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Introduction

In the recent times, business units prefer to employ management accounting tool with the motive to make optimum use of financial resources. Moreover, MA field of finance furnishes information about cost and thereby helps in taking decision about future aspects. By using management accounting techniques firm can do effectual financial planning which in turn makes significant contribution in the attainment of goals. This report is based on the case scenario of Tech Ltd which manufactures and offers mobile chargers as well as electronic gazettes to the customers. In this, essential requirements of management accounting in the context of Tech Ltd will be described. Further, report also depicts the role of managerial report indecision making. Besides this, report will provide deeper insight about the use of marginal and absorption costing in decision making. It also exhibits the manner in which MA techniques help in planning and responding financial problems.

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Task 1

P1 Management accounting systems and their requirements in the context of business unit

1. Explaining the manner in which management accounting differs from financial

Management accounting is the process of preparing managerial reports and accounts which aid in the long & short decision making aspect of business organization. It lays high level of emphasis on identifying, measuring, analyzing, interpreting and communication information that contributes in the goal attainment (Mondal and Percival, 2010).

Management and financial accounting can be distinguished in the following manner:

Basis of difference

Management accounting

Financial accounting

Meaning

It focuses on providing managers with suitable information about internal operations so they become able to take prominent decisions.

FA is concerned with the recording of business transactions and providing stakeholders with the framework for decision making.

Use

Give input to the internal management team for taking decision about budget etc.

Enables both internal and external stakeholders in analyzing the financial performance of firm (Financial Accounting vs. Management Accounting, 2018).

Form of reporting

In this, no prescribed or specific format is following for reporting purpose.

Financial reports are prepared by taking into account standardized format.

Frequency or time duration

As per the requirements of management team managerial reports are prepared.

On statutory basis, financial accounting report are drafted and presented on annually and semi-annually basis.

Statutory compliance

No

Yes or mandatory

Rules

Under MA, no need to follow specific rules while preparing reports

IFRS, GAAP, IAS

2. Importance of management accounting in decision making aspect

Manager of Tech Ltd can take suitable business decisions considering management accounting aspects about following matters:

  • Management team can make proper forecast about future aspects. Such field of finance enables manager in deciding whether more funds should be invested in equipments or not.
  • It facilitates appropriate decision making at both strategic and operational level. Tech Ltd’s manager can assess whether firm should purchase product from third party or manufacture them in house (Lukka and Modell, 2010). Thus, management accounting tools help company in taking the most important decision pertaining to make or buy.
  • Variance analysis technique of management accounting enables manager to build on positive results and make efforts to manage the negative aspects.
  • Facilitates appropriate forecasting of cash flows through budgeting and helps in making suitable estimation about the rate of return.

3. Cost accounting system

Management team of Tech Ltd can capture or assess the cost of production by using cost accounting system. It lays focus on recording input cost associated with each step of production. Cost accounting system offers opportunity in relation to doing comparison of actual performance in against to the budgeted figures (Modell, 2010). Hence, by assessing deviations or variances firm would become able to take corrective measure for improvement within the suitable time frame.

Advantages

  • CA system enables management team of Tech Ltd to detect loss and assess reason behind the same
  • Provides assistance in formulating future production policies
  • Gives input for setting suitable prices of the products or services offered

Disadvantages

  • Aspects regarding under or over overhead absorption leads problem
  • In the case of partial capacity utilization, such system is not considered as useful
  • This system presents past information, whereas management is taking decision about future

4. Inventory management system

By employing inventory management tool manager of Tech ltd can maintain suitable stock and thereby would become able to carry out operations without any difficulty. Through undertaking economic quantity method Tech Ltd can decide the level to which they need o maintain raw material within the business unit. This in turn helps in making control on ordering and holding cost (Baldvinsdottir, Mitchell and Nørreklit, 2010). Further, FIFO method is highly effectual which contributes in effective stock management and reduces risk level associated with the introduction or use of new technological aspects.

Advantages

Disadvantages

  • Leads cost reduction
  • Maximizes profit level
  • Avoids bottlenecks in the production activities
  • For determining optimal inventory level or value manager has to devote more time.
  • Training needs to be organized for developing familiarity of personnel regarding inventory software.

5. Job costing system

This system assists business unit in allocating manufacturing product to an individual or batches of products. By using this, Tech Ltd can assess cost of material, labour as well as overhead and thereby would become able to identify cost per unit (What is Job Costing?, 2018). Considering unit cost such manufacturing firm can set suitable prices of the products or services offered.

Advantages

Disadvantages

  • High flexible and provides assistance in calculating indirect cost
  • Offers opportunity in relation to making assessment of expenses incurred
  • Enables to assign cost to the individual product and thereby helps in assessing profit margin
  • It includes more clerical work in relations to the recording of business transactions.
  • Includes measurement difficulties

P2 Managerial reporting system

1. Presenting varied managerial reports and their role in decision making

For the purpose of effectual decision making Tech Ltd should make focus on undertaking managerial reporting system. There are several reports which furnish information about internal operations or departmental performance and thereby aid in competent decisions.

  • Budget Report: It helps in assessing department which is performing well and the one that demand for improvement. Budget report reflects the level to each department has met budgeted figures. Hence, referring the results of variances Tech Ltd would become able to develop suitable strategies and employee’s incentive plan.
  • Job Cost Report: This report renders information about the profitability of each job. On the basis of such report, manager becomes able to make comparison of expenses incurred on each job with the revenue generated. This in turn helps in assessing business segments that is facing issues. Hence, by taking suitable measures firm can attain and improve profitability to a great extent.
  • Receivable Report: Tech Ltd can identify the time period within which debtors are making payment due to them. Such report helps in identifying customers who make default in payment (Ezzamel, Robson and Stapleton, 2012). By taking into account receivable report business unit can decide whether it should make changes in the existing credit policy or not.
  • Inventory Report: Considering such report manager of Tech Ltd can get information about inventory wastage, per unit labour hour and overhead cost. Hence, by comparing all such aspects with standards and past figures company can assess the level of improvement. Thus, inventory report gives quick indication to the manager of Tech Ltd in relation to taking strategic action for improvement and controlling cost level.

2. Stating reason behind the presentation of information in an understandable manner

In regards to managerial report, information presented must be concise, complete and clear. Moreover, objective of management team behind the preparation of managerial reports is to take competent decisions which make contribution in the goal attainment (Kaplan and Atkinson, 2015). Thus, management accounting team of Tech Ltd requires to present information in a specific format which clearly reflects departmental and cost performance. Hence, emphasis should be placed on presenting information systematically rather than haphazardly.

Task 2

P3 Use of absorption and marginal costing method in decision making

Marginal Costing: It may be served as a decision making technique which assists in ascertaining or assessing the total cost of production. Under this costing method, variable cost is recognized as product cost, whereas fixed terns as periodical (Nawaz, 2013). In this, PV ratio presents profitability associated with the operations.

Profitability statement as per marginal costing

Particulars

Figures (in £)

Figures (in £)

Turnover

 

52500

Less: Variable expenses

   

Direct labour

10000

 

Material

16000

 

Variable production overhead

4000

 

Less: Ending inventory

7500

22500

Contribution (sales – variable cost)

 

30000

Variable selling & dist expenses (52500 * 15%)

 

7875

Net contribution

 

22125

Less fixed cost:

   

Fixed Production Overhead

15000

 

Fixed Selling, dist and administration expenses

10000

25000

     

Net loss

 

-2875

Absorption Costing: In this, total cost of production is determined through the means of expenses apportionment as per respective centre. This is also known as full costing method because it considers both fixed and variable expenses for the assessment of manufacturing cost (Absorption Costing, 2018). It presents cost data in a conventional way and helps in highlighting net profit per unit.

Income statement under absorption costing method is presented below:

Particulars

Figures (in £)

Figures (in £)

     

Sales revenue

 

52500

     

Less: COGS (refer working note 2)

 

30000

     

Gross profit (Sales – COGS)

 

22500

Less: Under absorption

 

5000

Net gross margin

 

17500

Less: selling, dist and adm. expenditure

   
     

Fixed

10000

 

Variable

7875

17875

     

Net loss

 

(375)

By applying the tool of marginal and absorption costing method it has assessed Tech Ltd will suffer loss. However, as compared to the marginal costing method, absorption tool presents lower level of loss such as 375 GBP significantly. The rationale behind the difference in the loss derived through absorption and marginal costing method is the variations take place in manufacturing cost. Absorption costing method considers both fixed and variable expenses so on the basis of this manufacturing cost implies for 20 GBP. In contrast to this, due to exclusion of fixed expenses, under marginal costing, manufacturing cost accounts for 15 GBP. Thus, due the inclusion and exclusion aspect of fixed cost differences take place in the results of marginal as well as absorption costing method.

Working note: 1

Manufacturing cost per unit: Material + labour + fixed and variable production overhead

5 + 8 + 2 + 5

= 20

Working note: 2

Particulars

 

Figures (in £)

Production cost

2000 * 20

40000

Less: Ending inventory

500 * 20

10000

Cost of goods sold (Opening stock + purchase – closing inventory)

 

40000 – 10000= 30000

Reconciliation statement

Particulars

Amount

Net loss according to absorption costing method

(375)

Less: Fixed production overhead pertaining to closing stock (500 units @ 5 each)

(2500)

Net loss condition in accordance with marginal costing method)

(2875)

Task 3

P4 Presenting the use of managerial accounting techniques in planning

Different types of budget and their advantages as well as disadvantages

Budget presents revenue which will generate during the specific time frame over the expenses. For making optimum use of monetary resources Tech Ltd makes focus on preparing budgets. Varied budgets which Tech Ltd can prepare for planning purpose are as follows:

Cash Budget: Such budgeting framework helps company in assessing whether it has enough cash for performing business activities or not. This budget includes an estimation of cash inflows and outflows pertaining to the specific time frame (Kemp and et.al., 2015). Hence, cash budget includes information about revenue generated, expenses paid, loan receipt etc. Using cash budget Tech Ltd can evaluate its financial performance and control the same.

Advantages

Disadvantages

  • Provides information about company’s cash position
  • Helps in identifying the amount of cash needed for fulfilling short term obligations without overdraft
  • It is based on estimated figures which in turn limits its significance level
  • Lack of flexibility
  • Includes manipulation

Capital Expenses Budget: This financial plan presents amount and time when fixed assets will be purchased by the business unit. Capital expenditure budget provides high level of assistance in organizing activities for the upcoming time period.

Advantages

Disadvantages

  • Ensures appropriate planning
  • Facilitates appropriate investments on time
  • Time intensive activity

Static Budget: This budgeting framework remains same at each level of activity or output. In other words, such budget is not affected from the changes take place in the number of production units (Drury, 2013).

Advantages

Disadvantages

  • Facilitates prioritization of activities
  • No need to update on continuous basis
  • Helps in performing budgetary control
  • Inflexibility
  • Static budget does not facilitate allocation of additional resources

Defining budget preparation process and methods pertaining to price determination

By using below mentioned process manager of Tech Ltd can draft suitable budgeting framework such as:

  • Assessment of cash inflow and outflow by taking into account activities which need to be performed during the specific time frame.
  • In the next stage, manager also takes input from the managers of each department for developing appropriate plan
  • Presenting financial estimation to the budget committee for getting approval
  • Circulating final budget at all respective or concerned department
  • Execution of budget
  • Matching actual income and expenses with the budgeted figures
  • Assessing deviations and taking measures for performance enhancement

Price can be determined by Tech Ltd through doing demand and supply analysis. In the case of more demand and low supply firm can set high prices of the offerings. Further, by making evaluation of competitors policy manager of the business unit determine the prices of its own offerings (Ellul and et.al., 2015). In addition to this, by adding margin, which firm wishes to attain, in per unit cost company can set appropriate prices of the mobile chargers and electronic gazettes offered by it.

Stating the importance of budget as s tool for planning and control purpose

Significance of budget as a planning and controlling tool can be presented in the following manner:

  • Budget provides manager with the standards and helps in comparing the same with actual financial performance. Through this, Tech Ltd can assess the extent to which budgeted figures are met. Budget or budgetary control tools offer opportunity to the manager to identify reasons take place behind deviations. Hence, considering deviations firm can take corrective measure on time and thereby becomes able to improve or control performance.
  • In addition to this, deviations assessed through budgetary control help in setting suitable standards for the upcoming time period (Otley and Emmanuel, 2013). By taking into account reasons take place behind deficiency Tech Ltd can set realistic and achievable budgeting plan.

Thus, by taking into account above depicted aspects it can be mentioned that Tech Ltd can develop suitable financial plan and control performance by taking into account budgeting or budgetary control tool.

Task 4

P5 Explaining ways in which managerial accounting tools help in responding financial problems

From assessment, management team of Tech Ltd has found the loss of 1.5 GBP millions which is not good from the perspective of company’s growth. Hence, for dealing with such situation Tech Ltd is planning to undertake balance scorecard strategy. Moreover, such tool helps in aligning actions or strategies with the business goals. The reason behind this, balance scorecard tool helps in investigating issue from several perspectives such as learning & growth, business process, customers and financials (Holsapple, 2013). Hence, by making evaluation of performance on the basis of such four main aspects Tech Ltd would become able to develop suitable policy framework. Further, by using BS firm can ensure that each individual is performing as per the strategic framework or not. Hence, with the help of balance scorecard tool business unit can measure and monitor progress in the context of strategic targets.

In addition to this, there are several management accounting tools which leading business units such as Dixon and Vodafone plc employs for responding monetary problems such as:

  • KPI’s: Sales, profit margin, customer base, market share etc are considered as the main indicators which presents the extent to which company’s performance is good. With the motive to get the desired level of outcome or success Dixon and other firms lay focus on setting specific key performance indicators. Thus, comparing performance in against to KPI’s firm would become able to develop framework which helps in gaining competitive edge over others.
  • Benchmarking: Using benchmarking tool firm can assess deficiencies which take place in financial aspects. It enables firm to compare performance on periodical basis and give indication about improvement. Companies can easily assess the reasons behind deficiencies take place in revenue and expenses by using benchmarking tool. Hence, such tool helps in taking remedial measure within the suitable time frame and thereby helps in getting the desired level of outcome or success (Mondal and Percival, 2010). However, on the critical note, it can be depicted that high benchmarks or unachievable standards decreases the level of employee morale and motivation. l
  • Financial Governance: In accordance with such tool, companies evaluate their performance by taking into consideration stringent rules as well as guidelines (Kaplan and Atkinson, 2015). Using financial governance tool firm can assess loopholes and take action for improvement.

Conclusion

In conclusion to this report, it can be presented that managerial tools such as cost accounting, job costing and inventory management aid in suitable decision making. It can be seen in the report that by undertaking managerial reporting system manager of Tech Ltd would become able to evaluate the performance of department. Further, it has been articulated that absorption costing method presents fair view of manufacturing cost by taking into account both fixed and variable expenses. It can be depicted that by undertaking budgeting management team of Tech Ltd can do prominent panning in relation to the usage of financial resources. Besides this, it can be summarized from the report that budgetary control tools such variance analysis offers opportunity to Tech Ltd in relation to evaluating departmental performance and taking corrective measure for improvement.

References

  • Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory and practice in management accounting. Management Accounting Research. 21(2). pp.79-82.
  • Drury, C. M., 2013. Management and cost accounting. Springer.
  • Ellul, A. and et.al., 2015. Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance. 70(6). pp.2489-2538.
  • Ezzamel, M., Robson, K. and Stapleton, P., 2012. The logics of budgeting: Theorization and practice variation in the educational field. Accounting, organizations and society. 37(5). pp.281-303.
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