Apply a range of management accounting techniques

Qualification - BTEC Level 5 Higher National Diploma in Business

Unit Name - Management Accounting

Unit Number - Unit 5

Assignment Title - Management Accounting

Learning Outcome 1: Demonstrate an understanding of management accounting systems

Learning Outcome 2: Apply a range of management accounting techniques

Learning Outcome 3: Explain the use of planning tools used in management accounting

Learning Outcome 4: Compare ways in which organisations could use management accounting to respond to financial problems

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Task 1:

Scenario:

You are a Management Accountant for an enterprise in the manufacturing sector and, in an effort to promote understanding between different departments in the organisation, you have been asked by your managing director to prepare a report on the role and function of the management accounts department, covering the management accounting systems operating in the organisation as well as the range of techniques used. The report should cover the following:

Critically evaluate how management accounting systems and management accounting reporting is integrated within organisational processes. In doing this you need to (a) explain management accounting, essential requirements of management accounting systems and (b) explain different methods used for management accounting reporting.

Solution:

The presentation of financial and non-financial decision-making material to management is referred to as management accounting. Managers use accounting knowledge to help educate themselves when making decisions within their organisations in management accounting or managerial accounting, allowing them to plan better and execute control functions. Management Accounting is a modernistic approach to accounting and has a lot of innovation scope. Management Accounting thus helps in efficient planning and control, increasing labour efficiency, achieving management and business operations efficiency and better communication. Different types of management accounting systems include traditional systems like job order costing and process costing as well as modern accounting systems like activity based costing, standard costing etc. Another very common management accounting system which is widely used is transfer pricing.

In the organisational process, there are several steps which includes reviewing the business plans and objectives, departmentalisation of work activities in order to accomplish the objectives, classification of the work activities into manageable units, assigning and delegating authorities across departments designing a hierarchy of relationships. In implementation of an appropriate organisational process, management accounting systems play a key role. With consideration of factors like opportunity cost, standard cost, budgets, variance analysis, etc. Management accounting systems make the process of organisation set up easy.

Management accounting is thus a system which focuses on tracking costs which are associated with the manufacturer production of products and services in an entity. Commonly used management accounting systems like lean accounting, throughput accounting etc. Provides companies with several methods of cost tracking so that goods and services can be produced at the lowest cost possible. If an entity fails to adopt a proper management accounting system, it may lead to over pricing of goods and lower gross earnings and margins. By using management accounting systems, companies are able to track their actual production cost with their budgeted standard costs. They can also perform variance analysis to understand what went wrong and which areas have further scope of improvement and cost optimisation. Using such management accounting systems, improve the overall efficiency of the organisation and provides better yield.

The different methods which are used for management accounting reporting can be summed up as follows:

1. Cost reports: these reports provide cost information to the managers which help the managers to control the future costs involved. The per unit cost Is computed using several inputs like raw material cost, labour cost, cost of overheads, other additional costs. The cost report summarises the information from the above inputs and presents it in a manner that the managers unable to ascertain per unit cost and make decisions accordingly.

2. Budget: budgets are prepared by the budgeting team or the internal management team and helps the managers to compare the actual results of the entity put the estimated results and assess the performance over a period of time. A variance analysis helps to understand the difference between the budgets and actuals and helps to make business plans accordingly.

3. Business performance reports: these reports summarises the projections over a period of time and the actual performance of the given periods. Analysis of past performance reports and trends helps managers to prepare upcoming budgets in line with past performance and any adjustments thereof.

Apart from these the management also uses techniques like financial statement analysis, planning, historical cost analysis, budgetary controls, marginal costing, funds flow statement, revaluation accounting and other statistical and graphical techniques to perform reporting.

Thus, it is evident that the management accounting systems and reporting are closely interlinked and dependent upon each other. Management reports cannot be accurately prepared without efficient management system in place and similarly a proper management system loses its importance if timely and accurate reports are not presented to the management for decision making. It's clear that integration of these two is very critical in an organisation to achieve organisational goals.

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Task 2:

You have been appointed as the Management Accountant for Modern Ltd that produces and sells two products, Product X and Product Y.

Calculate costs using appropriate techniques of cost analysis to

(a) Prepare an income statement for March 2018 based on marginal costing Principles.

Solution:

(b) Prepare an income statement for March 2018 based on absorption costing principles.

Solution:

(c) Produce financial reports (income statements) that accurately apply and interpret data for complex business activities and provide an accurate interpretation and analysis on the performance for the month of August 2020.

Solution:

Analysis of Performance:
When using marginal costing, the fixed and variable costs are shown separately. The cost of sales includes only the variable costs and thus a contribution figure is arrived at. There is no provision for gross profit calculation in marginal costing.

Absorption costing however does not differentiate between fixed and variable cost profit calculation. This technique assumes that the fixed costs of production as well as the variable cost of production or both form part of the product cost. Here, the cost of production or Cost of goods sold includes both fixed and variable production costs. This figure is deducted from the total sales to arrive at the gross profit. From the gross profit, the selling and administration expenses, be it fixed or variable, are deducted along with the Adjustment of over absorption rate as well as under absorption rate.

In the given case, since the actual fixed production cost is less than the absorption rate of fixed overheads, it is said to be a case of over absorption. This means that the cost of production includes more cost allocation than actually incurred. This amount is therefore adjusted from the gross profit for the quantity of goods sold to arrive at Net Profit.

Task 3:

- Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success. In order to do this you need to analyse the use of different planning tools and their application for preparing and forecasting budgets and how management accounting can lead organisations to sustainable success.

- Explain the advantages and disadvantages of different types of planning tools used for budgetary control and compare how organisations are adapting management accounting systems to respond to financial problems.

Solution:

In case of management accounting, there are several tools which can be used for planning. These planning tools include forecasting, benchmarking, budgeting, breakeven analysis, linear programming, etc. Most companies also perform an environmental scanning which involves screening of competitors information and interpreting Environmental changes. They source information from various global sources and devise their planning strategies. Various mathematical tools and statistical tools are also applied in the planning mechanism. For example forecasting involves quantitative as well as qualitative forecasting. In quantitative forecasting mathematical rules are applied to a set of hard data. Qualitative forecasting, on the other hand uses expert opinions and judgements and predictions based on these opinions for planning. A best planning practice involves forming a team for planning, gathering information which involves both internal and external data, Analysing the data for identification of performance gaps and lastly preparation and implementation of the action plan. Planning also involves budgeting in the form of preparation of several budgets like revenue budget, expense budget, cash budget, profit budget. These are categorised into variable and fixed budgets. Budgets need to be flexible and appropriate. these are only tools for planning.

These planning tools help to solve financial problems by providing accurate solution to several circumstances that may arise based on historical data. While planning the past trends and historical data are well analysed and possible responses to any issues and concerns are prepared so that the organisation may be well-established in handling any unforeseen event. The different planning tools use different concept like budgeting uses forecasting data, screening uses market analysis, linear programming uses equations derived from trends, etc. to ensure that the management accounting leads organisations towards sustainable success.

Below are the advantages and disadvantages of different planning tools used in management accounting:

1.budgeting: budgets are estimation of income and expenditure over a period of time and are used to achieve financial and operational goals of the organisation. The advantages of budgets are that budget help in assessing the cash flow position and future financial position of the entity, helps in planning cash management, helps in planning of capital expenditure and also ensures goals are set as per Management objectives. The disadvantages of budgets are that budgets are expensive and the management may need to incur additional funds towards budgeting, it may not be always accurate, if prepared incorrectly it may lead to unethical decision making by the entity.

2. Breakeven analysis: breakeven analysis helps to ascertain a business position where there is no profit no loss from a particular investment. The advantages of breakeven analysis a date it has to assess the minimum quantity sales required to arrive at breakeven and is helpful for management to be able to arrange underwriters or customers to reach the target sales. A disadvantage of breakeven analysis is that it may not be always accurate and may mislead the management.

3. Strategic planning: strategic planning is often used by management to devise pricing strategies and marketing strategy. Such strategies are derived based on cost estimates provided by the production department. Advantages of strategic planning is that the overall management and sales can be properly regulated at a standard price. Fixed pricing also ensures higher customer retention. The planning for pricing must be done keeping in mind the competitors moves. Disadvantages of strategic planning for pricing a date the company cannot charge differential pricing from potential customers. Sometimes variable pricing may be more profitable for the entity. Overall, strategic planning in other areas too can involve a lot of cost for the entity which brings down its overall profitability.