Management Accounting Application
Report – Answering the Brief Questions
Academic Subject: Accounting
Word Count: 3000
Submitted by: Student
The main aim of the report is to highlight the management accounting fundamentals’ that apply to the business environment plus the corporations that operate in that environment. The study of how management accounting applies financial data to assist in the monitoring, planning decisions, and managing of finance within the organizations. Upon successful completion of the unit, students shall be capable of presenting financial statements in the workplace setting and be in a position to help senior managers with the business planning of finance. Also, they will have the fundamental skills and knowledge to progress to the higher level of learning. Management accounting assists managers and business owners to monitor the performance of the company and are prepared throughout the accounting periods as required. Depending on the kind of venture and time-sensitivity of the data, the manager or owner can request reports daily, weekly, monthly or even quarterly (Appelbaum and Kogan, 2017).
P1: Explain management accounting and give the essential requirements of different types of management accounting systems
Management accounting refers to the process of measuring, identifying, interpreting, analyzing and communicating financial information in the pursuit of the company’s goals. It is also referred to us as cost accounting. The main difference between financial accounting and management accounting is that information of management accounting is aimed at assisting managers in an organization to make decisions, whereas financial accounting is targeted at offering information to the external parties of an organization. The procedure of preparing management accounts and reports are that offer timely and accurate statistical and financial information needed by managers to establish day to day and short-run decisions (Appelbaum and Kogan, 2017). It contains reports that are prepared to meet the requirements of managements.
Accounting is the process of measuring, identifying and communicating economic data to allow informed decisions and judgments by the users of data according to (AAA) American Accounting Association. Managerial accounting systems are varying in their application. Every system is fashioned to provide varying managerial information basing on the requirements of management, to assist in making decisions (Blocher, 2016). There are many kinds of management accounting systems they include inventory management, cost accounting system, price optimization and job costing system all with various accounting objectives, elements, and functions. However, all the accounting systems’ basic elements create the standardized context as to the aim for the data that is analyzed, identified and communicated (Edmonds and Olds, 2013).
Cost accounting system
Cost accounting system or costing system is the framework applied by the corporation to approximate the cost of its products for inventory valuation, profitability analysis, and cost control. In the cost accounting system allocation of cost is performed based on either activity-based costing system or traditional costing system. Approximating the actual products’ cost is crucial for effective functions (Blocher, 2016). Cost accounting is the kind of accounting system which aims at capturing the corporations’ production cost through weighing the inputs costs of every production step plus fixed costs like capital equipment depreciation. Costing system will individually measure and record the costs then comparing of inputs outcomes to actual results or output to assist management of the company in measuring financial performance. Business managers rely on accounting data in general and specific on cost since any task of the company may be explained via its cost. Cost accounting is seen as the key concept in management accounting as it offers the analytical tools like budgetary control, marginal costing, standard costing, operating costing and inventory control which are applied by management in discharging their reproducibility efficiently.
Inventory management refers to the method of controlling and overseeing the ordering, use, and storage of components which the corporation applies in the production of the goods it sells. Inventory managing system combines the application of barcode scanners, desktop software, mobile devices and barcode printers to streamline the inventory management such as consumables, goods, stock, and supplies (Drury, 2015). Also, it is the practice of controlling and overseeing of quantities of the finished goods for sale. The objective of inventory management is to accurately understand present inventory levels and minimize overstock and understock situations. Through efficient tracking of quantities across the stocking location, managers will have insight and be capable of making sufficient inventory decisions. The inventory of a business is one of its key assets and accounts of the investment which is tied up to the products sells.
The following constitutes to functions of the inventory management system: creating purchase orders, receiving, relocating, adjusting and disposing of inventory. Also, it makes sales orders, picking, packaging, and shipping of products (Drury, 2015). It performs cycle counts, and physical inventory counts, create, manage, scheduling and sharing reports plus printing barcode labels. Benefits of the inventory management system to an organization include improving the bottom line of the company, enhancing inventory accuracy and improving company workflow.
Job costing system
Job costing refers to the system of allocating manufacturing costs to the individual item or batches of the products. It is applied if the goods processed are different from one another. It involves the practice of accumulating data on the costs related to a particular service or production job. The information can be needed to submit cost data to a consumer under the contract in which costs are refunded. Also, the information is important for determining the accuracy of the estimating system of the company that must be capable of quoting prices which permit for a reasonable income (Drury, 2015). The information may also be applied to assigning inventorial costs to processed products. The job costing system requires accumulating the following three kinds of direct information labor, direct materials and overhead.
Price optimization systems
Price optimization refers to the application of mathematical analysis to the corporation to determine how consumers will react to various price for their goods and services via different channels (Edmonds and Olds, 2013). Also, it is applied to determining the prices which a company determines shall best fulfill their goals like maximizing the operating profit. Discovering an alternative via the highest achievable performance or cost effective under the provided constraints through maximizing desired aspects and minimize the undesired ones (Edmonds and Olds, 2013
P2: Explain different methods applied for management accounting reporting
Managerial accounting focuses on internal information received via financial accounting. Management accounting is applied for controlling, planning and decision-making. Managerial accountants depend on financial statements comprising the balance sheet, income statement, and cash flow statement (Edmonds and Olds, 2013). However, they also apply other forms of accounting reports in evaluating corporation information. These may include budgets cost reports, product and performance reports
Management accounting calculates costs of items manufactured. It is done through taking all the raw product overhead, costs, labor plus any extra cost in consideration. The sums are then divided into amounts of goods produced (Edmonds and Olds, 2013). All of the data is summarized in the cost report. The report permit managers the capability to view the cost value of products versus the selling price. It assists the managers’ control and plans profit margins.
One of the key elements of management accounting is budgets preparation. Budgets are established through applying budgets of prior years and adjusting them to future forecasts. The budgets of a company list all expenses and revenues sources. The corporations attempt to attain its objectives and goals whereas staying within the budgeted amounts (Edmonds and Olds, 2013). The managers consider new vendors to employ as raw materials suppliers’ to save money. They also look for means of increasing sales while reducing expenses.
Management accountants apply budgets to comparing actual revenues and expenditures to the budgeted amounts. The differences computed are evaluated when shaping new budgets plus all information concerning the amounts is listed on the performance report (Horngreen,, Sunden, Stratton, Burstalher, and Schatzberg, 2013). These reports are computed each year, but some corporations establish them quarterly or monthly. The reports assist managers in planning for the future demands in production and cost increases.
P3: Calculating costs using suitable techniques of cost analysis to prepare the income statement using absorption and marginal costs.
Calculation of costs
The marginal costing technique centers on the contribution created by the product towards profit and fixed costs of the business.
Contribution = total of profit and fixed costs or the difference between revenue sales and variable costs
Sales – Variable Costs = contribution or
Contribution – Fixed costs = profit
The cost of each unit of cake under marginal costing method
|Cost of 10000 units produced||Calculation||Cost per unit|
|Direct material =£50000||50000/10000||£50|
|Direct labor = £30000||30000/10000||£30|
|Variable manufacturing overhead =£20000||20000/10000||£20|
|Marginal cost per unit cake||£100|
Under absorption costing method cost of each unit
|Cost of 10000 units produced||Calculation||Cost per unit|
|Direct material = £50000||50000/10000||£50|
|Direct labor =£30000||30000/10000||£30|
|Variable manufacturing overhead=£20000||20000/10000||£20|
|Fixed manufacturing overhead =£40000||40000/10000||£40|
|Production cost per unit||£140|
INCOME STATEMENT USING MARGINAL COSTING
SRC Pvt. Ltd
For the period ended 30, June 2017
|Particulars||Units||selling price £ per unit||value in £|
|Less: marginal cost of goods|
|direct material||10000*50 =50000|
|direct labor||10000*30 = 30000|
|variable manufacturing OH||10000*20 =20000|
|total marginal cost||£100000||100000|
|less: variable selling& Admin exp.||30000|
|less: fixed cost|
|fixed manufacturing overhead||40000|
|fixed selling and admin exp.||30000||70000|
P4: Explain the disadvantages and advantages of different kinds of planning tools used for budgetary control.
Budgetary control refers to a process through which budgets are arranged for the future date and are compared with the actual results in finding out the variances (Horngren, 2017). The comparing of budgeted amounts with the actual amounts will assist the management to locate variances and make corrective actions promptly. The following are key objectives of a budgetary control:
- Defining the company’s objectives,
- Offering plans for accomplishing the defined objectives,
- Coordinating the tasks of different departments
- Operating various cost centers and departments efficiently and economically,
- Improving the profitability through eliminating waste,
- Centralizing the management system,
- Correcting the variances from set standards
- Fixing the responsibilities of different individuals in the company (Horngren, 2017).
Merits of budgetary control
Budgetary control has to turn out to be an essential tool in the organization in controlling costs and maximizing profits. Some of the merits of budgetary control include: It defines the plans, goals, and policies of the company. When there are no specific aims, then the determinations shall be wasted in attaining any other aims (Levitan and Baxendale, 2012). It also fixes targets. Each department is compelled to work efficiently to attain its target. Therefore, it an effective procedure for managing the activities of different departments of the business unit. Also, it secures good coordination among different departments. In the situation where performance is below anticipation, budgetary control assists the managerial in finding out the responsibility. It assists in reducing the production cost through eliminating wasteful expenditure (Levitan and Baxendale, 2012). Through facilitating cost awareness among the workers, budgetary control contributes to economy and efficiency. Budgetary control promotes centralized control through the decentralized task. Budgetary control assists in the smooth running of the company because everything is provided and planned for in advance. Budgetary control tells the managers as to where the exploit is needed for solving issues without delay.
Disadvantages of budgetary control
The following are limitations of budgetary control: it is difficult to prepare accurate budgets under inflationary situations. Budgets incorporate a huge expenditure that small businesses concern may not afford. Budgets are organized for the next upcoming period that is always undefined. In the future, circumstances can change that will affect the budgets (Mohammad, 2016). Therefore, future risks minimize the use of budgetary control system. Budgetary control is a management tool. Thus, it may not replace managerial in making decisions since it is not the substitute for managerial. The budgetary control success relies upon the top management support. When there is lacking top management support, then it will fail.
The use of different planning tools and their application for preparing and forecasting budgets
Using budgets for control and planning
Preparing different kinds of budgets such as operating and capital. The alternative procedures of budgeting plus the behavioral inferences of budgets to management help them make sufficient and prompt decisions (Mohammad, 2016).
Pricing strategies can be attained in understanding how the competitors determine their product or service prices and demand and supply considerations.
Normal costing, actual costing, and standard costing help the company arrive at the best costing system that suits their business to maximize their profits (Mohammad, 2016). The cost systems vary depending on the activity of costing such as job costing, batch costing, process costing and contract to cost.
Applying SWOT, PEST, Porter’s Five Forces of balance scorecard analysis to the organizational financial position helps the management to understand requirements needed for business to grow (Mohammad, 2016).
P5: Compare how organizations are adapting managerial accounting systems to responding to financial problems.
Corporations today encounter the question on how to adapt their business models, strategies, and procedures to respond to environmental and social challenges while establishing the value for their shareholders and financial success (Nishimura, 2013). Few organizations are confident that they have the required skills to address the challenges and competing in the sustainable economy. It is argued that several corporations are missing out on the valuable analysis and insight through failing to take advantage of the skill set of management accounting. It comprises of making the business scenario for analyzing and sustainability and reporting on the effect of social and environmental aspects on organization performance.
An organization can use the following managerial accounting ways to respond to financial problems
Identifying financial issues: using budgetary targets, key performance indicators (non-financial and financial and benchmarks to identify problems and variances so as to address them without delays (Seal, et al 2014). Financial governance: the company should define financial governance and understand how it can be applied to prevent or pre-empt financial issues. The business can use financial governance in monitoring strategy. Managerial accounting skill sets: an organization must know the features of an efficient and effective managerial accountant. Also, they understand how the skills can be applied to deal with or prevent the problems such as misappropriation of resources meant to grow the business (Vanderbeck and Mitchell, 2016). Effective strategies and systems: the development of systems and strategies that need timely and effective reporting, full disclosure financial statements and are responsibly governed and owned by the organization.
The report proposes many ways in which management accountants may guide their company’s towards the sustainable success of the business (Seal, et al 2014):
- Identify the social and environmental trends which will impact on the organization’s capability to build value over the time.
- Liking sustainable corporate challenges to the strategy of the company, performance outlook, business model and license to function.
- Describe the impact of the sustainability issues in strong business terms comprising of how and when they would affect the company.
- Establish KPIs which support sustainable and strategic goals.
- Apply tools and techniques of management accounting like natural resource availability scenario planning, carbon foot-printing and lifecycle costing to assist incorporate sustainability issues into the process of decision-making (Vanderbeck and Mitchell, 2016).
- Generate reports which include information on sustainability effects to inform pricing and budgeting decisions, strategic planning and investment appraisals.
- Establish the reporting strategy which incorporates sustainability matters to ensuring that relevant non-financial and financial information is revealed (Selto and Curry, 2014). The International Incorporated Reporting Framework established by IIRC (International Integrated Reporting Council) is an example.
An organization having a right managerial accounting system is important as choosing the right administrator for any corporation. As the managerial accounting system is hoped to offer management with reliable and accurate information, administrators have to certify that the right structure for their model of business is chosen for implementation. The management accounting study assists students lucidly illustrate; professors cannot uphold any blooper. The main reason is that accountancy is regarded as the cornerstone of each business and therefore needs accuracy. Providing understandable chart and tables of financial accounting is the common issue which accounting student encounter in writing an assignment. The reason why persons require management accounting study help. Accounting is an understandable but practical discipline which details the transactions of finance relating to organizations or business. The students have to examine thousands of transactions which a company can perform throughout a specific time span. It becomes difficult for them to accumulate that data and integrate them.
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