Planning Tools in Management Accounting - Excite Entertainment

LO1.

P1. Explaining MA and importance of its systems

A. Difference between MA and financial accounting

Financial accounting deals with disclosure of financial information to stakeholders in order to help them in making suitable or informed decisions (Maas, Schaltegger and Crutzen,  2016). However management accounting is been  seen as confidential and limited to disclosing information only to an internal management of an organization for the purpose of bringing effectiveness and an efficiency in the functioning of the company.

B. Cost accounting system

It is the framework that is been used by Excite Entertainment in estimating the product cost for the purpose of valuing inventory, cost control and profitability analysis. It is critical for an enterprise to anticipate an accurate cost for attaining profitable operations. The two main methods of the costing are as follows-

Direct cost- It means the method in which only the variable cost of manufacturing are been assigned to an inventory and the cost of sales (Quattrone, 2016). The fixed cost of manufacturing are been viewed as an expenses for a particular period within which they are been incurred. It includes cost relating to direct labour, direct material and direct expenses.

Standard costing- It is referred as an accounting system that is been used by the producers in determining differences or the variances present between actual cost of goods which were produced and a cost that has been occurred for production of an actual goods. This method helps in measuring deviation in the performance so that corrective measures can be taken in order to overcome the deviations. It also ensures effective controlling for Excite Entertainment on its business operations.

C. Inventory management system

It is the system of MA that refers to the combination of the technology, procedures and the processes which oversee maintenance and monitoring of the stocked products. It is the tool that that allows Excite Entertainment in tracking the flow of its inventory within an supply chain (Mirzaey,  Jamshidi and Hojatpour,  2017). It helps the firm in optimising an entire spectrum from an order placement with the vendor to an order delivery to the ultimate consumers by mapping an overall journey of a product.

Some of the main feature of inventory management system are as follows-

• This system maintains right quantity and an amount of an inventory for each of the product without over and under stocking any of the item.
• It easily determines and traces the products as barcode are integrated for an instant labelling and identification of the product.
• Strategies and the process in certification, classifying and reporting under inventory management such as Just-in-time, FIFO, ABC analysis etc.

An inventory system is said to be effective and efficient when it results better cash flows, lower carrying cost,  better supply, low dead stock etc.

Just in time- It is reflected as an inventory strategy where only the materials are ordered and received as they are required in process of production (Panchenko,  2018). The main aim of this technique is reducing the cost by seeking for saving money on the inventory overhead expenses. It helps in minimizing an inventory and in increasing efficiency. It is also called as the system of Toyota Production as the car manufacturer that is Toyota has opted for this system in 1970s.

ABC analysis- It means the method that categorises into three parts where A represented as most valuable and the demanded product by the customers. It involves the products which heavily contributes to overall profit without consuming too much of the resources. Category B presents the moderate products which do not have high or low demand and lies in the middle of the road. Lastly, Category C is seen as tiny transactions which are essential for earning profits and the does not contributes to value of an entity (Uyar and Kuzey, 2016). This technique is used for segmenting the customers into three major segments as per their value and specification.

D. Job costing system

It is the method which is defined as the technique of recording a cost in manufacturing the job  instead of the processes. With this system, manager could keep a track on cost of each and every job by maintaining the data that is more relevant to  business operations. It is proved to be an efficient costing method in allocation of distinct cost of the product and in monitoring an order expenses at the time when the products are seen as non-identical.

E. Evaluating advantages of MA systems

P2. Presenting different MA reports

A. Describing several MA reports

The MA reports are generated by the managers on continuous basis and thereafter they assesses such reports for highlighting certain  patterns and in converting them into an  useful information for an enterprise (Shevelev,  Sheveleva and Gvozdev,  2017). The different reports that are prepared by managers are as follows-

Budget report- This report relates with creation of the overall budget that involves anticipation of the expenses and an income. The budget report is been made on the basis of the previous experiences in order to cater any uncertainty that may arise in future. Excite Entertainment could achieve its mission and the goals by staying with a budgeted amount. It helps in guiding the managers to offer for better incentives, renegotiating the terms with suppliers and reducing costs.

Accounts receivable report- Under this report, details regarding remaining balances of the customers are broken into particular time periods which allows the managers in determining issues and the default if any in the collection process of Excite Entertainment (MA reports, 2018). It enables the managers in tightening its credit policies because cash flow is counted as crucial for the business.

Cost accounting reports- It presents the summary information of all the cost that includes material cost,  labour cost and overhead. It offers a capacity to the managers in realizing the cost prices against its selling price. It provides an exact understanding relating to all the expenses that are important for optimum use  of the resources within all the departments.

Performance report- This report is created for reviewing the performance of Excite Entertainment as well its employees. This report is used by the managers in making important strategic decisions regarding future prospects of the business. It acts as vital for the company in keeping an accurate measure of its strategy towards its mission.

Inventory report- It is the report that involves information of hourly cost of employment, per unit overhead that are incurred in manufacturing. Through this report, comparison can be drawn across the multiple lines in order to detect and emphasize on promising and the prospective areas  and also helps in rewarding employees who are performing best.

B. Explaining the reason for presenting the information in an accurate manner

• It is crucial for managers in to prepare the reports that is reliable, updated and accurate because it helps an external users in making the decisions regarding the investment made by them in the securities of the firm.
• The information presented enables the government in reviewing and deciding on the tax structure for the company.
• In case there exist an errors in the information that in turn would hamper the final reports.

C. Evaluating the ways in which MA systems and reporting are integrated within the operational process of firm

It is critical for Excite Entertainment to remain conversant with a management accounting concept in order to make appropriate decisions for its multiple departments. Well application of the MA concepts would translate into an efficient practices of financial accounting for an entity. With better knowledge of the MA principles and methods, the company could be able to equipped better budget that results in minimum wastage and attaining maximum profits.

LO2.

P3 Determining income statements using the marginal and absorption costing

There are different costing techniques which are used by the organisations to record their transactions and getting the results from profits. Two of the commonly used ,management accounting techniques are marginal costing and absorption costing.

Marginal Costing

Marginal costing can be defined as principle where variable cost are charged to unit costs and fixed costs which are attributable to relevant periods are written off against contribution for the period. Marginal costing is concerned with ascertaining marginal costs and its effect over profits due to change in volumes or output through differentiation between variable and fixed costs. Costs are defined into two classes that are fixed and variables. Concept of this technique is based over behaviour of the cost with output volumes. The approach  is also known as variable costing where only variable costs are aggregated and per unit cost is ascertained on variable costs. Marginal costing covers only cost expenses that are variable in nature and where fixed costs are charged as periodical costs. Excite ltd uses marginal costing for computing total costs and net profit  from manufacturing each product it  is planning to manufacture.

Advantages and Disadvantages of Marginal Costing

Advantages

• Marginal costing helps Excite ltd in comparing its costs with budgeted and actual and taking the corrective steps for cost control.
• This helps the business enterprise in short term planning and in defraying the break evens.
• This helps the business to calculate  per unit profit of the product.
• Its assists the management of Excite ltd in planning the productions by disclosing change in profit levels with the change in output.

Disadvantages

• It is difficult for the enterprise  to segregate cost between fixed and variable.
• This technique do not account for the fixed costs associated with the production of products.
• It becomes difficult for company to fix selling price under the cost plus contract systems as it depends  over distributions.

Absorption Costing

Absorption costing is also known as full costing system and is recommended by the accounting frameworks. In absorption costing all the manufacturing costs are treated by company including both variable and fixed as the cost of product. Variable costs changes with the changes in activity levels, where the fixed costs do not change with the change in output or activity level. Variable costs are usually cost of materials, labour manufacturing overhead. The costing technique considers fixed costs that are incurred in production of goods in measuring the over all cost of product. The technique is used by the organisation to calculate the profitability from the product. The accounting techniques is used by the Excite ltd to calculate the cost of product including both variable and fixed costs. The accounting techniques provides more reliable and accurate results. The technique provides the company with contribution per unit from production of products.

Advantages and Disadvantages of Absorption Costing.

Advantages

• Absorption costing helps organisation in tracking the profitability from the product in more appropriate manner.
• It provides the business organisations with the realistic product cost.
• The technique consider both variable and fixed in calculating the cost of product.
• Absorption is more suitable for the organisations having constant demand of their products.
• Unlike variable costs it do not consider fixed as variable costs.

Disadvantages

• The costing technique is not suitable when the business wants to make comparisons between the product ranges.
• The technique is not suitable when the operational efficiency is to be improved.
• The accounting technique fails to take challenges associated with under and over absorption of the variable costs.

Marginal Costing

Calculation of cost per unit

Interpretation

Profits using the technique of marginal costing is 29000. Total sales are calculated using the selling price of 15 for 8000 units. The variables costs are calculated using the production units  10000. The value of closing inventors is calculated without considering the fixed costs. Net profit from the production is 29000.

Absorption Costing

Assessment of cost per unit

Interpretation

Profits under the absorption costing is 35000 that is higher than the marginal profits. The cost of goods sold have been calculated using the fixed cost in calculation of inventory. The absorption costing includes the fixed costs for its production.

The reason behind higher profits in absorption costing.

There is a difference between both the accounting techniques. Marginal costing provides lower profits where the absorption costing provides for more higher profits. The difference between the profits is due to distribution of fixed costs to the production of units. In the absorption costing fixed costs costs are considered while calculating the cost of closing inventory. This results in reducing the cost  of goods sold that is lower, as closing stock is valued more in absorption costing. The lower cost of goods sold results in higher profits in absorption costing.

M2. Use of varied of management accounting approaches and developing suitable financial reporting documents.

Techniques of MA is beneficial for the company as same help manager to formulate documents of the financial reports as well as maintain the products and services cost within business concern. Techniques like marginal and absorption states whole cost of company and then ascertain net profits into company. It is the accountability to accomplish many data connected to accounting as well as maximise productivity. Both techniques are useful for Excite   Ltd. Like their accountant can prepare appropriate management reports through evaluating revenues as well as expenditures which aids in making decisions. Also, this assists in enhancing production and sales in respective organisation.

LO3.

Planning tools in management accounting

The planning tools are the one which are used by the companies in order to plan for the things which need to be achieved (Armitage, Webb and Glynn, 2016). In management accounting there are many different types of tools which can be used by the accountant for proper planning of all the requirements and for making good decision. The different types of planning tools used by the Excite Entertainment are discussed in the following points connected below-

Cashflow budget- the cashflow budget is a type of budget which outlines all the estimation relating to the different sources of income and the various areas of application of money. This type of budget outlines all the inflow and outflow of the cash which is expected to take place at time of doing the business. This budget help Excite Entertainment in properly plan for the optimum utilisation of the cash in such a way that the company is able to manage the work in proper manner. This budget will also help the company in analysing and deciding that which sources to go for arrangement of money whether to go for equity or for debt or a combination.

Advantages- there are a wide range of advantages which are experienced by the company at time of using the cash budget which are explained in the following points connected below-

• The major advantage of this tool is that this help the company in beforehand planning for all the sources of income and the areas where the expenses can incur. Thus, this help the company in properly manage the work as the company knows in advance that how much money is available to the company and they have to manage their work in that amount only.
• Another advantage is that if there are any deficit then it can be found out with help of this budget. This is because of there is shortage of money in the budget then the company can think for sources from where it can arrange for the money (Samuel, 2018). Thus, this will save the time of the company in arranging for the money as they know in advance what all deficit they can face.

Disadvantages- the disadvantages faced by the company of cashflow budget are as follows-

• The major disadvantage is that this is very time consuming as the planner has to first analyse all the sources and application of money and then only the budget can be prepared.
• Also, another disadvantage is that the planner needs to have a high knowledge relating to the preparation of the cash budget. As a small mistake can also result in high losses.

Sales budget- this is a type of plan which outlines the estimation of the sales which need to be produced by the company in order to earn profits (Rizza and Ruggeri, 2018). Under this a target sale are set that the company has to do in any condition. Then in the sales budget the company plan and implements the resources within the activities which are necessary for the completion of the sales. The reason for preparing this sales budget is to effectively plan and control the resources which are required to attain the desired and planned sales objective.

Advantages- the major advantages enjoyed by the company are as follows-

• The major advantage is that this help the company in optimally allocate all the resources to all the activities of the manufacturing process. This is necessary because of the reason that this will outline all the additional resources which need to be allocated if there is any emergency or contingent situation.

Disadvantages- the drawbacks of using this type of planning tool is discussed in the following points connected below-

• This budget cannot be accurate as it is not possible for any person to predict the future. Thus, there are chances that the set target for the sales does not meet up to the expectations.
• Another drawback is that there are some contingent risk and expenses for which the person cannot predict the future trends.

Operational budget- this is a type of budget which is used as a planning tool wherein all the income and the expenses for a given period of time are estimated. This is a plan which is made in advance by analysing the past trends within the income and expenses. This plan is treated as a goal or objective which the company need to achieve at time of operating and manufacturing.

Advantages- the major advantages enjoyed by the company because of use of operational budget are discussed in the following points-

• The major advantage of this is that this helps the company in projecting the future expanses (Borker, 2016). This will help the company in projecting the all possible expenses which the company may incur and to make arrangement for dealing with those expenses.

Disadvantages- the major disadvantages faced by the company are as follows-

• There are many changes taking place in the business environment and this can also lead to changes in the price of the different materials used by the company. Thus, these changes cannot be predicted and if they happen then it impacts to the profitability of the company to a great extent.

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Comparison of the planning tools

In comparison among all the three it was outlined that cash flow budget is being used by the company for calculating the cash flow from all the three activities that is operating, financing and investing activities. But in contrast to this the sales budget is used by the company to maintain and monitor that whether the set target for the sales will be able to achieve with the given resources. In the end of the comparison it was outlined that the operating budget is used in order to plan for the future by estimating the income and the expenses which may be accrued by the company (Zeng, 2018). But all the three budgets need to be prepared by the company because all the three budgets are different form one another and has their own utility and importance in attaining the objectives of the business.

LO4.

P5. comparing ways within which application of MA deals with the financial problems and prevents financial problems

Variance analysis- It is the tool which determines the difference between the planned and the actual behaviour. It is used for identifying the degree and the cause of difference between the actual performance and the baseline to maintain effective control over project (Tenhunen,  2018). This technique helps in resolving the financial problems relating to financial and performance gap in the business.

Financial governance- It refers to the method in which the an entity collects, reviews, manages and control the financial information. It helps in tracking the financial transaction, managing and controlling the data, complying with disclosures and seeking for efficient operations. It prevents an organization from financial issues in relation to lack of funds, material errors etc.

Benchmarking- It is the process that is adopted by the firm in measuring the performance of its own products, processes and strategies with that of competitors products (Christ and Burritt,  2017). This helps the company in attaining competitive edge over its rivalry and overcome the financial problems with respect to high cost, low production, ineffective quality.

Key performance indicators- It is the method that indicates the ways in which an entity could achieve its business goals and objectively. It prevents the financial issues in terms of non-achievement of targets and goals.

Interpretation- The above results shows that for gaining the profits amounting to  £90000, Excite Entertainment need to sold 7000 units. At 4000 units, the company will attain break even point where it incurs no profit and loss.

CONCLUSION

By summing up the above report it has been stated that MA plays a crucial role in running smooth working of Excite Entertainment. It helps the firm in gaining a leading position and success in the overall market. The MA reports and systems helps in reviewing the performance of the company and resolving any issue occurs in future relating to financial measures.

REFERENCES

• Armitage, H.M., Webb, A. and Glynn, J., 2016. The use of management accounting techniques by small and medium‐sized enterprises: a field study of Canadian and Australian practice. Accounting Perspectives. 15(1). pp.31-69.
• Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of organizational DNA, business potential and operational technology. Asia Pacific Management Review. 23(3). pp.222-226.
• Bedford, D. S., 2015. Management control systems across different modes of innovation: Implications for firm performance. Management Accounting Research, 28, pp.12-30.
• Borker, D.R., 2016. Global management accounting principles and the worldwide proliferation of IFRS. The Business & Management Review. 7(3). p.258.
• Boučková, M., 2015. Management accounting and agency theory. Procedia Economics and Finance. 25. pp.5-13.

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