There are various questions which are given below:
- Analyse the understanding of management accounting systems.
- Describe the various management accounting techniques.
- Explain the role of planning tools used in management accounting.
- Determine the ways through which the company could use management accounting in response to financial problems.
INTRODUCTION
Management accounting is a technique which is concerned with analysis of performance of organisation and formulation of strategies for betterment of it according to current situations. In order to grow in future it is very important for all the companies to make sure that management records are taken in to consideration by them in the decision making process so that effective elements could be used for betterment of business (Astuty, 2015). This report is based upon Alpha Limited which is a medium sized manufacturing company involved in the production of pizzas. It was established as a small organisation in year 2001 and now it has grown massively and planning for franchising the business. This assignment covers range of topics that includes reports and systems of management accounting with methods used for calculating costs with the help of cost analysis. Additionally, various planning tools for budgetary control with their advantage and disadvantages along with usage of management accounting systems for the purpose of responding financial challenges.
TASK 1
P1 Different types of systems of management accounting with their essential requirements
Management accounting is a process which is followed by managers in organisations to carry internal analysis of the organisation so that effective decisions for future could be formulated. It is very important for companies such as Alpha Limited to pay attention towards proper conduction of management accounting on regular basis so that stakeholders can analyse actual performance of company (Ghasemi, and et.al., 2016).
The internal system of an organisation which is followed to carry out operations in a predetermined manner is called management accounting system. With the help of it managers can assess current position of business and then try to gather detailed information for business so that strategies for betterment could be formulated for future. In Alpha Limited different types of systems are used by management to carry out operations properly. These are discussed below in detail with their essential requirements:
Price optimisation system: Main goal of all the organisation is customer satisfaction and for the purpose of achievement of it companies are required to set appropriate price for all the products and services. For the same purpose price optimisation system is used by organisation to analyse response of patronages on pricing policy adopted for the purpose of setting price for all the products. It is used by managers in Alpha Limited to set the right rate for all its pizzas so that expectation level of consumers could be met. In order to generate higher profits this system is essentially required for business entities.
Inventory management system: For all business entities it is very important to manage their goods properly to execute operations effectively. Inventory management system is used by companies for same purpose which guides manage the stock properly (Boiral, 2016). In Alpha Limited it is also used by managers involved in the management activities of goods used for production activities. Different types of it are as follows:
- AVCO: The inventory is used for business activities by taking average cost as the base for them.
- FIFO: It is used by companies to use firstly bought goods to perform operational activities properly.
- LIFO: The system in which recently purchased stocks are utilised for the purpose of carrying out operations is known as LIFO.
From all the above described systems managers in Alpha Limited using FIFO inventory management system because it helps them to utilise all the goods for pizza making properly. Essential requirement of it for the business is that it guides managers to use inventory appropriately so that funds could be saved for future purposes (Abromiley and et.al 2015).
Job order costing system: The organisations which are performing multiple activities use it as it helps them to record data of all the operations separately. Main purpose of it is to facilitate managers to assign and allocate appropriate costs to all the activities which are perform by the company. In Alpha Limited managers are using it to make sure that they are allocating right amount to business operations according to their requirements or not. One of the major essential requirements of this system is that it helps to perform different jobs appropriately by making sure that there are sufficient funds to execute them (Burns, Euske and Malina, 2014).
Cost accounting system: Companies are required to keep track record of all the costs which are taking place due to operational activities. Cost accounting system is mainly used for the purpose of analysing all the operations which are resulting in higher expenditures for business. In Alpha Limited management is using it to figure out the activities which are creating very high cost for business so that they can formulate strategy to reduce it and save funds for contingencies in future. It is required for the enterprise because it facilitate the managers to forecast the most and least profitable activity of business.
P2 Various methods used for management accounting reporting
Top level executives of companies require that they get detailed information of operations in s single document so that their time which could be invested by them in the analysis could be saved. For this purpose management accounting reporting is used by large as well as small enterprises as with the help of it they can analyse actual position of business. In Alpha Limited managers are also using it to deliver accurate and efficient information of operations to the stakeholders so that their interest within the organisation could be enhanced. In order to keep track record of all the business activities different reports are generated by the management of company (D'Onza, Greco and Allegrini, 2016). All of them are as follows:
Budget report: In order to allocate funds to all the business activities this report is created in business entities. Management in Alpha Limited is also generating it as it facilitate managers to compare current and previous year's performance and then forecast future events. Main benefit of it for businesses is that is help to project such activities which are having possibility of taking place in future.
Inventory management report: The document which is generated to keep record of stock used for operational activities is known as inventory management report. With the help of it managers can make sure that they order goods for operations on time. In Alpha Limited it is used to determine that company have sufficient material to produce pizza according to requirements of customers. It is very beneficial for enterprise because by using it managers will be able to keep detailed data of inventory utilised for operations.
Performance report: For companies it is very important to keep information about its own and employee's performance so that effective judgements could be formed for betterment of business. In Alpha Limited it is generated by managers to analyse that all the strategies which were formed by them for business are able to improve performance or not. They also use it to make sure that all the staff members are contributing in achievement of organisational goal or not. One of the main advantages of it is that it facilitate in decision making for future developments (Grunewald, Syrbe and Bastian 2014).
Account receivable report: When companies deal in credit and clients ask to pay the amount after a certain period of time then to keep track of such transactions this report is generated. Alpha Limited also formulates it to make sure that all the customers who are allowed to take credit are paying the outstanding amount on time or not. It is advantageous for business as it allows top executives to analyse that owed amount is received on time or not. It also guide them to tighten the policies of providing credit if clients get failed to pay the due amount on time.
M1 Application and benefits of various management accounting systems within the organisation
There are various types of management accounting systems which are used by managers in Alpha Limited. All of them with their benefits and applications are as follows:
|
Management Accounting systems |
Application and benefits |
|
Cost accounting system |
Management in Alpha Limited are applying cost accounting system within the company because it helps to record expenses appropriately which are related to manufacturing operations. |
|
Job order costing system |
In Alpha Limited managers apply this system to record information of each and every job separately so that benefit of detailed data of them could be acquired. |
|
Inventory management system |
It is applied within Alpha Limited by managers to make sure that they are keeping detailed information of goods used for business operations so that it can help to perform operational activities effectively. |
|
Price optimisation system |
For the purpose of attracting large number of customers this system is applied by managers of Alpha Limited. |
D1 Evaluation of integration of management accounting system and reporting in the organisations processes
For all the companies it is vital to keep detailed information of all the operational as well as executional activities so that appropriate strategies for future could be formulated. Some of the systems which are used in Alpha Limited for same purpose are cost accounting, job order, price optimisation and inventory management. The reports that are formulated are performance, account receivable, performance and budget. Price optimisation system guide managers to set appropriate rates for all its food items so that large number of customers could be attracted and operational activities could be performed. On the other hand, performance reports are used to keep information of organisation's performance and other activities so that appropriate decisions could be formulated for future.
TASK 2
P3 Calculating different types of costs with the help of techniques of cost analysis
Marginal costing: It is a system which is used to identify the cost of additional unit which is produced by companies according to requirements of clients. In Alpha Limited it is used by managers to analyse the expenses which are taking place due to production of extra pizza so that accurate profits could be calculated (Heinzelmann, 2016 ). The calculation on the basis of this technique are as follows:
Problem 1 (1)
Cost card
|
Cost card (Marginal costing) |
|
|
|
£/unit |
|
Unit Variable Price |
3 |
|
Marginal Cost |
3 |
|
|
|
|
Selling price |
8 |
|
Less- Marginal cost |
3 |
|
Contribution |
5 |
Profit and loss account:
Working note 1
Absorption costing: It can be defined as a system of costing which is mainly used for the purpose of making sure that cost of all the units gets absorbed from the sales of same products. In Alpha Limited it is used by management to calculate profits by taking fixed and variable costs in to consideration (Luft and Shields, 2014). Calculation of net income with the help of this method is as follows:
Cost card:
Working notes:
2.
Problem 2/ 1 (a)
Problem 2/ 1 (b)
Problem 2/ 2 (a)
From the above calculations it has been assessed that if company will not install the machine then a loss of 180000 pounds could be faced by it.
Problem 2/ 2 (b)
The above calculations are showing that if managers install the new machine then it may create profits of 104000 pounds for business. By assessing the profit and loss it has been recommended to the company to install the machine.
M2 Accurate application of various management accounting techniques
While creating income statements business entities such as Alpha Limited can use different techniques of management accounting. Some of them are standard, normal, historical costing etc. and description of them is as follows:
Standard costing: It is a costing technique which is used by organisations to identify the causes which are resulting in difference between actual and standard figures. It can help to formulate effective decisions for future by analysing all the current processes in detail.
Normal costing: Under this type of technique actual data is used by managers for the purpose of deriving the costs for all the products manufactured by company. With the help of it managers try to allocate funds to activities on the basis of material, overhead and labour which are related to activities.
Historical costing: This method guides companies to record all the assets which are acquired by it on original cost in the balance sheet according to the accounting principles. It can guide stakeholders to determine actual value of assets which are recorded in the final accounts.
D2 Interpretation of of range of business activities
The calculations for marginal costing are showing that the organisation will be able to generate profits or losses of 175000, 100000, 250000, 175000, 150000, 200000 for month April to September. If absorption costing will be used by managers for profit calculation then the amounts for same period will be 70000, -50000, 70000, -10000, -150000 and 600000. By analysing both of them it has been suggested to the management of Alpha Limited to use marginal costing to calculate profits.
TASK 3
P4 Advantages and disadvantages of various planning tools used in budgetary control
Budget: It is a plan which is formulated by companies for the purpose of making sure that all the activities are having sufficient funds to reach business goal or not. In Alpha Limited managers keep specific amount for all the operations so that long term objectives could be met properly.
Budgetary control: It can be defined as the system which is used by organisations to take actual cost and expenses in to consideration while forming financial plan. Main purpose of it is to increase profitability, setting coordination between actual and standard budgets and making plans for future for development of business. Managers in Alpha Limited are paying attention towards budgetary control so that the deviations which are affecting performance of business could be controlled effectively (Markaryan and Snetkova, 2015). There are various types of planning tools which are used by managers for budgetary control are as follows:
Master budget: It is a tool which is used by managers to gather brief information of all the lower level budgets of the organisation which are formed by functional units of business. It is also generated in Alpha Limited by managers to keep brief information of all the budgets which were formulated for business. It could be created on monthly, yearly, half yearly or quarterly basis. All its advantages and disadvantages for company are as follows:
- Advantages: It helps internal stakeholders to analyse summary of all the budgets of the company so that actual performance could be analysed with low efforts. With the help of it profit for business could be estimated because it helps to assess actual position of business (Mittendorf, 2015).
- Disadvantages: The process of creating it is very complex as it requires large data and the possibility of error in it is very high because improvements according to the business processes could be made in it due to high level of complexity.
Zero based budget: It is a planning tool created by managers to determine profitability for each and every accounting year. In Alpha Limited it is generated by the managers to analyse that the business is able to generate profits in each and every accounting year or not. It starts with a zero base so that prior year's data could be ignored for future purposes (Zero based budget, 2019). Some of its advantages and disadvantages are as follows:
- Advantages: With the help of it staff involvement in business could be increased because they get motivated to perform new tasks. With the help of it internal environment of business could be improved because it ignores data of prior years.
- Disadvantages: It could be used for short term benefits because it cannot result achievement of long term goals because for this purpose effective forecasting is required which is possible with the help of previous year's data.
M3 Analysis of the way in which planning tools are used for the purpose of preparation and forecasting of budgets
For all the business entities such as Alpha Limited it is very important to use planning tools such as master and zero based budget because with the help of them forecasting and preparation of budget could be done appropriately. Both of them are used by managers to create budgets appropriate so that they can reach to organisational objectives as soon as possible. Master budget guide them to analyse brief information of business to determine profitability. Zero based budget is used to check profitability of all the operations separately. With the help of these informations budgets could be prepared and forecasted properly.
TASK 4
P5 Comparison of two organisations on the basis of the way in which these are using management accounting system to respond finance related problems
All the issues which are faced by companies due to lack of funds are known as financial challenges. It is very important for managers to be prepare to deal with them by making reserves in advance so that performance of operations won't get affected due to this (Noordin, 2015). While planning to enhancement of profits it is vital for managers to forecast such challenges so that budgets for them could be generated in advance. Alpha Limited is also facing some finance related issues which are as follows:
Improper management of funds: When the staff members who are responsible for management of financial resources are not having proper information of financial principles then this problem may take place. In Alpha Limited management is also facing this issue because the funds are not managed in systematic manner by the finance department. It also creates problems for organisational goals because this issue results in lack of funds for operational activities (Osadchy and Akhmetshin, 2015).
Weak credit policy: It is also a financial challenge which is faced by Alpha Limited because it results in late payments by clients that affect the business execution because of lack of finance for this purpose. When clients do not pay the owed amount on time then it may result in lower amount of finance for business activities.
The above discussion shows that both the issues are affecting operational efficiency of the company due to lack of funds. Therefore it is very important for managers to make sure that they are formulating effective decisions for identification of them. There are some effective tools and techniques which could be used by Alpha Limited to identify the above described financial problems. Description of them is as follows:
Key performance indicators: These are the measures which are used by business entities to evaluate success or failure of policies or strategies adopted for betterment purpose. There are two main types of it which are as follows:
- Financial KPI: It can be defined as tool that guides managers to analyse the way in which business is performing so that the errors such as inappropriate money management system could be identified (Schaltegger, Shields and Shelleman, 2016). It guides managers to be aware of real time updates in financial records of business.
- Non financial KPI: The KPIs which are related with customer relation, operations, supply chain, distribution channel and employees are known as non financial KPIs. With the help of them errors in operational activities and other areas which are not related to finance are analysed.
From both the above described KPIs management in Alpha Limited are using financial KPI as it guides them to figure out the problems such as improper fund management as it helps them to identify the causes of it. There are various elements which are analysed for the purpose of identification of issue. These are cash flow, current ration and other components which are mainly related to finance.
Benchmarking: It is the process of comparing performance, products and services of an organisation with others to figure out the factors which are resulting in issues for business. Main purpose of using it is to figure out the opportunities to make internal improvements and enhance performance of business. In Alpha Limited it is used by management to identify the problem of weak credit policy by comparing it with competitors. It helps to make effective changes in it and figure out the causes of issue so the best possible solutions could be formulated.
When all the financial problems are identified then it is very important for managers to make sure that they are trying to resolve them so that the issues which are taking place due to them could be responded properly. In Alpha following technique is used to deal with both the financial challenges:
Financial governance: It can be defined as the process of collecting, monitoring and controlling finance related information to analyse that the records which are formed by accounting professionals are appropriate or not. It also guides companies to make sure that they are following appropriate financial principles for formulation of reports (Speckbacher, 2017). In Alpha Limited it is used to respond the problems of weak credit policy and improve fund management because it help managers to check all the records and make sure that these are formed according to rules. With the help of it effective improvements are made in fund management and receiving processes that helps to deal with financial challenges effectively.
Comparison of use of management accounting systems:
|
Management accounting systems |
Alpha Limited |
The Victor Pizza |
|
Price optimisation system |
While facing the financial challenge of weak credit policy management within the organisation use price optimisation system because it helps them to set right price for all the products that helps to reduce the possibility of clients to ask for credit. |
While facing the financial problem of lower profits this system is used by management because it helps to set best suitable price for products that results in higher sales and profits for business. |
|
Job order costing system |
For the purpose of resolution of financial challenge of improper management of funds this system is used. Whereas, it guide to record the costs of all the activities separately according to their nature so that possibility of their improper management could be reduced. |
Managers in the company are using this system to deal with financial challenge of unplanned expenses whereas, it helps to forecast expenses in advance which is beneficial to form budget accordingly (TRUHACHEV, KOSTYUKOVA and BOBRISHEV, 2017). |
M4 Analysis of usage of management accounting to deal with financial issues faced by the company
For all the organisations it is very important to use effective techniques so that all the financial challenges which are taking place at workplace could be dealt properly. Managers in Alpha Limited are using different tools such as KPI, benchmarking and financial governance to identify and deal with finance related problems. Currently the company is facing issues related to improper management of funds and weak credit policies and these are responded properly with the help of techniques of management accounting.
D3 Evaluation of use of planning tools for responding financial challenges
Alpha Limited is a medium sized company which is running its operations in manufacturing sector. It is facing different types of financial problems which are affecting its operational efficiency. The issues faced by it are weak credit policy and improper management of funds. In order to deal with them properly different planning tools such as master and zero based budget could be used by managers. All of them can help to forecast and estimate these problems in advance and then strategies to deal with them could be formulated in effective manner.
CONCLUSION
From the above project report it has been concluded that management accounting is a systematic framework which is used by business entities for the purpose of keeping track record of all the internal activities. There are various systems and reports of it which are utilised by organisations to share detailed information of business with internal stakeholders such as managers, employees etc. These are cost accounting, inventory management, price optimisation etc. systems and performance, budget, account receivable etc. reports. Cost analysis techniques such as marginal and absorption costing are also used by managers to analyse actual cost for business. In order to forecast and prepare budget along with respond to financial challenges different planning tools such as zero based, master etc. budgets are used by organisations.
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