Planning tools used in management accounting Assignment Help

Avail Higher National Diploma in Business (Level 5) - Unit 5 Management Accounting Assignment Help

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College of Banking and Financial Studies

Higher National Diploma in Business (Level 5)

Unit Number and Title Unit 5 Management Accounting 

Assignment Title Planning tools used in management accounting

Learning Outcomes:

LO3 Explain the use of planning tools used in management accounting  
LO4: Compare ways in which organisations could use management accounting to respond to financial problems
Learning Outcomes and Assessment CriteriaPass
Merit DistinctionLO3 Explain the use of planning tools used in management accounting

D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success. P4 Explain the advantages and disadvantages of different types of planning tools used for budgetary control. M3 Analyse the use of different planning tools and their application for preparing and forecasting budgets.  LO4: Compare ways in which organisations could use management accounting to respond to financial problems P5 Compare how organisations are adapting management accounting systems to respond to financial problems. M4 Analyse how, in responding to financial problems, management accounting can lead organisations to sustainable success.

Assignment Brief:

Task Summary

Case Scenario

ABC Company makes and sells a range of laptops. The directors are concerned that ABC Company has recently faced increasing competition. Consequently, there have been issues concerning decline in revenue, increase in closing stock, increase in receivables movement, concerns related to some relevant ratios and adverse variances.

The directors of ABC Company are reviewing the annual report and other management reports and they want company's management accounting team to prepare relevant budgets for six months ended December 2019, calculate relevant financial ratios considering benchmarks, key performance indicators and budgetary targets, identify variances for last two years , apply relevant strategic planning tools , financial governance to monitor strategy, management accounting skill sets and effective strategies and systems and compare the ways in which Company can respond to financial problems effectively and efficiently.

ABC Company's financial statements and budgeted information are given below: - 

A.    Statements of financial position as at 31st December 

                                                                                          Amt in '000'

                                                                                       OMR

 

2018

RO'000'

2017

RO'000'

Non­current assets 

63,600

35,400

Current assets 

 

 

Inventory 

10,000

7,400

Receivable

7,200

4,800

Cash  

3,200

2,400

Total Assets

84,000

50,000

Equity and Liabilities 

 

 

Ordinary share capital (RO1 per share) 

28,800

19,200

 

 

 

Share premium 

14,400

0

Reserves 

7,200

4,800

  Non­current liabilities 

 

 

10% Loan notes 

20,000

14,400

Current liabilities 

 

 

Accruals 

9,200

7,800

Trade payables 

3,400

3,800

Total Equity and liabilities

84,000

60,000

B. Statements of profit or loss for the year ended 31st December

                                                                             Amt in '000'

                                                                                                                         OMR

 

2018

RO'000'

2017

RO'000'

Sales

48,000

24,000

 Cost of sales

(31,200)

(15,000)

Gross profit 

16,800

9,000

Distribution costs 

(6,240)

(2,160)

Administration expenses 

(600)

(360)

Operating profit 

9,960

6,480

Interest 

(2,400)

(1,440)

Profit before taxation 

5,760

5,040

Taxation 

(1,200)

(1,000)

Profit after taxation 

4,560

5,040

 

Other relevant information:

C. Benchmarks - Average data for companies similar to ABC Company

Ratios for financial year ended December   2018

Benchmark

Gross profit ratio

37%

Operating profit margin

24%

Return on Capital Employed (ROCE)

15.5%

Current ratio

2.2:1

Quick ratio

1.5:1

Inventory days

50 days

Receivables days

45 days

Payable days

65 days

Gearing ratio

29%

 

D.     ABC Company- Budgeted information for the financial year 2018 & 2017 , no change in actual units & budgeted units produced and sold:                     

                                                                                       Amt in '000'

                                                                                       OMR                                                       

 

2018

Budget      '000'in OMR

2017

Budget              '000'in OMR

Sales revenue

50,000

25,000

Cost of sales

31,000

16000

Distribution costs 

6,400

2,200

Administration expenses 

550

300

Interest 

1,400

800

 A. ABC company has provided you with the following budgeted information related to cash budget , budgeted income statement and budgeted statement of financial position for the last six months ended 31st Dec 2019 :

 

Amt in OMR

1.Quarterly Utilities (payment due in Sep & Dec)

18,000

2.Cash outlay on equipment (payable in Sep)

200,000 

3.Monthly planned purchases of stock for re-sale are (one-month credit period):

July

32,000

August

36,000

September

44,000

October to December (per month)

10,000

4.Monthly planned sales on one -month credit period:

 

July

20,000

August

65,000

September

30,000

October

65,000

November

30,000

December

30,000

 

 

5. The monthly cash outlay on other administrative expenses are expected to be OMR 15,000 per month.

6. Depreciation on non -current assets for the second half year is expected to be OMR 12,000.

7. Opening balance of cash at bank and cash equivalents expected to be OMR 200,000.

8. The budgeted closing stock at the end of Dec 2019 is estimated at OMR10, 000.

9. Opening balance of equity at 1st July 2019 is expected to be OMR 200,000

As a member of Management accounting team of ABC Company, you are required to evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organization to sustainable success.

                      (For details refer to Grades given in page 2 of the assignment)

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Solution to Higher National Diploma in Business (Level 5) - Unit 5 Management Accounting - Planning tools used in management accounting

Table of contents

1. Introduction 3

2. Preparation of the Cash Budget of ABC Company 3

3. Estimated financial statement of ABC Company 3

4. Financial Ratio of the business for the last six month in 2019 5

5. Explanation of the advantages and disadvantages of different types of planning tools used for budgetary control 5

6. Analysis of the use of different planning tools and their application for preparing and forecasting budgets 6

7. Comparison of how organisations are adapting management accounting systems to respond to financial problems 6

8. Analysis of how, in responding to financial problems, management accounting can lead organisations to sustainable success 7

9. Evaluation of how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success 7

10. Conclusion 8

Reference list 9

Introduction

In this report, the role of the planning tools in the different aspects of management accounting department will be discussed in this section. Some of the aspects which will be discussed in this report are the advantages and disadvantages of the different planning tools, roles of the planning tools in the preparation of budgets and many more aspects like these.

Preparation of the Cash Budget of ABC Company

Cash Budget  of ABC company  for the last six months ended 31st Dec 2019

Particulars

July

August

September

October

November

December
 

Amount(OMR)

Amount(OMR)

Amount(OMR)

Amount(OMR)

Amount(OMR)

Amount(OMR)

Cash inflow

 

 

 

 

 

 

Estimated sales

 

20000

65000

30000

65000

30000

Total cash inflow

0

20000

65000

30000

65000

30000

Cash outflow

 

 

 

 

 

 

Quarterly Utilities

 

 

18000

 

 

18000

Cash outlay on equipment

 

 

       2,00,000

 

 

 

Monthly planned purchases of stock for resale

 

32000

36000

44000

10000

10000

Administrative expenses

15000

15000

15000

15000

15000

15000

Total cash outflow

15000

47000

269000

59000

25000

43000

Net change in cash flow

-15000

-27000

-204000

-29000

40000

-13000

Opening balance

200000

185000

158000

-46000

-75000

-35000

Closing balance

185000

158000

-46000

-75000

-35000

-48000

Table 1: Estimated Cash Budget

(Source: Calculated by the learner)

Estimated financial statement of ABC Company

 

Estimated Profit and loss Statement for the six months ending 31st December 2019

Particulars

Amount (OMR)

Sales

2,40,000

 Cost of sales

1,42,000

Gross profit 

98,000

Administration expenses 

90,000

Quarterly Utilities

36000

Operating profit 

-28,000

Depreciation

12,000

Profit before interest and taxation 

-40,000

Interest

-172

Taxation 

-8,800

Profit after taxation 

-32,928

Table 2: Estimated Profit and loss statement

(Source: Calculated by the learner)

 

Estimated Balance Sheet for the six months ending 31st December 2019

Particulars

Amount (OMR)

Non­current assets 

1,88,000

Current assets 

 

Inventory 

10,000

Receivable

30,000

Cash  

-35,000

Total Assets

1,93,000

Equity and Liabilities 

 

Equity

2,00,000

Retained loss

-32,928

Total equity

1,67,072

  Non-current liabilities 

 

10% Loan notes 

15,928

Total noncurrent liabilities

15,928

Current liabilities 

 

Trade payables 

10,000

Total Equity

25,928

Total Equity and liabilities

1,93,000

Table 3: Estimated Balance Sheet

(Source: Calculated by the learner

Financial Ratio of the business for the last six month in 2019 

Ratios

For six month

Gross profit ratio

41%

Operating profit margin

-12%

Return on Capital Employed (ROCE)

124.35%

Current ratio

0.5

Quick ratio

-4

Inventory days

15.21

Receivables days

45.63

Payable days

25.70

Gearing ratio

16%

Table 4: Estimated Financial Ratios for last six month in 2019 

(Source: Calculated by the learner)

Explanation of the advantages and disadvantages of different types of planning tools used for budgetary control

There are different advantages, and disadvantages of different types of planning tools used for budgetary control and they will be discussed here. The first planning tools used for budgetary control is the cash budget, and its advantages are given below.

  • It helps the business efficiently manages its cash resources.
  • It helps the business prepare for any cash deficiency that the business may have to face in the future operation of the business.
  • It helps the business understand the financial position of the business in its future operation (Gaille, 2019).

The disadvantages of cash budget are listed below.

  • The biggest weakness of the cash budget is its dependency on the accuracy of the estimates that have been used in the cash budget.
  • The second weakness is the lack of flexibility in this budget (Adams McIntosh, 2019).

Another planning tool that is used for budgetary control is variance analysis, and the advantages of these planning tools have been listed below.

  • It helps in monitoring the different cost of the business.
  • It helps the business find out the reasons for negative variance in the certain cost of the business and help the business take appropriate action for it.
  • It helps the business measure the performance of the different departments of the business (Accountlearning.com, 2019).

The disadvantages of variance analysis are listed below.

  • It is difficult to implement setting the standardised cost for a customised production which produces according to different customer needs like service organisations.
  • It makes goals and objectives of the business and conducts its operation in a way in which the interest of the business in the short term period is more emphasised than the long term (Accounting-simplified.com, 2019).

 Analysis of the use of different planning tools and their application for preparing and forecasting budgets 

The different planning tools are used in different ways in preparation and forecasting of the budgets of the business and two of these significant tools will be discussed here.

  • Cash flow modelling - In these planning tools, the cash flow of the business in its future business operation are calculated in different situation of the business. The significant planning of the business depends on it's as it helps the business plan in its budget how it wants to use the cash resources of the business. In the case of cash deficiency, it helps the business procure the required fund most cost-effectively (Kaspina et al., 2015).
  • Contingency planning - It is another planning tool which is used to make the budget more effective by creating contingent strategies and planning of the business to combat any unpredicted negative financial situation of the business.

 Comparison of how organisations are adapting management accounting systems to respond to financial problems

The different organisations have different strategic goals and objectives, and this difference in the strategic goals and objectives of the business changes how it responds to the financial problem of the business. Also, the financial and other capabilities of the business differ, which again change the ways by which the business uses management accounting to respond to the financial problems of the business. For example, one organisation which has a strategic goal to expand the market of the business quickly will use the management accounting to find the most profitable investment project in a new market which will give the highest return to the business through the cost management system. On the other hand, another business which wants to expand its market share more in the existing market will do a gap analysis and evaluate all available options which can remove the gap from the business through the cost accounting system

Similarly, the organisation with high cash flow will use the management accounting process in which it will invest its excess cash flow in the most profitable project, and the organisation with low cash flow will find out the most cost-effective suitable source of fund for the business to remove the cash deficiency through management accounting technique like cash management system.

Again, the targeted customer segments of the business are different, and the price optimisation system is used by the organisation to find what will be the best pricing strategy of the business (Choi et al., 2016). All these are the different ways by which the organisations are responding to the financial problem using the different management accounting systems.

Analysis of how, in responding to financial problems, management accounting can lead organisations to sustainable success

There are different ways by which the management accounting can lead the organisation to sustainable success, and these different ways have been listed below.

  • The different management accounting tools and techniques like breakeven analysis or standard costing are used in a way which makes the planning and decision-making process most effective and efficient as it takes into account different constraints and requirements of the business before making formulating a plan for its future period.
  • It also helps the business formulate sustainable goals and objectives for the business future operation.
  • It helps the business develop effective financial governance of the business.
  • It helps the business takes into account different market information before deciding for the business, which makes the decision more sustainable for the business.
  • It also helps the business identify the different issues, which is making the sustainability of the business low. Therefore, by the help of management accounting, those issues are identified and removed from the business operation.

All these are the way by which management accounting leads the organisation to sustainable success.

Evaluation of how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success

Planning tools benefit the organisation in solving financial problems of the business in different functions of the business and making these functions of the business more sustainable. Some of these ways have been discussed here.

  • Planning - The planning tools help the business in different aspects of the planning of the business and align the future operation of the business with the strategic goals and objectives of the business through planning tools like the budget. This makes the business more sustainable.
  • Controlling and monitoring - The controlling and monitoring of the business become more efficient as the business able to control and monitor the different cost of the business through planning tools like variance analysis.
  • Competitive advantages - The business also sometimes gain competitive advantage by efficient management of the different resources of the business through the help of different planning tools of the business like cash flow modelling.

Conclusion

In this report, the different role of planning tools in the management accounting department function had been discussed and analysed. Also, the cash budgeting and other financial statements of ABC Company had been prepared for six months.