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Introduction

In the recent era, business units lay more focus on undertaking management accounting tools and techniques with the motive to make effectual use of financial resources. Manager of the company uses management accounting tools for getting timely financial and statistical information for taking day to day as well as short term decisions. Present report is based on the case situation of Tech Ltd which produces special chargers for mobile phone. Further, other gadgets are also produced and offered by Tech Ltd in the UK. In this, report will provide in-depth insight about the different types of MA systems which can be used for decision making. Further, report also depicts the level to which managerial reports aid in decision making aspect. Report also entails the manner in which absorption and marginal costing system helps in assessing profit margin. It also discusses about different MA tools which can be used for planning purpose and coping up with the issue.

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Task 1

A. Explaining management accounting and essential requirements of such system

1. Difference between management and financial accounting

Financial accounting is highly concerned with the recording, analysis and summarization of monetary transactions pertaining to a business. On the other side, management accounting field focuses on preparing internal business reports timely and in an accurate manner. Tech Ltd should consider differences that take place in between management and financial while making plan about the future operations such as:

Differential basis

Management accounting

Financial accounting

Objective

MA helps in planning, setting goals and evaluating the same.

Provides in-depth insight about financial position and performance at the end of accounting year.

Stakeholders

Internal stakeholder such as management team use managerial accounting reports for decision making

Financial accounting satisfies the need of both internal and external stakeholders.

Requirement

Not legally required, manger prepares report as per requirement on weekly and monthly basis.

Business unit needs to prepare and publish financial reports at the end of accounting period.

Focus

It lays focus on present and helps in taking decisions about near future.

Under FA, emphasis is placed on historical information

Format

In MA, informal format is followed for the purpose of account preparation and reporting (Aleem, Khan and Hamad, 2016)

Specific formats are followed under FA for preparing reports.

Rules

Unlike FA, no need exists pertaining to following specific legal requirements and rules.

In FA, GAAP and IFRS is followed while preparing financial statements.

Information

Furnishes monetary and company goal driven information.

This accounting system provides monetary and verifiable information.

2. Importance of management accounting information as a decision making tool

Management accounting tools provide deeper insight about the internal operation and thereby help in devising competent plan. In the context of Tech Ltd, significance of MA in decision making can be presented in the following manner:

  • Company can do relevant cost analysis by using the techniques of MA. It will assist Tech Ltd in determining selling prices and identifying the manner in which product should be sold to the customers.
  • MA serves information about material, labour and overheads incurred for manufacturing products (Alfonso and et.al., 2016). Thus, using MA tools Tech Ltd can perform make or buy analysis in the best possible way.
  • Using MA tools manager of Tech Ltd can make assessment of departmental performance and thereby, becomes able to plan about incentives and other activities such as training etc.

3. Cost accounting system

Cost accounting system is used by manufacturers for recording production activities. Tech Ltd can use cost accounting system for recording, classifying, summarizing and analysing alternative course of action for cost control (Fullerton, Kennedy and Widener, 2013). Using such system firm can determine the cost of running business and thereby would become able to do profitability analysis more effectually.

Advantages

  • CA system is highly significant which in turn helps in eliminating wastage, losses and inefficiencies
  • Helps in reducing cost and enhancing profit margin
  • Tech Ltd can easily make decision pertaining to make or buy
  • Reasons behind increasing and decreasing profit margin can easily be assessed through cost accounting system

Disadvantages

  • In the case of partial utilization, cost cannot be ascertained in the best possible way.
  • CA system furnishes information about past performance whereas management want to take decision about near future.
  • Cost accounting system leads the problem of under-absorption overhead

4. Inventory management system

In the context of Tech Ltd, inventory management tool or system is highly significant which helps company in making estimation about stock that need to be managed within the firm. In other words, inventory management system gives idea to the business unit about the stock required for ensuring smooth production and meeting the requirements of customers (Fullerton, Kennedy and Widener, 2014).

Advantages

  • Assists in making control on holding as well as ordering expense and thereby overall cost level
  • Helps in managing stock and thereby ensures smooth functioning of operations
  • Profit can be maximized by Tech Ltd using stock management tools & techniques

Disadvantages

  • Installation and maintenance of inventory management software is expensive in nature
  • Time-intensive process

5. Job costing system

Job costing system provides high level of assistance to the business unit in measuring production in terms of completed job. Using job costing method, Tech Ltd can assign manufacturing cost to the individual products or services. Such costing method lays focus on accumulating cost regarding material, labour and overhead. Using such costing method, Tech Ltd can take suitable decision and becomes able to track performance in monetary terms (Gautier and et.al., 2017).

Advantages

  • Gives basis for cost estimation in the similar jobs
  • Job costing system provide detailed information about cost of material, labour and overhead for each job
  • Provides high level of assistance in doing variance analysis and taking corrective actions for improvement

Disadvantages

  • This costing system lacks standardization of job
  • Job costing system is highly expensive in nature
  • During the inflationary period

B. Presenting financial information

1. Presenting different types of managerial accounting reports

Managerial accounting reports contain information about firms operations which are used by the managers for the purpose of decision making. Hence, for developing strategic and policy framework following managerial reports can be prepared by Tech such as:

  • Performance report: Manager of Tech Ltd can use budget or performance report for evaluating the performance of each department and personnel. It provides management team with the valuable information about the level to which goals are met. Using budget report, manager can assess deficiencies and thereby becomes able to take remedial actions for improvement.
  • Job costing report: It helps in evaluating costs like material, labour and overheads, etc. that associated with the specific jobs. Hence, accumulating such costs manager of Tech Ltd becomes able to compare the same with planned revenue (Gong and et.al., 2016). Thus, job cost report enables firm to employ its most of the resources in the profit-earning areas.
  • Accounting receivable aging report: By taking into account receivable report manager of Tech Ltd can assess time period within which debtors are making payment. High credit period imposes default risk in front of business organization and meanwhile impacts working capital aspect. Thus, evaluating such report manage can decide that there is a need to tighten existing credit policies or not.
  • Inventory report: This report contains information about expenses associated with stock management. It helps in getting information about expenses and wastage related to the stock. Hence, using stock report manager can identify the areas which demands for specific controlling measures.

2. Stating reasons due to which it is important to present information in a understandable manner

Managerial reports are used by the manager for decision making purpose so they must be presented in a clear, understandable and comparable manner. For ensuring smooth functioning of operations manager of Tech Ltd focuses on the preparation of accurate and timely reports (Ionescu, 2016). Decision making aspect of the management team is highly based on such reports. Thus, managerial reports must be prepared in a simple language along with the reasons behind increasing or decreasing cost and profit etc.

Task 2

Preparing statements using marginal and absorption costing system

Marginal costing: Marginal costing presents cost and profit by distinguishing expenses in terms of fixed and variable. In other words, under marginal costing method, variable expenses are charged in against to the unit cost (Marginal and absorption costing, 2018). In contrast to this, fixed expenses are written off in against to the aggregate contribution.

Absorption costing: In such full costing method, cost pertaining to the products or services are assessed by taking into account both direct and indirect expenses (Wijaya and et.al., 2015). It assumes that fixed cost become variable in long-run. From the perspective of accounting standard board, absorption costing method is considered as highly effectual over others.

Income statement according to absorption costing method

Particulars

Figures (in £)

Figures (in £)

     

Sales revenue

 

52500

     

Production cost (2000 * 20)

40000

 

Less: Ending inventory (500*20)

10000

30000

     

Gross profit (Sales – COGS)

 

22500

Less: Under absorption

 

5000

Net gross margin

 

17500

Less: selling, distribution and administration expenditure

   
     

Fixed

10000

 

Variable

7875

17875

     

Net loss

 

(375)

Computation of manufacturing cost per unit

Material + labour + fixed and variable production overhead

5 + 8 + 2 + 5

= 20

Marginal costing

Particulars

Figures (in £)

Figures (in £)

Revenue

 

52500

Less: Variable expenditure

   

Direct labour

10000

 

Material cost

16000

 

Variable production overhead

4000

 

Less: inventory at the end of period

7500

22500

Contribution (sales – variable cost)

 

30000

Variable selling & distribution expenses (52500 * 15%)

 

7875

Net contribution

 

22125

Less fixed cost:

   

Fixed Production Overhead

15000

 

Fixed Selling, distribution and administration expenses

10000

25000

     

Net loss

 

-2875

Computation of variable cost per unit

Variable cost per unit: 5 + 8 + 2

= £15

Interpretation: The above depicted table shows that loss is higher under absorption costing method such as 375 respectively. On the other side, marginal costing method exhibits the loss of 2875 significantly. Due to the difference takes place in the production costs variations in the losses have found. In marginal costing method, production cost implies for £15. On the other side, in absorption costing method production cost is £20 because it categorizes expenses in the form of fixed and variable. Considering evaluation it is advised to Tech Ltd to make focus on undertaking absorption costing method which in turn gives suitable input for decision making by considering both fixed and variable expenses.

Reconciliation statement

Particulars

Amount

Net loss as per absorption costing method

(375)

Less: Fixed production overhead on ending inventory (500 units @ 5 each)

(2500)

Net loss according to marginal costing method)

(2875)

Task 3

A. Presenting different kind of budgets and their advantages as well as disadvantages

Budgeting is the process which can be used by the manager for assessing income and expenses pertaining to the specific time frame. Tech Ltd makes focus on budget preparation with the motive to make effectual use of financial resources (Wagenhofer, 2016). Different types of budget which can be prepared by the manager of Tech Ltd are enumerated below:

Fixed budget: This budget implies for the financial framework which does not change according to the increase or decrease in sales revenue. Companies which have proper estimation regarding demand and expenses can use such budget for planning purpose.

Advantages

Disadvantages

  • Helps in making clear distinction between highly and less important activities
  • Easy to prepare and implement
  • Provides high level of assistance in doing variance analysis and thereby evaluating cost as well as profit margin.
  • Lack of flexibility is recognized as a major limitation of a fixed budget.
  • Not suitable for the all kind of business units. In other words, static budgets work in the companies where sales cost and volume are predicable.

Flexible budget: Unlike fixed, flexible budgets are not remained at one point irrespective of the activity level or volume. In other words, flexible budgets make focus on adjusting figures regarding revenue and expenses as per the changes take place in the volume of activity. In the today’s changing business environment flexible budgeting method is highly suitable over others.

Advantages

Disadvantages

  • Enables manager to do variance analysis in an appropriate manner
  • Fulfils objective in relation to cost control and profit maximization to a great extent (Advantages Of Flexible Budget, 2018)
  • Gives correct basis for comparison and thereby aid in decision making
  • Based on the assumption of cost linearity
  • Determination of fixed and variable cost is arbitrary
  • It also focuses on undertaking assumption regarding continuity. Whereas, some cost behaves in discontinues manner.

Cash budget: It presents the level of inflow and outflow associated with the business over a specific time frame. Such budget helps manage of Tech Ltd in estimating whether it has enough cash balances or not.

Advantages

Disadvantages

  • Helps in gaining attention of management team pertaining to the areas which are not working as per predetermined plan.
  • Facilitates co-ordination among the various activities of department
  • Enables management to devise competent plan for making effectual use of resources
  • Reduces cost level and maximizes profit margin (Cash budget, 2018)
  • Cash budgets are built on subjective estimations which in turn affects its significance level
  • Decrease in employee morale and productivity when targets are unrealistic in nature

B. Defining budget preparation process and determination of pricing using varied costing system

Tech Ltd.’s manager can undertake below mentioned process for budget preparation such as:

  • Obtaining estimates: In the first stage, manager makes estimation about sales, production, cost and availability of resources in the context of each department.
  • Co-ordinating estimates: At this stage, budget committee makes evaluation of financial plan submitted in the respect of each unit (Martinez-Sanchez and et.al., 2016). Hence, committee makes evaluation with an objective to assess whether resources are fairly allocated or not.
  • Communicating budget: Once approvals have been taken from the committee, manager sends budget to the responsible manager of concerned departments.
  • Execution of budget plan: In this, budgets are executed by the managers and personnel while carry out business activities and functions.
  • Giving report about interim progress pertaining to business objectives: In the last stage, departmental performance reports are prepared by doing comparison of actual performance with the budgeted figures. As per such report, manager can revise or make suitable modifications in the budget pertaining to upcoming time frame.

C. Significance of budget as a tool from the perspective of planning and control

In the context of planning and control, significance of budget is greater from the perspective of decision making. Using budget, manager of Tech ltd can do comparison of actual performance with the budgeted figures. This helps in ascertaining variances (favourable and unfavourable) along with the reasons. Hence, considering the reasons of deviations Tech Ltd’s manager can take suitable decision for improvement (Kaplan and Atkinson, 2015). This aspect shows that budget helps in monitoring and controlling performance more effectually. In addition to this, budgetary control tool also aid in planning significantly. By taking into account deviations and their reasons Tech Ltd can suitable financial framework for the upcoming time period.

Determination of pricing using different costing system

In relation to the manufacturing company, Tech Ltd, from the perspective of price determination activity based and absorption costing method proves to be more effectual. ON the basis of ABC technique, by allocating expenses as per cost driver firm can determine suitable cost and profit margin. (Zivin, Kotchen and Mansur, 2014) In addition to this, referring both fixed and variable expenses regarding production & non-production Tech Ltd can assess appropriate cost and thereby, becomes able to determine suitable profit margin.

Task 4

Presenting manner in which balance scorecard technique assists in responding financial problems

On the basis of cited case scenario, Tech Ltd is facing the situation of loss pertaining to £1.5 million. Thus, by undertaking the strategy and tool of balance scorecard Tech Ltd can cope up with such undesirable financial situation or condition. Such tool helps in responding concerned issue from both monetary and non-monetary perspective. BS offers opportunity to the manager to make evaluation of performance from monetary and resource availability aspects (Balanced Scorecard Basics, 2018). Further, using such tool Tech Ltd can evaluate customer value, satisfaction as well as retention aspect. BS also enables business unit to evaluate quality of the existing offerings. Through using BS approach, organizational capacity can also be evaluated more effectually. Thus, by making evaluation of all such aspects manager of Tech Ltd can take suitable decision for avoiding the situation of loss.

On the other, ABC manufacturing company is facing the loss of £1.2 million. Such business unit focuses on undertaking financial governance, benchmarking and KPI strategy for evaluating as well as dealing financial problems. Benchmarking is highly effectual technique which helps company in identifying deviation within the suitable period. Hence, by taking strategic action ABC would become able to respond monetary issues timely. Further, by setting KPI’s related to sales, profit, etc. firm can avoid undesirable financial performance.

Conclusion

It has been articulated from the above report that management accounting systems provide high level of assistance in evaluating cost and thereby, helps in taking suitable decision for improvement. It can be seen in the report that field of MA helps in decision making aspect to a great extent. Further, it can be stated that managerial reports are highly significant which in turn assists manager in devising plan and communicating information about business cost as well as operations. It can be summarized from the evaluation that Tech Ltd should make focus on using full costing method. By using absorption costing method, manager can assess the suitable cost of production using fixed and variable. Along with this, it has been assessed that using budgeting tools and techniques gives input to the manager of Tech Ltd in assessing performance and thereby, helps in taking appropriate decisions. In the context of Tech Ltd, balanced scorecard technique is considered as an effectual technique which in turn helps in meeting financial problems prominently.

References

  • Aleem, M., Khan, A. H. and Hamad, W., 2016. A comparative study of the different costing techniques and their application in the pharmaceutical companies. The Audit Financiar journal. 12(143).
  • Alfonso, Y. N. and et.al., 2016. Trends in the Marginal Cost of Male Circumcision in Rural Rakai Uganda. JAIDS Journal of Acquired Immune Deficiency Syndromes. 73(5). pp.564-571.
  • 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). pp.414-428.
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