There are following questions which enlist the requirement of the assignment are given below:
- Describe an understanding of management accounting systems.
- Use a range of management accounting techniques.
- Define the use of planning tools used in management accounting.
- Analyse ways in which organisations could use management accounting for responding to financial issues.
Management accounting is defined as a procedure of analysing business cost recorded under the financial statement so as to make reliable and profitable decision for an organisation. For this, accounting manager need to provide an adequate support to the management in terms of giving relevant information about current financial position of company. This will encourage managers to update their current policies with an objective of achieving financial growth in an organisation. The present assignment report is based on Prime furniture which is engaged in manufacturing furniture products located in East London, UK. As a junior management accountant, presentation is made which includes the concept of management accounting along with its benefits. Apart from this, accounting and reporting system, planning tools, costing methods and role of management accounting in dealing with financial issues has been also discussed under this report.
Management accounting is a process of making an effective decision for the betterment of an organisation by analysing the financial information of company taking books of accounts into consideration. It is the way of analysing business cost by summarising financial statements of an organisation (Bryson, Crosby and Bloomberg, 2014).
Prime Furniture is growing East London based company which requires an adequate support from different management accounting systems in order to maintain books of accounts containing information about the business cost and transactions happened on daily basis. Using various kinds of accounting system help managers of Prime Furniture to increase the performance level by updating policies and plans according to the current financial situation. These management accounting systems includes:
- Cost accounting system: On the basis of cost accounting report, the managers of the organisation analyse different cost associated with manufacturing which are related to raw material, labour, indirect expenses. It will help the management of Prime Furniture to have a detailed analysis of all the expenses related to the manufacturing of furniture and other related services. In cost reports all the expenses whether direct or indirect all are covered and organisation by analysing it tries to minimise these costs (Damodaran, 2012).
- Inventory management system: Inventory management system is generally followed by those organisations who has to deal with a lot of inventory which help them to manage it well. Prime Furniture is required to manage their inventory which in been used in the process of manufacturing furniture products. The different approaches that are used to manage the inventory are LIFO, FIFO and AVCO.
LIFO is an approach in which inventory that is received in the last is used first. While in FIFO, the inventory which is receives first is used first. Whereas in AVOCO, inventory is used on the basis of average cost of production. In case of Prime Furniture, FIFO method is used as they are into manufacturing business (Fowzia, 2011).
- Price optimisation system: This system is used by the organisation in order to minimise the prices of the goods so produced by the organisation. This help Prime Furniture to determine the cost of the units produced by them. This further help the managers of Prime Furniture to decide the prices for their customers. Price optimisation system helps the Prime Furniture to compete their project in the cost that they have quoted to their customer for the projects (Garrison and et. al., 2010).
- Job order costing system: This system helps an organisation to allocate cost to the activities or a particular job. For Prime Furniture this system is very important as they can divide their total cost into different furniture that they have constructed for their clients. It will help Prime Furniture to advertise their projects with the prices to the customer, which are complete dependent on the cost provided to them by the manufacturing company. This also help the companies to manage the cost of different activities in relation to their performance.
Management accounting system
Cost accounting system
It is used by the Prime Furniture to analyse the different costs associated with direct materials, labour and other direct expenses.
Inventory management system
This system is applied in Prime Furniture to manage the inventory used in manufacturing process by their managers so that they can monitor the cost.
Price optimisation system
Prime Furniture uses this system to determine the prices of the building they have to provide to the customers which are based on the expectations of the clients and the estimated cost provided by the constructor.
Job costing system
Prime Furniture uses this system as it helps them to determine the cost of different activities individually.
There is somewhere linkage between management accounting and reporting system as the using or preparation of these kinds of report or systems depends on each other. For an instance, cost accounting system provides information about the total business cost which further be recorded under the cost accounting report. The reliability and accuracy of cost accounting report is very much based on cost accounting system.
Management accounting reporting: It is considered as a process of recording business transactions occurred on daily basis. This will require support from managers to maintain reports containing all financial information so that the performance of an organisation can be easily analysed and compared with previous year performance. There are several kind of reporting system that manager of Prime Furniture can use which includes:
Cost accounting report: It is a document specifying information related with amount invested in different business operations so that allocation of cost can be done with an expectation of getting maximum return in future. The manager of Prime Furniture can use such kind of report to prepare an effective budget in which allocation of funds can be done according to the requirements. It will help manager in analysing the actual financial position of an organisation by comparing invested cost with return (Honggowati and et.al., 2017).
Account receivable report: It is another document specifying information about the unpaid debtors along with interest amount. The main motive of maintaining such kind of document is to recover the due amount from debtors so that financial position of an organisation can be stronger. Preparing such document by Prime Furniture help in rectifying their current credit policies and update them to ensure that the chances in receiving payments from clients after expiry of due date can be minimised. This will direct their investors to pay due amount to company on time in order to make a better relation with them in future time period.
Inventory management report: This is another document that must be prepared by Prime Furniture to maintain sufficient level of inventory in their warehouses so that client’s requirements can be fulfilled without any delay. This kind of document contains information about the shortage of inventory which encourages manager to order further stock from suppliers to meet future client’s requirements. The main advantage of preparing this document is that it reduces storage inventory cost which makes positive impact on financial position and also maintains a good relation with their loyal customers by providing them demanded products on time (Linoff and Berry, 2011).
Cost is the amount which is invested in process of manufacturing furniture products. It includes different aspects such as risk, efforts, resources, time, utilities and materials. It consists of various types which includes marginal and absorption:
Marginal costing: It is the cost which includes only variable cost due to which t shows more profitability than actual in the financial statement of an organisation. Due to this, Prime furniture can use such costing method with an objective of attracting new investors by showing them financial statement with high profitability (Lukka and Vinnari, 2014).
Absorption costing: It is a method which consists of both variable and fixed cost due to which it is also known as full costing methods. It shows actual figures in financial statement which can easily retain loyal shareholders. Thus, it can be used by large sized organisation.
Here are the preparation of Profit and loss account using marginal and absorption costing method.
(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.
There are various accounting techniques which is used to make financial reporting documents which includes financial statement such as profit and loss account, balance sheet, cash flow statement etc. These are prepared on timely basis with an objective of identifying the actual financial position of an organisation.
The above calculation depicts that profitability generated from absorption and marginal cost has been analysed properly. In first quarter, profit came is 4700 and 1900 in sales is achieved. In second quarter estimated profits is 5900 and 4700. marginal cost must be effectively used to take strategically right decisions.
Budget: It can depict as an effective tool which is used by the business organisation to estimate its future incomes and expenses for a specific period of time. Prime Furniture prepare various budgets for its client as per their requirements (Budget, 2019). The organisation is also using the budgetary control to asses that how the manager utilises various budgets to monitor and control the cost or expenses. It is also used by the company to compare its actual results from the expected one so that the deviations can be figure out and can adjust the performance.
Different types of budgets:
Capital budget: This is the budget which is use by the company to record the information related to the various activities in which the large capital has invested. This budget also helps in keeping record of financial performance (Nitzl, 2016). Prime Furniture is engaged in manufacturing business use to which it is important to prepare capital budget so as to make an effective financial plan. The advantages and disadvantage of this budget are given below:
This budget helps the business to manage all those projects in which the large monetary resources are endowed.
The lack of specificity take place in this budget as it comprises the information of all department.
It also helps the stakeholder of the business to track the financial performance of the business.
Due to high level of involvement of each department this budget creates confusion and problem in updating.
Operating budget: This budget is preparing by the business organisation in order to record all the estimation of their sales and revenues which might occur in future. This budget is helpful for the Prime Furniture in analysing that all the monetary resources within the organisation are utilising properly or not.
This budget helps the business in keeping their eye on overall performance of the business.
It can magnify incomes and other figures in statements of firm.
The assessment of past and current expenses and incomes is possible with this budget.
In this budget all the figures can easily manipulated.
Other methods of budgeting: The other alternatives methods are also available in the budgeting:
Zero based budgeting: This budgets is generated by Prime Furniture to decrease the cost of the business activities by justifying the cost of each and every activity for a new period.
- Advantage: In this aspect a new budget is prepare for every activity in order to maintain the proper accuracy.
- Disadvantage: It is not suitable for a short term planning as the records can be biased by managers.
Cash only or traditional budgeting: This is the most crucial budget which helps the Prime Furniture in maintaining the balance between their cash inflow and outflow so that the strong financial position of the business can be maintained (Senftlechner and Hiebl, 2015).
- Advantage: This will help the Prime Furniture to easily determine the loss in the business.
- Disadvantage: It decrease the ability of the business to deal with the credit transactions.
Behavioural implications of budget:
- Budget allows Prime Furniture to properly allocate their resources as it focus on actual data rather the budgeted figures.
- Other, budget is a complex task for the business as it requires higher monetary investment.
Pricing strategies: Organisation are using the various pricing strategies in their business for selecting a most appropriate price of their products and services. Here define some of the strategies are:
- Penetration: In this strategy firms set lower price at the initial level for attracting a range of customers.
- Premium: In this aspect the quality of the products and services are high due to which the higher price is offering to the customers in this strategy (Suomala and Lyly-Yrjänäinen, 2012).
In the Prime Furniture, penetration pricing is used for determining the price of their furniture products.
The way in which competitors ascertain their prices: Competitors of the Prime Furniture like Lozi is determining their price by assessing the market segments by adopting the market research strategies.
Supply and demand consideration: The various supply and demand consideration are available like economics conditions, market situations and other which should be consider by Prime Furniture.
Explosive political situation can affect the Prime Furniture as it is not possible for them to sustain their position according to the changing government rules and regulations.
Changes in the inflation rate might affect the Prime Furniture as it impacts on the buying behaviour of the customers.
In order to getting higher success and growth Prime Furniture needs to offer services as per customer choice, preferences and demands.
For attracting a range of customers business need to adopt various latest techniques like aerogel insulation, smart bricks and healing concrete.
The brand image of Prime Furniture is higher which helps them to covers huge market share.
Organisation invest less on research centre due to which they fails to get adequate knowledge about customers’ preferences.
Expanding the business in other countries is the great opportunity for Prime Furniture.
The company have to face tough competition from As Lozi company which hinder the chances of the succession of the business.
Balance scorecard: This is an effective tool which is used by the manager of Prime Furniture with the purpose of assessing that all the activities which are accomplishing the staff member are under their control or not. It will also help them to monitor the unfavourable situation also which are occurring due to these activities (Tucker and Lowe, 2014).
Preparation of budget is necessary in order to reduce unnecessary cost during execution of project. It is important for management of Prime furniture to prepare various kind of budget according to the nature of their desired project. Various budgets include zero based budgeting, flexible budget etc. For example, flexible budget allows managers to make changes in amount fixed in budget according to the situation occur during progress of project. This will minimise the cost and increases the output.
Financial problems are those issues which are incurring due to the lack of appropriate funds or monetary resources. In order to operate their business without any crisis then it is essential for the business to identify the reasons of the problems and implement effective strategies to cope form this kind of issues. Prime Furniture also facing some financial issues which are described below:
Sudden expenses: This problem occur because of the ineffective planning of the management of Prime Furniture due to the unexpected expenses take place which results lower financial position of the company (Uyar, 2010).
Late payments by customers: It is the another issue which is facing by the company as it occurs because of giving the higher credit facilities to the customers.
In order to overcome from above discuss all issue Prime Furniture needs to use some effective techniques which will help them to maintain their financial position. Here are defined some of the techniques which can be used by the company:
KPIs (Key Performance Indicators): This is the most effective which will help the business to measure the success and failure of the business. The two types of KPI is available, first is financial which helps the business to determine the unnecessary expenses and second is non-financial which assist the business in identifying the conflicts in their business operations and supply chain. By utilising the financial KPI technique Prime Furniture will be able to solving out the issue of sudden expenses by helping them in ascertaining effective plans or strategies for their operations.
Benchmarking: This framework is used by the business in order to compare their performance form their competitors. It will help Prime Furniture to solve out the issue of late payment by clients through comparing the credit policies of them to their competitors so that required changes can be implemented.
Budgetary targets: It refers to the computation of the required funds for a specific financial year. This is used by the business organisation of Prime Furniture with the aim of find the deviation between actual and estimated figures so that the financial issues can be resolved (Yeshmin and Hossan, 2011).
Financial governance: It portrayed as a set of financial principles which are necessary to be followed by the company in order to solve the financial issues. This technique will help Prime Furniture to solve out all their financial issues like sudden expenses and late payment by creditors as it will help them to establish proper control and monitor on the business activities so that the all the financial transactions and business performance can be maintained effectively.
Characteristics of an effective management accountant and the way in which it can be used to prevent problems:
- An effective management accountant needs to have some skills to predict and prepare strategic plans so that the complex situations can be found and deal with them.
- The management accountant must have decision-making skills so that the appropriate decisions can be formulated to prevent the organisation form the financial crisis.
Cost accounting method is used by the organisation in order to save the extra cost of their operations so that the issue of sudden expenses can be solved.
Inventory management system is used by the business to keep the record of the availability of the stock so that the production activities can be regulated effectively.
Price optimisation system is adopting by Prime Furniture to set an effective price of their building so that the clients will be able to pay easily and the issue of the late payment will not able to take place.
Cost accounting system is used by the business to cope from the issue inappropriate records of cost as it will help them to maintain the proper records of cost of every activity.
Benchmarking technique is using by them to keep the track of their financial position.
The financial governance tool is used for disclosing the financial position of the business in front of stakeholders.
Management accounting plays an important role while dealing with financial issues arising due to various reasons. It includes cost accounting system, inventory management accounting system etc. For an instance, using inventory management system help Prime furniture to maintain sufficient kevel of stock whenever the client demands. This reduces storage cost of inventory which indirectly increases overall financial position of company.
KPI, benchmarking etc. are some kind of tools in order to cope up with financial problems. KPI is used to rectify the performance level of employees by comparing their actual with expected results. This will motivate them to work had and contribute more towards making financial performance more strong. Whereas benchmarking is used to set target towards employees to reach within given deadline. Setting target is done after analysing rivals current strategies. This will bring companies ahead than their rivals in competitive market.
From the above-stated context, it can be concluded that management accounting is defined as a procedure of analysing business costs recorded under the financial statement so as to make reliable and profitable decisions for an organisation. For this, the accounting manager need to provide adequate support to the management in terms of giving relevant information about the current financial position of the company. Many students fail to acknowledge the Importance of management accounting, hence get low distinctions in the subject, to improve this Instant Assignment Help Australia provides accounting essay writing help .
It can be concluded from the above discussion that an organisation can strong its financial position if it receives maximum support from management accounting as they are responsible to make corrective decision on the basis of financial information available to them under financial statements. It is important for an organisation to maintain books of accounts which can be possible through using management accounting and reporting system, costing methods used to calculate profit, budgetary tools and techniques to resolve financial issues.
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Books and Journals
Bryson, J. M., Crosby, B. C. and Bloomberg, L., 2014. Public value governance: Moving beyond traditional public administration and the new public management.Public administration review. 74(4). pp.445-456.
Damodaran, A., 2012.Investment valuation: Tools and techniques for determining the value of any asset(Vol. 666). John Wiley & Sons.
Fowzia, R., 2011. Strategic management accounting techniques: Relationship with business strategy and strategic effectiveness of manufacturing organizations in Bangladesh.World Journal of Management.3(2). pp.54-69.
Garrison, R.H. And et. al., 2010. Managerial accounting. Issues in Accounting Education. 25(4). pp.792-793.
Honggowati, S. and et.al., 2017. Corporate governance and strategic management accounting disclosure.Indonesian Journal of Sustainability Accounting and Management. 1(1). pp.23-30.