Following are the question that describes the requirement of the brief is explained below:
- Explain the understanding of management accounting systems.
- Use a range of management accounting techniques.
- Define the use of planning tools used in management accounting.
- Analyse and compare which an organisation can use the management accounting to order to analyse financial problems.
Management accounting is defined as a provision of accounting information so as to inform stakeholders so that an actual financial position can be identified. The accounting manager needs to get support from finance manager in terms of receiving financial information that can be easily obtained from profit and loss account, balance sheet etc. It makes easy for making an effective decision that can increase the possibilities of an organisation to achieve its desired goals and objectives within pre-determined time period. Prime furniture is chosen organisation which deals in manufacturing furniture products having strong presence in East London, United Kingdom. The company decides to conduct an intern on the role of management accounting due to which the present report includes overview of management accounting and its systems along with their benefits to an organisation. The report also discusses the reporting system, different costing methods, planning tools to control budget and role of different management accounting to resolve financial issues.
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P1 Management accounting and essential requirements of its systems
Management accounting: It is an activity of analysing the financial information obtained from financial statements with a purpose of making a profitable decision so that an organisation can achieve its desired goals and objectives within limited time period (Bagautdinova, Kundakchyan and Malakhov, 2013).
Origin and evolution of management accounting: The concept of management accounting introduced during industrial evolution. Such concept came after financial accounting when the need of making decision on the basis of financial information are high. Two industries which includes Textiles and Railroad plays a major role in evolution of management accounting (Booth, 2018).
Management accounting systems: There are various kind of systems which every organisation need to use in order to analyse their actual financial position in competitive market. These includes cost accounting system, price optimisation system etc. Prime furniture is engaged in manufacturing industry due to which it is an important to consider the benefits to these systems and implement accordingly. Here are briefly discussed these systems:
Difference between management and financial accounting:
It assist managers to make profitable decision for an organisation.
It assist management in analysing their actual financial position of an organisation by preparing annual financial records.
It provides information which are in monetary as well as non-monetary terms.
It provides details of an organisation only in monetary terms.
Different management accounting systems are as follows:
Cost accounting system: This system facilitates in providing information related with company’s cost that are invested in manufacturing different products and services. In the context of Prime furniture, using such system will be more suitable to adopt as it provides them relevant information of incurred cost in each manufacturing activity. This will make easy for finance department to prepare an effective budget for future business activities. There are different kinds of cost which includes direct and indirect. Direct cost refers to an amount which is directly allocated to manufacturing activity whereas indirect cost refers to the amount which is incurred the support the execution of manufacturing activity in direct way (Bryson, Crosby and Bloomberg, 2014).
Inventory management system: This system assists in maintaining records of current level of inventory with an organisation to meet customer’s needs and requirements. Prime furniture is required to use such system to maintain a better relation with new clients and retain loyalty of existing customers by maintaining sufficient level of inventory in warehouses so that pre-ordered products can be deliver on time without any delay. Inventory management system consists of three types which includes LIFO, FIFO and AVCO. LIFO means the received inventory is used at first for manufacturing activities. FIFO means the products purchased earlier will be used at first in production activities (Demski, 2013). The other AVCO referred as an average cost which is distributed on the basis of units produced. The management of Prime Furniture is responsible to gather information about these inventories which can be possible through using such kind of system.
Price optimisation system: This system facilitates in providing information about the client’s actual perception towards pricing policy framed by an organisation which makes easy for manager to bring new pricing policy in order to retain loyal customers. It will be more suitable for Prime Furniture to use such system to maintain existing customer base by meeting their expectations related with prices charged by them (Grabner,and Moers, 2013).
Job order costing system: This system facilitates in providing information about the actual cost incurred in manufacturing each and every unit of an organisation. It assists an organisation in keeping records of total cost which makes easy for manager to estimate the profitable unit which provides maximum amount in return. This will make easy for manager of Prime Furniture to stop the producing furniture products which incurs more cost and give less return after selling it to the customers. This will minimise the cost and increases the income of an organisation.
P2 Different methods used for management accounting reporting
Management accounting reporting: It is an activity of recording business transactions which facilitates management in making profitable decision for future growth and success of an organisation. These reporting systems includes cost accounting report, inventory management report etc. The management of Prime Furniture must require to prepare these types of reports in order to analyse their actual financial situation in market (Honggowati and et.al., 2017)
Why information should be relevant to the user, reliable, up to date and accurate:
Information recorded under the accounting reports must be genuine, up-to date, reliable and accurate so that the trust and loyalty of stakeholders can be easily retained with an organization for longer period of time. For this, transaction on daily basis must be recorded with an accurate amount so that mis-representation of data towards stakeholders can be minimized.
Reasons behind understanding and overall easy to comprehensive of reports:
Understanding and interpretation of reports must require by the management as it assist them in making suitable and correct decision for the growth of business. Analysing the information available in the accounting reports help stakeholders of Prime Furniture in identifying their actual status in competitive market.
Types of managerial accounting reports:
Performance Reporting - Performance reporting is a part of communications management plan. Collecting information related to work performance, analysing it, creating reports and sending them to respective stakeholders is involved in reporting performance of the project. Performance reporting improves customer insights by focusing on the best sales opportunities. It also develops a visibility of the business partner activities and the purchasing behaviour. With these reports, employees of Prime Furniture understand the needs of the consumers (Kober, Subraamanniam, and Watson, 2012). On the other hand, senior managers can understand the demands of the employees thus reducing workplace conflicts. Investors are able to understand the current status of the business performance and where it’s heading. Performance Reporting generates real time information about the business performance and helps in setting realistic targets for the workers that are achievable and it allows the management to focus the employee’s efforts in the right areas which leads to increase productivity and profitability.
Cost Accounting Report - Cost accounting report offers a summary of all costs of articles that are manufactured which includes raw material costs, overhead, labour and any added costs that are taken into deliberation. The report offers managers of Prime Furniture the capacity to realize the cost of prices of items versus their selling prices. Profit margins are estimated and monitored through cost accounting reports so that it can give us a clear picture of all the costs that went into the production or procurement of the articles (Maas, Schaltegger and Crutzen, 2016).
Also, Inventory waste, hourly labour costs, and overhead costs are the part of these reports. For the better optimization of resources among all the departments, these reports provide an exact understanding of all the expenses. Cost accounting report also helps Prime Furniture to make the distinction between the fixed cost and variable cost, which allows the firm to fix prices in different economic scenarios. The control over materials and restocking of materials is also done with the help of cost accounting reports.
Inventory Management Report: An inventory report is a summary of items belonging to a business, industry, or organization. It provides a comprehensive account of the stock or supply of various items to keep track of the goods as they move through the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates when they move through the process. Inventory management reports helps the company to discover trends, identify weaknesses and strengths, and fill gaps and inefficiencies (Maher, Stickney and Weil, 2012). The knowledge gained from this report can help management of Prime Furniture to make more informed decisions. It shows all the costs associated with obtaining, holding, transporting inventory, and ensuring inventory stock in its proper condition to sell. It has become vital for the survival of an organization to have a good control over inventory, otherwise the company can lose their control over the profits.
Job Costing Report – Job costing reporting is the process of coding and allocating project expenses to track financial efficiency and profitability. The job cost is broken down into following categories:
- Labour Cost
- Material Cost
- Sub-Contractor Cost
- Field Overhead Cost, etc.
Proper job cost reporting begins with solid cost estimates. Each job should be start by arranging the estimates in the same cost categories that will be used to accumulate the actual job cost information. The proper format depends on how many job costing levels were used in the estimate. For Instance, for smaller jobs, totals for, say, materials, labour, and subcontracts are sufficient (McLaren, Appleyard and Mitchell, 2016). Prime Furniture uses the job costing process to track the true costs to deliver a job, so a firm can charge the right price to achieve its target profit margins. With the help of customized job costing reports and clear gross profit goals, a company can make data driven decisions to answers to questions like “Are they running jobs on budget?”, “Who are the most profitable and least profitable customers?'' etc.
P3 Calculation of cost using different costing techniques
Cost: It is defined as value of amount which is invested in operating different business activities. This amount includes various aspects such as time, efforts, value etc. Prime Furniture is engaged in manufacturing furniture products due to which it is important to analyse cost which makes easy for manager to compare output with invested cost. Cost includes two types such as direct and indirect cost. Direct cost relates with manufacturing of furniture on direct basis whereas indirect cost relates with expenses incurred in the process of manufacturing activities indirectly (Quattrone, 2016).
Cost analysis: It refers to the process of measuring the benefits received due to different actions so that overall profitability goals can be achieved.
(b): Reason for analysing variations in profit
The above calculation depicts that there is difference in net profit due to changing costing methods. The main reason of arising such differences is due to inclusion of fixed cost in absorption costing method. The same is been presented underneath:
For the first quarter:
Overhead absorbed= (66000*0.20) = 13,200
Fixed overhead costs= 16,000
Under absorption: (2,800)
For Second quarter:
Total absorbed expenses: (74000*0.20) = 14,800
Fixed costs= 16,000
Under absorption= (1200)
(c): Reconciliation Statements:
It needs to be done by taking crucial difference those are arises in a project that can help in reducing those gaps.
P4 Tools for budgetary control along with its advantages and disadvantages.
Budget: It is considered as a forecasting tool that are used to calculate future revenue and expenditures for a particular period of time. The manager of Prime Furniture design several types of budgets for their client as per the requirements of them.
Budget preparation: It includes many steps that are to be considered while making a budget in order to identify the current resources and future requirements also (Smith, 2017).
Different types of budget:
1. Capital budget: This kind of budget is exercised in order to keep records of all activities that requires large investment of capital as well as support their financial positions of Prime Furniture.
It records the all informations of finance that are invested in projects and examine the financial performance of a company.
As it has collective records of all departments that are hard to observe and controlled.
2. Operating budget: This defined as a approximation of all future income and expenses on the basis of past sales and profits of Prime Furniture. This is used by a company to support the executives of businesses in order to identify the proper utilisation of financial resources that are allocated.
It facilitates a clear view of monetary resources that are in used by a company.
In this budget figures and data's are not easily manipulated.
Alternative methods of budgeting:
- Zero based budgeting: It starts from a base of Zero figure as it is developed by Prime Furniture with respect of their customers for the purpose of reducing operational cost after justifying the recorded expenses of books.
It is accurate in manner as it requires to formulated new for every year.
It is not appropriate for the short term organisational planning.
- Traditional budgeting: This kind of budget is based on the inflows as well as outflows of cash over a specified time duration and this is considered by Prime Furniture to track the company's financial resources (Zoni, Dossi and Morelli, 2012).
It shows the profit and loss of the company in a clear way.
This restricts the credit transactions ability.
Behavioural implications of budget: This will help to effective communication as well as coordination among their workers and the resources are properly utilised by an organisation because of they focused on actual budget rather then estimated figures.
Pricing strategy: To fix the price of goods and services a company use several kind of pricing strategies. Some are considered as below:
- Penetration: In this company's focus on set minimum prices at initial phase which are marketed to their customers.
- Premium: In this prices are high as they prefer superior quality of goods to their customers.
Ways through which prices are determined: In order to identified the prices analysis of market situations is required to know the competitor’s strategies such as Laz furniture who is a rival of Prime Furniture.
Supply demand consideration: This is based on the market conditions that are required to analyse by Prime Furniture to take a competitive advantages and success (Budget, 2019).
- Political: As changes in the governmental policies or unstable political conditions can impacts on the Prime Furniture while formulating strategies.
- Economic: Continuously fluctuations in the inflation as well as deflation rates can effect Prime Furniture’s customers purchasing power.
- Social: Timely the taste and preferences of people change that can lead to decrease in Prime Furniture 's profitability.
- Technological: To get a competitive advantages a company requires to emphasised on the latest technologies.
- Strength: The good brand image of Prime Furniture in the marketplace is a strength of it.
- Weakness: They less focused on spending for R&D activities as it results in inappropriate information towards the market changes.
- Opportunity: In order to attain high growth and success a company have expansion opportunity in the marketplace.
- Threat: Huge market competition is a threat for the company as all competitors focused on gain high market shares.
Balance score card: This is defined as a performance management tool that are in used by Prime Furniture 's manager in order to analysed and monitor the employee’s performance and reduce unfavourable circumstances that are in activities.
P5 Comparison of the way in which organisations are adapting management accounting systems
Financial issues arise due to various reasons which includes the following:
Sudden expenses: Financial issue faced by Prime Furniture is due to inefficient planning which incurs more cost and less income.
Late payments by customers: Prime Furniture can also face financial issue due to receiving late payments by its clients. This will reduce their financial situation.
To resolve above financial issues, below are some financial tools which plays an important role:
KEY PERFORMANCE INDICATORS – In order to assess and measure the processes, companies often use KPI's. Key Performance Indicators are the factors that are tracked by organisations to analyse their manufacturing processes. This helps Prime Furniture in controlling worker’s behaviour and their actions, which further defines their performance. These criteria are used to measure success relative to a set of predetermined goals or objectives.
BENCHMARKING – Benchmarking is the quality improvement tool that identifies what the company is doing, how the company is doing, how other companies do it, how well the company is doing it in references to measures and what and how to improve. For example – Benchmarks could be used to compare the processes used in Prime Furniture with Laz furniture company.
Financial Governance - Financial governance refers to the way a company collects, manages, monitors and controls financial information. It helps Prime Furniture to have the entire view of life cycle of data and where that data appears which results in clear ownership and accountability of the financi