Planning tools used in management accounting
Contents Page
1. Introduction
2. Preparation of the Cash Budget of ABC Company
3. Estimated financial statement of ABC Company
4. Financial Ratio of the business for the last six month in 2019
5. Explanation of the advantages and disadvantages of different types of planning tools used for budgetary control
6. Analysis of the use of different planning tools and their application for preparing and forecasting budgets
7. Comparison of how organisations are adapting management accounting systems to respond to financial problems
8. Analysis of how, in responding to financial problems, management accounting can lead organisations to sustainable success
9. Evaluation of how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success
10. Conclusion
Reference list
1. 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.
2. Preparation of the Cash Budget of ABC Company
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Cash Budget of ABC company for the last six months ended 31st Dec 2019
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Particulars
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July
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August
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September
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October
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November
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December
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Amount(OMR)
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Amount(OMR)
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Amount(OMR)
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Amount(OMR)
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Amount(OMR)
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Amount(OMR)
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Cash inflow
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Estimated sales
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20000
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65000
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30000
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65000
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30000
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Total cash inflow
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0
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20000
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65000
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30000
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65000
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30000
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Cash outflow
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Quarterly Utilities
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18000
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18000
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Cash outlay on equipment
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2,00,000
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Monthly planned purchases of stock for resale
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32000
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36000
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44000
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10000
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10000
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Administrative expenses
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15000
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15000
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15000
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15000
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15000
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15000
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Total cash outflow
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15000
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47000
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269000
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59000
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25000
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43000
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Net change in cash flow
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-15000
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-27000
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-204000
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-29000
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40000
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-13000
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Opening balance
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200000
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185000
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158000
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-46000
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-75000
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-35000
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Closing balance
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185000
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158000
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-46000
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-75000
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-35000
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-48000
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3. Estimated financial statement of ABC Company
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Estimated Profit and loss Statement for the six months ending 31st December 2019
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Particulars
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Amount (OMR)
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Sales
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2,40,000
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Cost of sales
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1,42,000
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Gross profit
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98,000
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Administration expenses
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90,000
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Quarterly Utilities
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36000
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Operating profit
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-28,000
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Depreciation
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12,000
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Profit before interest and taxation
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-40,000
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Interest
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-172
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Taxation
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-8,800
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Profit after taxation
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-32,928
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Estimated Balance Sheet for the six months ending 31st December 2019
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Particulars
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Amount (OMR)
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Noncurrent assets
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1,88,000
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Current assets
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Inventory
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10,000
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Receivable
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30,000
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Cash
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-35,000
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Total Assets
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1,93,000
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Equity and Liabilities
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Equity
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2,00,000
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Retained loss
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-32,928
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Total equity
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1,67,072
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Non-current liabilities
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10% Loan notes
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15,928
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Total noncurrent liabilities
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15,928
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Current liabilities
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Trade payables
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10,000
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Total Equity
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25,928
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Total Equity and liabilities
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1,93,000
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4. Financial Ratio of the business for the last six month in 2019
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Ratios
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For six month
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Gross profit ratio
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41%
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Operating profit margin
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-12%
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Return on Capital Employed (ROCE)
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124.35%
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Current ratio
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0.5
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Quick ratio
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-4
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Inventory days
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15.21
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Receivables days
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45.63
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Payable days
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25.70
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Gearing ratio
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16%
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5. 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).
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.