Management Accounting Systems That Improve Business Operations and Accountability

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

Introduction
A report would be presented by the Trainee Management Accountant of a medium sized financial consultancy firm for having a thorough understanding of the discipline of management accounting. Accordingly the report would strive for the fundamentals of management accounting along with the sorts of reports and techniques used in its business process. Besides the theoretical perspective, the report would also attempt to run the determination process of the costs in terms of marginal costing and absorption costing and respond to the financial issues prevailing within the business scenario.

Scenario 1:
Management accounting– Management accounting is concerned with evaluation of the different kinds of expenditures generating in the business operations of the organisation. In this regard the business operations related to preparation of the financial statements, internal reports and other sorts of accounting techniques are to be used (Chenhall & Moers, 2015). The kind of financial proposition tends to be very efficient in contemplating business decisions in a rightful way. So management accounting is found to have the implications of financial and statistical analysis to have an efficient running of the business.

Benefits of management accounting –

• MIS development – Management accounting strives to bring out the MIS report for the business extracting information from different departments to have an integrated business report (Brewer, 2017).
• Stewardship accounting – Through this guideline the financial accounting elements along with that of the cost accounting techniques are to be adopted for making rightful business decisions.
• Controlling – Management accounting would be quite effective in the business process to exert a suitable control mechanism in terms of cash flow analysis, fund flow analysis, standard costing, budgeting and variance analysis and working capital management amongst others.
• Planning – Management accounting is helpful in budgeting and forecasting to come up with futuristic business plans and design the corporate strategies accordingly.
• Management participation – The management accountants occupies the Board position of the company to help in making business decisions (Malmi, 2016). They strive to erect a bridge between the management and executive to fulfil the business goal and deliverance of the resources for its fulfilment.
• Decision making – The aspect of management accounting enable the business managers to take important decisions like purchasing or leasing an asset, presentation of the appropriate product or service mix, capital budgeting and evaluation of projects for rightful utilisation of the resources.
• Capital structure – It is the utmost responsibility of the management accountants to maintain a rightful balance between the equity and debt capital of the business for having the ideal business leverage and trading on equity (Granlund & Lukka, 2017).

Different types of management accounting systems –

• Financial statement analysis – It scrutinises and considers the financial data and information of the business to have an insight of its performance and trends (Drury, 2015).
• Financial accounting – It deals with the past financial figures for contemplating the financial planning system and forecasting to extract the rightful business decisions.
• Cost accounting – It takes account of the sorts of mechanism to have an idea of the price of the goods and services to be represented by financial figures in terms of standard costing, marginal costing, budgetary control and inventory accounting amongst others.
• Data interpretation – It is being done to interpret the data off the financial statement and run a thorough analysis on it (Edwards, et al., 2015).
• Quantitative techniques – It is concerned with the economic and financial data to take consideration of the managerial decisions by means of sophisticated mechanisms like game theory, regression analysis, time series and sampling.
• Financial management – It deals with planning and controlling aspects of the financial issues optimally to enhance the business worth (Otley, 2016).

Different methods of management accounting reporting –

• Absorption costing – It takes into consideration both the fixed and variable costs to have the required product and services being offered to the customers (Russell, 2017). It deals with the aspects of under-absorption and over-absorption to exert a rightful control of the business expenditures.
• Activity based costing – The ABC reporting system allocate the overheads to take proper control of the business resources. It is being done to reduce the overhead burden of the organisation to identify the expenses and activity drivers and create a cost pool, both primary and secondary in nature to present the reports rightfully (Quattrone, 2016).
• Cost volume profit analysis – CVP analysis consider the changes with regards to the costs and volume in favour of the business to attain the desired profitability. The methodology has the prowess to affect the operating income and net income of the business with respect to the selling price of the product and services offered (Warren & Jones, 2018). In this case the fixed costs remain constant and the break-even point strives to find out a favourable business position.
• Marginal costing – It is a costing technique in which the marginal or the variable costs would be levied to the cost units doing away with the element of fixed costs completely (Hopper & Bui, 2016). As the term suggests marginal cost tends to accrue an additional cost for manufacturing an additional unit of output.

Integration of management accounting system and management accounting reporting –
Management accounting occupies a unique position in the organisational process especially for the manufacturing units as it happens to integrate the business operations and record the financial transactions and analysis (Brewer, 2017). The discipline is responsible to have different kinds of strategies and reporting techniques to manage various business intricacies on the likes of arranging and managing inventories, handling production system, selling and marketing process to strike for a suitable business profitability. Therefore it is the prime responsibility of management accounting to bring into foray the various function of the manufacturing process and get apposite evidence owing to it (Seal, 2014). In this regard the aspect of automation is quite distinguishable in striking for an integrated system to control the business expenses and manage the finances for an effective business decision.

On this note management accounting would be very much effective in the business process to have a suitable planning and controlling along with a stupendous business decision making on the likes of cost reports, budgetary and performance reports. The kinds of cost reports would be very much appropriate for the manufacturers to understand the expenditures and make attempt to reduce those for having a cost efficient proposition (Pfister & Hartmann, 2011). In the same stride the budgetary reports for the organisation enable the manufacturers to have feasible projection of the anticipated revenue and expenses in the upcoming years. Lastly the performance report another pillar of the integration process running a comparative analysis to have the company costs and revenues in collaboration with the budgeted data (Edwards, et al., 2015).

Budgetary control – In the business process, the management accountant takes due consideration of the aspect of budgetary control as it is a financial mechanism to have the considerations of the expected income and expenses in the forthcoming years (Drury, 2015). Accordingly the various forms of budgeting would be critically discussed to have a better understanding of the same –

Flexible budget – It happens to modify itself with the changes in volume and business activities and also goes by the name of variable budget (Kaplan & Atkinson, 2015). So flexible budgeting could be deliberated as a financial plan of the expected revenue and expenses based on the contemporary level of business output to be determined monetarily.

The advantages of flexible budget lies in having a competitive advantage due to its adaptability as per the requisite business scenario (Malmi, 2016). So this kind of budgeting modifies itself as per the contemporary business situation and able to take on challenges rightfully.

The disadvantage of flexible budgeting lies in its due assumption of the continuity aspect while the expenses occur indiscreetly (Otley, 2016). So the determining aspect of the fixed and variable costs are indiscriminate in nature having little relevance in the current business scenario lacking the requisite flexibility.

Fixed budgets – It takes into consideration the expected worth of the inputs and outputs as the business starts off in estimation of the difference in figures from that of the actual trails (Seal, 2014).

The advantage of fixed budget is that it is considered as a user friendly technique and useful for the purpose of taxation.

The disadvantage of fixed budget is suitable for small businesses and the medium sized and big business houses has little relevance of it (Russell, 2017).

Incremental budgets – It attempts to bring in moderate changes keeping in mind the contemporary budgeting strive for having a budget in the business scenario (Kaplan & Atkinson, 2015). So it takes the initiative to get added with the passage of year for having the modified one.

The advantage of incremental budgeting lies in its flexibility to determine and put into application for the business purpose to have continuity of the business capital and in the process contemplate the changes swiftly (Brewer, 2017).

The disadvantage of incremental budgeting lies in unplanned expenses on part of the business managers in absence of an innovative stride to control the sorts of business expenses (Malmi, 2016). This apparently strives for a budgetary drooping leading to a lower revenue and higher expenses.

Zero based budgeting – ZBB starts off with the base of zero taking no such relevance of the past and the same needs to be prepared completely based on the current business situation. It is comparatively a new concept taking the assistance of the zero base to project the business income and expenses (Drury, 2015).

The advantage of ZBB happens to accrue in an organised manner in due process of business in respect to a continuous assessment phenomenon to have an effective cost management scenario for having the rightful budgeting system (Pfister & Hartmann, 2011).

The disadvantage of ZBB is that it is a complex process and so needs a proficient technical expertise to handle the matter, expensive and time consuming at the same time.

Variance analysis – It is a quantitative study meant as a difference amongst the actual and budgeted figures depicting an overall effect on the over-performance or under-performance of the business for a stipulated time (Pfister & Hartmann, 2011).

The advantage of variance analysis is to assist in having a suitable budget keeping in mind the actual business expenses considering the overall business goal and helpful to have the departmental costs for the manufacturer (Granlund & Lukka, 2017).

The disadvantage of variance analysis is that it is time taking activity to have an understanding of the effect of variances with the time lag in play to implement the controlled business measures (Seal, 2014). In this case sensitivity analysis happens to showcase a more effective outcome displaying variation of the actual outcome with that of the planned activities.

Usage of preparing and forecasting budgets

• Budgeting directs a definite financial means to attain business efficiency in consideration of the kinds of variances either positive or negative in nature.
• It happens to throw a light on having an understanding of the company estimates for having the expenses for the forthcoming years (Edwards, et al., 2015).
• It is coupled with an appropriate planning system to facilitate the business for contemplating the definite business activities.
• Budgeting apparently has the potentiality to exert control over the business expenses indicating the worth to be implemented for controlling exploitation of the assets (Chenhall & Moers, 2015).

Planning tools solving business problems ensuring sustainability –
The discipline of management accounting happens to point out the financial matters with the relevance of the management accounting means like budgetary control and the variance analysis. This is being undertaken to present suitable business information and collects feedback to have a level playing field for the business in the competitive market to have a suitable financial insight for a futuristic direction (Warren & Jones, 2018). So the aspect of management accounting is quite significant in prioritising the business objectives to have the requisite resources and the most intriguing fact is that the outcome could be easily quantitatively determined. It is seen that both the financial and non-financial aspects are being taken care of to have the issue of business sustainability (Edwards, et al., 2015).

In this regard the aspect of balanced scorecard strategy would be quite useful in taking care of the financial proposition of business along with customer services, human resources and business operations. Management accounting strives for specifications to address the financial matters in terms of budgetary control, financial governance and the aspect of key performance indicators to design the business strategies with respect to the business objectives (Hopper & Bui, 2016). So management accounting happens to take consideration of the risk management tactics, budgetary control and capital budgeting to contemplate the business decisions.

Scenario 2:
Absorption Costing

Workings:

Workings:

Marginal Costing

Workings:

Workings:

Reconciliation of profit –
It is seen that there has been a difference between the actual and budgeted profit gained by working out the absorption costing and marginal costing system. The main difference between the two system lies in the treatment of fixed costs as marginal costing tend to ignore the fixed costs completely while absorption costing gives due relevance to the sorts of fixed costs (Chenhall & Moers, 2015). Again in absorption costing the aspect of under-absorption has been applied which brings a change in the output. Further it is seen that the budgeted profit derived through both the system has been able to have a suitable result but when the actual units are being concerned to have the actual profit, Galway Plc. suffers loss. It seems that the actual profit need to be given due relevance as it tends to bring into scenario the actual result while the budgeted figures could be used to run a comparison between the two for understanding seriousness of the scenario.

Material Variances –

Material price variance (MPV) = (Standard price – Actual price) x Actual quantity
Actual price = £20,900/2,200 = £9.50
MPV = (£10 – £9.5) x 2,200 = £0.50 x 2,200 = £1,100 Favourable

Material price variance (MPV) shows the difference between the standardised price and the actual price for the actual quantity of materials used for the purpose of manufacturing in Galway Plc. (Granlund & Lukka, 2017). In this case a favourable MPV of £1,100 has been derived owing to a lower actual price than the standardised price indicating cost efficiency of the company.

Material usage variance (MUV) = (Standard quantity – Actual quantity) x Standard price
Standard quantity = 1000 x 2 = 2,000 kg
MUV = (2,000 – 2,200) x £10 = (200) x £10 = £2,000 Adverse

LIFO method –

Last-in, first-out (LIFO) method is a unique inventory system showing that the inventories which are bought currently would be amongst the first to be dispatched to the final customers (Quattrone, 2016). In this way Galway Plc. would be able to deliver fresh inventories to the customers negating the issue of old and obsolete supplies strengthening the business relationship.

Average Cost Method –

Average cost method of inventory determines the closing balance of inventory based on its weighted average cost per unit of inventory and is a simplistic mean to derive the inventory value (Brewer, 2017).

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References
Brewer, P. C., 2017. Redefining Management Accounting. London: IFAC.

Chenhall, R. & Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, organizations and society, 47(2), pp. 1-13.

Drury, C., 2015. Management and Cost Accounting. 9th ed. London: Cenage Learning.

Edwards, A., Schwab, C. & Shevlin, T., 2015. Financial constraints and cash tax savings. The Accounting Review, 91(3), pp. 859-881.

Granlund, M. & Lukka, K., 2017. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting, 45(2), pp. 63-80.

Hopper, T. & Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research, 31(5), pp. 10-30.

Kaplan, R. & Atkinson, A., 2015. Advanced management accounting. London: PHI Learning.

Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31(5), pp. 31-44.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31(2), pp. 45-62.

Quattrone, P., 2016. Management accounting goes digital: Will the move make it wiser?. Management Accounting Research, 31(12), pp. 118-122.

Russell, M., 2017. Management incentives to recognise intangible assets. Accounting & Finance, 57(4), pp. 211-234.