Management Accounting - Network Critical Solutions Ltd

Management accounting system and its reporting, various costing techniques, advantages and disadvantages of planning tools used in budgetary control and various techniques to deal financial problems that an organisation have to face are discussed under this project report.

TASK 1

P1 Management Accounting System and its Types

Management accounting is a tool which is used by various managers of the organisation to plan, organise, control and direct business operations and individuals within the organisation. It helps the managers and internal stakeholders to keep an eye on each activity of business. Managers are liable to administrate the business by making strategic decisions. In Network Critical Solutions Ltd management accounting helps to set goals and objectives for the organisation and policies and strategies to attain the same (Bouten and Hoozée, 2013). With the help of management accounting system a managers of Network Critical Solutions Ltd can control the business in an effective way and analyse the cost and other expenses of the company. It is also helpful while determining the outstanding amounts by different clients of the organisation. The managers use four different systems, that can help them while controlling and analysing activities of business. Those systems are explained below:

• Cost Accounting System: It is mainly used by manufacturing companies to record all the production activities. Main objective to use this system is to measure all the costs involved in manufacturing process of a products. In this system managers measure and record the costs first and then compare the input results to the actual to measure the actual performance of the company and output of various business activities (Figge and Hahn,2013). In Network Critical Solutions Ltd managers use cost accounting system to track the actual cost of their manufacturing process. It is very beneficial for the company because it can facilitate the work of management to identify that where the funds of the company are utilised.
• Price Optimisation System: It is a tool which is used by various organisation to determine the best price for their products that can attract customers and satisfy their needs and help to achieve organisational goals such as profit maximisation (Fullerton, Kennedy and Widener, 2013). Price optimisation system is used by the management of Network Critical Solutions Ltd to record the behaviour of the customers for their price changing strategies. With the help of this system managers get to know about the willingness of customers to pay for their products. Various data is used in the process of price optimisation such as inventories, operating and historic cost etc. It is very important for the organisations because, it can provide the idea of the price which should be fixed by the company for its products.
• Inventory Management System: It is a system which is used to record the information of stock of an organisation. It is mainly used to measure the location and quantity of inventory. Managers of the organisations try to reduce the waste of goods with the help of optimum use of available resources (Hiebl, 2014). In Network Critical Solutions Ltd managers and accountants use inventory management system to keep a detailed record of each activity which is related to the inventory. There are various importance of this system to the management but the main importance of this system is that it is helpful while tracking the inventory of the organisation. It can be divided in to three sub parts such as LIFO, FIFO, AVCO. LIFO means last in first out, in this method the recent asset will be recorded as it has been sold first. FIFO means first in first out, oldest inventory is recoded in this method as it has been sold first. In AVCO the inventory is recorded on average basis or weighted average basis.
• Job Costing System: Management of an organisation use this system to determine the cost which is involved in various activities of manufacturing process of products. This information is very helpful while distributing cost to the each segment of the production and assigning cost to the manufactured products for supply process. In Network Critical Solutions Ltd job costing system is used to find out information of direct material, direct labour and various overheads related to the production. It is very helpful and important for the manufacturing companies like Network Critical Solutions Ltd to control the use on raw material, labour hours and other expenses.

P2 Management Accounting Reporting and its Types

Management accounting reporting is a process of recording various information to the reports that are prepared by the managers to analyse the performance and position of the company and other factors that may affect the business execution activities. When a company is facing losses from a long period than these reports may help them to find out the cause and solution for this problem (Fullerton, Kennedy and Widener, 2014). Managers in Network Critical Solutions Ltd generate management reports to get an insight of the organisation. These reports contain informations like a performance of business, cost of production, outstanding amount by customers and budgeted figures of the company. Management of Network Critical Solutions Ltd generate five different reports to analyse actual status of the business. These reports are explained below:

• Performance Report: It is created to analyse the performance of whole organisation as well as the individuals who are working in the organisation. These reports help the managers to look out in those fields where improvement is required and form strategies to enhance the level of performance. Managers of Network Critical Solutions Ltd generate this type of report to analyse the result of activities of different operations. It is very advantageous to the company because it helps the managers to find out the area where they can make modifications to ignore losses.
• Account Receivable Report: It is generated by the businesses who are offering credit to its customers or clients. It provides the detailed information of such debtors who are unable to pay their amount (Hilton, and Platt, 2013). In Network Critical Solutions Ltd these reports are created to get the exact idea of outstanding amount by customers. Managers uses this reports to identify the default in credit policies and services of the company. It is very important for the company to collect owed amounts from customers by analysing the reports that consist information of them.
• Inventory and Manufacturing Report: These reports are generated to get detailed information of inventory and manufacturing process of various products. Manager can compare different assembly lines within the organisation with the help of this report. It contain information of inventory waste, hourly labour rate and overheads that incur while producing a product. In Network Critical Solutions Ltd managers use inventory and manufacturing reports to make the production process more efficient and effective which help the company to maximise profits. It is beneficial for the organisation to keep a track record of inventory and determine the cost of a product.
• Budget Report: It is a very important report in management accounting, which is used by managers to identify the monetary resources available in different department and set budgets for them (Otley and Emmanuel, 2013). Management in Network Critical Solutions Ltd generate this report to estimate future expenses, on the basis of past reports and current status of the company. It also help to reduce the cost by identifying the areas where the managers can cut cost. It is beneficial for the managers as well as owners of the organisation because it helps them to understand and control cost across the business.
• Job Cost Report: These reports can help managers and leaders to identify the cost of individual job. In Network Critical Solutions Ltd it is generated to analyse various tasks and identify the most gainful job from them. It can provide the idea of the expense that the owner have invested on a particular project to attain organisational goals. It is very important for the business, because it helps to analyse expenses while a project is under process, so that managers can modify the areas of waste before costs turn impossible to control.

M1 Benefits of Management Accounting System

D1 Integration of Management Accounting System and its reporting in organisational process

Management accounting system and its reporting help the managers to analyse performance and market position of the company. Various management reports help the managers with valuable information which help to make strategic decision and form strategies to lead the organisation toward success. Account receivable reports help managers to determine owed amount by customers and to tighten the credit policies of the company. Inventory and manufacturing reports are used by management of an organisation to determine actual cost involved in manufacturing process which help them to reduce waste and costs where they may cut the cost.

TASK 2

P3 Calculation of Cost Using an Appropriate Technique

Cost: Cost is a monetary evaluation of various expenses, that are incur in the production process of an organisation. It is charged by the seller and paid by the buyer. If a company is producing large number of products than, the cost will be minimised and the managers can plan to set lower price to attract more and more customers. Low cost help to attain more market share of the selected segment where the company is selling its products (Otley, 2016).

As Network Critical Solutions Ltd is a manufacturing company, hence it should set a low cost as compare to its competitors, for the products to grab attention of the customers. While buying a product a customer always try to find out the cost to make buying decision, whether it is affordable or not.

Marginal Costing: It is a costing technique which is used to measure the additional cost, known as marginal cost. It helps to identify the manufacturing ability and optimum production quantity of an organisation. This techniques is used by Network Critical Solutions Ltd to determine the additional cost of extra production unit. It also help in decision making process, whether it should produce extra units or not.

Calculation of net profit by using marginal costing method:

Absorption Costing: It is a method in which is used to identify the actual cost involved in individual units of production and allocating them to the related units. These costs are absorbed from the sales of same units to whom the cost is concerned (Parker, 2012).

Calculation of net profit by using Absorption costing method:

Break even analysis: It is used to find out the point where total cost and revenues of a company are equal. This point is called break even point, whihc means that the organisation is neither earning a profit nor facing a loss, but recovering the cost from sales. This method is used by the managers of Network Critical Solutions Ltd to determine the number of units to be sold to recover the costs.

A Total number of products sold:

1. Calculation of break even point in accordnce to sales revenue:

1. Calculation to reach desired profits of 10000:

Margin of safety: It is used to determine the difference between break even sales and actual sales. Managers of Network Critical Solutions Ltd use margin of safety to know the level of decreased sales before the projects become unprofitable for the company.

1. Calculation of margin of safety when 800 units are sold:

M2 Various cost accounting techniques

Managers in Network Critical Solutions Ltd use three different techniques that are standard, marginal, historical costing technique. Standard costing is used to identify the difference between actual and forecasted budget and performance of the business. It helps to identify the cause of differentiation among current and future position of business. Marginal costing is used to analyse the cause the increased cost of production which is because of the additional units. Historical costing is used to measure the actual price of assets or inventory at the time of purchase.

D2 Data interpretation

As per the calculations The managers of Network Critical Solutions Ltd use marginal and absorption costing methods to calculate net profits. While using marginal costing method the profits are £17500 and for absorption costing it was £15675. There is a difference of £1825 in profits. Break even sales of Network Critical Solutions Ltd was £20000 when the selling units are 500. If the company is thinking to earn profit of £10000, it have to sale 1333.33 units to attain this target. If the company is selling 8000 units then 37.5 will be the level of margin of safety for the organisation.

TASK 3

P4 Budgetary Control and Planning tolls with their Advantages and Disadvantages

Budgetary control: It is a tool which is used by managers to set oprational and financial goals to compare actual result to budgeted and enhance the performance quality of the company. It is a control process of the organisation's operational activities by establishing standards and targets related to incomaes and expenses (Budget and Budgetary Control,2018). In Network Critical Solutions Ltd budgetary control is used to monitor utilisation of available monetary resources and business execution process. Budgets are designed to assess income and expenditures for a future date.

The process of budgetary control is very easy and managers are suggested to follow the process to utilize the assigned budget in an effective way. It includes establishing a targeted performance, examination of actual performance, comparison of actual and forecasted performance, calculation of variances, take an immediate action if it is required to enhance the ability of performing operations of the company. Managers of Network Critical Solutions Ltd use three planning tools in budgetary control. These tools are described below:

• Forecasting tools: This tool is used by companies to predict future conditions that are based on past data and current market trends. It helps the management while cooperating with the uncertainty or any risk of future (Renz, 2016). In Network Critical Solutions Ltd forecasting tools are used to measure the risk or good result of a business project. It is based on manager's experience, cognition and judgement ability. It helps to plan budget and forecast future growth opportunities for business.

• Contingency tools:It is used to analyse different factors that may affect negatively toward business operations. It helps to identify an uncertainty that may occur in future. In Network Critical Solutions Ltd contingency tool is used to determine unfavourable possible events that may take place and affect the market image and performance of business. It helps managers while making decision and budgets to to deal with future risks.

• Scenario Tools: This tool is used to examine a set of clearly assorted futures. It help the managers to make different plans for future to maximise profits and achieve organisational goals (Schaltegger, Gibassier and Zvezdov, 2013). In Network Critical Solutions Ltd scenario tools are used to determine best and worst possible situation of future and make strategies to face and resolve the same.

M3 Use of different planning tools for preparing and forecasting budgets

The management of Network Critical Solutions Ltd use three planning tools that are forecasting, contingency and scenario, while preparing and forecasting budgets. These planning tools help the managers while making decision related to the organisation and budgets. These ca n provide information of future based events that may take place and affect business operations negatively or positively. Managers make assumptions that are based on these tools. It also help the organisation to be prepares in advance to deal an issues that may occur in future.

TASK 4

P5 Responses of Management Accounting System to Deal with Financial Problems

Financial problem in business refer to the shortage of money in an organisation to run its daily activity and perform their operation. They can suffer from fiscal problem at one time or another, especially during a recession (Soin and Collier 2013). In general it means that firm do not have enough money to pay off debt, provide salary to their worker etc. There are number of problem faced by each firm like high level of debts, less inflow of cash, insufficiency of funds, lack in knowledge to manage money and bankruptcy etc. Network critical solution is a small company and wants to grow but it also faces some monetary problem that are discussed underneath:

• Insufficiency of funds: Business needs decent amount of capital to pay for the cost of staff, rental premises, buying and leasing equipment, market etc. So, this problem arise when company do not have sufficient amount of capital to fulfil its payment. Network critical solution faces this because they do not have amount to expand its business.
• High level of debts: Company wants to increase its sale weather a credit or a cash sale in order to expand its business by attracting more number of customer. So, continuous credit sale leads to increase in the level of debts. Network critical solution, in order increase sale provide credit facilities to its customer but their recovery system is not so good. As a result company is not able to pay their debts (loan).
• More spending than earning: Every company should manage their money in a proper manner so that they are able to run their business activity easily. Network critical solution is an It company so it does lot of promotional and advertisement activities to increase it sale. But company is not able to make that much of revenue to overcome its expenses.
• Unforeseen expenses: Management of small companies must be able to mange their funds to use it when some unforeseen expenses happen. Network critical solution faces this problem because their whole income is involved in business activity like manufacturing, advertisement etc. there management so not have a reserve to met any unforeseen expenses.

So, to over come these challenges company follows various important management accounting tools such as benchmarking, key performance indicators and financial governance. These tools are discussed below:

Benchmarking: It is the process of examining performance of an organisation product, services or processes against those of other business consideration to be the best in the industry. In addition, it is the practice of a business firm comparing key metrics with their operation to other similar companies. Price of product, production, per unit cost etc. are the common indicators which are identify and measured (Ward, 2012). Network critical solution uses this tool to resolve its financial issue that is related to high level of debts. They compare its debt performance with other company in same industry. This benchmarking tool helps to develop a good and efficient credit strategy to recover debt from customer's on time. Company will set standard relevant to credit policies followed by competitor that guide them to recover due amount in appropriate manner.

Key performance indicators: This tool is use by business firm managers to track and analyse factor view as important to the success of an organisation. It help to determine that how the managers are working to achieve organisational goals and objectives. In Network Critical Solutions Ltd KPI is used to evaluate the its activities to reach success. If a company is growing and getting success then will help to solve the problem of insufficiency of funds because, if the organisation is working successfully then there is a positive market image of the company. It will help to resolve the issue of insufficient funds, because with a good market image Network Critical Solutions Ltd will be able to get funds from market. There are two types on KPIs:

• Leading KPI: It helps to measure performance of a business or its particular project. In Network Critical Solutions Ltd it is used to forecast trends and future events and help to manage the performance.
• Lagging KPI: It is used to identify long term trends of the market. In Network Critical Solutions Ltd managers use these KPIs to evaluate how well a process or project can be managed.

Financial governance: It is a tool which is used by all type of organisation whether it is small, large or medium to manage, monitor, control and collect financial information of the business (Wickramasinghe and Alawattage, 2012). In Network Critical Solutions Ltd financial governance is used to maintain financial information in a proper way. It is beneficial while dealing with the problems of unforeseen expenses and more spending. If the financial information is mentioned properly in financial accounts then managers may predict such type of expenses and reserve funds for the same. In such way these issues can be minimised by the company.

Comparison of Two Companies:

M4 Management Accounting lead to sustainable success in responding to financial problems

In Network Critical Solutions Ltd managers use three different techniques such as benchmarking, KPI and financial governance to deal financial issues like unforeseen expenses, insufficiency of funds, high level of debts and more spending than earning. These techniques respond positively to deal these financial problems. It also help the management in strategic decision making because good decisions and proper strategies may reduce the possibility of such financial problems.

D3 Planning tools respond appropriately to resolve financial problems

Planning tools are used by companies to deal financial problems. In Network Critical Solutions Ltd managers use different tools to forecast financial problems and other issues that may affect the efficiency of operations. As described above that planning tools help to determine uncertainties and it also help to make plans to deal with same issues. Forecasting tools are used to analyse possible events. Contingency tools are used to determine unfavourable situations that may have to be faced by the organisation, hence it help the managers to make plan to respond effectively to these problems.

Conclusions

Management accounting and its reports help the managers to evaluate business performance and its market image. Different reports are used to analyse different informations to get insider knowledge of the company. Managers can use different costing techniques such as marginal and absorption costing to calculate its net profits. Organisations may use three different planning tools that are forecasting, contingency and scenario tools to predict and make budgets and deal with various financial problems to lead the organisation toward success.

References

• Books and Journals:
• Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
• Bouten, L. and Hoozée, S., 2013. On the interplay between environmental reporting and management accounting change. Management Accounting Research. 24(4). pp.333-348.
• Figge, F. and Hahn, T., 2013. Value drivers of corporate eco-efficiency: Management accounting information for the efficient use of environmental resources. Management Accounting Research. 24(4). pp.387-400.
• Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society. 38(1). pp.50-71.
• Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7-8). pp.414-428.
• Hiebl, M. R., 2014. Upper echelons theory in management accounting and control research. Journal of Management Control. 24(3). pp.223-240.
• Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
• Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control. Springer.
• Otley, D., 2016. The contingency theory of management accounting and control: 1980-2014. Management accounting research. 31. pp.45-62.
• Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and relevance. Critical perspectives on accounting. 23(1). pp.54-70.
• Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
• Schaltegger, S., Gibassier, D. and Zvezdov, D., 2013. Is environmental management accounting a discipline? A bibliometric literature review. Meditari Accountancy Research. 21(1). pp.4-31.
• Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and control.
• Ward, K., 2012. Strategic management accounting. Routledge.
• Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches and perspectives. Routledge.

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