Costing Methods: All the costs of manufacturing of a product including both of its fixed and variable costs which includes direct costs like material costs, labor costs and indirect costs like overhead costs comes under absorption costing method. It is also known as 'Full Costing' method. This is the oldest and widely used technique of ascertaining cost. It helps to give more precise and accurate view of how much cost us required to produce the inventory (Soin and Collier, 2013). This method also helps to make sure that all the invested costs is recovered from the selling of the product or services. This system helps to calculate the overall profit and separate net profit of the company.
  • Marginal Costing Methods: Marginal costing is a process in which marginal cost is charged to units of cost, wherein the fixed cost for that period has been written off against the contribution. In this system, cost is divided into two parts which is fixed and variable costs. Variable costs in marginal costs involves material and labor costs, some estimated fixed costs like overhead administration and selling expenses. Marginal costing is based on the behavior of costs which is varying with volume of the output of the company. It uses gross margin (includes applied overhead) to measure the profit of the company.

 

Absorption Costing Methods:

Interpretation: As it considers both fixed and variable expenses, so Tech Ltd should opt for Absorption Costing method while assessing manufacturing cost because it generates more net profit for the organization. This method will help them to provide more precise and accurate knowledge of how much cost is required to produce the inventory by the company. This will enable the manager to calculate the overall cost of the Tech Ltd company. Absorption costing method will help to correct or understand profit situation for the company as compared to variable costing method. Thus, by using this costing system method, manager of Tech Ltd would able to assess suitable cost and profit margin for the organization.

M2 and D2 : In absorption costing method, income statement of Tech Ltd. Company, it is gaining a net profit of 15,625 which in comparison, is higher than the marginal costing techniques in which it is only 13,625. Based on both the techniques it will be beneficial for the company to choose absorption costing method as it is giving them more net profit. Absorption costing method will help them to make all the invested costs recovered from the selling of the product or services of the company. It will also help them to calculate their overall profit and separate net profit of the company. From this it will be easier for the Tech Ltd to understand their financial budget.

TASK 3

A. Presenting different types of budgets with their advantages and disadvantages:

  • Cash budget: Estimation of the cash inflows and cash outflows for the business over the specific period is known as Cash Budget. It has many advantages and disadvantages such as :

Advantages

Disadvantages

It helps to maximization profit and minimizes the cost

Its success is only depends on the operation of the staff

It helps to improving communication and better understanding (Christ and Burritt, 2013)

It may lower the morale of a company if it does not achieve the target.

It creates harmonious relations between the staff and management team.

It may take longer time to achieve the goals.

Its necessary to identify whether the cash is sufficient to fulfill the objectives of the company or not.

Cash budget flow cash during a year but it doe snot know whether the cash level will flow same during next year

 

  • Master budget: All the lower level budget produced by a company's various functional areas, which also include budgeted financial statements, cash forecast and financial planning, all comes in master budget. It has many advantages and disadvantages such as :

Advantages

Disadvantages

All the reports are present in this budget only

Its not easy to modify the master budget

It gives complete estimated profit of the company.

Managers of the company do not consider new opportunities for the growth of the company.

Functional budget can be cross verifies the information by using master budget.

It takes too much time for the formatting, adding and altering and deleting a small change in the entire budget.

 

Financial budget: Financial Budget is a plan which shows the financial status of the company and show whether the company faces some loss or not which can be show by the budgeted balance sheet. It has many advantages and disadvantages such as :-

Advantages

Disadvantages

It creates the financial awareness for the spending and earning of the business.

It takes too long to creates the financial budget of the business.

Financial budgeting help to gain more opportunities and help to expand the business.

It concerns only with financial outcomes as its main work to identify the financial status of the company.

Financial budgeting help to make financial planning for the business

This is based on assumption only. But it is not possible in the business terms (Lambert and Sponem, 2012).

It presents the annual report and overall business financial status during the financial year.

The decision making power of the team is quite rigid.


B. Tech limited used use required following steps for the preparation of the budget as follows :

  1. First step during the preparation of budget is to update our budget assumption.
  2. Next is to see whether the fund is available or not.
  3. Allot different cost to different departments.
  4. Create budget package to sort out the problems of different departments.
  5. Issue budget package.
  6. Obtain the budget from different departments and check the errors, and comparing the fund from last year.
  7. Meet senior management team to review the budget.
  8. Create the bound version of the budget and load it into the software.

C. Importance of budget as a tool for planning and control purposes:

The importance of the budget for Tech limited company allows to create the spending plan for the money. Once a budget is created, we can keep our finance on tracks and in case of emergency we can use our save money. To follow the budgeting plan we can keep our self out of debt. Budgeting ensures us that we do not need to spend the money as we don't have money to spend. It also helps in our future planning and forecasting too (Wood, 2016).

TASK 4

P5 Use of managerial accounting in respond to financial problems 

Tech Limited company faces the financial problem and has a loss of 1.5 million. To overcome the situation of this they use the balance scorecard approach as suggested by the auditors:

To keep the track of the staff's activity and to monitor the consequences raise from the action, balance scorecard strategy is used. The original four perspective are

  • Financial: It keeps the record of the cash flow, sales growth, operating income, return on equity and identify the financial measures.
  • Customers: Balance scorecard identifies the basic trend of the market which means that it identifies the basic need of the customer (Balance scorecard, 2018). For example : Percent of sale from new product, on time deliver, ranking by the important customers.
  • Internal business process: It identifies the main and new product of the market and what is the particular cycle time for that particular product and introduction of the product.
  • Learning and the Growth: Balance scorecard identify how they can improve their product and create values and innovate them. They create new ideas for new generation of the product and the life cycle of the product maturity and last but not the least time to market versus competition.

Lets us compare the tools with another business firm. So there are three basic tools which other organization mostly use lets discuss them :

  1. Key performance indicator: KPI is the measurable value which shows if the company is able to achieve its goal effectively. Choosing a right indicator will show on which track your business is going. Each department chooses different KPI for measuring the success based on the business goals, and activity.
  2. Bench marking: Bench marking is a business comparing tools which compare the performance from other companies. It also helps in selection, planning and delivery of the projects. Bench marking is based on specific indicator i.e. cost per unit measure, productivity per unit measure and defect per unit measure.
  3. Financial governance: Financial governance ensure the integrity of the data collection process with the financial data quality management. To run a company in a better way a set of rules and guidance issued by the regulators for best financial process (Salvo, 2015). It emerged out of scandles like Enron, regulatory measures like US's Sarbanes Oxley Act.

CONCLUSION

From the above report, it can be concluded that requirement of management accounting system is a must for the company. For the company, both the system management and financial accounting is important as these plays an important role in decision-making for them. This will give all the financial information required for the company. This report also summarises the different types of accounting system like cost accounting, inventory management and job costing system will help the employee to evaluate the overall report of the company. From the different types of managerial accounting reports, company can get the information regarding different aspects and can check their advantages and disadvantages from it. The managerial accounting reports can be used by the company manager which can help the management to take decisions and increase the rate of revenue in the future for the company. A good management accounting system will ensure the overall growth of the organization and its success.

REFERENCES

  • Christ, K. L. and Burritt, R.L., 2013. Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production. 41. pp.163-173.
  • 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(7-8). pp.414-428.
  • Hilton, R. W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
  • Lambert, C. and Sponem, S., 2012. Roles, authority and involvement of the management accounting function: a multiple case-study perspective. European Accounting Review. 21(3). pp.565-589.
  • Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and relevance. Critical perspectives on accounting. 23(1). pp.54-70.
  • Renz, D. O. and Herman, R.D. eds., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
  • Salvo, S. G., 2015. Massage Therapy-E-Book: Principles and Practice. Elsevier Health Sciences.
  • Salvo, S. G., 2015. Massage Therapy-E-Book: Principles and Practice. Elsevier Health Sciences.
  • Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and control.
  • Ward, K., 2012. Strategic management accounting. Routledge.
  • Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches and perspectives. Routledge.
  • Wood, D. A., 2016. Comparing the publication process in accounting, economics, finance, management, marketing, psychology, and the natural sciences. Accounting Horizons. 30(3). pp.341-361.

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