Role of Management Accounting in Forecasting Budget

TASK 1

P1. Management Accounting and its Types.

MA- It is linked to the process of preparing internal reports for managers so that they can make suitable decisions in accordance with the needs of the business.

• Cost accounting system- It is linked with a systematic procedure of predicting possible expenses. It helps to finance department of businesses so that they can become able to keep effective control over expenses and costs. This accounting system contributes to tracking those activities which are leading to higher costs for companies. In addition, it is essential for business entities in order to minimise overall expenses in an effective manner. Alpha Limited company, implemented it in their finance department so that the cost of their operations can be kept below standard costing (Hopper and Bui, 2016).

• Price optimisation system- This starts with the process of gathering information from customers regarding product demand, perception and many more. This collective information is being used by sales department of companies in price setting which may lead to higher sales. It is beneficial to companies which are unable to generate higher amounts of revenue due to a lack of sales. Hence, it is useful in order to revise or set the pricing of products and services at an effective level. In Alpha limited company, this is being used by their sales department in order to set the prices of their pizzas.

• Inventory management system- This accounting system's meaning can be understood by its name as it is linked with the process of tracking the quantity of all forms of material in businesses. Generally, in a manufacturing entity, a vital range of stock is acquired for production selling and for many other purposes. In this aspect, this is compulsory to analyse the quantity of materials regularly (Burritt, 2017). It is so because if they will do so then it can be beneficial for them to utilise available raw materials in an effective manner. Thus, it is essential for companies to track all forms of materials on a daily basis and guide the purchasing team to buy more goods. In addition, various kinds of techniques are used for assessing the quantity of goods such as LIFO, FIFO and many more. In Alpha Limited company, their managers implement it for assessing the quantity of raw material stored in their warehouses timely.
• Job order costing system- This is linked to the process of assessing the cost of each individual activity by assigning the cost of the job separately. Under this accounting system, the managers of companies evaluate the cost of each job assigned to a particular activity or function for a particular time period (Hall, 2016). Hence, it is compulsory for businesses to track the cost of each job that is being allocated to any specific activity. The above company, use this accounting system in order to set the cost of a job individually so that their finance manager can track the cost of each job.

P2. Various Methods Used for Management Accounting Reporting.

MA reports- MA reporting plays a vital role in protecting companies and evaluating their efficiency (Singhvi and BODHANWALA, 2018). These documents are compiled in the accounting time according to the specifications. Such documents provide valuable information on various transactions or operations as well as income.

Types of reports:

• Inventory reports- Organizations generate physical products, and inventory management documents play a key role in centralizing data related to stock costs or other overhead costs involved in both raw material procurement and production processes. Such a report is a design document that includes source, location and product information. This report covers all the information, like how much raw material is produced in the company and when and how much it takes for the production process. In the above company, this report is used for managing total raw materials.
• Performance report- It is designed for the purpose of keeping records of operational results in separate time frames. Using performance reports, each entity's managers offer rewards along with incentives to work according to their efforts to achieve business goals. The Alpha Limited company benefits from evaluating employee performance and assessing increasing worker performance in contrast to which does not perform. Higher performers are rewarded more and more training courses are offered to performers.
• Budget report- One of the main documents is the budget study, which helps to understand and monitor costs in order to assess the quality of companies. Using the budget report, to assess the costs, actual figures are matched with the pre-established estimate. Management uses the expenditure statement to assess the successful use of monetary resources. Alpha Ltd Company's activities including production, sales and marketing are reported in this document.

• Account receivable ageing report- The document used in the accounting period to monitor credit purchases as well as assess due transactions. It is usually chosen by organizations performing credit-related operations and routinely recording all credit transactions along with date, lender name and sum (Makrygiannakis and Jack, 2016). It is used by the top corporate management to assess the collection performance and credit functionality. Such as in the above company, it is being used by companies in order to manage their credit records.

M1. Benefits of MAS.

D1. Integration of MAS and Reports to Organisational Process.

In the business entities, there are wide range of functions which are performed by different departments. In this aspect MAS links with various activities and functions of companies (Rikhardsson and Yigitbasioglu, 2018). Like in Alpha limited company, their different departments are linked to MAS. Like finance department is integrated into the cost accounting system, the sales department into the price optimisation system etc. Similar to MA reports are also linked to business operations and processes. It can be understood by the example of the above company, as the account receivable ageing report is linked finance department. This overall indicates that MAS and MA reports are aligned with the processes of companies.

TASK 2

P3. Preparation of Income Statement with Help of Absorption and Marginal Costing.

Problem 1.

Income statement under marginal costing technique:

Working Note:

Scenario 1. Machine is not installed:

Scenario 2. If machine is installed:

2d. Should company install machine?

As per the above calculation, this can be recommended that the company install the machine because, in the case of without installation of the machine, they may face a loss of -£18,000.00. On the other hand, if they install the machine then there will be a profit of £1,04,000.00. Hence, the installation of the machine can be beneficial for the above company.

M2. Role of Accounting Techniques to Produce Income Statements.

There are different methods to produce income statements and many other financial statements. Such as in the context of the above calculations two costing techniques are used to prepare the income statement of given data. These techniques are absorption and marginal costing. In marginal costing, fixed and non-fixed costs are considered in different manners (Herschung, Mahlendorf and Weber, 2018). In this technique fixed cost is taken as the cost of the period and the non-fixed cost is assigned as the cost of the unit. While, in the absorption costing technique, all types of occurred costs are considered in a similar manner as the cost of units.

D2. Interpretation of Produced Financial Statements.

In the above part of the report, various types of calculations are done on the basis of given data. Mainly, there are two income statements produced under absorption and marginal costing. In the context of the absorption costing technique, there is a net profit of 175000, 130000, 220000, 175000, 140000 and 200000 for the month of April, May, June, July, August and September. While under marginal costing, the net profit is different which is 175000, 100000, 250000, 175000, 150000 and 200000 for similar time period. In the context of the preparation of the income statement, the data is the same in both techniques but the amount of net profit is variable. It is so because of the consideration of cost in a different manner under absorption and marginal costing techniques.

TASK 3

P4. Advantages and Disadvantages of Different Planning Tools of Budgetary Control.

Planning methods are tools which are used as an effort, system or intervention by a particular type of company to take appropriate measures. Such resources offer comprehensive information about the services of the organization and how to be effective with the proper use of certain tools. The Alpha Limited company apply different types of planning tools such as:

Zero-based Budget

It is a form of budgeting in which all the expenditures reported from the beginning period are presented. Upon evaluating all departments properly, the preceding budget is not used as a basis and all functions are performed in Alpha Ltd.

Advantages:

• Through this budget, gather information from various divisions and have detailed knowledge of their strengths and weaknesses (Järvenpää and Länsiluoto, 2016).

• Based on this plan, Alpha Ltd will make strategic decisions that facilitate the achievement of quick-term goals in a specific time frame.

Disadvantage:

• It is intended for a small period as it does not work for a long period of time.
• ZBB is beneficial in a critical way, not in a reasonable way.

Cash Budget

This is an estimate of the organization's cash in and outflow in a certain amount of time. The cash plan is primarily used by the company to estimate the leverage status and have sufficient quantities of money-sustaining routine activities. In the above company, their accountant prepares this budget to make an effective use of their cash.

Advantages:

• Optimal utilisation of cash- Alpha Ltd knows about the cash position through the cash plan and understands where to spend cash to be successful. If there is any question so that all remedies are implemented accordingly.
• All divisions operate together by this budget and assess the corporate environment.

Disadvantage:

• Lack of flexibility: Build numbers to plan the budget and distribute numbers to the managers in this budget process. There is no improvement after getting the management feedback because there is no versatility.
• The effectiveness of the Alpha Ltd cash budget relied largely on the commitment and collaboration of the workers.

Master Budget:

It is regarded as the reduced-level budget that has been built into various operational areas by companies and consists of different kinds of financial statements, forecasting cash situation and a spending plan (Bouma, 2017). The above company prepares this budget in order to manage their various kinds of activities and operations.

Advantages:

• This report gives an overview of the business environment as it is known as a description of all budgets. Therefore, through this review of the operation of the budget throughout the entire corporate situation.
• Alpha Ltd is funded by the master budget to consider challenges and plan for future growth.

Disadvantage:

• Lack of specificity: This is a key drawback that detailed information about the various items included in the master budget is not given.
• Difficult to read and update: It's another downside that's hard to patch. The products are included in various categories so it is not easy to describe the budget of Alpha Ltd.

M3. Use of Planning Tools in Order to Prepare and Forecasting Budgets.

Different types of forecasting tools that help achieve results over a larger time frame are used to produce and predict the budget needed. The Zero-based plan aims to meet all the data from the organization in depth and all the quick-term goals. The master plan is used by the company to summarily gather information about the entire budget. In addition to applying the money plan to learned the cash's role in various business operations.

TASK 4

P5. Role of Management Accounting in Solving Financial Issues.

Financial Issues

It is important for companies to operate their business activities without facing any issues. These monetary issues occur in business entities because of a lack of finance in order to complete different types of activities and operations on time (Horton and de Araujo Wanderley, 2018). In this aspect, the role of the management department becomes crucial because it is their responsibility to find out alternatives to sort the issues. For this purpose, there is a vital range of accounting systems and techniques. Herein, some key financial issues are mentioned that are as followings:

Lack of Sales Revenues

This issue occurs in business entities because of lower sales. In other words, under this issue, companies fail to sell out more number of quantity of goods. As a result, total sales revenue starts to minimise and this issue occurs in companies. In the context of Sainsbury, they are facing this issue and are unable to generate a higher amount of revenue.

Increased Expenditures

This is an issue that occurs in companies because of a lack of control over total expenses. In a broad manner, the main reason for this issue is the poor management and allocation of financial resources into different activities. In the aspect of Tesco plc, they are facing this issue because their expenditures are increasing in a significant manner while revenues are decreasing.

Identification of Financial Issues

Ratio analysis - This is related to the process of identifying monetary issues by the help of calculating various ratios (Alyousef and Mickan, 2016). In the context of Tesco plc, they use this technique in order to find issues of higher expenditures. They compute the sales turnover ratio with the objective of efficiency of sales activities. In addition, they assess the strengths and weaknesses of various departments with the help of this technique.

Activity-Based Costing

It is related to the procedure of allocating costs separately to various activities. The key aim of this technique is to minimise the total number of cost as much as possible. In the Sainsbury company, they implement this technique to find out the actual issue of higher cost.

Financial Governance

This works as evaluation plan for companies assessing the actual level of deficiency (Nuhu and Appuhamilage, 2017). It is a form of approach that is regarding to collecting a company's financial information in an effective way so that the actual level of deficiency can be found.

Comparison:

M4. Management Accounting to Solve the Monetary Issues.

There are various types of accounting systems such as stock management systems etc. All these systems help to sort the issue in less time and expenditures. Such as in the above Sainsbury and Tesco companies, their monetary problems have been sorted out with the help of cost accounting and price optimisation systems.

Related Article: Management Accounting System and Their Types 

D3. Planning Tools to Solve Financial Problems.

Apart from MAS, planning tools also play a key role in sorting monetary issues. It becomes possible because by help of these planning tools, executives of businesses are able to forecast possible income and expenditures (Alsharari and Youssef, 2017). Like in the above company, they are using various planning tools like cash budget, master budget etc.

CONCLUSION

As per of above report it has been articulated that the role of MA is too wide and it relies on businesses how well they use all accounting systems. The report concludes with various accounting systems as cost accounting systems, and stock management systems as well as MA reports like performance reports, budget reports etc. In the further part of the report, computation is done according to given data such as income statement, BEP calculation and many more. In addition, planning tools like cash budget, and master budget are also mentioned under the report. In the end role of this accounting system is to sort issues of Sainsbury and Tesco plc.

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