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Introduction

Management Accounting is a technique used to analyse different costs and operational aspects of the business and helps in preparation of financial statements, reporting and recording different transactions which supports the managers in better decision making to achieve the goals of the business. This method also helps in making decisions related to competition by gathering information and processing them which helps top-level in deciding the strategies of the business and evaluate them on timely basis. In this study Continental Clothing Company Ltd. which is UK's one of the largest manufacturer of clothes and has a significant position in clothing industry. The company has grown to become the world market-leading designer and manufacturer of cloths and offering customers wider range of quality clothings. In this report the following topics are discussed in detail which includes various techniques used in reporting of  management accounting, methods of cost accounting which are used to make the profit and loss statement, tools to plan for controlling the budget and the ways in which management accounting helps in resolving monetary issues. (Angelone and Neopost, 2015).

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TASK 1

P1 Management accounting and requirement of different types of management accounting systems

Any accounting that helps the corporations in working more effectively can be terms as Management Accounting. As per one of the well known institute, if management accounting is applied in the companies by the skilled professionals then it can help the top management in formulating good strategies and policies which can be used for the smooth operations of the business. The main purpose of Management Accounting is to provide most reliable and precise fiscal and economical data/information to key management personnel for momentous decision-making. Different systems of MA also aim to provide assistance in planning and controlling tasks within entity.

Difference between MA and Financial Accounting:

Management Accounting

Financial Accounting

This system contributes in providing information for strategic and managerial purposes within entity.  

It is a system which entirely emphasises on framing of annual FS of corporation in order to give fiscal information to different stakeholder parties.

Both non-monetary and monetary aspects are covered in this system.

Only monetary aspects are covered in this system.

No specific process and formates are specified in respect of processes of MA.

Here specific formates and processes are specified for such systems.

Core users are internal managerial personnel.

Core users are internal and external parties.

For Continental Clothing Company Ltd. management accounting systems help in analysing costs associated with production of cloths, determining ways of reducing prices and providing better products to the customers, measurement of performance which increases efficiency of business and hence leads to maximisation of profits.

Below mentioned are few systems used in management accounting:

  • Job costing Technique: It is a method wherein production costs of every product is allocated with simultaneously keeping watch on the expenses incurred. Continental Clothing Company Ltd. can make use of this method to calculate the costs related to every product can use this system to determine the cost of each of its product that it offers to its clients according to their needs and preferences. As there are lot of differences in the items that are produced, this method needs a complete segregation of cost for every product and they are also recorded separately. It gives details regarding the variable costs like direct material which are used. (Gupta, 2017).
  • Price optimising technique : This method is used to set optimal prices of all kind of products the company offers. It helps in controlling the price level and also used to find out that what will be the demand at each price point.  Continental Clothing must use this method to set the prices which are acceptable to different target customers and to see that how will they respond at each price level. Company can also decide different structures related to pricing like pricing for promotions, discounts and the market entry pricing. To decide the prices, company make use of various factors like benchmarking the competitors, the product life cycle of the all the products and the vision and objectives of the company as a whole.
  • Cost accounting technique: This method is used to determine the costs for the purpose of analysis of the profitability of the business, valuation of its inventory and to control the overall cost. There are two methods under this: Job and Process costing. The first one i.e. Job Costing helps in identifying the production costs that are attached to each job in the case where the firms have different products and different manufacturing for all. On the other side, process costs are those that identify separate costs for every process and can be used where production go through different processes. Continental Clothing Company Ltd. have an option to choose this method they can identify the costs of customized products which are designed as per the requirements of the clients. (Kaplan and Atkinson, 2015).
  • Inventory management technique:This method helps in the proper maintenance of stock level and managing them. It helps in better management of inventory while focusing on procurement and better inventory turnover.  Continental Clothing Company Ltd. If uses this method, then they can effectively manage all their stock levels, can replenish their raw materials on time and can satisfy their consumers by proper availability of goods on the retail stores. It enables managing officials to have a physical record of all inventories within the firm.

P2 Different methods used for management accounting reporting

Companies can become extremely efficient and productive if they do proper reporting and make management accounting reports. These reports can be used to do proper planning, in making regulations for the companies and to measure the performance both financially and operationally. Through these reports, relevant figures and statistics are produced which make decisions better and help in making better long term strategies for the organization. These information are important for internal users that help in making decision making for reducing costs or directing funds in more beneficial product lines.

Continental Clothing Company Ltd. also prepare various reports that are discussed below :

  • Budget reports: To measure the performance of the organization, budget reports are very important. A budget helps a company in forecasting the future sales and expenses which are going to be incurred based on the historical trends of the companies. It is also helpful in forecasting unusual circumstances. Budget helps the company in achieving the set targets and goals set. This report support Continental Clothing Company Ltd. To meet their revenue targets in an efficient way. (Karadag, 2015).
  • Accounts receivable ageing reports: This report gives detail information about each and every debtor of the organization. It also tells the accounts receivables turnover of the company and the duration in which they are paying back to the company. Here, the company also gets to know that whether there is a need to tighten the policies of collection and is very useful in monitoring the doubtful debtors who keeps on extending the dates of payment. It also identify the bad debts of the company and helps in managing the liquidity position of the company. Continental Clothing Company Ltd. Make use of this report to effectively manage its policies related to accounts receivables which needs to be monitored on a regular basis.
  • Job cost report: This report mentions different costs related to every activity or job of the organisation. This reports analyse that which activity is less profitable and where the efforts of the business can be reduced or eliminated. This also examines the costs related to each project and the wastage if any is occurring in the project is identified so that project can become very profitable. Continental Clothing Company Ltd. can use these reports to determine the best pricing for the products and to decrease the costs for each product to generate revenues. (Maas, Schaltegger and Crutzen, 2016).
  • Inventory and manufacturing reports: The main motive of this report is to make inventory management better and production processes more worthy. The report contents include different costs related to labour, overhead costs and the unnecessary wastages of stock. It also helps managers in comparing various manufacturing plants and where they are lacking so that improvement can be done. This report can help Continental Clothing Company Ltd. for better management of inventory levels of cloths with controlling manufacturing costs (Maas, Schaltegger and Crutzen, 2016).

M1  Benefits of management accounting systems and their application within Continental Clothing Company Ltd.

Management Accounting Systems

Benefits

Application

· Job costing

- It helps in estimating each and every cost throughout the manufacturing process in respective company.

-Evaluation of quality of work done.

This method can be used when companies have same products and they can keep watch on its costs during the manufacturing process.

· Price optimising system

-Determine attitude of customers based on different prices within Continental Clothing Company Ltd.

-Maximisation of profits with best prices.

-Can be used to identify prices for promotions, discounts and during market entry to gain a competitive advantage.

· Cost accounting system

-Measure efficiency in processes  and make improvements.

-Provides information required for planning.

-Can help in correct ascertainment of cost of products and is easy to understand and use.

· Inventory management system

-Improve accuracy of inventory orders that helps in saving time and money in respective company..

-Can use to achieve effective and efficient flow of inventory within the company at the time of sale.

D1 Evaluation of how management accounting systems and management accounting reporting is integrated within organisational processes

The reports prepared in management accounting reflects the current order with the company, sales revenue, cash in hand, other current assets like debtors or accounts receivable, stock, current liabilities like accounts payable or creditors and outstanding debts. Some more information about variance analysis and necessary statistical data are also there which enables managers in better decision making. Continental Clothing Company Ltd prepare all these reports for the strategic decisions. Job cost method is useful in making reports related to job costs which include calculation of costs, expenses and profitability of every activities happening in the company. Cost accounting method is helpful in preparing budget report so as to analyse company performance, control costs and determine actual expenditures incurred in past. Inventory management system helps in preparing inventory and management report to determine various costs related to labour,  overhead costs and the unnecessary wastages of stock. Price optimising system helps in determining strategies of pricing of different range of clothings based on client's preference and need (Mack and Goretzki, 2017).

TASK 2

P 3 Techniques of cost analysis to prepare an income statement using marginal and absorption costs for Continental Clothing Company Ltd.

Costs reflects to value which has been put to produce goods and services. It includes all those costs starting from the procurement of raw materials, labour used, the time and resources utilised, other fixed and variable costs used to manufacture a product. There are two main methods used in costing i.e. Absorption and Marginal or variable.

  • Marginal costing: Marginal costing refers to the method where all the variables costs are fixed costs are treated separately and are segregated as per product and period costs respectively. Here, segregation only happens based on variable and fixed and not on the basis of manufacturing and non-manufacturing costs. It is an easy technique to estimate the costs and net profit and loss and the changes due to change in the production level.(Maskell, Baggaley and Grasso, 2017).
  • Absorption costing: This method treats variable and fixed cost as same but it differs or segregates on the basis of manufacturing and non-manufacturing costs. Here, while calculating the unit cost, absorption rate is calculated and in the end to find out the profit or loss over/under absorption is calculated.

M2 Application of management accounting techniques and produce appropriate financial reporting documents

Continental Clothing Company Ltd. will get benefit is it uses the marginal method to determine the costs as it will be more useful to the management in making decisions because this method considers additional costs involved in the manufacture of each unit of the product. Only variable costs are considered, as product cost and fixed costs are classified as period costs. Here, all the variable part is treated as product cost and all the fixed part is treated as the period costs for that period. Under marginal costing, all the variable costs are used to determine the unit cost for that period and the fixed costs are directly deducted from the contribution to get the net profit or loss. It also aids in taking pricing decisions, showing true profit of the period, preparing break-even analysis etc. To prepare financial statements, methods of management accounting can be used so that accurate documents can help in realising the actual position of the organisation and its profits can be increased by the managers depending on the documents so prepared (Mishan, 2015).

D2 Financial reports that accurately apply and interpret data for a range of business activities

From all the calculations and analysis above, it can be said that marginal costing does not use fixed costs to calculate the unit costs while absorption costing uses fixed costs and add it to the unit cost itself and total absorption per unit cost is £26.53 whereas as per marginal costing is £16. The net profit according to marginal costing is £5750 and net profit according to absorption costing is £9792.4 for Continental Clothing Company Ltd. revenue  has dramatically increased that is showing the growth of the company.

TASK 3

P4 Advantages and disadvantages of different types of tools used for budgetary control

Budget is used to predict the future expenditures and sales for the coming year and is compiled on a regular basis. It is also re-evaluated very frequently to monitor and alter the changes if any from time to time. Organisations make use of budget to set the goals and objectives, to measure the results and to plan for any future circumstances. Budgets are usually made based on historical trends, past data, economic situations of the nation, etc. (Mohamed, Kerosi and Tirimba, 2016).

Budgetary control means how well managers utilizes the budgets so that it can benefit to the organization for that period. They continuously monitor and evaluate the budgets, its costs and expenditures so that it does not decrease the profitability of the business. Mangers can create and set their business goals both financially and non-financially, can compare the budgeted and actual results and finally can alter the performance of its sales team accordingly to meet the targets. Different kinds of tools for budget control are

Budget Variance: Budget variance deals with a company's accounting discrepancies. Variance of the budget means the gap between what was actually forecasted and what is the actual figures. Continental Clothing Company Ltd. Can use this to find out the gap between expected and reality so that they can take corrective action and can predict the future costs and revenues in a much better way.

  • Benefits: Helps managers of Continental Clothing Company Ltd. in creating detail and realistic budget for future periods. It helps managers by acting as a great tool to control costs incurred by various departments, facilitates in assigning responsibility to make expenses only according to the estimated budgets (Otley, 2016).
  • Limitations: The budget variance is analysed much later after quarterly closing and the time gap may affect remedial actions; if the budgeting is not done considering the detailed analysis of each factor then it may result in forming an inappropriate budget which may deviate from actual numbers.

Flexible Budget: Continental Clothing Company Ltd. can make this budget when there are changes in volume/activity. This budget considers all the expenses and revenues of the current period and take them as a base to make future changes and estimations of expenses and revenues as the output changes. It is the best tool in measuring a manger's efficiency.

  • Benefits: It enables Continental Clothing Company Ltd. to predict the profitability and financials like sales, revenues, etc. given the current profitability and performance. It enables more accurate assessment of managerial and organisational performance, and to establish control over key business operations (Otley, 2016).
  • Limitations: These kind of budgets can confuse the manager as there is a requirement of a lot of planning in this to watch on different expenses and make adjustments in the differences created; they are also less disciplined as they can be moulded as per requirement which is not possible in static budgets.

Master Budget: Continental Clothing Company Ltd. can formulate this budget by aggregating each and every budget produced with the help of lower levels of different  functional areas, This budget also contains financial statements like balance sheet, income statement, cash flows, forecasts and future plans. This helps the company in decision making regarding all activities of the company.

  • Benefits: It helps the inter division coordination of the company and motivates the staff in planning their department's budgets in advance; it also helps the company in accomplishment of its goals and objectives. This allow to control different costs related to production and manufacturing.
  • Limitations: This budget is not easy to modify and is not easy to understand as it includes the budgets of all the departments; this budget is highly rigid and the divisional staff is forced to achieve targets despite having practical difficulties in achieving the same.

M3 Use of planning tools and their application for preparing and forecasting budgets

Organisations uses different kinds of techniques and methods to estimate the budgets and to make future predictions of different performance measures. These tools help to quantify each and every factor and make some meaningful data which can be analysed to fulfil expectations of the future goals and also helps in taking actions which will support the existing position of the company. This also enables the companies in setting the targets which are realistic and motivates the employees, also help in doing efficient staffing and provide various information on the production, liquidity and working capital management and capital structure of the company.

Budget variance can help Continental Clothing Company Ltd. in forecasting future costs and revenue with complete accuracy by examining the reasons for differences in the incomes and costs for the present year. It aids in understanding how adverse variations can be reduced. Flexible budget can be used by the company to more easily update a budget for which revenue or other activity figures are not finalized. It allows for changes in budget based on unexpected expenses or fluctuations in income. Master budget is also helpful to the companies in integrating activities of different departments of the company in formulating an aggregated budget that helps in making decisions based on overall activities of the company (Petrus and et. al., 2015).

TASK 4

P5 Adoption of management accounting systems to respond to financial problems.

Every business need finances to operate its day to day functions like buying the raw materials, selling of final goods, paying off debts etc. A good financial situation can keep a business running and enables it to cover all the necessary expenses without worrying about the source of income. But at times companies face various financial problems that need to be timely addressed so that they do not lead to financial crisis in the business and its ultimate closure (Tschopp and Huefner, 2015).

Financial problems: These problems are related to monetary issues faced by a company when it do not have enough funds to pay off it's debts. These problems may arise due to improper cash flow management, poor accounting practices, unnecessary expenditure, mispricing of the products, offering too many sales promotion etc. Some of the causes of financial problems are discussed below :

  • Mispricing: When the managers of the company are unable to estimate the costs related to manufacturing of the products and this leads to low pricing of the product and brings loss to the company.
  • Offering too many sales promotion: In order to capture a large market, companies sometimes spend a lot on promotional programs that increases it's expenses more than the profits earned by it and thus leads to financial problems.

The companies can eliminate or reduce it's financial problems by adopting any of the following tools:

  • Financial Governance: It means how the company collects and record the transactions to create the meaningful financial information. It requires proper disclosure of the information by using proper regulations, compliance and operational procedures. It refers to the way a company collects, manages, monitors and controls it's financial information. Financial governance is helpful to Continental Clothing Company Ltd. in solving its monetary problems by strategically analysing and evaluating financial data of the company and make decisions accordingly.
  • Key Performance Indicator (KPIs): KPIs are used by the companies to measure the performance based on some very important aspects. KPIs are chosen by the companies very tactfully as these play an important role to determine the growth and performance of the companies. It gives companies some criteria to analyse and based on that company can take various important decisions. It is helpful to Continental Clothing Company Ltd. as it sets various targets and keeps track on various parameters. (KPIs). 2019.).
  • Benchmarking: Benchmarking means taking competitors as your base and then compare with it to measure your company's performance. It gives the new ways of improving and also opens the eyes of business that where they are standing in this competitive era. Continental Clothing Company Ltd. can use this strategy so as to assess it's performance in comparison to other similar businesses.

A comparison between Continental Clothing Company Ltd. and it's rivalry firm

Basis

Continental Clothing Company Ltd.

Net Optics Ltd.

Financial problems

The company is facing a problem of mispricing of clothing products it provides to it's customers based on their needs and preferences. This leads to loss to company as the managers are incompetent to price their products properly.

The company is facing a financial problem because it is over spending on sales promotion which are increasing its expenses compared to it's overall income.

Tools used

The company should use financial governance to reduce it's financial problems  which would help it to track it's financial transactions and strategically analyse and evaluate financial data of the company and make decisions accordingly.

The company can use benchmarking as a tool to reduce it's financial problems which would help it to compare the amount of money it needs to spend on sales promotion by setting a base for comparison where it needs to reach.

Management Accounting system

The company can use cost accounting system so as to accurately determine the price of tailored products it provides to it's customers by identifying cost, expenses and profitability of each and every activity of the company.

The company can use job costing system in which manufacturing cost of each individual product is assigned while keeping a track on expenses incurred which gives an idea to managers to allocate appropriate funds to promotion.

M4  Role of MAS in responding to financial problems that can lead organisations to sustainable success

MAS is helpful in identifying various problems which an organization is facing financially and it also helps ion better decision making so that goals can be achieved optimally.  Continental Clothing Company Ltd. can solve it's financial problems by adopting appropriate accounting systems for example the company is facing financial problem due to mispricing of the products it provides to the customers, therefore, it can use cost accounting to accurately examine the costs incurred in building the product and accordingly pricing the same (Williams and Dobelman, 2017).

D3 Planning tools used in solving financial problems to lead organisations to sustainable success

Along with using appropriate MAS, good tools which will help in planning are also required so that organizations can resolve their monetary problems efficiently. Continental Clothing Company Ltd. Is facing the problem of mispricing of the products that it provides to the customers based on their needs and preferences. This can be solved by using financial governance in strategically analysing its financial information before making managerial decisions. It also helps in establishment of financial controls and policies. The budgeting process gets improved by using financial governance which helps in allocating of appropriate amount of funds that are required for all the activities of the organisation (Ye, Yang and Tan, 2015).

Conclusion

It can now be concluded that companies can make use of MAS for their sustainable success. Proper reports have to be made by the management from time to time so as to analyse it's growth towards achieving its goals. The techniques which are used to analyse the costs can be adopted by the organisation i.e. variable and absorption costing which are the best methods to be implemented in the companies that will help in determining the net profit and loss for the period after taking into account all the costs. Budgets are a helpful tool which can be prepared by the organisations so as to allocate an appropriate amount to each department and set a comparison basis as to how much was estimated and much was actually incurred.

References

  • Angelone, S., Neopost Technologies, 2015. System and method for managing postal accounting data using transient data collectors. U.S. Patent 9,183,590.
  • Gupta, S.L., 2017. Financial Derivatives: Theory, concepts and problems. PHI Learning Pvt. Ltd..
  • Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
  • Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal . 5(1). pp. 26-40.
  • Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production. 136. pp. 237-248.
  • Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production. 136. pp. 237-248.
  • Mack, S. and Goretzki, L., 2017. How management accountants exert influence on managers–a micro-level analysis of management accountants’ influence tactics in budgetary control meetings. Qualitative Research in Accounting & Management. 14(3). pp. 328-362.
  • Maskell, B.H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.
  • Mishan, E.J., 2015. Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

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