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Introduction

Management accounting is a process of generating reports that may provide actual information of business to internal stakeholder of an organisation. It help to get exact knowledge of that how a business is operating and performing its activities (Management accounting, 2018). Managers of an organisation are liable to record information in different reports so that this information may be used to analyse actual position of company. It helps in decision making and planning for future, by estimating possible future consequences. Management of a company generate reports to record information of cost, inventory, activities and budgets. The company chosen for this project report is Oak Cash and Carry Ltd, it is a retail company which is based in Banbury, United Kingdom. Main objective of this report is to analyse use of management accounting in a business.

In this project report various topics are discussed, that are management accounting, its systems, reports, benefits, various costing techniques to calculate operating profits of the company, advantages and disadvantages of different planning tools that are used in budgetary control and how organisation use management accounting system to resolve financial problems.

TASK 1

P1 Management Accounting and Requirement of its Systems

Accounting: It is a process of recording data of financial transactions in to books. It includes assessing, summarising, analysing and reporting these transactions to supervise administration, regulatory bodies and tax collection authority (Amidu, Effah and Abor, 2011). It is a function which is followed by the organisations. There are two different types of accounting, that are as followed:

Financial Accounting: It refers to the formulation of financial statements such as income statement, balance sheet and cash flow statements. These are mainly generated for external stakeholders like customers, suppliers, government and investors of company to analyse financial position in the market (Carlsson-Wall, Kraus and Lind, 2015). In  Oak Cash and Carry Ltd financial accounting is followed to generate reports that may reflect financial status of the organisation.

Management Accounting: It is a process in which managers prepare management reports that reflects the performance of a company. These reports are generated for internal stakeholders to provide them actual information about operational and executional activities that are performed by an organisation. In Oak Cash and Carry Ltd managers use management accounting to analyse that how organisation is performing in market. It helps managers in strategic decision making so that they may plan in advance for possible uncertainty. In Oak Cash and Carry Ltd three management accounting systems are followed that are as follows:

Cost Accounting System: It is used to analyse actual cost of products that are sold by a company. It help managers to estimate profitability of firm by analyse most profitable products (Dražić Lutilsky and Dragija, 2012). In Oak Cash and Carry Ltd cost accounting system is followed by the managers to record actual cost involved in distribution, sales and supply chain of products. Management of organisation may estimate actual cost with the help of their system. There are three types of cost accounting system that are used by the company. That are as followed:

  • Actual Costing: It is a method in which actual costs like labour and overheads are recorded in books that are related with the product. For example managers of Oak Cash and Carry Ltd determine direct costs that are concerned with distribution of products.
  • Normal Costing: It refers to the allotment of costs to products according to their requirement. For example in Oak Cash and Carry Ltd managers use this system to set selling prices for their products after analysing costs that are concerned with the same
  • Standard Costing: It is a method which is used to analyse the different between actual cost and budgeted cost of products. For example in Oak Cash and Carry Ltd management use standard costing to determine the variances in their actual cost and forecasted or standard cost.

Inventory Management System: This is used by organisation to keep a track record of their inventory. It help managers to get exact information of stock, whether goods are in transit or delivered to client (Granlund, 2011). Three different types of inventory is used by organisation like raw material, work in progress and finished goods. In  Oak Cash and Carry Ltd this system is used by managers to keep detailed information of inventory. The managers of company use FIFO (First In First Out) method in inventory management system, in which recently received inventory is used for sale or distribution by the company. LIFO, JIT, Perpetual inventory and periodic inventory are other methods that can be used by companies in inventory management system.

Job Costing System: It refers to examination of cost that are involved in different activities of a company. Managers use this system to analyse exact cost of totally different jobs that are performed according to demand of customers (Johnson, 2013). In Oak Cash and Carry Ltd management use job costing system to analyse direct and indirect cost which is involved in products. For example it can be used to analyse cost of different products that are supplied by Oak Cash and Carry Ltd according to demand of customers.

M1 Benefits of Different Management Accounting Systems

System

Benefits

Cost accounting system

· The major benefit of cost accounting system is that managers can analyse most profitable products for company.

· It helps managers to set right prices for products by providing the accurate information of cost.

Inventory management system

· It leads managers to increase efficiency and profitability of company.

· It increases level of transparent information of stocks.

Job costing system

· Managers can determine profitability of individual activity performed.

· It provides detailed information of cost like labour and overheads which is involved in different jobs of company.

P2 Management Accounting Reporting and Its Types

Management accounting reporting: It is a process of recording accounting information to reports that are generated by managers and presented to internal stakeholder to determine performance and profitability of organisation. In Oak Cash and Carry Ltd, management create such reports to record information of company. It helps executives of organisation to gather detained information of their business (JOSHI and et. al., 2011). The objective of management accounting reporting is to examine cost and than make decisions or strategies to reduce costs and increase profits. Four different types of management accounting reports are generated by the managers of Oak Cash and Carry Ltd that are as follows:

Inventory management report: It is generated to record information of inventory related activities. It helps to make supply chain more efficient by properly maintaining information. In Oak Cash and Carry Ltd, inventory management reports are generated to compare different distribution channels of company to find best way to supply its products. Managers can keep a detailed information of inventory with help of these reports.

Importance: Major importance of this system is that it help managers to keep a track record of stock while buying or supplying (Klychova, Faskhutdinova and Sadrieva, 2014). It directs owners of business that what is quantity of products in warehouses and when to order inventory before warehouses go empty.

Budget report: This report is generated by managers to compare estimated output and actual performance of a company. In Oak Cash and Carry Ltd, such reports are created by management to control and understand costs of products. It helps to estimate future expenses in prior years so that managers may formulate strategies to deal with or resolve same.

Importance: It helps to analyse financial health and provide overview of activities that are performed by company in whole year. Managers may monitor revenues with help of budget reports by keeping exact information about activities that are performed.

Account receivable report: These reports are mainly generated by companies who are providing goods or products on credit to customers and clients. It assist in getting accurate outstanding amount of debtors (Mistry, Sharma and Low, 2014). In Oak Cash and Carry Ltd, account receivable reports are created to calculate actual owed amount which needs to be recovered from clients. It is mainly prepared for those clients who are not able to pay whole amount at time of purchase but willing to pay amount later.

Importance: It is very important for company because it helps to find errors in credit policy. It will lead managers to tighten credit policies of the company.

Financial report: Financial reports are mainly concerned with statements that may show actual status of company and provide financial strength. It help managers to analyse that what are the total revenues and expenses of an organisation. In Oak Cash and Carry Ltd, these reports are generated to analyse position of company in market.

Importance: This is very important for companies because it help stakeholders to analyse actual performance and its profitability. It is also beneficial for mangers while making strategic decisions.

D1 Integration of Management Accounting System and its Reports in Organisational Process

Management accounting system and its reports help managers and internal stakeholder to analyse performance of organisation. It provides information of cost which is involved in distribution activities, actual owed amount by customers, financial position of company etc. Account receivable reports can help managers to tighten credit policies by providing them information of those customers who are not able to pay their outstanding amounts. Inventory management reports is also assisting in management to track inventory in whole supply chain.

TASK 2

P3 Different Costing Techniques

Cost: Cost is the monetary value of a product, that includes cost of material, overheads, labour etc. Companies set their selling prices according to their cost because it will help them to earn more profits (Moser, 2012). A customer who is willing to buy a product will always try to find out that what is the actual cost of that product so company should set appropriate cost for their products, it will help them to attract more and more customers.

Oak Cash and Carry Ltd is a retail company so managers of company should set such cost or selling prices for products that may attract more customers and help company to acquire more market share. Cost of products include different direct and indirect expenses. Here, the mentioned techniques are followed by managers of Oak Cash and Carry Ltd to calculate their net profits:

Marginal costing: It is a technique which is used by companies to estimate cost of additional unit which is added by managers in distribution channel or supply chain of company. It includes variable cost which is going to be absorbed from sales of additional units.

Calculation of Net Profit by using Marginal Costing Method:

Particulars

 

Amount

Sales revenue = (selling price * no. of goods sold = 55 * 600)

 

33000

Marginal Cost of goods sold:

 

9600

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

12800

 

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

3200

 

Contribution

 

23400

Fixed cost ( 3200+1200+1500 )

 

5900

Net profit

 

17500

Absorption costing: It is a technology which is used by companies to absorb all costs that are involved in a product and all costs are going to absorbed from sales of same units.

Computation of net income by using absorption costing method:

Particulars

Amount

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

33000

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

14025

Gross profit

18975

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

3300

 

 

Net profit/ operating income

15675

Break-Even Analysis: It is done by companies to calculate break even point in which company is having no profits and no loss but all costs are recovered by managers from sales.

A. Total number of product sold

 

 

 

Sales per unit

40

Variable costs   VC = DM + DL

28

Contribution

12

Fixed costs

6000

BEP in units

500

 

b. Calculation of breakeven point in accordance to 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

 

c. Calculation for getting desire profit of 10,000

Profit

10000

Fixed costs

6000

Contribution

16000

Contribution per unit

12

Sales

1333.33

Margin of Safety: In this method which shows the safety level if the level is achieved by the company than it is going to earn profits and do not have to face losses (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013).

d. The margin of safety, if 800 products are sold

 

 

Actual sales in units

800

Break even sales in units

500

Margin of safety

37.5

M2: Different Types of Accounting Tools and Techniques

Accounting is a concept in which various accounting statements are prepared. In order to effectively develop accounting report, it is important to use accounting tools and techniques. Some of these techniques are mentioned below:

Marginal Cost– This technique helps in ascertaining the profit which is earned by company by ascertaining marginal or variable cost. Oak Cash and Carry uses this technique to ascertain their variable cost and determine profit which does not absorbs incurred fixed cost.Operating profit from marginal costing approach is 17500.

Historical Cost– According to this technique, financial statements such income statement and balance sheet is prepared by using historical cost in order to ascertain correct amount of depreciation.

D2: Analysis of Data Collected from Income Statement

In order to ascertain profit which is earned by Oak Cash and Carry, various accounting techniques are used. From marginal technique, profit which is calculated is 17500 and profit from absorption costing is determined as 15675. While calculation break even point for the organisation it has been observed that if 20000 is earned than company has to face no profit and no loss situation. Margin of safety has ascertained to be 37.5 which is a safety margin of this company.

TASK 3

P4 Advantage and Disadvantages of Different Types of planning tools used for Budgetary Control

Budget - Basically budget is a written document which shows details of expenditure. It tells that how an organisation is going allot its money (Schaltegger and Csutora, 2012). Managers of Oak Cash and Carry has used the budgets to allot funds to different departments of the organisation. There are various types of budgets which are prepared by manager in order to determine total expenses and cost they are going to incurred in near future time like, production, sales, raw material and cash budgets. Some of them are mentioned below:

Budget

Advantage

Disadvantage

Cash Budget: It is known as an estimation of cash inflows and outflows for a business over a specific period of time. This particular budget is used to assess, whether Oak Cash and Carry Ltd has sufficient cash to operate their business in near future time. It is categories into two part such as:

Cash Receipts:It is basically said to be an amount of money retain by a company for sale of product and services. Accountant of Oak Cash and Carry Ltd can add cash receipts to balance brought down to provide company total amount of cash presented at present in company.

Cash Payment: It is a kind of journal i.e. used to record transaction that are paid in form of cash. A cash payment consists of paying a creditor or commission fee or withdraw cash. If any of payment made in cash is recorded into cash book.

Advantage: It fits well with the requirement for compliance and expenses control. Expenses are classified through organisation and object of expenditure.

Disadvantage: It cannot overlook issues of government aims, their connection to  budget and services to be delivered by government.

Master Budget: Master budget is the combination of budgets of lower level produced by company's managers engaged in budgeting process and includes budgeted financial statements, financing plan and cash forecast also (Ward, 2012). This budget is presented may be in half-yearly or quarterly or may be yearly. A documentary explanation as note may be attached with master budget which explains planning and strategic direction of company.

Master budget is main planning tool used by management team to perform and direct the activities of organisation as well as used for performance appraisal of responsibility centres.

Income Statements: Income statements is the financial document which depicts company's financial performance over specified accounting era. It also shows earned revenues and expenses through both operating and non-operating activities. Overall, it depicts the final net profit or loss incurred by an organisation during specified era. Income statement also known as consolidate Profit and Loss statement.

Balance Sheet: Balance sheet is also one of most important final statement of company which discloses the overall position of company. Balance sheet discloses actual performance of a company and also provide the information of available financial resources. There are two parts of balance sheet one is assets part which shows the values of total current assets and total non- current assets. Second part shows information about liabilities as well as total shareholders equity.

Advantage: This type of budget helps in planning for future events as this budget incorporates all aspects of future. It has budgets of all the departments due to management can easily identify what department causing problems in company.

Disadvantage: Along with merits, there are few limitations are also present which states that this sort of budget is difficult to update and there is lack of specificity.

M3 Use of Planning Tools while Forecasting and Estimating Budgets

There are three planning tools which are Balance Scorecard, Key Performance Indicators and Benchmarking which translate an organisation's mission and strategy into set of performance measures. It offers better strategy planning, improved strategy and better execution. Key Performance Indicators can be measured and it tells how effectively a company is achieving its targets within a specific time. Benchmarking help to set benchmark for a company and than perform activities according to the benchmark.

 

Sept

Oct

Nov

Dec

Jan

Receipts

£

£

£

£

£

Cash sales

250

350

255

380

450

Credit sale receipts from debtors

320

150

100

120

220

Other income received

415

430

320

215

330

Total receipts (a)

985

930

675

715

1000

 

 

 

 

 

 

Payments

 

 

 

 

 

Purchases

215

260

290

330

415

Wages- Labour and overheads

115

90

180

210

150

Fixed costs

200

200

200

200

200

Capital expenditure - Plant

650

 

 

 

 

Advertising

20

35

55

75

90

Total Payments (b)

1200

585

725

815

855

 

 

 

 

 

 

Surplus/Deficit (a) – (b)

-215

345

-50

-100

145

TASK 4

P5 How organisation is dealing with financial problems

Basically financial stability is one of the major aspect of every business whether its a big or small business. Management accounting help the businesses to deal financial difficulties. Every business should have strong backup as far as financial stability is concerned (Wickramasinghe and Alawattage, 2012). Oak Cash and Carry Ltd is also dealing with financial problems. Following are the types of financial problems:

Late Payments from clients on regular basis: As this a big problem for businesses, if business does not gets payment on time from clients, than rotation of money in business gets slow. Oak Cash and Carry faced same issues as firm is getting late payments from the clients on regular basis, which turned out as financial problem for them.

Sales growth: This is a basic issue, many business have this as they have not enough sales according to their size of business. As if business does not have sales, then they will have no revenue and as end result, business will suffer from financial issues. As Oak Cash and Carry also faced the same issues and reported as financial issues.

High cost of production: As if cost of production would be high then, simply product cost will be high and sale will be lower, rotation of money will not be there and business have to face financial issues. The reason for high cost of production is difference of actual yield and standard yield. For example –1000 units output based on, 1000 kilogram material in 9 hours of production, but actual output is 950 unit. So there is variance of 50 units. And if standard cost is $50, then yield variance would be $2500. As same case happened with Oak Cash and carry also. And it turned out as an issue like high cost of production for business (Windolph and Moeller, 2012).

KPI: KPI stand for Key Performance Indicators that can help Oak Cash and carry. Debtors days is key KPI for business to know issue of late payments from clients, so OAK Cash and Carry can decide, number of days to receive payments from debtors. And issue of late payments from supplier can be resolved.

Balance scorecard: Balance Score Card can help Oak Cash and Carry to grow their 0sales. Financial perspective of Balance Scorecard depicts that if any business work on lower cost, more sales policy (Zainun Tuanmat and Smith, 2011). It can help business to grow sales and if sales will be more, then similarly revenue will be more. And issue of sales growth can be solve.

Benchmarking: Benchmarking is best solution for issues of high cost of production. As a standard quantity is set for production, in actual yield if it goes below from set benchmark then cost of production for per unit will be high, because yield is not according to set benchmark. As for example –1000 units output based on, 1000 kilogram material in 9 hours of production, but actual output is 950 unit. So there is variance of 50 units. And if standard cost is $50, then yield variance would be $2500. And if benchmark would used there, then material would be used according to 950 units. So there would not be any yield variance.

Oak Cash and Carry

Agmet Chemical

As this company used Key Performance Indicators tools to solve issue of late payments from clients. As through this they set specific time for debtors to make payments in given time.

This spend less money on raw materials, they just buy enough resources to make ordered products.

As this use Balance Scorecard for the boosting sales, as Balance Scorecard financial prospective say, low more, more revenue.

This use Just in Time, according to them, one should focus on primary task like making goods to interacting with customers, rather than stocking the material

To avoid high cost of product, they use Benchmarking as it sets standard before production and then it compare to actual yield. Through comparison of actual and standard yield, difference would be known to company.

As company does not need to store raw material for production, as Just In Time concept tells to order material when it needed. So company does not need to keep material in warehouses, so cost warehousing can be minimized through this concept.

M4 How planning tools help to deal financial problems

Planning tools like cash budget and master budget help Oak Cash and Carry Ltd to resolve financial issues by properly maintaining its monetary funds so that there is not lack of such resources. It will help company to possibility of financial problems. In this way, it will help to respond financial problems appropriately, with help of planning tools like cash budget and master budget.

D3 Planning tools for solving financial issues

The managers of Oak Cash and Carry have used three different tools to resolve financial issues these tools are balance scorecard, benchmarking and KPI. Key performance Indicators helps to financial issues of business of Oak Cash and Carry Ltd used to eliminate late payments from clients.As Oak Cash and carry Ltd used Benchmarking to removes high cost of production through setting up benchmarks.

Conclusion

From above project report it has been concluded that management accounting can help managers while dealing with financial problems. It can help internal stakeholder to analyse actual performance of company as well as level of operational activities of a company. Planning tools can help to forecast and estimate budgets by analysing possible future expenses. Management accounting help internal stakeholders to analyse performance and position of the company.

References

Books and Journal:

  • Amidu, M., Effah, J. and Abor, J., 2011. E-accounting practices among small and medium enterprises in Ghana.Journal of Management Policy and Practice. 12(4). pp.146-155.
  • Carlsson-Wall, M., Kraus, K. and Lind, J., 2015. Strategic management accounting in close inter-organisational relationships. Accounting and Business Research. 45(1). pp.27-54.
  • Dražić Lutilsky, I. and Dragija, M., 2012. Activity based costing as a means to full costing–possibilities and constraints for European universities. Management: Journal of contemporary management issues. 17(1). pp.33-57.
  • Granlund, M., 2011. Extending AIS research to management accounting and control issues: A research note. International Journal of Accounting Information Systems. 12(1). pp.3-19.
  • Johnson, H. T., 2013. A New Approach to Management Accounting History (RLE Accounting). Routledge.
  • JOSHI, P. L., and et. al., 2011. Diffusion of management accounting practices in gulf cooperation council countries. Accounting Perspectives. 10(1). pp.23-53.
  • Klychova, G. S., Faskhutdinova, Ðœ. S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences. 5(24). p.79.
  • Mistry, V., Sharma, U. and Low, M., 2014. Management accountants' perception of their role in accounting for sustainable development: An exploratory study. Pacific Accounting Review. 26(1/2). pp.112-133.
  • Moser, D. V., 2012. Is accounting research stagnant ?. Accounting Horizons. 26(4). pp.845-850.
  • Ruiz-de-Arbulo-Lopez, P., Fortuny-Santos, J. and Cuatrecasas-Arbós, L., 2013. Lean manufacturing: costing the value stream. Industrial Management & Data Systems. 113(5). pp.647-668.
  • Schaltegger, S. and Csutora, M., 2012. Carbon accounting for sustainability and management. Status quo and challenges. Journal of Cleaner Production. 36. pp.1-16.
  • Ward, K., 2012. Strategic management accounting. Routledge.
  • Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches and perspectives. Routledge.
  • Windolph, M. and Moeller, K., 2012. Open-book accounting: Reason for failure of inter-firm cooperation?. Management Accounting Research. 23(1). pp.47-60.
  • Zainun Tuanmat, T. and Smith, M., 2011. Changes in management accounting practices in Malaysia. Asian Review of Accounting. 19(3). pp.221-242.

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