Management Accounting Application

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Introduction

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 organisations. 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 a 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, analysing, 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 organisation to make decisions, whereas financial accounting is targeted at offering information to the external parties of an organisation. The procedure of preparing management accounts and reports is 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 management.

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 based 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 optimisation, 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

A 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 an activity-based costing system or traditional costing system. Approximating the cost of the actual product 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. The costing system will individually measure and record the costs then comparing of inputs outcomes to actual results or output to assist the 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 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

Inventory management refers to the method of controlling and overseeing the ordering, use, and storage of components that 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 quantities of the finished goods for sale. The objective of inventory management is to accurately understand present inventory levels and minimise 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 sold.

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, creates, manages, scheduling and shares reports plus printing barcode labels. Benefits of the inventory management system to an organisation 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 that 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 prices 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 minimise 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

Cost Reports

Management accounting calculates costs of items manufactured. It is done by taking all the raw product overhead, costs, labor plus any extra cost into 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.

Budgets

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 their 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.

Performance Reports

Management accountants apply budgets to compare 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 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 the marginal costing method

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 budgetary control:

1. Defining the company’s objectives,
2. Offering plans for accomplishing the defined objectives,
3. Coordinating the tasks of different departments
4. Operating various cost centers and departments efficiently and economically,
5. Improving the profitability through eliminating waste,
6. Centralizing the management system,
7. Correcting the variances from set standards
8. 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 maximising 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 is 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 manager in finding out the responsibility. It assists in reducing the production cost by eliminating wasteful expenditure (Levitan and Baxendale, 2012). Through facilitating cost awareness among the workers, budgetary control contributes to the 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 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 systems. 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 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

Pricing strategies can be attained in understanding how the competitors determine their product or service prices and demand and supply considerations.

Costing systems

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.

Strategic planning

Applying SWOT, PEST, Porter’s Five Forces of balanced 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 respond to financial problems.

Corporations today encounter the question of how to adapt their business models, strategies, and procedures to respond to environmental and social challenges while establishing value for their shareholders and financial success (Nishimura, 2013). Few organizations are confident that they have the required skills to address the challenges and compete in a sustainable economy. It is argued that several corporations are missing out on value 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.