Nelson College London

Unit Number and Name: Unit 5 Management Accounting

Unit Code: H/508/0489

Level: Level 4

Unit Learning Outcomes:
LO1 Demonstrate an understanding of management accounting systems.
LO2 Apply a range of management accounting techniques.
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.

LO1 Demonstrate an understanding of management accounting systems.
Scenario: Assume you are a Management Accountant at Dell. The business has a number of different initiatives. At present it has several issues that need to be addressed and you have been tasked to examine some of these matters. Following a recruitment campaign a number of new trainees have been appointed and are to take part in a short induction course. Your line manager has asked you to design a Training Manual to introduce the new trainees to the business and to its various procedures. The induction course will concentrate on a number of key issues within the organization.

Some of the tasks within this assessment will require you to focus on preparing suitable materials to assist trainees on the induction course. This will form the contents of the Training Manual as mentioned above that you are called upon to prepare.

Note: Please answer all the following P's, M's and D's.

P1. Explain management accounting and give the essential requirements of different types of management accounting systems.
Guideline:
• What is Management Accounting?
• How Does Management Accounting differ from Financial Accounting?
• Who are the primary users of Management Accounting information?
• What is a Management Accounting System?
• Principles of Management Accounting
The most basic types of Management Accounting Systems are:
• Cost Accounting System
• Inventory Management System
• Job-Costing System
• Price-Optimization System

M1. Evaluate the benefits of management accounting systems and their application within an organizational context.
Guideline:
Evaluate the benefits of management accounting systems like reducing expenses, improving cash flow, improving business decision making process, and increasing financial returns etc. Furthermore, illustrate application of these benefits to an organization.

P2. Explain different methods used for management accounting reporting.
Guideline:
Types of Management Accounting Reports:
• Budget Report
• An operating budget
• Accounts Receivable Aging
• Job Cost Reports
• Inventory and Manufacturing
• Profit & Loss Statement

D1. Critically evaluate how management accounting systems and management accounting reporting is integrated within organisational processes.

P2. An explanation of the methods used for management accounting reporting (p2)

Westfield company produces and sells only washing machines. The company uses variable costing for internal reporting and absorption costing for external reporting.
The data for the year 2010 is given below:

Direct materials £150/unit
Direct labour £45/unit
variable manufacturing overhead £25/unit
Fixed manufacturing overhead £160,000 per year
Fixed marketing and administrative expenses £110,000 per year
Variable marketing and administrative expenses £15/unit sold
Company produced and sold 8,000 machines during the year 2010.

Required:

P3 Calculate unit product cost under variable costing and absorption costing.

M2 Accurately apply a range of management accounting techniques and produce appropriate financial reporting documents.

D2. Produce financial reports that accurately apply and interpret data for complex business activities.

LO2 Apply a range of management accounting techniques

Scenario: It is mentioned in the vocational scenario that Dell is able to maintain the lowest level of inventory in the industry compared to its competitors. Keeping in view the fact that inventory levels have a direct impact on profitability under various types of costing systems, your line manager has provided you with an Income Statement for Dell computed on the basis of Absorption Costing and wants you to prepare a Financial Report that is capable of interpreting data for a range of business activities carried out by Dell.

 Direct materials £ 20
 Direct Labour £ 8
 Variable manufacturing overhead   £4
Fixed manufacturing overhead   £50,000
Unit Sold 200,000
 Selling price £45

P3 Calculate unit product cost under variable costing and absorption costing.

M2 Accurately apply a range of management accounting techniques and produce appropriate financial reporting documents.

D2. Produce financial reports that accurately apply and interpret data for complex business activities.

LO2 Apply a range of management accounting techniques

Scenario: It is mentioned in the vocational scenario that Dell is able to maintain the lowest level of inventory in the industry compared to its competitors. Keeping in view the fact that inventory levels have a direct impact on profitability under various types of costing systems, your line manager has provided you with an Income Statement for Dell computed on the basis of Absorption Costing and wants you to prepare a Financial Report that is capable of interpreting data for a range of business activities carried out by Dell.

P3. Calculate costs per unit under both absorption costing and marginal costing and prepare an Income Statement under Marginal Costing and Absorption Costing.

M2. Accurately apply a range of management accounting techniquesand produce appropriate financial reporting document.
Guidelines: Use the results obtained in P3 above to produce an Income Statement using the management accounting technique of Marginal Costing.

D2. Produce a Financial Report that accurately applies and interprets data for a range of business activities carried out at Dell

Guideline (Task-2)
• Prepare a Financial Report using
• Absorption Costing and Marginal Costing
• Reconcile the difference between the net profits
• Relate it to inventory

LO3 Explain the use of planning tools used in management accounting

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 in the context of Dell or any other organization of your choice.

D3. Evaluate how planning tools respond appropriately to solving problems in the context of Dell , leading to sustainable business development.

LO4 Compare ways in which organisations could use management accounting to respond to financial problems

Scenario: Refer to an extract from the vocational scenario given below

Jon Rhymes, EMEA Service Business Development Finance Director, has responsibility for large, complex bids within the region. He and his team of business development ‘prices' work closely with bid teams and sales colleagues to help construct deals. Rhymes joined Dell from UBS six years ago. At the time, clarity on deals, win rates and profitability was lacking or inconsistent. "We did not have a clear view of our pipeline of opportunities. We did not have a view of what deals we had sold, from a budgetary perspective, and we did not have a view of deal P&Ls, i.e. which deals were making money and how they were being tracked." Rhymes' team now works with Dell's consulting and managed services organization on the financial aspects of high-value deals.
The Senior Management is now interested in carrying out a competitor analysis and wants you to present a Report.

P5. Compare Dell with one of the two Lenovo or HP (or use any two organizations of your choice) in order to evaluate how organizations are adapting management accounting systems to respond to financial problems such as lack of view of what deals had been sold from a budgetary perspective as given in the case scenario

M4. Analyse how, in responding to financial problems, management accounting can lead an organization such as Dell to sustainable success

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Introduction

The report has significantly entailed the management accounting process of the company Dell, which has ensured an effective financial performance in the financial years to make proper business progression. The report has highlighted the discussion about different accounting systems that has been judged for deriving the particular assessment regarding efficient performance of the company. Different purpose of management accounting reporting has been highlighted and proper aspects of utilizing these significance has been discussed within the report.

P1: Explanation of management accounting and essential requirements of management accounting systems

Management Accounting refers to the accounting processes that include the combination of the financial and non-financial statements with the objective of providing effective decision-making opportunities for the organization. Financial managers are able to make use of accounting information for taking controlled decisions. Management accounting plays an important role in management decision making, planning and performance management systems and integrated financial reporting. Dell, currently is facing severe issues for which the immediate need for effective decision making has been felt. Management accounting is the yardstick for offering a detailed outline about the profit percentages, product lines and customer bases.

Dell Inc. now is attempting to use advanced management accounting for improved decision-making purposes. Management accounting provides a detailed picture of profits figures, customer bases, products & services; financial accounting helps in reporting & addressing the absolute result of the business. Financial accounting portrays a clear picture of the profitability position of the business and management accounting ends up finding out the key causes of managerial problems (Chenhall, & Moers, 2015). Financial accounting helps in preparing financial statements and managerial accounting will enable Dell Inc. to focus upon the operational reports that are allocated within the organization only. Dell Inc. so far had to comply with several accounting standards, but with the improvisation of managerial accounting, the management need not need comply with any of the accounting standards if the information is used for internal control and accounting purposes. 

As small & medium scale entrepreneurs usually come up unlimited accounting issues in their daily life, management accounting is a useful tool that uses accounting information from the operations for producing an idea about the business performance. Via management accounting, Dell Inc. will be able to easily determine the quantity of laptops sold out. The accountant can easily determine the related costs among the advertisements overlooking the common costs. Through the implementation of management accounting techniques, Dell Inc. would be able to determine the activities for developing such product lines in all over the world (Cooper, et al.,2017). Management accounting offers information about manufacturing and helps in preparing budgets for continuous improvement of the managerial practices.

The widely used management accounting techniques are cost accounting; inventory management accounting and job costing systems. Application of cost accounting technique will enable Dell Inc in recording, analysing, summarizing, allocating and categorizing all the actions for controlling the total managerial & operational costs. Inventory management techniques play an important role for computer multinational companies like as Dell Inc. as the former will enable the managerial accountant in knowing the time of restocking the inventory, exact manufacturing volume etc. Inventory management therefore involves the process of storage and restocking the organizations' inventory so as to increase the overall sales volume. Another most widely used technique is job costing and the same is another type of management accounting technique mostly used in manufacturing units of computer related products as the accountant can easily look upon the exact cost for each and every job. As Dell Inc. manufactures personal computers, laptops, network storage devices and servers, application of job costing will enable the accountant in assessing the costs for all the discrete batches, by allocating the overhead costs separately.

P2: Different methods used in management accounting reporting

Implementation of management accounting processes at Dell Inc. will enable the accountants in representing the managerial accounting information in an operative manner so that the organization is able to take strategic decisions for the smooth transition of the business. With the application of the management accounting processes at Dell Inc. the profitable operations of the management are easily visible before the stakeholders. There are different types of management accounting reports - financial statements, accounts receivable report, job cost reports and stock & manufacturing reports.

1. Preparation of the Budgetary reports will enable Dell Inc. to evaluate the current performance with the budgeted performance. Budgets are prepared based on the actual expenditures as compared to the earlier performance (Klychova, et al.,2014).

2. With the preparation of account receivable aging report, the financial managers at Dell Inc. will be able to keep an eye upon the cash inflows and cash outflows and accordingly can plan out for increasing he credit lines for the customers. Dell Inc's collection issues can be easily assessed.

3. Job Cost reports will allow Dell Inc.'s management to have a systematic review of the total expenditures for the specific projects. The overhead costs incurred for production processes for laptops and network storage devices as compared to profitability reports.

The benefits of applying management accounting at Dell Inc. can be summarized as follows:

1. Management accounting system improves the overall efficacy of the computer technology company for performing its key operations.

2. Since management accounting technique involves budgetary control, the same helps in budgetary control processes. Through this process, the business will be able to curtain the overall expenditures from the operational activities and investing activities

3. Management accounting helps in taking managerial decisions as the same provides easy reports of the financial statements and there is a clear & distinct scope for the stakeholders to assess the solvency position of the business (Klychova, et al.,2015).

4. Through the application of the management accounting at Dell Inc. the management can work easily with the IT department as well as ensure budgetary actions. This ensures cost transparency within the business.

Dell Inc. the leading American multinational company producing computer technology products will face different opportunities by applying the integrated solution ofmanagement accounting as an integral accounting technique as summarized below:

  • Management accounting helps the accounting managers in identifying and monitoring the environmental and social trends of using mobile phone chargers that definitely creates value over time.
  • Through the application of the management accounting techniques, Dell Inc. can develop new KPIs and can evenly sustain overtime by overcoming the managerial issues
  • Management accounting system will help in integrating the business operations with the scenario planning of the company's resources and accordingly helps in lifecycle costing (Lopez-Valeiras, et al.,2015)
  • Dell Inc. will be able to make budgetary decisions, pricing decisions, investment appraisals, and strategic decision making.
  • Management accounting will help to integrate the cost management systems as the cost of inputs and accordingly will value for the production processes
  • The quality related costs are monitored through management accounting and thus leverages the operational functions

P3: Calculation of the cost per unit under absorption costing and marginal costing

In this section, the derivatives of the financial activities are revealed so as to understand the financial performance achieved from the business operations.

Marginal Costing

PARTICULARS

AMT (£)

Unit Price (£) (200000 units)

Sales revenue

9000000

45

Marginal Cost of Sales

 

 

Direct materials

4000000

20

Direct labour

800000

8

Variable manufacturing overheads

800000

4

Contribution

3400000

 

Less Fixed Cost

-50000

 

Profit

3350000

16.75

Absorption Costing

PARTICULARS

AMT (£)

AMT (£)

Unit Price (£) (200000 units)

Sales revenue

 

9000000

45

Marginal Cost of Sales

 

 

 

Direct Materials

4000000

 

20

Direct Labour

800000

4800000

8

Gross Profit

 

4200000

 

Variable manufacturing Overhead

800000

 

4

Fixed manufacturing overhead

50000

850000

 

 

 

 

 

Profit

 

3350000

16.75

It can be said that the budget prepared on the basis of the overall value provided for the company Dell has sufficed that the business operations entailed are highly successful and can generate successful operation in determining the success. It has been revealed that the sales made by the company has been targeted to be higher enough for compensating the values attributed towards the overall profit that will generate higher sustenance in the business in the long run. Therefore, the consequences determines the abilities of forecasting which ensures that the company will acquire higher profit percentage after covering cost associated regarding the purchase of production of finished goods for the firm. In view of that, the company can easily predetermine the objectives of making excess sales by which higher reserves will be maintained as per the demand in the industry.

P4: Explanation of the advantages and disadvantages of different planning tools used for budgetary control

A budget usually estimates the future results of a business along with the financial position of a company for one or more financial year. Budgets are usually prepared for future planning purposes, performance measurement needs, rolling out of new products and services and controlling processes. A budget usually enables the business in estimating the time-to-time financing needs. Organizations that are already using budgets review their budgets for keeping close eye upon the reality and they are able to assess the causes of variances in the actual results as planned before. The advantages of budgetary control on Dell Inc. can be summarized as below:

1. Budget primarily helps the entity to move its focus from its short-term goals towards long term objectives.

2. Budget will help the financial managers at Dell Inc. to think about the competitive position and the solvency position along with the corrective measures to remove all variances (Otley, 2016)

3. The preparation of a structured flexible budget will help in pointing out the key monetary aspects by assessing the overall productivity of the firm. Budget will help the company to decide whether it shall end up at shut-down point or must expand its operations

4. Overall performance of the Dell Group can be assessed through the budgets

5. The operational overhead costs incurred by Dell Inc so long can be ascertained which however makes the company to stay financially sound in decision making processes.

6. Budgets will produce a clear idea of the total amount cash inflows and outflows into the business (Quattrone, 2016).

7. The total overhead costs are evenly allocated among all the departments through the budgetary control.

A budget has a number of discrepancies irrespective of the above advantages and the same are summarized as below:

1. Budgets are bureaucratic in nature

2. Often budgets can pursue an intimidating nature and the accountable managers need to enforce control over the total manpower for alternating the absolute chances of intimidation

3. Since budgets are made up of a set of hypothetical assumptions that is totally different from the reality, that can cause discrepancy in assessing the operational efficiency of the company.

Budgetary reports are prepared for executing an assessment of the actual results with the anticipated results in the future years. The budget preparation process shall be regimented so that the same is used in the next financial year. The various planning tools that are involved in the budgetary control procedure are described below:

I. Marginal cost pricing: Once the actual cost-price volumes are accomplished within the company, the management is able to adopt marginal cost pricing method.

II. Competitive pricing: Decisions taken based on competitive pricing within the organization will enable Dell Inc.  to understand the existing competitive prices of the key competitors, like as HP, Lenovo etc. in the market and they can constantly survey the market prices (Soltani, et al., 2014).

III. Cost plus pricing: Computer technology MNCs like as Dell Inc that are able to set up prices can avail cost-plus pricing as the cost of service rendered is computed upon the excess amount for generating additional amount of contribution to the company's reserves.

IV. Activity Based Costing: ABC is basically applied in any manufacturing firm where with increase in the technological growth, the ultimate productivity has reduced the relative proportion of the direct costs of the company, while the indirect expenses are still on a higher side.

V. Standard costing: Standard costs are the estimated costs and are developed from the historical data derived. As budgets are prepared by executing an assessment of the actual performances with the planned performance, the accounting manager always takes into account the standard costs and the actual costs for doing a manufacturing job to highlight the causes of variances.

A budgetary plan is therefore a complete financial plan that is decided by the existing accountable managers at Dell Inc for accomplishing the functional and operational objectives. It is basically considered as a yardstick for strategic planning process within any business. It validates the direction & harmonisation of exercises between different divisions while adjusting the respective exercises to the master plan - the organization's core plan. It gives a scope to improve the managerial responsibilities through the planning procedures involved & through leadership obligations and accordingly regulates the administration's duty. With a strong managerial plan, all the accountable managers at Dell Inc. will be working towards a similar objective. Again, budgetary control procedures improve the planning of performance appraisals - giving a typical construct to exchange information with respect to how well the managers met his objectives and giving an argument concerning why actual outcomes varied from the budgetary plans. It energizes all departments inside the business to end up more proficient, which moves up to a more noteworthy effectiveness far reaching. Engagement in the planning procedure is an essential piece of every multinational computer technology companies alike Dell Inc.

P5: Ways in which organisations could use management accounting to respond to financial problems

Today's organizations are continuously adapting with the competitive environment and management accounting techniques help the companies in responding as well as solving the financial problems. Dell Inc. tries to focus upon the financial gains through applying management accounting technique. Management accounting is used as a benchmarking tool for pointing out the key financial areas where the company is ahead and accordingly can help the financial managers to improve the overall standard of the operational practices at Dell Inc. Management accounting is the source for streamlining internal benchmarking. Financial performance measurement is often considered as the critical success factor for large MNCs like as Dell Inc and therefore shall be managed effectively (Wagenhofer, 2016). Through the improvisation of the management accounting techniques at Dell Inc., the management can find a sound monitoring facility for the financial performance as compared to its other competitors like as Lenovo or HP. Management accounting techniques are sound systems enduring in financial governance in computer software companies like as Dell Inc.

Another major technique applied at Dell Inc. is Balanced Scorecard, which is an illustrative model for financial performance evaluation, and these play a succinct role in improving the overall performance and sustainability of the organization. Management accounting software may provide Dell Inc. with a better scope for improved financial decision making (regarding how much capital to invest, how much profit to plough back into the business etc.). The financial managers and accountants can easily view the profitability position before the creditors so as to extend their credit limits and this will foster the organizational growth of the business (Otley, 2016). Since, profit percentage, market share, economic value added, EBIT, depreciation, ROC, ROE etc. are the key factors affecting the financial performance, profit seeking concerns like as Dell Inc. endorse management accounting techniques to overcome the conventional short term financial issues that currently is faced by Dell Inc. Therefore, Dell Inc. will be able to generate sustainable financial information by the use of financial statements for effective operational practices as compared to the key international competitors like as Lenovo or HP.

Conclusion

Thus, management accounting system improves the overall efficacy of the computer technology company for performing its key operations. Since management accounting technique involves budgetary control, the same helps in budgetary control processes. Through this process, the business will be able to curtain the overall expenditures from the operational activities and investing activities.