Financial Management Assignment Solution

Task 1

A. Explaining management accounting and essential requirements of such system

1. Difference between management and financial accounting

Financial accounting is highly concerned with the recording, analysis and summarization of monetary transactions pertaining to a business. On the other side, management accounting field focuses on preparing internal business reports timely and in an accurate manner. Tech Ltd should consider differences that take place in between management and financial while making plan about the future operations such as:

2. Importance of management accounting information as a decision making tool

Management accounting tools provide deeper insight about the internal operation and thereby help in devising competent plan. In the context of Tech Ltd, significance of MA in decision making can be presented in the following manner:

• Company can do relevant cost analysis by using the techniques of MA. It will assist Tech Ltd in determining selling prices and identifying the manner in which product should be sold to the customers.
• MA serves information about material, labour and overheads incurred for manufacturing products (Alfonso and et.al., 2016). Thus, using MA tools Tech Ltd can perform make or buy analysis in the best possible way.
• Using MA tools manager of Tech Ltd can make assessment of departmental performance and thereby, becomes able to plan about incentives and other activities such as training etc.

3. Cost accounting system

Cost accounting system is used by manufacturers for recording production activities. Tech Ltd can use cost accounting system for recording, classifying, summarizing and analysing alternative course of action for cost control (Fullerton, Kennedy and Widener, 2013). Using such system firm can determine the cost of running business and thereby would become able to do profitability analysis more effectually.

Advantages

• CA system is highly significant which in turn helps in eliminating wastage, losses and inefficiencies
• Helps in reducing cost and enhancing profit margin
• Tech Ltd can easily make decision pertaining to make or buy
• Reasons behind increasing and decreasing profit margin can easily be assessed through cost accounting system

Disadvantages

• In the case of partial utilization, cost cannot be ascertained in the best possible way.
• CA system furnishes information about past performance whereas management want to take decision about near future.
• Cost accounting system leads the problem of under-absorption overhead

4. Inventory management system

In the context of Tech Ltd, inventory management tool or system is highly significant which helps company in making estimation about stock that need to be managed within the firm. In other words, inventory management system gives idea to the business unit about the stock required for ensuring smooth production and meeting the requirements of customers (Fullerton, Kennedy and Widener, 2014).

Advantages

• Assists in making control on holding as well as ordering expense and thereby overall cost level
• Helps in managing stock and thereby ensures smooth functioning of operations
• Profit can be maximized by Tech Ltd using stock management tools & techniques

Disadvantages

• Installation and maintenance of inventory management software is expensive in nature
• Time-intensive process

5. Job costing system

Job costing system provides high level of assistance to the business unit in measuring production in terms of completed job. Using job costing method, Tech Ltd can assign manufacturing cost to the individual products or services. Such costing method lays focus on accumulating cost regarding material, labour and overhead. Using such costing method, Tech Ltd can take suitable decision and becomes able to track performance in monetary terms (Gautier and et.al., 2017).

Advantages

• Gives basis for cost estimation in the similar jobs
• Job costing system provide detailed information about cost of material, labour and overhead for each job
• Provides high level of assistance in doing variance analysis and taking corrective actions for improvement

Disadvantages

• This costing system lacks standardization of job
• Job costing system is highly expensive in nature
• During the inflationary period

B. Presenting financial information

1. Presenting different types of managerial accounting reports

Managerial accounting reports contain information about firms operations which are used by the managers for the purpose of decision making. Hence, for developing strategic and policy framework following managerial reports can be prepared by Tech such as:

• Performance report: Manager of Tech Ltd can use budget or performance report for evaluating the performance of each department and personnel. It provides management team with the valuable information about the level to which goals are met. Using budget report, manager can assess deficiencies and thereby becomes able to take remedial actions for improvement.
• Job costing report: It helps in evaluating costs like material, labour and overheads, etc. that associated with the specific jobs. Hence, accumulating such costs manager of Tech Ltd becomes able to compare the same with planned revenue (Gong and et.al., 2016). Thus, job cost report enables firm to employ its most of the resources in the profit-earning areas.
• Accounting receivable aging report: By taking into account receivable report manager of Tech Ltd can assess time period within which debtors are making payment. High credit period imposes default risk in front of business organization and meanwhile impacts working capital aspect. Thus, evaluating such report manage can decide that there is a need to tighten existing credit policies or not.
• Inventory report: This report contains information about expenses associated with stock management. It helps in getting information about expenses and wastage related to the stock. Hence, using stock report manager can identify the areas which demands for specific controlling measures.

2. Stating reasons due to which it is important to present information in a understandable manner

Managerial reports are used by the manager for decision making purpose so they must be presented in a clear, understandable and comparable manner. For ensuring smooth functioning of operations manager of Tech Ltd focuses on the preparation of accurate and timely reports (Ionescu, 2016). Decision making aspect of the management team is highly based on such reports. Thus, managerial reports must be prepared in a simple language along with the reasons behind increasing or decreasing cost and profit etc.

Task 2

Preparing statements using marginal and absorption costing system

Marginal costing: Marginal costing presents cost and profit by distinguishing expenses in terms of fixed and variable. In other words, under marginal costing method, variable expenses are charged in against to the unit cost (Marginal and absorption costing, 2018). In contrast to this, fixed expenses are written off in against to the aggregate contribution.

Absorption costing: In such full costing method, cost pertaining to the products or services are assessed by taking into account both direct and indirect expenses (Wijaya and et.al., 2015). It assumes that fixed cost become variable in long-run. From the perspective of accounting standard board, absorption costing method is considered as highly effectual over others.

Income statement according to absorption costing method

Computation of manufacturing cost per unit

Material + labour + fixed and variable production overhead

5 + 8 + 2 + 5

= 20

Marginal costing

Computation of variable cost per unit

Variable cost per unit: 5 + 8 + 2

= £15

Interpretation: The above depicted table shows that loss is higher under absorption costing method such as 375 respectively. On the other side, marginal costing method exhibits the loss of 2875 significantly. Due to the difference takes place in the production costs variations in the losses have found. In marginal costing method, production cost implies for £15. On the other side, in absorption costing method production cost is £20 because it categorizes expenses in the form of fixed and variable. Considering evaluation it is advised to Tech Ltd to make focus on undertaking absorption costing method which in turn gives suitable input for decision making by considering both fixed and variable expenses.

Reconciliation statement

Task 3

A. Presenting different kind of budgets and their advantages as well as disadvantages

Budgeting is the process which can be used by the manager for assessing income and expenses pertaining to the specific time frame. Tech Ltd makes focus on budget preparation with the motive to make effectual use of financial resources (Wagenhofer, 2016). Different types of budget which can be prepared by the manager of Tech Ltd are enumerated below:

Fixed budget: This budget implies for the financial framework which does not change according to the increase or decrease in sales revenue. Companies which have proper estimation regarding demand and expenses can use such budget for planning purpose.

Flexible budget: Unlike fixed, flexible budgets are not remained at one point irrespective of the activity level or volume. In other words, flexible budgets make focus on adjusting figures regarding revenue and expenses as per the changes take place in the volume of activity. In the today’s changing business environment flexible budgeting method is highly suitable over others.

Cash budget: It presents the level of inflow and outflow associated with the business over a specific time frame. Such budget helps manage of Tech Ltd in estimating whether it has enough cash balances or not.

B. Defining budget preparation process and determination of pricing using varied costing system

Tech Ltd.’s manager can undertake below mentioned process for budget preparation such as:

• Obtaining estimates: In the first stage, manager makes estimation about sales, production, cost and availability of resources in the context of each department.
• Co-ordinating estimates: At this stage, budget committee makes evaluation of financial plan submitted in the respect of each unit (Martinez-Sanchez and et.al., 2016). Hence, committee makes evaluation with an objective to assess whether resources are fairly allocated or not.
• Communicating budget: Once approvals have been taken from the committee, manager sends budget to the responsible manager of concerned departments.
• Execution of budget plan: In this, budgets are executed by the managers and personnel while carry out business activities and functions.
• Giving report about interim progress pertaining to business objectives: In the last stage, departmental performance reports are prepared by doing comparison of actual performance with the budgeted figures. As per such report, manager can revise or make suitable modifications in the budget pertaining to upcoming time frame.

C. Significance of budget as a tool from the perspective of planning and control

In the context of planning and control, significance of budget is greater from the perspective of decision making. Using budget, manager of Tech ltd can do comparison of actual performance with the budgeted figures. This helps in ascertaining variances (favourable and unfavourable) along with the reasons. Hence, considering the reasons of deviations Tech Ltd’s manager can take suitable decision for improvement (Kaplan and Atkinson, 2015). This aspect shows that budget helps in monitoring and controlling performance more effectually. In addition to this, budgetary control tool also aid in planning significantly. By taking into account deviations and their reasons Tech Ltd can suitable financial framework for the upcoming time period.

Determination of pricing using different costing system

In relation to the manufacturing company, Tech Ltd, from the perspective of price determination activity based and absorption costing method proves to be more effectual. ON the basis of ABC technique, by allocating expenses as per cost driver firm can determine suitable cost and profit margin. (Zivin, Kotchen and Mansur, 2014) In addition to this, referring both fixed and variable expenses regarding production & non-production Tech Ltd can assess appropriate cost and thereby, becomes able to determine suitable profit margin.

Task 4

Presenting manner in which balance scorecard technique assists in responding financial problems

On the basis of cited case scenario, Tech Ltd is facing the situation of loss pertaining to £1.5 million. Thus, by undertaking the strategy and tool of balance scorecard Tech Ltd can cope up with such undesirable financial situation or condition. Such tool helps in responding concerned issue from both monetary and non-monetary perspective. BS offers opportunity to the manager to make evaluation of performance from monetary and resource availability aspects (Balanced Scorecard Basics, 2018). Further, using such tool Tech Ltd can evaluate customer value, satisfaction as well as retention aspect. BS also enables business unit to evaluate quality of the existing offerings. Through using BS approach, organizational capacity can also be evaluated more effectually. Thus, by making evaluation of all such aspects manager of Tech Ltd can take suitable decision for avoiding the situation of loss.

On the other, ABC manufacturing company is facing the loss of £1.2 million. Such business unit focuses on undertaking financial governance, benchmarking and KPI strategy for evaluating as well as dealing financial problems. Benchmarking is highly effectual technique which helps company in identifying deviation within the suitable period. Hence, by taking strategic action ABC would become able to respond monetary issues timely. Further, by setting KPI’s related to sales, profit, etc. firm can avoid undesirable financial performance.

Conclusion

It has been articulated from the above report that management accounting systems provide high level of assistance in evaluating cost and thereby, helps in taking suitable decision for improvement. It can be seen in the report that field of MA helps in decision making aspect to a great extent. Further, it can be stated that managerial reports are highly significant which in turn assists manager in devising plan and communicating information about business cost as well as operations. It can be summarized from the evaluation that Tech Ltd should make focus on using full costing method. By using absorption costing method, manager can assess the suitable cost of production using fixed and variable. Along with this, it has been assessed that using budgeting tools and techniques gives input to the manager of Tech Ltd in assessing performance and thereby, helps in taking appropriate decisions. In the context of Tech Ltd, balanced scorecard technique is considered as an effectual technique which in turn helps in meeting financial problems prominently.

References

• Aleem, M., Khan, A. H. and Hamad, W., 2016. A comparative study of the different costing techniques and their application in the pharmaceutical companies. The Audit Financiar journal. 12(143).
• Alfonso, Y. N. and et.al., 2016. Trends in the Marginal Cost of Male Circumcision in Rural Rakai Uganda. JAIDS Journal of Acquired Immune Deficiency Syndromes. 73(5). pp.564-571.
• Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society. 38(1). pp.50-71.
• Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7). pp.414-428.

UPTO50%

Avail The Benefit Today!

To View this & another 50000+ Free Sample

Enter Email

Submit