Management Accounting and its Importance

The project report is categorized into different activities and each activity consists various information. Such as first activity includes information about MA, its objectives and reporting methods. While second activity consists information regards to calculations about income statements, variances as per the given data. The third activity covers information about various planning tools of budgetary control and in the last activity implementation of MAS is analysed in order to solve financial issues.

MAIN BODY

ACTIVITY 1.

1.0 Introduction to MA.

MA- It is an accounting that is related to procedure of making arrangement of financial and non-financial data for preparing internal reports. Main objective of this accounting is to contribute in process of internally judgement-making by providing needed data about company's transactions (Renz, 2016). The scope of MA is not limited to any particular aspect as it is linked to various functions. Such as it helps in budgeting, forecasting, stock management and many more.

1.1 Comparison between MA and Financial Accounting.

1.2 Introduction to Management Accounting System (MAS).

The MAS are those accounting systems which manages various functions of business entities by providing proper guidelines to manage (Ji, 2017). These accounting systems contribute effectively in order to better management.

1.3 MAS:

(a) Cost accounting system- This is a process of forecasting expenses and cost in order to complete different functions & activities. This accounting system has different types of features such as recording of revenues and expenses occurred in process of manufacturing, offers statistical data for producing different budget (Tucker and Schaltegger, 2016). Basically, it's objective is to provide needed financial data about estimated expenditures to executives which can help them in producing competitive policies and plans. For instance in the 'Warburtons the bakers' company, it is implemented by financial executives so that they can compare actual and estimate costs.

(b) Inventory management system- It is integrated with measurement of quantity of stock on daily basis so that usage of stock in manufacturing process can be calculated. It has some features such as it helps in setting a range on how much quantity of a particular item will be needed in warehouses, setting up automatic restock of products. The key objective of this accounting is to help production managers in better management of inventories by providing essential information regards to level of units of raw material at the end of month or accounting period. In this accounting system different techniques are applied like LIFO, FIFO etc. Like in the above 'Warburtons the bakers' company, they implement it, in the process of manufacturing of bakery products. By help of this, they become able to efficient utilisation of stored raw materials.

(c) Job costing system- It is a process of compiling information regards to cost associated to a particular manufacture and service job (Kumarasiri and Jubb, 2016). Due to this accounting system, it becomes easier for managers to assess cost each activity separately along with cost of number of people allocated in process of completing that activity. There are some key features of this accounting system like identification of each job clearly, all types of costs are assigned separately. The objective of this accounting system is to help in better planning, control over expenses etc. For instance, in the above company, this system is compulsory to them in order to compute cost of each job that occurs in completing any activity.

(d) Price optimisation system- This is a process of setting suitable prices of product and service. In order to set prices, under this a detailed analysis of customers' demand for products, market condition etc. is done. The key feature of this accounting are as like collection of data of customers' perception, setting price as per the demand. This is useful for determining prices of products and services in according of demand of customers. Like in the above company, they apply it, to set prices of their product and service as per the demand in market.

1.4 Benefits of MAS.

1.5 Application and Integration of Management Accounting Systems and Reporting Methods in the Business Processes of Warburtons.

The success of corporations depend on the way in which they manage operations of different departments. For this purpose MAS and reporting helps a lot. It is so because application of MAS is integrated with business process (Collis and Hussey, 2017). Such as in the above 'Warburtons the bakers' company, their operational process are integrated with both MA reports and MAS. For example their finance department is integrated with cost accounting system as well as production department with stock management system. This integration help to companies to achieve targets in less time and effective manner.

ACTIVITY 2

2.0 Introduction to MA Reporting Methods.

MA report- The term MA report shows complete picture of company. These reports contribute effectively in order to assessing strengths and weaknesses of different aspects (Nørreklit, 2017). There are different type of accounting reports which are accounts receivable ageing report, budget report, inventory reports etc. By help of these reports, managers gain key information about performance of different departments and take corrective actions accordingly.

2.1 MA Techniques or Methods.

(a) Marginal costing method- It is defined as a type of technique in that variable cost is allocated to cost of units. On the other hand, fixed cost is charged to cost of period. Under it, income statements are prepared in an effective manner because costs are divided into two parts including fixed and variable.

Purpose- This costing technique has below mentioned objectives which are described below in such manner:

• This costing technique is useful for all companies as it is easy to use and understand.
• It is useful for companies in order to ignore past years' fixed cost in the current period' s cost. Due to this it becomes easier to make cost comparison.
• Another purpose of this costing technique is that it provides meaningful information for taking crucial managerial judgement making.

Principles- Herein, underneath some principle of marginal costing are mentioned that are as follows:

• When unit of a product is produced, the additional cost occurred in its manufacturing are considered as variable production cost. While due to this, fixed costs are not affected and no additional fixed cost occurs when units are increased.
• Profit calculation should be accordance of analyse of total contribution.
• Fixed costs relate to a particular period of time and do not flex in proportion of increase and decrease of sales.

Advantages and disadvantages-

Advantage-

• This technique is useful in order to make proper cost controlling.
• It helps in minimising cost variance per unit.

Disadvantage-

• This is complex to separate all costs in fixed and variable costs effectively.
• Though, this costing technique is based on past data but this may produce wrong outcome in the availability of increasing costs.

(b) Absorption costing method- It is a costing technique in which all sort of incurred costs are considered as cost of unit (Bouma, 2017). It is considered as a key technique of management accounting as by help of it income statements are produced.

Purpose-

• Main objective of this accounting is to consider total cost of product in process of preparing income statement.
• This is useful for calculating cost of product in most easier way.

Principle-

• Manufacturing cost includes both fixed and variable production costs.
• The product cost will include cost of direct material, direct labour and overheads.
• In addition product cost would contain cost of selling, administration etc.

Advantages and disadvantages-

Advantage:

• This is beneficial to adapt with accrual and matching concepts that need matching cost with sales for a certain time frame.
• It is useful in avoiding the separation of cost in fixed and variable aspects that can't be done with ease.

Disadvantage:

• This is not beneficial in taking managerial decisions. This is so because of consideration of both cost in income statement and due to which managers feels it complex.
• Under it, this is complex in making comparison and controlling of cost. It is so because of lack of separation of cost in this method.

(c) Standard costing and variance analysis-Standard costing- This may be understood as a form of costing technique in that cost of different context is projected. In accordance of it this becomes much easier to business entities to do comparison of actual cost (Järvinen, 2016). It acts as MA technique because by help of this income statement is prepared as well as cost is classified into fixed and variable types.

Purpose- The purpose of standard costing is to help managers in order to make comparison of actual cost with estimated costs.

Advantages and disadvantages-

Advantage:

• It is beneficial for companies to produce budgets because by help of this managers can get estimated data about costs.
• This costing technique, contributes in order to do better managerial planning and cost controlling.

Disadvantage:

• One of the key issue of this technique is that it is expensive.
• As well as this is not suitable for non standardized products.

Variance analysis- This is a systematic procedure of computing difference between actual outcome and estimated outcome (Lueg and Radlach, 2016).

Purpose- Main purpose of this technique is to measure and analyse actual level of performance to take right steps by managers in the case of negative performance.

Principles:

• Variances are analysed product per product.
• All the variances are presented in terms of monetary aspect.
• The total cost of variance is different between actual and standard cost.

Advantages and disadvantages-

Advantage:

• It keeps in touch to managers about actual level of performance.
• This acts as control mechanism.

Disadvantage:

• This consumes too much time in order to examine the effect of variances and due to which corrective actions are taken late by managers.
• It is not applicable in small companies as they cannot involve themselves in process of comparing actual and estimated outputs due to lack of funds.

(d) Breakeven point analysis- This can be understood as a method that benefits in the aspect of assessing a level on which companies will cover its cost and can generate profit. On this point, business entities can not face lose or profit on a certain level of output (Novas, Alves and Sousa, 2017).

Purpose- Main purpose of break even point analysis is to find out the minimum output which should be surpass for a company to revenue.

Advantages and disadvantages-

Advantage:

• This is beneficial for enhancement of profitability of companies.
• It contributes to management of businesses in order to make better profit planning.

Disadvantage:

• This is based on assumption that sales price will remain constant at all level of production which is not possible in real.
• There is too much consumption of time in the process of preparation of break even chart.

Also Read:- The Integration of Innovation, Technology and Knowledge Management

2.2 Application of Management Accounting Techniques.

Analysis of Unit Cost: In accordance of above calculation, this can be find out that unit cost is different in both of methods. Such as in the marginal costing method, it is of 80 pounds per unit and in the absorption costing method it is of 104 pounds per unit.

Working Note:

Analysis of profits: On the basis of above prepared income statements, this can be find out that there is net profit of 24000 pounds under marginal cost method. While in the absorption costing method there is net loss of 26000 pounds. It is so because of consideration of cost in different manner under both methods.

2.3 Calculation of Variances.

Analysis of Variances: In the above part both material and labour variances are calculated. There are two material variances which are of price and usage. The value of material price variance is of £300000 (F)and usage variance is of £100000 (F). While labour variances are of rate and efficiency whose value is negative. The labour rate variance is of 2500 (A) and efficiency variance is of 393750 (A).

Break-even Point (BEP)

Break-even Point (BEP)

• BEP: In Quantity = Fixed Cost/Contribution

Contribution = S - VC

= £ 1.2 - £ .80

= £ 0.40

Fixed cost = (£150000 + £100000 + £ 50000)

=£300000

BEP= 750000Units

P/V ratio = Contribution/ Sales

= 0.40/1.2 x 100

= 33.33%

BEP = 300000/33.33

= £900090

Analysis of Break-even Point: On the basis of above calculation, this can be find out that value of BEP has been measured in both terms including unit and value. BEP in value is of 900090 pounds and in units, it is of 750000 units.

Analysis of profits at different levels: The above presented table indicates that value of profit is different at different sales level. Such as at 20% increase of sale, the profit is of 88800 pounds and at 50% increase the profit is of 186000 pounds. While at 70% increase of sale produce 250800 pounds' profit.

ACTIVITY 3

3.0 Explanation of the Advantages and Disadvantages of Different types of Planning tools used for Budgetary Control.

Budgetary control- This is procedure of assessing efficiency of companies by help of range of financial plans (Kastberg and Siverbo, 2016). Main purpose of this method is to monitor and control various cost of operation during a particular accounting time period. Under this technique, a vital range of budgets are included in order to measure and manage overall performance of various aspects. Such as in the 'Warburtons the bakers' company, they apply this technique in order to keep additional control over performance of different aspects.

Budget- It is also known as financial plan in which expenditures and revenues are estimated for a particular time frame. Herein, underneath some limitations and drawbacks of budgets are mentioned below-

Advantages of budget-

• The budgets are beneficial for managers in order to provide guidelines regards to planning and execution of policies.
• Budgets are useful for effective control of income and expenses of companies for a specified time frame.
• Budget defined the objective of companies in terms of numerical aspects for a particular time period.
• These are used to assess the policies and objectives of a company. Though, these policies and objectives are evaluated by help of budgetary control.
• It helps in guiding both capital and sales resources in a beneficial manner.
• Budgets allow managers to decentralize liabilities without losing control over business.
• These are helpful for making correct forecasting of demand of customers

So, these are the advantages of budgets as well as above mentioned 'Warburtons the bakers' company, also get benefited from above mentioned advantages.

Disadvantages of budgets-

• Costly- This is one of the key drawback of budgets as it consumes too much cost in process of estimating futuristic income and expenditures. Such as for small business entities, it may become difficult to bear higher cost of preparation of budget.
• Inaccuracy- Most of the budgets are prepared in accordance of past data. Due to this, it becomes difficult to produce accurate results. As well as companies cannot rely on the outcome of budgets. Such as the above 'Warburtons the bakers' company may face issues if they totally relay on produced outcome of budget.
• Only consider financial outcome- Another huge drawback of budgets is that is these consider only financial outcomes. They do not consider rest of other factors which are crucial for companies (Andersen and Sax, 2019). Due to this, companies become unable to measure overall performance in an effective manner.
• Time required- In addition, this can be higher time consumption to make a budget for small business entities who do not have enough time and resources. Such as for above company, they may face this issue of higher time consumption.
• Budgets can demotivate to employees. This is so because of their lack of participation of employees in the process of budget making. If employees do not get chance to prepare the budgets then this may lead to poor relation between employees and managers.
• If companies relay on budgets completely then this may lead to reduction of initiatives, innovation in the company.

SWOT analysis- This is a type of technique that is used by corporations in order to make proper analysis of four aspects that are strength, weaknesses, opportunities and threats. Companies use this tool for proper analysis of micro environment in an effective manner. Herein, underneath some advantages and disadvantages of this method are mentioned in such manner:

Advantages-

• Multi-level analysis- One of the key advantage of swot analysis is that it is useful to make proper analysis of different levels in a better way. For instance, identified threats of a company can help them to apply suitable strategies to overcome from threats. Such as in the above company, they can do multi-level analysis by help of above mentioned technique.
• Simplicity- Another benefit of this tool is that it is simple to use. It does not require any technical skills and capabilities (Bennett and James, 2017). Due to this, companies become able to do analysis in an effective manner and can take suitable steps accordingly. Like in the 'Warburtons the bakers' company, their managers can apply this technique with ease.
• Cost- As above stated that this technique does not require any additional skills and training. Due to this, it becomes easier to companies to assign any employee to conduct this analysis. Such as in the above 'Warburtons the bakers' company they can do swot analysis at lower cost and in effective manner.
• Data integration- It needs the integration of qualitative and quantitative information from different source. Due to this overall analysis of company's performance become possible. Like in the above 'Warburtons the bakers' company, they can apply this technique for making proper analysis by help of this technique.
• Can be applied any company and situation- Another benefit of this tool is that it can be applied on any company and situation. It does not need any specific conditions. So this is also a key benefit of this tool.

Disadvantage-

• Subjective analysis- It's issue is that this tool conducts only subjective analysis. It does not consider key factors to do analysis. This is a main issue of swot analysis.
• Too many opinions to address- In the swot analysis, there are vital range of opinion and aspects which are needed to be consider. Due to this level of complexity increases. Like in the above 'Warburtons the bakers' company they may face this issue if they apply swot analysis.
• Lack of clarity- In addition, lack of clarity is also an another issue of swot analysis. This framework does not provide any particular way to do analysis. Leaders need to align their values with factors which makes analysis ineffective.
• Lack of prioritization- A SWOT analysis can be intimidating if members are uncertain about what they will focus. That is not done directly by the device itself, so it can be difficult to decide what to tackle first. SWOT is intended to address relevant issues, so representatives may face compelled to deal with everything all at once.

PESTLE Analysis- An analysis of PESTEL is a technique of analysing factors of macro environment which can affect companies performance (Shields and Shelleman, 2016). Most of the companies apply this framework to do proper analysis of various factors that can hamper their performance.

Advantages-

• Cost effectiveness- It is one of the main benefit of pestle analysis. It does not require any huge amount of cost in order to conduct analysis of factors. Under this only time is needed to make proper analysis.
• Deeper understanding- Without swot analysis, this can become difficult for business entities to avoid negative impact of environmental factors. Basically, this analysis enables companies to have deeper understanding of various aspects. Like in the above company, they apply this tool in order to make better understanding of different factors of external environment.
• Exploit opportunities- Another role of this is that it makes enable to exploit opportunities. It becomes possible because by help of this, a company can focus on its target audience and can take benefit by garbing opportunities on right time.

Disadvantages-

• It cannot offer full picture- In the pestle analysis, six factors are considered but for making effective strategic planning companies need more factors. This tool provides only outside perspective of business. Such as in the above company, they may face this issue when they do strategic planning on the basis of this tool.
• Factors change quickly- The factors which are considered under this framework can be change quickly. Due to this, it becomes difficult for companies to relay on analysis done by this tool.
• Most of the data is not easily found- Another issue of pestle analysis is that under this vital range of data is needed which cannot be find out easily. For this purpose companies need proper research and time. It indicates that this framework is not suitable for small companies.

Balance scorecard- This is a type of tool that is used to measure overall performance of companies (Lowe, 2019). Under this tool mainly four types of perspectives are considered which are financial, customers, learning & growth and innovation.

Advantages-

• Provide a clear picture- One of the key benefit of this tool is that it offers a clear picture of organisation to managers. By help of this framework, it is analysed that how the goals of company are being achieved.
• Indicates company performance- In addition, another benefit of this tool is that by help of it a company becomes able to know its performance into various aspects. For instance monitoring the performance of sales team can be done by analysing how many clients are generated and lost during a particular time frame. Such as in the above company, they can analyse performance of different aspects by help of this tool. Like they can analyse performance of sales team, production department, customers satisfaction level.

Disadvantage-

• Expensive and time consuming- It is one of the main issue of this tool is that under this companies need higher cost and time. This is so because under it, skilled persons are needed to measure performance of various perspective and due to which it becomes expensive.
• Poor support from employees- In addition under balance scorecard, support from all human resources is needed. It does not become possible for all organisations to get support from all employees. Due to this performance of companies can not be measured in an effective manner. Like in the above company, they may face this issue if they can not get enough support from their employees.

3.1 Analysis of the use of Planning Tools and their Application for Preparing and Forecasting Budgets.

The role of planning tools is too wide. This is so because by help of planning tools like pestle analysis, swot analysis, BSC etc. it becomes easier to managers and accountants to have complete information about performance of their company (Burritt, 2017). For example, by help of pestle analysis different factors of external environment analysed and it becomes easier for managers to predict futuristic financial condition and budget can be prepared. Same as the rest of tools can also be useful to contribute effectively in process of budget making.

ACTIVITY 4.

4.0 An Evaluation of how Organisations are Adapting Management Accounting Systems to Respond to Financial Problems.

Financial problem- This is a problem which is related to lack of financial resources to accomplish different activities and operations

• Higher storage cost- This is an issue that occurs in corporations due to ineffective management of inventories (Schaltegger, 2018). As a result, companies fail to take corrective actions regards to purchasing of new raw material and production of new products. These all things become cause of higher storage cost. Such as in the above “Warburtons the bakers” company this issue is being faced by them.

• Increased level of expenditures- It is a type of financial problem in that level of expenditures start to increase and companies face issue of lack of funds to operate different activities. For instance, this financial issue is faced by competitor of above company that is Hovis bakers.

Methods to Identify Financial Problem-

• Benchmarking- This approach is related to comparing financial and non financial aspects of two companies with each other. Objective of this method is to identifying those areas in which performance is weak of a particular business entity. Such as in the above Warburtons the bakers company, this technique is applied to find out issue of higher cost of storage.
• Key performance indicator- Under this method both financial and non-financial performance indicators are analysed in order to address financial problem. In the financial performance indicator various aspects are included such as profitability, flow of cash etc. and in the non financial performance indicators, information about employee-manager relation, companies' goodwill etc. are considered. In the Hovis bakers company, they apply this framework in order to find out their financial problem.

Financial governance- This is method in that a company's financial data is recorded in a systematic manner so that performance can be evaluated in an effective manner (Johnstone, 2018). This is used by companies in order to monitor financial performance and to take suitable steps in the case of financial problem.

Comparison:

4.1 An Analyse How, in Responding to Financial Problems, Management Accounting can lead Organisations to Sustainable Success.

MA's contribution is wider to overcome financial issues. For example in the above two companies MAS are applied that helped them in sorting monetary problems (Arunruangsirilert and Chonglerttham, 2017). Such as in Warburtons the bakers company, their financial issue of high storage cost has been solved by help of inventory management system. Along with in their competitive company, cost accounting system applied to overcome issue of increased expenditures. It shows that MA and its systems are useful to solve financial problems.

4.2 An Evaluation of How the use of Management Accounting Planning Tools can solve Financial Problems to Lead Organisations to Sustainable Success.

Same as the MA, planning tools are also useful to overcome financial problems which can lead to sustainable success (Mio, 2016). There are different planning tools which are discussed above such as balance scorecard, swot analysis, pestle analysis etc. These all tools help in the solving financial issues in an effective manner. It is so because by help of this companies can forecast futuristic income & expenditures and can make plans accordingly.

CONCLUSION

In the end of report, this may be concluded that MA is becoming an essential part for companies to implement. Its importance for various departments is increasing, specially for management team. The report concludes about different MAS and its role in overcoming from financial issues. As well as about MA techniques like absorption, marginal, standard cost etc. In accordance of given data, some calculations are done such as P&L account, variances, BEP. In the further part of report, various planning tools and its contribution in forecasting of budgets is also concluded

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