Management Accounting System Assignment Help, Diploma in Business

Qualification - Higher National Diploma in Business

Unit Name - Management Accounting

Unit Level - Level 5

Unit Number - Unit 5

Assignment Title - Management Accounting

Learning Outcome 1: Demonstrating and understanding of management accounting system
Learning Outcome 2: Appling a range of management accounting techniques
Learning Outcome 3: Explaining the use of planning tools used in management accounting
Learning Outcome 4: Comparing ways in which organisations could use management accounting to respond to financial problems

Scenario
ABC Co. Ltd. specialises in manufacturing electronic products. The range comprises of 2 products, Personal Computers (‘PC') and Video Players (‘VP').

Executive Summary:
The report deals with adoption of Management Accounting techniques in an Organisation in order to effectively manage costs and implement cost controls. The given company, ABC Co. Ltd. is a manufacturer of electronic products comprising of two distinct products independent of each other. The cost analysis of these two products using Absorption Costing and Marginal Costing has been presented in the first part. The remaining parts deals with Budgets and Budgetary Controls. The company plans to begin a new line of product "IP'. The budgets have been prepared for three months for the new product. Also, Variance analysis have been performed to compute and understand the difference between actual costs and budgeted costs.

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You need to advise the manager the following issues:

Explain the meaning of management accounting, various management accounting tools and role of management accountants

Part 1: Analysis:

Discussion of Existing products:

For the purpose of Decision making, costs are usually bifurcated into Relevant and Irrelevant Costs. Only relevant costs are considered for Decision making. For example, sunk costs, i.e. costs already incurred are ignored in decision making. Also, certain fixed costs which are specific to the organisation and not to the product are also ignored for Decision making. When deciding between alternate products, the contribution or the contribution per unit of restrained product is considered to ascertain the most profitable product. All these can be understood by the computations provided in the below segments for ABC Co. Ltd.

Calculate the unit costs of PC and VP based on absorption costing and marginal costing methods

Computation of Unit Costs of PC and VP:

Consideration of Special order:

For new order of 10,000 units of PC @ $ 1,050; recommended costing method is Marginal Costing. This is because Marginal Costing relies on the concept of Contribution per additional unit of a Product. It ignores the Fixed Costs as these are irrelevant for the purpose of Decision Making.

If there is no constraint of any resource, the special order can be accepted as it yields a contribution of $50 per unit or $500,000 for 10,000 units. This leads to an overall increase in profitability of the Business as the Fixed costs are irrelevant in decision making. These would be incurred irrespective of whether the special order is accepted or not. However, Management needs to consider impact of any restraint of resource while accepting or rejecting the special order. Several non-financial factors like Government regulations, Trade Unions, Plant Capacity etc. needs to be considered for the accept/reject decision.

Analysis of Product IP:

Computation of Break-even:

Breakeven of IP: (Assuming only IP is produced)

Prepare a proposal to advise the manager who has no management accounting knowledge and background.

The proposal is very good for the Company as it results in increased profitability for the Company.

In fact, with increased volumes, the fixed cost per unit comes down. Therefore, the profitability increases. The company can also reduce its selling price to boost sales as it would not reduce its overall profitability.

Part A:
Analyse and evaluating ABC's financial performances by using the various management accounting technique, and make the possible recommendations in dealing with the financial problems and the price strategies in revising its price.

Solution:
ABC has a strong financial performance which has been assessed by computing its profitability per product. The computation of Marginal and Absorption Costs have been shown in the segments above. In order to deal with financial problems of costs and revenues, the company needs to adopt various pricing strategies so that it covers the costs and provides the anticipated profits. In case of resource restraint, the most profitable product should be produced first over the less profitable one. In case there is no resource restraint, the contribution analysis should be used for deciding whether to accept or reject the expansion. For additional or special orders, sales price can be reduced considering that the contribution provided by the product is positive. This is why Marginal Costing approach is used in decision making.

Part B: Budgeting Process:
• the major functions of budgeting process
• the advantages and disadvantages in operating a budgetary control system;

Solution: Budgeting process:
Budgeting is an effective method that allows managers to successfully execute its tasks, such as organising, scheduling and managing activities.

Time and capital are limited assets for organisations; the productive and successful utilisation of these assets involves planning. Forecasting alone, though, is not enough. Regulation is therefore important to ensure that the proposals are fully executed. Budgeting is a method used by planners to prepare and monitor the usage of finite resources. The budget is a method used by management to prepare and monitor the usage of limited resources. Budgeting is a strategy that demonstrates the goals of the organisation and how organization strategies to procure and use capital to accomplish those targets.

The functions of budgeting process include the following:
1. Planning: Planning relies on the prediction which has been made previously to make assumptions regarding the future. Projected data produced by forecasts are used for planning purposes.
2. Evaluation: The budget reflects the desired results, which can subsequently be measured to the real results. And this can contribute to disciplinary steps being implemented.
3. Communication: Budgeting helps to gather and organize information in a systematic manner and disseminate this information to different management levels/divisions so that they actually receive the budget that has to be followed and work in efficient manner.
4. Motivation: Budgets are prepared in an easier manner so that it is understandable by the staff who can accept the budgets and participate in implementing the budgets. Participatory budgets are prepared where inputs and approval of lower level members are also taken into account for finalizing budget which motivates them to follow it in a more effective manner.

The budgetary control structure aims to establish the priorities for the company overall, and deliberate attempts are taken to accomplish them. The advantages of budgetary control includes the following but is not limited to:
A. Maximizing revenues: The goal of budgeting strategy is to increase the company's revenues. In order to accomplish this goal, careful preparation and execution of the various operations are done. The services shall be used to the maximum beneficial purpose.
B. Creates co-ordination: The work of the numerous divisions is well organised. The budgets of the specific divisions have an impact on each other.
C. Unique goals: Plans, strategies and objectives shall be determined by the upper executives. All activities are taken collectively to accomplish the overall purpose of the organisation. Every division has a goal set which is to be achieved.
While there are many advantages of budgetary regulation, this method has some weaknesses.
A. Unsure Future: Budgeting will be planned for the future era. Given the best forecasts developed for the futures, the projections might not really be accurate. The future is still unpredictable and the scenario that is supposed to occur in the future will vary.
B. Disagreement within various divisions: Budgeting can contribute to conflict between the operational divisions. Any manager of the division is worried with the priorities of his team without caring about the company purpose. Each division is attempting to get the full quota of funding, and this causes a dispute with various divisions.
C. Budget review needed:The estimates are planned under the basis that such circumstances will occur. Owing to potential uncertainty, the expected circumstances do not persist triggering a review of the budget goals. Regular adjustment of the goals would decrease the efficiency of the budget and the changes will also entail large spending.

Part C: Budgetary Planning:

• whether fixed or flexible budgets should be prepared for the coming January to March
• based on information provided in question, prepare the monthly budgets as follows:
o sales budget
o cash collection budget from sales (assuming 40% of current month sales being paid within the same month with the remaining 60% payable in the following month)
o production budget (assuming monthly production units equals to monthly sales units)
o raw material purchase budget (assuming the company purchases the exact quantity of raw material in each month to meet the monthly production requirement)
o cash payment budget for raw material purchases (assuming payment being made in the month following the month of purchase)
• prepare the monthly cash budget (assuming that the only other item is cash payment of $300,000 in January for the purchase of production equipment and that the projected cash and bank balance as at 1 January is $20,000)

Solution: Budgetary Planning:

In case of Budget preparation, Flexible Budgets should be prepared for the coming January to March period. Fixed Budget does not change with the actual volume of Output while a Flexible budget considers the impact of change in actual volume of Output. A flexible Budget can be revised to consider the actual output achieved. Flexible Budgets usually can change based on change in conditions. Here, costs are not classified according to their variability.

Since Flexible budgets are more closely aligned to actual results, these are of more use for managerial review and decision making as compared to fixed budgets.

Preparation of Budgets for Product IP:

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Part D: Budgetary Control:

• if the actual purchase and usage of raw material amounted to $435,600 in January, calculate the raw material variance
• it is found that the actual purchase price of raw material is $66 per unit and the actual purchase and usage quantity is 6,600 units to produce 3,000 units of IP in January. Compute the raw material price and usage variances to analyse the raw material variance in question
• prepare a cost reconciliation statement reconciling budgeted and actual raw material costs for the month of January
• it is discovered that raw material was purchased in January from a new supplier not on the company's approved vendor list. Report your findings to the manager in accordance with the responsibilities of the relevant departments and recommend possible corrective actions for the identified variance.

Solution:

Budgetary Control:

It can be seen that Raw Materials were procured at a cheaper price than Budgeted. This indicates that the pricing of the new vendor is more favourable for the company. Since Raw Material is procured cheaply, it reduces the overall cost of production. However, the overall Raw Material variance is unfavourable. This is because of an adverse Raw material usage variance. This could be due to variety of reasons like inefficiency of the production department or material handling department or poor quality of raw materials leading to higher defective materials. The purchase department needs to exercise checks on the requisition and implement physical verification during inward of inventory. Also, the production department needs to ascertain why the usage is higher than expected.

Part E: Compare ways in using management accounting tools

In addition to the budgeting and variance analysis methods stated above, discuss other possible ways in using management tools to respond to financial problems.

Solution:

Comparison of Management accounting tools:
In order to respond to Financial Problems, other tools that can be used by the Management includes Cash Flow analysis, Economic Order Quantity concepts, Standard Costing, Direct or Incremental Costing etc. There are other mathematical tools like Linear Programming, Network Analysis and Simulation which helps is effective analysis of costs.