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Boosting Business Performance Using Management Accounting Technologies

Question

Task: Learners need to have read carefully the instructions before attempting any of the questions. The assignment is to be addressed with reference to the scenario addressing all learning outcomes. The learners will be assessed through the written report submitted by them addressing the Pass, Merit and Distinction criteria. Contribution: 100% of the module.

Scenario 1: Management accounting plays a key role in organizations today and therefore decision makers in the organization must understand how to create and use good management accounting information. In today’s business environment, business wants to track performance information that goes beyond just the cost-based information of historic general ledger systems provided by traditional financial accounting information. Good management accounting involves responsibility to manage a wide variety of critical management accounting information using management accounting system and management accounting techniques such as cost-volume- profit (break- even) analysis, budgetary control, cash budget, marginal costing and absorption costing to produce relevant management reports for informed decision making.

You are applying to work as a Trainee Management Accountant in a medium sized financial consultancy organization that has a client base of 50 small and medium sized business. The organization serves clients operating in a variety of sectors such as Manufacturing, Retail, Hospitality or Construction and provides them with the crucial information they need for managerial decision-making. As part of the selection process, you are required to write a report demonstrating your knowledge and understanding of the management accounting function and management accounting systems as well as the importance of presenting information to internal stakeholders such as the management. They also want to see your understanding of planning tools and how planning tools help organisations to resolve their financial problems.

Guidance: In completing the report, you must explain what is management accounting and the requirements of different types of management accounting systems. Also explain the different methods used for management accounting reporting. Furthermore, your report must evaluate the usefulness of using management accounting systems and its application in an organization. The report must critically evaluate how management accounting systems and management accounting reporting are integrated within your chosen organization.

The second part of your report must explain the advantages and disadvantages of various planning tools used in budgetary control and analyse their use and application for preparing and forecasting budgets. You must also be able to evaluate how planning tools in accounting help the organization to respond appropriately to solving financial problems leading to sustainable success for organizations.

Scenario 2: Based on your report in relation to scenario 1 the firm has now hired you as a Trainee Management Accountant. Your line manager now wishes to assess your ability to apply a number of management accounting techniques and how organisations can apply management accounting as a solution to resolve financial problems.

Answer

Executive Summary
With the due passage of time, management accounting has undergone an immense change with the introduction of a new mechanism. Such a presence leads to better practice and presentation. In this report, the main emphasis is on the concept of management accounting and the different tools and techniques. This report is studied considering the organization name Galway Plc. The report deals with the management accounting concept followed by the need for the various accounting system. The variety of methods are studied and provided an explanation considering the status of the current scenario. The report primarily deals with the manner on how the reporting is performed and described in the organization. The techniques such as marginal costing, absorption costing, etc are studied to solve the issue of financial problem.

Introduction
Management accounting is imbibed in the organization and drives the organization leading to a smooth decision-making process. Hence, it is essential that the organization need to know about the management accounting information and their proper utilization. In the current scenario, it is vital for the business to consider the performance of the organization because an organization only when the management accounting is well established. When the company has a strong management accounting system it implies that that the organization is in a better position to undertake various critical issue and by utilization of various technologies such as budgetary control, marginal costing, marginal costing, etc it will be able to tackle the situation and drive the organization (De Wit & Meyer, 2010). The current report stress upon the sector such as Hospitality and Retail where there is a strong need for the information for the process of decision-making.

Management accounting
An organization conducts management accounting to get detailed information about the company’s financial performance and position to take important decision relating to business. Management accounting is also known as managerial accounting which the process is carried out by the internal team of the company for taking all types of financial decisions. Various documents are presented to the management team such as financial statements, certain invoices and other types of statistical data. The main objective of management accounting is to take business decisions correctly so that business is carried out smoothly and efficiently.

Important tools that are used in management accounting
The tools that are used by the management of the company in the process of management accounting are as follows:

Financial Planning: A company can survive in the long run only if it maximizes its customer satisfaction along with earning profits. If the company follows this, then it will be easier for the company to attain a proper financial status in the company (De Wit & Meyer, 2010).

Financial statement analysis: It is very important to study the financial statements (income statement for financial performance and balance sheet for the financial position) of the company. The analysis of these financial statements helps the investors and stakeholders to know about the growth prospects of the company. The growth rate can be determined by comparing the financial performance of the company over the years, and also by calculating various ratios and analyzing them.

Cost accounting: The data presented through cost accounting are usually divided into different departments based on various products, processes, branch, etc. It is used to provide information related to manufacturing and selling of the product (Horngren, 2011).

Find a flow analysis: The movement of the funds of the company from one place to another is determined by the flow analysis. With the help of point analysis, it also helps the management and other stakeholders to know whether the resources are utilized in an optimum manner or not (Horngren, 2011). However, the changes in the operation of the company and changes in working capital can be observed using this analysis.

Benefits of management accounting
There are numerous advantages of management accounting as it provides an effective system that the company may adopt and increase its efficiency of the business activities that are carried out. The various advantages of management accounting are discussed below:

Increases efficiency of the company: Management accounting is considered to be one of the most important processes carried out because it helps in analyzing the financial data and comparing it over the years. The efficiency of the employees of the company and the financial health of the company both improves because of this process (Hansen, 2011). The efficiency of the employees can be boosted by providing them a bonus or additional funds. So, we can conclude that management accounting not only helps in improving the financial performance and position of the company but also helps in expanding its market share.

Business decisions: If the management of the company possesses proper management accounting skills then it would help in taking crucial decisions of the company accurately. Some many tools and techniques are available for enhancing managerial skills of the team. A company many also carry out proper variance analysis to maintain the right track for the company’s operations. Budgets are also other tools that are prepared to keep the expenditures in control and for the determination of total cash flows of the company (Goode & Malik, 2011). Various types of budgets are prepared by the management of the company such as cash budget, production budget, sales budget, master budget, etc. Each budget has its advantages and importance.

Operational planning: Various business activities are carried out in one organization. These activities require expenditures and a process to track them. For this purpose, budgets are prepared. Budgets involve a process of distributing funds to different departments for a certain period to carry out a certain business activity. These budgets are usually prepared once in a year by keeping in mind the revenues, expenses and the cost overhead that has been incurred in the past. Every department of an organization is provided with a budget and a certain target that has to be achieved within the given time frame (Hope & Fraser, 2003).

Going concern: The process of management accounting is used in the evaluation of the business results of the company much better than an analysis of financial statements. Financial statements just help to know about the working of the company for a particular time but management accounting is a continuous process that helps to monitor the working and complete the tasks allocated to each department. The management of the company may also compute various financial ratios to determine the financial value of the company (Hanninen, 2013). These ratios help to determine liquidity position, profitability position, solvency position, etc of the company. These tell about the company’s expectation of survival in the future and carry out operations accordingly.

Cost management: Cost management is the process that helps to record and analyze the various expenditures related to manufacturing as well as selling of a particular product. The actual cost that has been incurred by the company to convert raw material into a finished product is recorded by the management of the company and all the unnecessary costs are then reduced (Hanninen, 2013). Therefore, cost accounting is also used as a tool for cost control. A product has been passed through various stages of production and each stage has some costs involved. The cost management team must analyze and review these expenditures. The company can survive in the long run only if it reduces wastage of its scarce resources and uses its resources in the best possible manner. If the resources are used properly then it would help the company to earn higher profits and help in maximizing the return of investors as well as satisfying the customers. Cost accounting is, therefore, a very important tool that is used by mostly all the manufacturing organizations today (Dao, 2012).

Galway PLC manufacturers
There are numerous benefits of having an appropriate managerial accounting system. An appropriate managerial accounting system allows an organization by not only letting it survive but also thrive in today’s excessive competitive phase. Having an appropriate managerial accounting system aids in the decision-making process of an organization. The financial wellbeing of an organization is also improved by means of having an appropriate managerial accounting system. When there is a proper use of managerial accounting techniques, the decision-making skills of the readers of the financial statements is also enhanced.

Continuous improvement: An appropriate managerial accounting system will also aid in the identification and elimination of extra time, efforts and materials. The management of an organization must always work towards having a regular improvement in the quality of the goods and services (Lynch, 2011).

Quality management: Quality management is also an important part of an appropriate managerial accounting system. It aids in the continuous enhancement of the quality of goods and services manufactured by the organization. Better the quality of the goods and services, better shall be the sales and ultimately the organization will be able to hold a tighter grip on the market. Thus, the organization shall be able to gain a competitive advantage in its domain (Lynch, 2011).

Cost management: Cost management is all about identification and elimination of unwanted costs from the costing of the goods and services. With the help of Cost management, an organization can uplift its overall efficiency and improve its financial performance. Therefore, it helps an entity to enhance its overall financial stability. An appropriate managerial accounting system is impossible without effective Cost management.

Advantages and disadvantages of different tools:
Financial Budgets: Financial budget sheds light on the sources of cash flows in and out of an organization. It puts forth the possible implications that arise out of the financial decisions of an entity. Purchase of new assets, payment to suppliers of raw-materials, remuneration paid to employees, dividend payment to investors, repayment of debts, etc are fine examples of cash outflows in an entity. Revenues from sale proceeds, sale of assets, issuance of stocks, loans, etc are the probable sources of cash inflows in an entity (Ekholm & Wallin, 2010).

Following are the different types of financial budgets:

  • Cash budget – Cash budget helps in the determination of actual cash in hand after all the cash outflows are accounted for. Cash budget helps an organization in monitoring its cash flows and draw comparisons with the previous period. Cash budget helps an organization in chucking out appropriate plans and options with respect to making investments with the excess of available cash in hand (Ekholm & Wallin, 2010).
  • Capital expenditure budget: Capital assets such as land and buildings, plant and machinery, and etc are mostly acquired by companies through various borrowing options which could be loans, long term bonds, etc. This is why preparing a capital expenditure budget is necessary for organizations. Capital expenditure budgets are prepared so as to monitor capital assets and keep a track on borrowings. All and all this saves an organization from getting drowned in huge borrowings.
  • The balance sheet budget: The balance sheet budget is prepared after all other budgets are seemed to have excellently performed. The balance sheet budget represents the basic results of the balance sheet of an organization once all other budgets are fulfilled (Ekholm & Wallin, 2010).

Operating Budgets: Operating budgets depicts the budgets for sales and cost associated with the manufacture of goods and services such as labor costs, overheads, cost of raw materials, etc for a forthcoming period.

  • The sales or revenue budget: The sales or revenue budget depicts the revenues that an organization may receive from certain activities. This budget helps the management of an organization to re-evaluate the financial performance of an organization.
  • The expense budget: It is important for the management to control it unjust expenses. This highlights the need for the management to pre-analyze all the current and future expenses. Therefore, with the help of an expense budget, the management can easily determine its overall future expenses and regulate the same by identifying and eliminating unwanted expenses.
  • The project budget: The project budget is designed to calculate budgeted profits from a respective project. The management can enhance these budgeted revenues by either increasing the sales or lowering the overall expenses or both.

Non-monetary budgets: Budgets that are prepared to uplift the expected profit figures through enhancement in sales figures or lowering the overheads or even both are termed as Non-monetary budgets. These budgets are denominated in revenues and expenses or non-financial sales.

Fixed and variable budgets: Whilst preparing a budget following are the costs that must be necessarily considered by the management of an organization -

  • Fixed costs: As the name suggests these costs remain unaltered and unaffected. This means that these costs shall accrue throughout the life of an organization. Remuneration of employees’, managers, etc is a few examples of fixed costs (Jensen, 2002).
  • Variable costs: Variable costs are such costs that always tend to fluctuate. Such costs are variable. These costs are affected by majorly due to the scope of operations. The raw materials used in production are a glaring example of variable costs.
  • Semi-variable costs: Semi-variable costs are costs that carry the slightest possibility of getting altered. Repairs and maintenance costs, advertising costs are fine examples of semi-variable costs (Jensen, 2002).

The management of an organization must ensure that the budget is made after duly analyzing all the related costs may it be variable, fixed or semi-variable costs. The regulation of fixed and variable costs is quite easier for the management of an organization. Fixed costs remain unaltered and forecasting variable costs is also easier to an extent. This makes the handling of these costs easier for the management of an organization. However, handling of semi-variable costs is not easy for the management and therefore, the same must be tackled with the help of experience, knowledge and professional judgment available whilst constructing a budget for a particular period.

Management accounting tools in countering issues
Management accounting tools allow an organization in improving its financial performance and thereby, maximizing its stakeholders’ value. The modern age management accounting tools used by organizations are Activity Based Costing, Balanced Scorecard Approach, and performance measurement mechanisms that aids in uplifting the financial performance of the same. The entity that focuses on enhancing its financial performance and sustainability opt for performance measurement mechanisms and Balanced Scorecard approach while the entity that is more keen on upgrading its decision-making ability must opt for the ABC method (Drury, 2011). In this context, it can be concluded that the prime purpose of entities is different from one another. Therefore, an entity must choose management accounting tools depending on its goals, experience, and knowledge.

  • Balanced Scorecard: Kaplan and Norton developed the BSC approach and this approach is based upon four factors that are the internal operations, financial performance, consumers and learning, and growth. It enables to have a balanced financial performance, innovation, and organizations internal operations. The financial performance, as well as sustainability of the organization, can be influenced with the aid of internal operations, financial operations, consumers and growth. Benchmarking is a potent tool when it comes to the evaluation of the financial status of the organization. The managers even receive various incentives due to benchmarking that influences them to enhance the operations (Brown et. al, 2017). It helps in the attainment of standards that are pre-determined with the aid of internal and external information.
  • ABC : ABC is an important tool that enables the organization to have a smooth decision making. This tool is undertaken by various entities that comprise outputs level on a complicated basis. It is even preferred by an organization that provides a consumer variety of services. The tool helps the enterprise to ascertain the level of resources consumed by a single activity. It is a powerful and effective tool when it comes to operations and taking vital decision thereby eliminating the occurrence of unwanted expenditures (Brown et. al, 2017).

Part 2

Galway Plc

Profit and Loss Statement (Absorption Costing)

 

May

June

Particulars

Rate

Qty

Amt (GBP)

Qty

Amt (GBP)

Sales

50

300

15000

500

25000

Less:

 

 

 

 

 

Direct Material

8

500

4000

380

3040

Direct Labor

5

500

2500

380

1900

Variable Production Overhead

3

500

1500

380

1140

Variable Selling Commission

 

 

750

 

1250

Total Marginal Cost

 

 

8750

 

7330

Add:

 

 

 

 

 

Opening Stock

0

0

0

200

3200

Less:

 

 

 

 

 

Closing Stock

16

200

3200

80

1280

Marginal Profit

 

 

9450

 

15750

Less:

 

 

 

 

 

Fixed Production Overhead

10

500

5000

380

3800

Fixed Administrative Overhead

 

 

2000

 

2000

Fixed Selling Overhead

 

 

4000

 

4000

Total Fixed Cost

 

 

11000

 

9800

Profit/(Loss)

 

 

-1550

 

5950


Galway Plc

Profit and Loss Statement (Marginal Costing)

 

May

June

Particulars

Rate

Quantity

Amount (GBP)

Quantity

Amount (GBP)

Sales

50

300

15000

500

25000

Less:

 

 

 

 

 

Direct Material

8

500

4000

380

3040

Direct Labor

5

500

2500

380

1900

Variable Production Overhead

3

500

1500

380

1140

Variable Selling Commission

 

 

750

 

1250

Total Marginal Cost

 

 

8750

 

7330

Add:

 

 

 

 

 

Opening Stock

0

0

0

200

3200

Less:

 

 

 

 

 

Closing Stock

16

200

3200

80

1280

Marginal Profit/Loss

 

 

9450

 

15750


Galway Plc

Reconciliation of Profit and Loss Statement

 

May

June

Particulars

 

 

Amount (GBP)

 

Amount (GBP)

Profit as per Marginal Costing Technique

 

 

9450

 

15750

Adjustments:

 

 

 

 

 

Fixed Production Overhead

 

 

5000

 

3800

Fixed Administrative Overhead

 

 

2000

 

2000

Fixed Selling Overhead

 

 

4000

 

4000

Total Fixed Cost

 

 

11000

 

9800

Profit as per Absorption Costing Technique

 

 

-1550

 

5950

 

 

 

 

 

 

Note: Rate of absorption of Fixed Assets 4000/400=10/-

 

Rate

Quantity

Total

Budgeted cost

10

2

        20.00

Actual Cost

                           9.50

2

        19.00

Actual Output

 

1000

 

Budgeted Material

 

2000

 

Actual Material

 

2200

 

Material Price Variance

Actual Cost

 20,900.00

 

 

Budget Cost

 22,000.00

 

 

Variance

   1,100.00

Favorable

Material Usage Variance

Actual Quantity

 22,000.00

 

 

Budgeted Quantity

 20,000.00

 

 

Variance

  -2,000.00

Adverse

Material Cost Variance

Actual

 20,900.00

 

 

Budget

 20,000.00

 

 

Variance

     -900.00

Adverse


Galway Plc

 

Inflow

Outflow

Balance (LIFO)

Date

Quantity

Rate

Amount

Quantity

Rate

Amount

Quantity

Rate

Amount

May-01

40

3

120

 

 

 

40

3.00

     120.00

 

 

 

 

 

 

 

 

 

 

May-12

20

3.6

72

 

 

 

60

3.20

     192.00

May-15

 

 

 

36

3

     108.00

24

3.50

        84.00

May-20

20

3.75

75

 

 

 

44

3.61

     159.00

May-23

 

 

 

4

3

        12.00

 

 

 

 

 

 

 

6

3.6

        21.60

34

3.69

     125.40

May-27

 

 

 

14

3.6

        50.40

 

 

 

 

 

 

 

11

3.75

        41.25

9

3.75

        33.75

May-30

 

 

 

5

3.75

        18.75

4

3.75

        15.00


 

Inflow

Outflow

Balance (Avg Cost)

Date

Quantity

Rate

Amount

Quantity

Rate

Amount

Quantity

Rate

Amount

May-01

40

3

120

 

 

 

40

3.00

     120.00

 

 

 

 

 

 

 

 

 

 

May-12

20

3.6

72

 

 

 

60

3.20

     192.00

May-15

 

 

 

36

3.2

     115.20

24

3.20

        76.80

May-20

20

3.75

75

 

 

 

44

3.45

     151.80

May-23

 

 

 

10

3.45

        34.50

34

3.45

     117.30

May-27

 

 

 

25

3.45

        86.25

9

3.45

        31.05

May-30

 

 

 

5

3.45

        17.25

4

3.45

        13.80

The problem can be solved by using any of the appropriate tools such as marginal or absorption costing. However, the utilization of the two methods provides a difference because each has its specialty. Marginal costing does not consider fixed costs when it considers the product costing or inventory valuation while absorption costing considers both fixed and variable cost (Berger, 2011). Further, a noteworthy difference is that the marginal costing can be separated into fixed and variable cost while the absorption costing can be projected as production, distribution and administration. The product cost contribution is being dealt by the marginal costing while the main focus of absorption costing is to provide a complete outlook of the profits. When it comes to marginal costing, the definition can be done in terms of contribution per unit while absorption costing can be defined in terms of net profit per unit. Marginal costing is more towards a conventional form of evaluating the costing method while absorption costing is needed for tax reporting and a prime traditional mechanism.

Conclusion
As pert the conduct of the study with the help of Galway Plc, it has been observed that there were differences when it comes to the process of marginal costing and absorption costing. The marginal costing provided profit in May and June on the contrary absorption costing lead to project loss in May followed by profit in June. The overall study provides a clear cut indication that the utilization of marginal costing is of more advantage to the company because it leads to better result. The only noteworthy point is that the variable cost is said to be the product cost. Therefore, marginal costing can be said to be the best method that applies in the situation and hence, is the appropriate mechanism to solve the issue with ease. Management accounting assignments are being prepared by our accounting assignment help online experts from top universities which let us to provide you a reliable assignment help online service.

References
Berger, A. (2011) Standard Costing, Variance Analysis and Decision-Making, Munich, GRIN

Brown, J. L., Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2017) The effect of budget framing and budget-setting process on managerial reporting. Journal of Management Accounting Research, 29(1), 31. Available from: https://search.proquest.com/docview/1967368440?accountid=30552 [Accessed 17 July 2019]

Dao, L. (2012). The main purposes of traditional budgeting. Available from https://blog.trginternational.com/bid/162038/the-main-purposes-of-traditional-budgeting [Accessed 17 July 2019]

De Wit, B. and Meyer, R. (2010) Strategy Process, Content, and Context International Perspective, 4th Edition, Cengage Learning

Drury, C. (2011) Cost and management accounting. Andover, Hampshire, UK: South-Western Cengage Learning

Ekholm, B. and Wallin, J. (2010) Is the annual budget really dead? European Accounting Review, 9(4), 519-539. Available from https://ideas.repec.org/a/taf/euract/v9y2000i4p519-539.html [Accessed 17 July 2019]

Goode, M. and Malik, A. (2011) Beyond budgeting: the way forward? Pakistan Journal of Social Sciences, 31(2), 207-214. Available from https://pdfs.semanticscholar.org/9fd0/9919161e6a6d20b15f48fc852c526e92e87e.pdf [Accessed 17 July 2019]

Hanninen, V. (2013) Budgeting at a crossroads – the viability of traditional budgeting – a case study Master’s thesis, Aalto University School of Business. Available from http://epub.lib.aalto.fi/en/ethesis/pdf/13148/hse_ethesis_13148.pdf [Accessed 17 July 2019]

Hansen, S. (2011). A Theoretical Analysis of the Impact of Adopting Rolling Budgets, Activity-Based Budgeting and Beyond Budgeting. European Accounting Review, 20(2), 289-319. DOI:10.1080/09638180.2010.496260

Hope, J and Fraser, R. (2003) New Ways of Setting Rewards: The Beyond Budgeting Model. California Management Review. 45(4), 104-119. Available from https://doi.org/10.2307/41166190 [Accessed 17 July 2019]

Horngren, C. (2011) Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.

Jensen, M.C. (2002) Corporate Budgeting is Broken, Let's Fix it. Harvard Business Review, 94-101, November 2001. Available from http://dx.doi.org/10.2139/ssrn.321520 [Accessed 17 July 2019]

Lynch, S.G. (2011) The Problem with Traditional Budgeting. Available from: https://finance.toolbox.com/blogs/stephenglynch/building-a-better-budget-part-2-the-problem-with-traditional-budgeting-020911 [Accessed 17 July 2019]

Management Accounting Assignment


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