Management Accounting: A Comprehensive Analysis

MANAGEMENT ACCOUNTING

Introduction

In the concept of management accounting, the administrators apply the provisions of accounting data for the purpose of better informing themselves prior to their decision inside the provinces of the organisation which helps their performance and administration of control functions (Drury, 2018). It is even termed as cost accounting and is the procedure of recognising, examining, deducing and communicating data to the administrators to aid attain the business objectives. This assignment explains the concept of management accounting and its types. Further, it explains its application in solving the financial problems of business. It even includes the distinct reporting patterns of management accounting.

Task 1 (LO1)

P1 Explain what is meant by ‘Management Accounting’ and give the essential requirements of different types of management accounting systems.

The concept of management accounting is to aid the administrators inside the province of an organisation to take important decisions. It is the practice that allows an organisation in recognising, examining, deducing and communicating data to the administrators to aid attain the business objectives. The information assembled with the aid of management accounting is transferred to other important areas of business and updates the administration of the organisation about the regular business chores and operations. It includes the information regarding the cost of services and products that is acquired or purchased by the organisation. The management accountants apply budgets for the purpose of quantifying the operational business plans. The concept of management accounting operates to offer sensitive data to the administration that is required in operate the decision making process of the business. For instance, a hospital might apply the concept of management accounting technique for providing assistance in house requirements. These techniques are nit same throughout the industry but vary to a great extent (Abdusalomova, 2019). It in broader terms can be explained as the procedure of preparing reports about the progress of a business and its operations that would aid the administrators in making long term and short term decisions. It aids any business to move forward towards its goals by recognising, measuring, examining, inferring and communicating data to the business managers. Hence the main function of the concept is aiding the managers to predict the future of the business operation. Further, it helps the managers to decide whether they must buy or make the products instead of investing money for purchasing it. This decision is embarked by predicting the cash flows in forthcoming days. As it helps in the process of forecasting, the variance between the actual performance and the predicted numbers can be easily identified. Therefore, it is allows in evaluation of the rate of return. The discussion underneath defines the different management accounting systems that can be applied in Capital Joinery Limited for the purpose of recognising and inferring the management situations.

• Cost accounting system: The manufacturers apply the concept of cost accounting system for the purpose of tracking the activities regarding production by the application of inventory system of perpetual nature. In clear words, it can be defined as a technique of accounting that has been designed to help the manufacturers of Capital Joinery Ltd to track their inventory flow uninterruptedly throughout the production process (Drobyazko et al., 2019). It is better known as a part of management accounting that evaluates the definite cost related with production of any product or offering a service analysing the entire expenses of the supply chain.

• Job costing system: This system of accounting is involved in the procedure of collecting data about the prices or cost related with certain job or any particular production process. The data might be a requirement for the purpose of submitting the cost data to any consumer of Capital Joinery Ltd under the contract (Hopper and Bui, 2016). This data would enable Capital Joinery Ltd to reimburse the costs incurred in paying for specific jobs. The application of this accounting technique can be attained separately. This attribute of job costing enables in finding the loss or profit at every stage of any specific job.

• Inventory management system: This management accounting technique is a amalgamation of procedures and technology. It is involved in the process of watching over for the purpose of observing and maintaining the pile of stocked goods and items. Those goods or products are either assets of the organisation, supplies, finished products or raw materials on the verge of being transferred to the vendors for sale. Capital Joinery Ltd is mainly found to be using the application of perpetual, inventory or periodic kind of inventory system (Muchaendepi et al., 2019). The inventory management technique the technological needs and the complexity in its execution is evident. However, the accuracy and efficiency with this technique makes it most recommended.

• Price optimising system: This management technique enables Capital Joinery Ltd to evaluate the variation of demand at distinct levels of price. The resulting information is then joined with data about stock and cost level for the purpose of recommending the best possible price that would improvise the levels of profits. This management accounting technique enables the retailers to achieve the objectives that are essential for their operation (Laudon and Laudon, 2015). This sometimes involves increasing prices when it was required to optimise profit. This even sometimes meant of reducing the prices for improvising the sales volume and revenue. Hence, it can be said that price optimising system helps a retailer in achieving whatever goal the retailer has.

P2 Explain different methods used for management accounting reporting

Management accountant make decisions with the help of financial statements. Apart from the financial statements, it applies additional varieties of reports in evaluating the data of the organisation and it encompasses the cost reports, budgets and performance report. The distinct kinds of management accounting report are discussed below:

• Investment appraisal report: It includes the results attained through the mechanism of investment appraisal technique and the consequence that has been achieved from the mechanism. In this report, the organisations put out the negatives and positives of every investment it takes into consideration and the consequences of moving ahead with the investment (Thomas, 2016). Application of the report inside the province of Capital guarantees that the organisation takes into account efficient decisions in case of probable investments. The main object of this report is that organisation must not undergo any kind of financial loss.

• Departmental report: The activities of different departments of the Capital Joinery Ltd are present in the report. It contains minute details of the organisation's department. If the organisation uses this report effectively they would be able to determine the obstacles that had stopped certain department from achieving the desired results. It consists of recommendations that would allow the departments to perform in a way that would give them desired results.

• Accounts receivable ageing report: This report enables any organisation to have the knowledge about the invoices that are unpaid with the period they have remained unpaid. Application of accounts receivable ageing report, would allow Capital Joinery Ltd to recognise invoices which are open and would enable them to place them in the topmost area in the list of clients who normally are slow payers.

• Job cost report: The report contains the total jobs of the organisation along with the cost required for the job. It contains the entire breakdown of the cost incurred for the job such as overhead cost and material cost. The application of job cost report in Capital Joinery Ltd would enable them to have an understanding of the value addition it would have from its job (Ameen et al., 2018). This report would enable the organisation to know the area of its spending and eventually would be able to know the amount of profit or loss it is able to make from the jobs.

Task 2 (LO2)

P3 Evaluation of cost with the application of cost techniques for preparation of income statement under marginal and absorption cost

In the province of every organisation where the technique of management accounting is practised and adopted for the purpose of augmenting the operations, there is variety of techniques available. These management accounting procedures can be divided into distinct classes, the most noteworthy amidst them are absorption and marginal costing.

In the current scenario, Capital Joinery Ltd, has constructed a budget in connection to sales and production in the organisation for the January, is presented down.

The actual information and figures adopted for the month of January are shown in [Refer to Appendix 1].

(a) Absorption cost technique

1. Evaluation of cost of production, total sales cost and total cost of production for the month of January

2. Budgeted statement of profit or loss for the month of January

3. If the actual produced units increase to 19000 units and the closing stock becomes 3000 with all other data remaining unchanged, the difference between actual and budgeted figures are shown in

[Refer to Appendix 2].

(B) Marginal costing technique

1. Evaluation of cost of production, total sales cost and total cost of production for the month of January

2. Budgeted statement of profit or loss for the month of January

3. If the actual produced units increase to 19000 units and the closing stock becomes 3000 with all other data remaining unchanged, the difference between actual and budgeted figures are shown

[Refer to Appendix 3].

It is evident that profit earned under absorption costing is slightly greater than that earned under the method of marginal costing.

Task 3 (LO3)

P4 The disadvantages and advantages of distinct variety of planning tools that are applied for budgetary control

The financial verbiage for the purpose of administering the expenditure and income is known as budgetary control. It actually means comparison and contrast of expenditure or income that an organisation has actually earned to that of the ones planned by it (Henttu-Aho, 2018). This comparison would enable the organisation to take steps or appropriate actions for correcting them.

Variance Analysis

This budgetary control tool deals with the evaluation of deviations between the actual and budgeted performance of financial nature of an organisation. It aids the organisation in understanding the exact reasons of fluctuations and the steps or actions it can take for correcting the variance that exists between the actual and budgeted figures (Armitage et al., 2016). This makes the budgetary control technique more effective and allows the organisation to perform the budgeting activity in a better way.

Advantages of variance analysis

The concept of variance analysis enables an organisation and its managers in making detailed, forward looking and better budgetary decisions. Hence, in broader words it can be said that variance analysis acts as control mechanism. It helps in allocating responsibilities and appoints on departments the mechanism of control (OBI, 2015). The evaluation of significant deviation on important items enables the organisation in having knowledge about the cause of deviation and in turn allows the management of the organisation to hunt for possible ways that can help in preventing or reducing the deviation. When the management of Capital Joinery Ltd would want to reduce the deviation, the management of the company with the help of variance analysis would allow the managers to construct forward looking and detailed budgetary decisions.

Disadvantages of Variance analysis

The activity of variance analysis is depended on the statements of finance that comes out a bit late than quarterly closing. Hence there is a time gap that can probably have an affect over the remedial measures decreasing the level of accuracy to some extent. Further, it is quite possible that entire sources of variance may not be present in the accounting data which would make it difficult to act upon the variances. Even in the absence of budgeting, if each factor is closely evaluated, the exercise of budgeting may not be properly done which would obviously give rise to variances. Hence, in such cases the evaluation of variances may not be termed influential.

Responsibility accounting

It is a variety of budgetary control technique which is accountable for the internal accounting of an organisation. The main aim of responsibility accounting is to back entire costing, planning and responsibility areas of an organisation (Akeem, 2017). It encompasses the construction of annual and monthly budget for the responsibility centre of the company.

Advantages of Responsibility Accounting

It impulses the administration to accept the structure of the company and verifies the person or department accountable and takes a step to solve the problem. It increases the awareness and attention of the administrators as they are required to define the variations for the ones they are accountable. It aids in comparing the achievements amidst the actual results and the pre-planned goals. It forms an idea of efficiency in the employees as their achievements and works are reviewed. It helps the administration to structure and plan the forthcoming revenues and expenditure of an organisation.

Disadvantages of Responsibility Accounting

It is often found out that it becomes problematic to fulfil the prerequisites of establishing a successful system of responsibility accounting. As it requires professional and skilful administrators to carry on with the concept of responsibility accounting, the technique becomes too expensive (Marzlin Marzuki and Ismail, 2019). It is only appropriate for the costs that can be controlled; in case of uncontrollable cost the system becomes insufficient.

Zero based budgeting

The approach or technique of preparing a budget from scratch is termed as zero based budgeting. The main speciality of this approach is not depended on budgets that were made previously. It initiates from zero and in this approach of budgeting it is required for the organisation to justify all expenditure before it is included in the official budget.

Advantages of Zero Based Budgeting

It is made on the analysis of cost benefit. Every item of expenditure is justified hence the organisation can find the costs that can be eliminated, mostly the ones that are not required. It even enables the organisation to determine the costs that are essential and most important for production and distribution activities. Efficiency of resource allocation is priority in case of zero based budgeting. The expenses that give the organisation a healthy return on investment are allocated efficient resources with the application of zero based budgeting.

Disadvantages of Zero Based Budgeting

Zero based budgeting is complex in nature and can prove to be expensive. It is often found that the zero based budgeting is complicated and time consuming. Moreover, implementing this budgetary control require extra training and skilled professionals. This makes the tool expensive as well. In case of departments, the deliverables aren’t dried and cut the application of zero based budgeting is not appropriate as it is associated to tangibility (Surianti and Dalimunthe, 2015). Making changes in the zero based budgeting can become intellectually taxing and emotionally disruptive.

Task 4 (LO4)

P5 Adoption of management accounting systems in response to financial problems

Any organisation faces challenges accounting from hiring to upholding relevance of product and in these circumstances, the organisations faces countless difficulties each days. Of them the challenges relating to finance is largest and has the tendency to loom. The management accounting systems have been designed in such a way that they can help the organisations overcome such situations and implement proper measures. Capital Joinery Ltd faces such financial pressures and must adopt the management accounting techniques to overcome them.

• Lack of cash flow: This is a perpetual struggle that every organisation faces. Most of the business has recognised the lack of cash flow as their greatest and most influential challenge. The organisation has experimented with their payment procedure to overcome this challenge but this has not proved to be an effective solution. Hence, the management accounting systems can prove to be a better solution. Cost accounting system of management accounting is a solution for this financial problem as it would help in controlling the cost (Lavia López and Hiebl, 2015). The application of cost accounting system would disclose the unprofitable and profitable activities as it would guide the forthcoming policies of production. Further, the frequent determination of profit or loss would enable the organisation to eliminate the unproductive activities. The control over cost would enable the organisation to have knowledge about the actual and exact cause for decrease and increase in profit. It even allows the company to have proper control over supplies and materials. This in turn allows the organisation to have reliable comparison with other organisations in the industry.

• Marketing: It becomes difficult for the organisations to compete with the marketing activities of large scale enterprise. It is often noticed that the large enterprises deploy platforms such as facebook, instagram and twitter for advertising and marketing and these platforms are quite expensive as compared to brochures and pamphlet. The application of cost accounting system would enable the organisation in controlling its costs and it could deploy more amount of money into the marketing sector. In this situation, the main challenge of the organisation is stay in the line of competition without disposing off its cash reserves. It is important for the organisation to not stick to lame advertising and go for content creation through SEO. This requires better capital and cash management and that is possible only through the implementation of cost accounting system. Another way to perform the advertising activities efficiently is through the process of eliminating wastages. The application of inventory management system is better management accounting technique to eliminate wastages of inventories and raw materials. The organisation may not order heavy amount of inventories that is not required as it would have proper record of the required quantity through the mechanism of inventory management system. On the other hand, poor management of inventory can result to productivity loss and harmful miscommunication.

• Lack of capital: Proper amount of capital is essential for maintain the business cycle and speed. Adequate level of capital is important for enabling the businesses grow continuously. Absence of capital would hinder the investment of money in projects that would allow the business to growth (Bromwich and Scapens, 2016). This requires the business to earn proper profit and have efficient flow of working capital. In order to earn better profit, the organisation must have proper price optimising system. This would give the organisation the opportunity to have focus on numerous goals such as sales margin. This provides the company with financial benefits and makes an addition to the expansion and growth. Moreover, the implementation of cost accounting system even would enable the organisation to control the cost which in further would increase the profit.

Conclusion

Hence, the above discussion signifies that management accounting is an important requirement for an organisation. The management accounting system allows any organisation in the process of decision making. The mechanism of cost accounting system and inventory accounting system would enable the companies to plan their production and distribution process. The business operations are controlled in such a way that the organisation is able to maximise the profits by the application of techniques such as price optimising system. Further, the management accounting reporting would enable any organisation to keep a track on the functions and activities of the business. The application of management accounting technique enables any organisation to recognise its area of problems and implement ways that would improvise the problems. Mostly, the financial problem can be met only through the application of management accounting through the execution of management accounting systems. Therefore, it is advised that the organisations must employ the techniques of management accounting for controlling costs and earning high amount of profit. The cost accounting system and the inventory management system would allow the organisation to efficiently eliminate its wastages and have efficient flow of working capital and equity.

Reference

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Appendices

Appendix 1: Budget

Table 1: January Budget

Table 2: Actual data for the month of January

Appendix 2: Absorption Cost Technique

Table 3: Table for calculations of cost of sales, cost per unit and total production cost

Table 4: Budgeted income statement under the absorption costing technique

Table 5: Difference between the actual and budgeted figures

Appendix 3: Marginal Costing Technique

Table 6: Table for calculations of cost of sales, cost per unit and total production cost

Table 7: Budgeted income statement using marginal costing

Table 8: Table 5: Budgeted and actual income statement using marginal costing