Management Accounting Systems And Its Applications

TASK 1

Management accounting and essential requirements of various type of MA systems

Meaning of management accounting system

Management accounting is recognised as an information communicating method to management and accountants of an entity (Chiwamit, Modell and Yang, 2014). The accounting information remains essential for accountants and managers subject to form a new business strategy and take sustainable strategic decisions for future. As per IMA (Institute of Management Accountants), management accounting is considered as a professional way to present and connect the accounting information to users. This contains following exercises as the reporting of financial outcomes and assisting management control, management decision making and performance management systems.  

Difference between financial accounting and management accounting

Management accounting systems

Cost accounting system: This accounting system work on overall cost of entity like cost of production for manufacturing organisations, cost of services provided to customers and cost of administrations. The key characteristic of this accounting system is to bifurcate the expenditure by their nature as direct, indirect, fixed and variable (Watson, 2015). The use of cost accounting system in KEF ltd may assist the managers to divide the producing and administrative cost according to their cost nature.

Price optimisation system: This accounting system assist management to analyse the variation in demand when prices of products and serviced are changed. The figures are aligned in a single database and inventories levels are compared parallel to collected figures. Considering the demand and trend of particular products and services updated prices are recommended to management. This accounting system mainly works on mathematical concepts and principles. The management of KEF Ltd can implement this price optimisation system to vary the prices of products (Chiwamit, Modell and Yang, 2014).

Inventory management system: This managerial system is one of the running accounting system used by entities to manage the level of inventories and keep coordination between the supply and demand. There are three type of inventories available to organisation as raw material stock, work in progress and stock of finished goods. There are three methods available for managing the goods properly as FIFO that refers the goods manufactured first will be sold first, LIFO that refers the goods manufactured last will be sold first and a weighted average method in which aggregate quantity of goods are sold and retained by organisation for selling and manufacturing. All these methods also used in setting up the cost of closing inventories at the end of financial year (Watson, 2015).

Job cost system: This accounting system mainly associated with gathering the data from a particular job section and consolidating them as an overall cost (Collis and Hussey, 2017). This accounting system mainly used by construction companies, organisation that deals in contractual projects or seasonal jobs and large manufacturing units that deals in multiple customer units. Three major cost are recognised in the cost accounting system as direct material, direct labour and overhead cost. KEF limited can utilise job cost system to focus on customer requirements and operational changes incurred at particular product or services.

Type of managerial accounting reporting methods

Management reports

Managerial reporting is considered as a professional way of communicating the information to management of organisation. The reports are critically examined subject to take crucial decisions, strategic planning, forming regulation and taking decisions on performance measures for sustainable business structure (Collis and Hussey, 2017). key reporting methods are communicated below that are being used in running organisations and assist management for better planning;

Job cost reports: A cost report is prepared by the cost accountants that includes the cost applied to a particular job section. In small and medium size entities cost of fragmented jobs is reported by this reporting method. Mostly, this report presents the summarised overall cost plan to managers in order to measure the total cost for the particular job centre. This helps in assessing the profitability of separated job sections (Elmassri, Harris and Carter, 2016). KEF Ltd would be benefited by implanting this reporting method in order to identifying the cost centres at different production sections and allocating the resources as per the requirements of different cost centres.

Budget reports: Accounts and financial experts uses this reporting methods in order to form

a consolidated report of anticipated financial forecast for successful operations of business operations. this reporting method helps managers to analyse the financial requirement for subsequent events and activities of entities (Elmassri, Harris and Carter, 2016). Main purpose of constructing budget reports in to evaluate the difference between the actual cost of incurred in last year and estimation of budget of current year. this reporting methods would help the accountants of KEF Ltd to assess the differences between actual and estimated cost and manage their financial resources accordingly.

Inventory reports: This reporting method is consistently used by both of small and large enterprises subject to track every day fluctuation of inventories in an organisational context. At current business environment type of software has been innovated and widely used by organisations. Inventory reports plays a vital role in a manufacturing industry because without having an accurate forecast for upcoming requirement of inventories could create complications subject to meet the production and suppliers demand (Tucker and Schaltegger, 2016). The inventory reports present a clear information regarding usage of raw material to a particular production centre, scrap amount and a defected finished goods for a particular span of time. with proactive evaluation of inventory reports management separates the production line form high efficient to low efficient manner and create reorder plan considering the departmental strength. So, it is considered that inventory reports are essential for KEF Ltd in order to manage the order of inventories and flow of raw material stock in production process.

Performance evaluating reports: These reports are presents a significant aspect subject to performance of organisation during the year. In performance reports the graph of current year’s operations are analysed with the past year’s performances (Tucker and Schaltegger, 2016). If the results remain higher than the key performance indicators are highlighted in the reports and if the results remain unfamiliar than the reasons of having low performances are highlighted with suggestion to attain the required efficiency for succeeding year. the favourable performance report not only used for future planning and control but it also assists the managers to motivate their team members by celebrating the success of business. The report can present positive outcomes in respect of KEF limited if management starts analysing and report the performance on periodic basis. This will improve both the potential and capacity to bear future risk and lead organisation towards sustainable success.

Receipts and payment reports: Management of revenues and payments is also a prime requirement of businesses. A consistent management and appropriation of financial resources of organisation helps in conducting the best possible aspects for entity to gain desired advantages and results (Strauss, Kristandl and Quinn, 2015). This reporting methods help accountants to collect the information of receivables and payables during the year. the irrecoverable amounts, outstanding payments and prepaid expenses are noted separately to assess the further financial requirement. it also helps in deciding the lag in period of collection payment form customers and making discounting policies for those customers who clear their debts on or before payment dates. This report can be beneficial for KEF limited in order to fragment the collection information in accurate and accessible manner.

TASK 2

Utilisation of absorption and marginal costing systems

Cost: It refers the expenses and overheads incurred in production process in order to determine the overall cost of organisation.

Direct cost vs indirect cost: The main difference around direct costs and indirect costs is that fixed cost items can only be attributed to additional costs. A price item, like a product, product, client, project, or activity, is really for which a cost is collected. Typically, these expenses are categorized as directly or indirectly costs only if they relate to manufacturing activities, not organizational practices.

Variable cost: The cost which vary with the variation of production units. Direct material, direct labour and direct expenses are recognised as variable cost. It is also recognised as prime cost.

Fixed cost: The cost which is not affected by variation among production units. Even if organisation having null production the fixed cost has to pay by entity. Factory rent, interest on borrowing and depreciation are the type of costs considered in fixed cost.

Marginal costing: This is the costing system consolidate the cost of production in propionate to each produced unit.

Advantages: This costing technique helps in long term running process and one of the cost effective technique.

Disadvantages: The value of closing stock remain uncertain by using this costing technique.

Absorption costing: This is the cost techniques that consider overall cost of production in order to calculate profit/loss for an accounting period.

Advantages: It delivers more accurate data comparative to other costing techniques. It contains both the fixed and variable cost.

Disadvantages: It derive the profitability downwards due to considering the fixed expenses and is not beneficial for comparison of product lines.

Activity based costing: This cost accounting technique also referred as an aggregate production costing because it segregates the overall cost of production among each production units.  

Advantages: It presents realistic results in terms of manufacturing of specific products and helps to target towards improvements.

Disadvantages: There is huge time required to gather overall production cost data which delay the associated processes of analysis. GAAP do not advise this reporting technique.

When production is 19000 units

Marginal costing method

Absorption method

The above calculation states the profit of £230000 with both marginal costing and absorption costing.

When the production is 22000 units and closing inventory is 2000

Marginal costing

Absorption costing

Form the above calculations it is clearly considered that the organisation will earn £270,000 with marginal costing. There is no significant change is recognized form both of the level of production. Form the above calculations it is clearly considered that the organisation will have to bear a profit of £270000 at actual production of 22000 units with closing stock of 2000 units.

v) Recommended costing technique

The above evaluation presents the dynamics of marginal and absorption costing technique. it critically is reviewed that marginal costing presents more favorable results compared to absorption costing technique because the concepts related to marginal costing bifurcate the criteria and management approach in more strategic and synchronized form.

TASK 3

Type of planning tools used in budgetary control

Budgetary control

Basically budgetary control is considered as a terminology of considering the anticipated income and expenditures in an organised form (Strauss, Kristandl and Quinn, 2015). In this process the forecasted revenue and expenditures are analysed on frequently basis and projected outcomes are encountered to attain organisational objectives. In different contextual way the use of budgetary control process is applied to specific projects or contracts.

Rolling budget

This is a form of budget that will be carried out following the end of the accounting period of previous years (Arunruangsirilert and Chonglerttham, 2017). This plan is used by the KEF limited liability entity as after the conclusion of the reporting cycle.

Advantage: The budget can be changed during the year which is a key characteristic of rolling budget. This is useful towards being reactive to clients to quickly handle unpredictable adjustments. KEF ltd can get benefit of logical decision by using this budget with in operation.

Disadvantage: Such plan is not appropriate for all those businesses who change their operations year by year.

Production budget

This is a plan that involves the calculation of the operations relating to the materials and the resources required for development (Budding, Grossi and Tagesson, 2014). The KEF Ltd is planning this plan for its terminology of production.

Pros - This is useful for making the development price-effective for businesses. Utilisation of plants and machinery be easily to attain maximum level of adequacy with in operations.

Cons - False estimate of the necessary quantities of product or finance can lead to massive economic loss in certain situations. Formation of budget in volatile business situation become more complex for managers and accountants.

Cash budget

It is a form of business plan that provides data about in-or of out of-cash operations. This budget is drawn up in all those entities whereby cash is made on a continuous basis for operations (Jack, 2015). Their executives use important data from this expenditure to the above-mentioned firm to organise the prerequisite for operating capital. It has certain benefits and drawbacks such as:

Benefits - This plan assists businesses define goals for deficits. This budget may assist the users to track all the cash relevant activities at a single point of view.

Disadvantage - Because of this allocation, administrators are unable to use the budget as a company requirement agreement.  it tends to adhere the operation of the money expenditures.

TASK 4

Using MA systems to resolve financial problems

Financial challenges are parts of business operations in todays’ changing business requirements. Scope and reach of organisational activities has been vast at both at large level. Changing organisational operations and needs enhanced the requirement of various type of financial resources (Murthy and Rooney, 2018). Working capital requirement is one of the common financial challenges faced by entities in order to carry out day to day business activities.

Financial governance: Proper management and control subject to relevant financial problem is recognised as financial governance. The concept of financial governance is very ancient in business operational studies. Financial governance is a set of internal financial management rules and monetary policies of organisation. Whenever a business faces financial challenges and find any financial issues the governance structure is reconstructed after certain amendments. Kind of financial problem identifier tools are used by entities to overcome the financial challenges which are defined as follows;

Benchmarking: This is one of the common tool that is used by entities to identify the financial issue by comparing the past outcomes to current year’s outcomes (Vann, 2016). It is one of the proactive approach that not only identify the financial issues but also suggest the possible actions to resolve these financial challenges itself.

KPI (Key performance indicator): This is a form of methodology that businesses use to concentrate on such elements that generate highest capabilities to overcome financial challenges (Klemstine and Maher, 2014). By using this technique to obtain information, managers can readily analyse the source of the financial problem in businesses. This approach is used by many business entities not only to figure out the specific financial problem, but also to control their actual performance properly.

Comparison of ways to adapt management accounting systems

Conclusion

The above report states the key characteristic of management accounting systems. It clearly states that how management accounting systems assist the organisational structurer to meet the objective of business in aligned manner. It clearly explicit the concept of cost techniques that helps in determining the profitability of business in further. It is quite cleared that effective use of planning tools leads budgetary control in right direction assist managers to attain strategic objective of business. The essentialness of Managerial accounting systems in organisational context to overcome financial challenges clearly concluded with comparison among two different organisations.

References

• Chiwamit, P., Modell, S. and Yang, C. L., 2014. The societal relevance of management accounting innovations: economic value added and institutional work in the fields of Chinese and Thai state-owned enterprises. Accounting and Business Research. 44(2). pp.144-180.
• Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting Literature. 34. pp.1-16.
• Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International Higher Education.
• Elmassri, M. M., Harris, E. P. and Carter, D. B., 2016. Accounting for strategic investment decision-making under extreme uncertainty. The British Accounting Review. 48(2).  pp.151-168.
• Tucker, B.P. and Schaltegger, S., 2016. Comparing the research-practice gap in management accounting: A view from professional accounting bodies in Australia and Germany. Accounting, Auditing & Accountability Journal. 29(3). pp.362-400.
• Strauss, E., Kristandl, G. and Quinn, M., 2015. The effects of cloud technology on management accounting and decision-making. Management and Financial Accounting Report. 10(6).
• Budding, T., Grossi, G. and Tagesson, T. eds., 2014. Public sector accounting. Routledge.
• Jack, L., 2015. Future making in farm management accounting: The Australian “Blue Book”. Accounting History. 20(2). pp.158-182.
• Drury, C. 2012. Management accounting for business decisions: textbook / trans. from engl.
  M.: UNITY- DANA. 655 p
• Murthy, V. and Rooney, J., 2018. The Role of management accounting in Ancient India: evidence from the Arthasastra. Journal of Business Ethics. 152(2).

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