Question :
You are asked to assume a management accountant in a business in which you are supposed to identify the role and importance of management accounting in the context of an organization through conducting workshops. Here are the Learning Outcomes that supposed to undertake by preparing a report:
- Explanation of management accounting system along with its application within TSR Pvt Ltd.
- Identify the role of various management accounting techniques to prepare suitable financial reporting documents.
- Determine the importance of planning tools to control budget within TSR Pvt Ltd.
- Demonstrate the planning tools to resolve financial issues faced by TSR Pvt Ltd. and make comparison with its rival.
Answer :
INTRODUCTION
Management accounting is a process of analysing the business cost and operations through preparing financial reports such as Profit & Loss a/c, Balance sheet, Cash flow statement etc. It helps an organisation to know its actual financial position in market on the basis of which further decision are taken by management in order to achieve desired goals and objectives. It is the responsibility of management to translate financial data into useful information so as to formulate effective plans and strategies. It is essential for every organisation irrespective of the size whether small, medium or large to maintain their books of accounts so as to present them towards its shareholders with an expectation of getting maximum financial support from them.
The present report is based on TSR Pvt Ltd. which deals in producing multiple number of products such as radiators, fans and packaging boxes. The project includes various types of management accounting systems along with their essential requirements in business organisation (Agyemang and Broadbent, 2015). In addition with this, management reporting system and different costing methods to determine the net profitability of company are also discussed under this report. Along with this, different types of planning tools which facilitate management in controlling budget along with their merits and demerits are also briefly explained under this report. Apart from this, all other aspects related with management accounting are also summarised under this report in the context of TSR Pvt. Ltd.
TASK 1
P1: Types of management accounting systems and its essential requirements
Definitions of Management accounting:
As per the Institute of Management Accountants (IMA): Management is such a profession that involves decision making process, formulation of planning, preparation of financial reports etc. which assist an organisation in achieving desired goals and objectives within pre-determined period of time.
According to the Institute of Certified Management Accountants (CMA): Management accountant uses his/her knowledge and professional skills in order to prepare financial reports which help management in making an effective decision and policies to manage and control the business operations in an effective and efficient manner.
Meaning: Management accounting refers to the provision of financial information which assist management to translate financial data into meaningful and useful information to formulate an effective plans and policies for the betterment of an organisation (Baldvinsdottir Mitchell and Nørreklit, 2010).
Therefore, Management accounting is an essential part of an organisation which facilitate company in identifying their actual financial position in market through maintaining financial reports on annual basis. For this, the management are held liable to perform such functions through using different management accounting systems such as price optimisation, inventory management system, cost accounting system etc. TSR Pvt Ltd. can able to achieve future growth and desired objectives when the management has attained more reliable and relevant data which can be available through financial reports made by accountant manager. It is essential for the management of TSR Pvt Ltd. to identify whether the business move towards right direction or need to make changes in existing plans and polices. It can be easily identified through using such accounting systems.
Importance of using management accounting systems:
Increase in efficiency: Using different management accounting systems help in identifying current position of company as well as market. For example, price optimisation system help management in identifying the perception of buyers towards prices the company charged for their products and services. This will help management in setting pricing strategies to achieve huge customer base (Bedford, Malmi and Sandelin, 2016).
Measurement of performance: It help in identifying and measuring overall performance of an organisation through comparing actual with standard performance which will help management in identifying the deviations if any, which restricts company to achieve growth. It enables management to make an effective policies and plans to manage and control business operations so as to bring efficiency in performance level.
Effective management control: Through analysing the business cost and operations, aid management in managing and controlling business activities through making an effective decisions and plans so as to achieve desired goals and objectives within given time frame.
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Different management accounting systems:
Price optimisation systems: Such system help management in determining the actual perception of targeted customers related with price the company currently charged for their products and services. It facilitate management in setting up an effective pricing strategies after determining the total cost incurred in delivering the products to the targeted customers. It will help company in restricting loyal customers not to shift to their rivals' products and services. For example, TSR Pvt Ltd. is manufacturing fans, radiators etc. due to which faces tough competition in market. Thus, using such system help company in retaining loyal customers with them through setting prices according to their willingness. Such system is more helpful in estimating the buying behaviour of targeted customers according to which the decision relating to formulating pricing policies are made. It help company in retaining loyal customers for longer period of time through maximising their satisfaction level (Boedker and Chua, 2013).
Inventory management system: It is such an effective accounting system which facilitates management of TSR Pvt Ltd. to identify the actual inventory they have at present. This will enable manager in determining whether the company have sufficient inventory to meet market needs and requirements. Using such system help company in reducing inventory cost as the store manager placed an order of inventory from the suppliers only when the company requires. This storage cost are eliminated.
Cost accounting system: It refers to an accounting system which communicates management about the total cost incurred while manufacturing specific products and services. For this, it is essential for management of TSR Pvt Ltd to first analyse the effectiveness of manufacturing products and its demand in markets and on the basis of which decision made regarding allocation of cost to produce specific products with an expectation of getting maximum outcomes. For example, during summer, the demand of fans increases thus allocation of maximum cost to produce fans brings profitable outcome to TSR Pvt Ltd.
Job costing system: Such accounting system help management to allocate cost to specific product or group of products after identifying the outcomes received in future. Using such system communicates information regarding cost data to a client where costs are compensate. It facilitates accounting manager to determine the need of cost required to be incurred in manufacturing process. For example, TSR Pvt Ltd. is manufacturing fans, radiators etc. thus producing bunch of fans products according to the market demand the proper allocation of cost are made with the help of such accounting system (Contrafatto and Burns, 2013).
P2. Various methods used for management reporting
Managerial accounting reports are very beneficial for planning, decision making, regulating and in measuring performance. These reports are prepared on continuous basis throughout the book keeping and accounting period as per the requirements. It is because many difficult decisions depends on the authenticity of this report. Manager evaluate these reports and turns into them useful information for an organisation. There are various methods which are used by TSR Pvt. Ltd. for preparing an accounting report that are as follows:
Budget report: This method of managerial reporting are very helpful in measuring firm's performance & manager evaluate their departments actions and control cost . Company crafts an overall budget to understand the schemes of their business. The estimated budget is prepared on the basis of actual expenses from past years. An organisation's budget is consist of all earnings and expenditures. TSR Pvt. Ltd. have to achieve their specific goals and objectives according to the budgeted amount. Managerial accounting report is related to the budget that helps in guiding manager to offer employees incentives, bonuses, cost costs and negotiate terms with suppliers and vendors. So a budget report is very crucial for an organisation.
Job costing report: This report contains all expenses for a particular project financed by the business. They are generally match with an estimated profit so manager can analysis the job's profitability. It helps in identifying higher earning areas of the firm so manager can concentrate on additional efforts rather than wasting time and funds on job with low profit margins. Job costing report are also beneficial for measure expenses when project is in progress so it helps in correct areas of waste before costs spiral out of control. With this tool, management of TSR Pvt. Ltd. can easily evaluate the records of work done along with the performance level of staff member in systematic and efficient way.
Performance reporting system: This type of report is prepared for review the performance of an organisation as a whole or for each employee at the end of a term. Manager of TSR Pvt. Ltd. use this report to take key strategic decisions about the future of an organisation. This kind of report offers the deep insight into the activities of a firm. Performance report plays important role in an organisation to keep an accurate measures of their strategy towards the aim of the firm. The main focus of this report is on the financial stalemates which helps in measuring and regulating the actual performance of an organisation (Granlund, 2011).
Manufacturing and inventory report: This is the one of the important report which helps in maintaining a physical inventory and manufacturing process more effective and efficient. These report involves items such as hourly labour cost, inventory waste and per-unit overhead costs. Manager of TSR Pvt. Ltd. Compare various assembly lines of company to identify the areas of improvement and also offer incentives and bonuses to the best performing department.
Accounts receivable aging report: This type of report is very essential tool for managing cash flow if company is extend credit to consumers of business. Manager of TSR Pvt. Ltd. use account receivable aging report to identify the issues related to the company's collection process. When more number of customer are not able to pay their balances than manager have to tighten its credit policies. Continuous analysis of account receivable aging is very beneficial to keep the collection department from overlooking old debts.
Cost managerial accounting reports: This report is useful when manager want to compute the cost of product that are produced in the organisation. Overheads, raw materials, labour and any other added cost are taken into deliberation. The totals are divided by the cost of product manufactured. This cost report gives summary of all the information related to the production process. Cost managerial report provides manager the capacity to realize the cost price of the commodity and also their selling price. Estimation of profit margin and monitoring through this report gives the clear picture of the cost which is incurred in production and procurement of the article. Hourly labour cost, inventory waste and overhead costs is the part of this report as it offers an exact understanding of all expenses which is important for optimum utilisation of resources among all departments.
For manager, it is very necessary to use these tools for the effective and efficient working in the organisation. These methods are helpful in analysing cost of product and also estimate the profit margin. It is important for TSR Pvt. Ltd. To prepare budget report which is helpful in accomplish particular objectives in budgeted amount (Hall, 2012).
M1. Merits of using management accounting system
Management accounting plays vital role in managing and monitoring the financial transaction which are taking place in effective and appropriate manner. It is very essential for an organisation for using number of systems in accounting such as job costing systems and price optimisation that help them to get effective and efficient profitable results. This type of accounting system is used for the motive of increasing the profitability and effectiveness of an enterprise by which a sustainable position can be attained by the company. Management accounting assist manager in crafting reports which are related to the performance of staff member. Collection of accurate and correct information helps manager in execute all business operations and actions in an effective manner.
D1. Integration of management accounting system and reporting with organisational process
Important for the manager of TSR Pvt. Ltd. to create reports with the help of relevant information and past data for effective and appropriate functioning of company. Further, manager can examine the overall performance of an enterprise. This is also very essential for the investment decisions. Increase in growth of firm is one of the main objective of using report system. There are various methods and techniques of reporting which is used by the TSR Pvt. Ltd. such as performance report, budgetary report, accounts receivable, job costing report and manufacturing & inventory report. These methods are helpful in eliminating wastage and increase in profit margins.
TASK 2
P3: Calculation of costs using appropriate techniques
Cost refers to the amount incurred to acquire or produce something with an objective of getting profitable outcomes after selling such manufactured products. In other words, cost is mainly valuation of the efforts, resources, time and utilities, risks etc. which are essentially required in process of executing business activities. As huge amount of cost are incurred in producing products and services which need to be carefully allotted after identify the effectiveness and profitability of manufactures products. Such cost that may incurred in production process are material, labour, overheads etc. For this, the management are liable to make decision regarding using different costing methods such as marginal and absorption in order to determine the net profitability of company. Such costing methods are briefly explained under the below:
Marginal costing: It is such a method which includes only variable cost and excludes fixed cost. It is associated with cost which are incurred in producing extra unit of output other than main output. It either increase or decrease the total cost of production in order to manufacturing one more additional unit of an item. Marginal cost are variable cost which includes labour and material costs in addition with estimated portion of fixed cost (Herzig and et. al., 2012).
Absorption costing: It is an managerial accounting costing method of expensing all cost which are incurred in manufacturing a particular products and is required for Generally Accepted Accounting Principles (GAAP) external reporting. Such costing method includes both variable as well as fixed cost. For example, direct cost includes wages cost, raw materials used and overhead costs. Due to adding fixed cost, the profitability of company goes down thus less adopted such costing method by large number of companies.
| Calculation of cost of radiators | |
| Direct material | 50000 |
| Direct Labour | 30000 |
| Variable manufacturing cost | 20000 |
| Fixed manufacturing cost | 40000 |
| Total Cost | 140000 |
| Total number of units produced | 10000 |
| Cost Per Unit | 140000 |
| Income statement using Marginal costing | |
| Revenue( 10000*25) | 250000 |
| Less: Cost Of goods sold (10000*14) | 140000 |
| Contribution | 110000 |
| Less: Variable Selling and administration expenses | 30000 |
| Gross profit | 80000 |
| Income statement using Absorption costing | |
| Revenue( 10000*25) | 250000 |
| Less: Cost Of goods sold (10000*14) | 140000 |
| Contribution | 110000 |
| Less: Variable Selling and administration expenses | 30000 |
| Less: Fixed Selling and administration expenses | 30000 |
| Gross profit | 50000 |
Interpretation: According to above calculation, it has been found that the company is having two effective costing method which will be helpful for them in attaining more reliable outcomes in coming period of time. With the use of marginal costing they are going to make sufficient amount of profit with 80000. Similarly, by the use of absorption costing they are getting a net profit of 50000. it has been found that the differences of 30000 is arises because of fixed cost treatment. In order to make future decision-making, managerial costing method is more effective as because, it used to provide maximum earning as net profit. Henceforth, the company need to go with marginal costing so that sufficient amount of revenues can be attain in near future time (Ji, 2017).
M2:Application of management accounting techniques
| Calculation at 5000 Units | |
| Income statement using Marginal costing | |
| Revenue( 5000*25) | 125000 |
| Less: Cost Of goods sold (5000*14) | 70000 |
| Contribution | 55000 |
| Less: Variable Selling and administration expenses | 30000 |
| Gross profit | 25000 |
| Income statement using Absorption costing | |
| Revenue( 5000*25) | 125000 |
| Less: Cost Of goods sold (5000*14) | 70000 |
| Contribution | 55000 |
| Less: Variable Selling and administration expenses | 30000 |
| Less: Fixed Selling and administration expenses | 30000 |
| Gross profit | -5000 |
Interpretation: From the above calculation, it has been found that company need to make utilisation of their results by taking into account two important costing methods. Marginal and absorption costing is two of the best suitable method that are held responsible for providing valuable amount of outcomes in coming time. It will be further helpful for the generating more suitable results in future planning of their projects. With the 5000 units company is earning a total of 25000 net profits by using marginal costing. While, negative -5000 of total profit is being collected during the time. Under this, the outcomes is the same as they are getting maximum revenues from taking into account the marginal costing.
D2: Financial reports along with interpretation data
Calculation of Labour variances
Labour cost variance: (AH*AR) - ( SH* SR)
Actual hours: 3400 Hours
Actual Labour cost: 17680
Actual Rate: 17680/3400= 5.2/ hour
Budgeted Labour Hours: 3000 hours
Budgeted Labour cost: 15000
Standard rate: 15000/3000 = 5/ Hour
LCV= (3400*5.2) - (3000*5)
= 17680- 15000
= 2680(F)
According to the calculation it has been seen that, labour cost variance of the given data is calculated as 2680 which is a favourable amount.
LEV= (Actual hours- Standard hours for AO)* Standard rate per hour
= (3400-3300)*5
= 100*5
= 500(F)
Calculation of Material variances:
Material cost variance = (AQ*AP) – (SQ*SP)
Actual Quantity= 2200
Actual Price= 9.5
Standard Quantity= 2000
Standard price= 10/ Kg
MCV= (2200*9.5) - (2000*10)
= 20,900-20000
= 900(F)
Material Usage variance= (Actual Quantity- Standard Quantity) * Standard Price
Actual Quantity= 2200
Standard Quantity= 2000
Standard price= 10/ Kg
MUV= (AQ – SQ) * SP
= (2200-2000)* 10
= 2000(F)
TASK 3
P4. Advantages and disadvantage of different types of planning tools
Budgetary control:
This is a system of controlling cost that involves coordinating the department, preparation of budgets, establishing responsibilities and comparing actual actual performance with the budgeted and work on the results to attain the maximum profitability. Budgetary control refers to how well manager use budget to control & monitor and operates in given financial period. The main aim of this tool is to eliminate or reduce the waste and increase in profitability (KneÃ…¾eviÄ"¡, StankoviÄ"¡ and Tepavac, 2012).
There is process of budgetary control:
- Consult with manager: An enterprise can attain control on business actions and activities when there is coordination between manager and various departments of company. So it is very necessary for TSR Pvt. Ltd. to have effective and proper cooperation among manager and other departments. Manager should discuss about the expansion and growth of business activities with their sub ordinates.
- Do assumption: After collection of relevant information, it is very essential for manager of TSR Pvt. Ltd. to do proper assumptions on the basis which helps in increase the profit. The important feature of this it is very useful for the manager to accomplish control over business expenses and expenditure (Weygandt, Kimmel and Kieso, 2015).
- Fix data to attain business targets: In this step, manager collects various information from the all departments of an enterprise. This provide long term benefits to firm and also helps in making the process of budgetary control more effective and efficient.
- Compare actual data with budgeted information: Under this step, actual business performance is compared with the budgeted and take actions in maximisation of profit. This helps in identifying gaps and find out the areas of improvement. It contributes in growth and success of an enterprise.
- Review analysis: The last step of budgetary control is to analysis all the above steps as to examine the effectiveness of every step. To attain set objectives of firm is very necessary that all steps are executed in an effective way (Lee and Cobia, 2013).
Planning tool:
It is a management process which focuses on defining goals for firm's future direction. This provides direction to manager and also ensure that there must be optimum utilisation of business resources. There are various planning tools which are used by managers of TSR Pvt. Ltd. This can be understood by following points:
Forecasting tools: It is one of the tool which helps in evaluating current internal business information and external economic data. By using previous data, manager decides the future activities of an organisation. In forecasting tool manager do planning on the basis of some assumption supported by knowledge, skills and judgement of management.
- Advantages: Forecasting tool is very essential method used by manager to get relevant information as it helps in to take effective and right decisions for organisation. This is useful in predict the right amount of sales and cost of business (Luft and Shields, 2010).
- Disadvantages: The major disadvantage of this tool is sometimes it fails in providing correct information to manager about the expenditures and expenses which is incurred by an enterprise. If forecasted amount of expenses are less or more than the actual amount than there is negative impact on the working of business activities.
Scenario tools: This tool is very useful for manager to find out the alternative available to execute business activities. Scenario tools are helpful in guiding and directing management in the actions of functional and operational in an organisation. All this contributes in achieving specific objective and goal of an enterprise (Shah, Malik and Malik, 2011).
- Advantages: The important benefit of scenario tool is it helps in collecting useful data about the several substitutes available and also aids in execute business activities and operations in an effective manner.
- Disadvantages: The major disadvantage of this tool is it is very time consuming process as manager have to identify various alternatives.
Contingency planning tools: This is essential planning tool used by an enterprise to take corrective actions in situation of emergency. A plan is formed by manager by considering various issues and factors that affects the operations of organisation (Maher, Stickney and Weil, 2012).
- Advantages: Benefit of the contingency planning tool is help manager in decrease the cost of business activities that maximises company's profitability. Another advantage of this tool is it is very useful in taking decision in emergency.
- Disadvantage: Limitation of this tool it is not suitable in every situation. This tool is only for emergency situations.
M3. Use of different planning tools and their applications
Budgetary control are utilised by the company for obtaining genuine and accurate data like cash budgets & operating budgets. When company uses operating budget to examine the total cost and expenditure incurred during the financial year while the cash budget helps the company to determine and detect the total inflows and outflows from various activities. There are different types of planning tools which are used by TSR Pvt. Ltd. for defining specific goals for organisation's future directions. Planning tools helps the manager for optimum utilization of all resources. There are various planning tools which are useful in different situations such as contingency planning tool is helpful in emergency (Morales and Lambert, 2013).
D3. Evaluation of planning tools for respond financial problems
There are number of planning tools that can be used by TSR Pvt. Ltd. for solution to their financial issues and accomplish set business goals and objectives. There are various tools which are financial performance, key performance indicator and set benchmarking that helps manager in examine the enterprise's performance in a particular period of time. When manager want to handle financial problems, they must require to implement system such as balance core card as it helps in find out the issues and also directs or guides to take corrective actions in a particular time. Scenario tool of planning helps the manager to identify available substitutes for execution of business operations or activities.
TASK 4
P5 Analysis of management accounting to respond towards financial issues
Business is the pace where activities are performed to earn profits. It is essential to work according to set targets so changes can be accepted as per requirement. The main motto TSR Pvt. Ltd. Is to earn profits, so this can be done through use of techniques which are important to maintaining good image of company. There are various tools which helps to frame policies which are signifiant for market growth and it shows positive impact on business operations of company (Noreen, Brewer and Garrison, 2014). There is requirement of proper training through which financial problems can be solved. Finance manager plays significant role in running and operating business (Budgetary Control, 2017). Profit is main segment which has to be considered by employees. While manufacturing, distribution, storage cost must be low. Product must ready to deliver the demand arises. It is necessary to come with new and latest trends which shows correct and true financial position of company. Some of the major obstacles found in financial data of TSR Pvt. Ltd. are as follows-
Profitability- This is the main reason for which TSR Ltd. is working in society. In case profits are not up- to the mark then manager are liable for business growth. Profits are one of the important component which is effective for knowing what can be done through which changes can be applied. In case profits are low, then stake holders will not invest money in organisation.
Performance and control- There is requirement of some controlling techniques so business operations can be controlled by financial department in order to earn appropriate profits. There are many departments which are working to achieve targets. So there are possibilities of misuse of resources (Renz, 2016).
Cost efficiency- This is also one issue which is faced by managers of TSR Ltd. There are any cost associated with manufacturing, distribution, storage of product. Sometimes there is increment in cost because of mis-managing of business activities.
Measures to overcome with these issues:
Key performance indicator (KPI): There is requirement of some people which perform well. This helps to set benchmarks which are considered by employees. These are some benchmarks for workers. These indicators helps know whether operations are performed in positive way or not.
Financial governance: Financial governance means guidelines which are issued to employees in order to get positive results. As there are many problems which rise in business, through this governance how to deal with them can be judged. Financial guidelines are changing on regular base, so it is important to work according to it.
Benchmarking: Benchmarking is the technique in which there is use of some past data as standards (Schermann, Wiesche and Krcmar, 2012). This helps to improve working and perform in more appropriate way. Sometimes these benchmarking is tool for knowing what actions can be taken to overcome problems. To know positive or negative result, actual performance can be measured with past performance.
Comparison of TSR Pvt. Ltd. with other enterprise
| TSR Pvt. Ltd. company | Haier company |
| TSR Ltd. is the company which deals in electronic segment at small level. | Haier is large company which operates in various parts of association and they deals in electronic appliances. |
| TSR Pvt. LTD. Is using benchmarking which is effective for knowing whether outcomes are positive or not. This can be easily judged and it helps to know what changes are made in appropriate way or not. | Haier is using financial governance which is important for analysing changes happening in finance sector. There is requirement of policies which are important for good financial position. As financial governance provides guidance to perform business related operations. |
| This has wider scope. | This has narrow scope. |
M4 Role of management accounting in analysing financial problems
Management accounting plays important role in managing business. It is essential to come with approaches through which changes can be taken in business and this helps to make positive impact of band in industry. There are many problems which arise while running business. It is important to know what can be done with which cost can be reduced and profits increases. There are many problems which are associated with financial data of company. There is change in technology which help to work in competitive market (Management Accounting, 2016). It is necessary to take actions which are effective and efficient for market growth and those can be affective for analysing market trends. To make good image, it is essential to accept changes which are significant for competitive analysis. Management accounting provides knowledge about use of techniques which is significant for making changes in working style through which positive changes can be made in working styles. In case of any problem, manager has to work according to market trend, which affects business operations ion positive way. There must be use of latest technology, so data can be save appropriately and can be used in case of need.
CONCLUSION
From above report it has been concluded that there is requirement of proper accounting through which changes can be implemented in proper and effective way. There are possibilities that due to change in working style, affects position of workers. Management accounting is beneficial for many organisations, which helps to know what has to be done through which changes are significant for growth of company. While dealing with management accounting accounting company has to work in proper manner, through which they can deal with external environment. There are different methods through which management accounting report can be prepared. In business there is requirement of various cost which are associated with promotion of product. There is requirement of various types of cost such as marginal cost, absorption cost which helps to know how much money is invented and accordingly policies are farmed. There are many stakeholders so it is important to keep proper documentation of cost which are incurred in business operations. Budget plays a vital role in performing business operations in effective and efficient manner. There must be activities according to set budget and standard. In case of negative results corrective actions has to be taken by managers.
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