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Application of management accounting principles and theories

Stratford College London

Code: H/508/0489

Learning Outcomes:

LO1: Demontrate an understanding of management accounting system.

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

Answer

Introduction 

Financial accounting helps to meet the demand of the shareholders; however the financial statement of accounting could not address the demand of the managers. As the management accounting focuses on the information derived from the financial statements, it can be said that the management accounting is the secondary phase of accounting process in an organization. In this study, the researcher shall discuss the management accounting and the essential requirements of the management accounting. After the discussion on the requirements of the management accounting, the researcher shall focus on the different methods of management accounting reports. Apart from discussing the methods of management accounting tools, the researcher shall apply the management accounting tools in order to calculate the cost of production of various units of the firm. Followed by this section, the study would also focus on the responses that the management accountants make to mitigate the financial problems in an organization. 


Task 1: Demonstration of understanding of management accounting system 

Management accounting is field of cost accounting process that helps in the identification, measurement and analysis of various pursuits of the organizational goals and objectives. This field of accounting is different from that of financial accounting process as it takes into consideration cost implications of the organization and helps the management accountants in better decision-making and achievement of the organizational goals and objectives. Usually, the management accounting process tends to encompass the other fields of accounting and present analysis of the business operation metrics. In this regards, the management accountants uses various tools and techniques that includes preparation of cost reports, preparation of performance reports, inventory management, budgets, etc. 


1.1.1 Explanation of management accounting

Management accounting deals with the management of the financial resources of a company and therefore, the managerial accounting concept is required to be considered as an important aspect for an organization. As stated by Ammar, (2017), managerial accounting helps the financial managers to derive financial information from the income statement and the financial position statement. Hence, it can be said that the management accounting is the derived form of financial accounting. The management accounting process also helps to make business decisions as it collects significant accounting information from the financial accounting statements. For making analysis, the management accounting segregates the revenues and the expenses in two different parts such as operating and non-operating. According to Bebbington et al. (2014), the operating revenues and the operating expenses are taken as the base of making decision for a business as these items have the long-term implications in a business. On the other hand, Braun et al. (2014) argued that non-operating revenue and expense have significance in management accounting as the business entities try to enhance the non-operating revenues through non-trading investments and decrease non-operating expense by reducing wastages in the manufacturing process. Therefore, it can be said that the management accounting process works based on separation of operating and non-operating transactions in a business.      


1.1.2 Different types of Management Accounting and its requirements

Management accounting system focuses on decision-making and therefore, it can be said that the accounting requires relevant financial data, which would help the management accountants to make business decisions. As opined by Brown et al. (2014), management accounting requires implementing the plans by using the managerial tools such as process accounting, overhead accounting and standard costing. Hence, it can be said that the implementation of financial strategies is also another requirement of different types of management accounting. In contrast to that, DRURY (2013) stated that management accounting helps to control the costs by the variance analysis, which emphasizes on the comparison between the actual result and the budgeted figures.    


1.2 Different forms of Management accounting reports  

Management accounting reports are of great significance to organizations in getting an overview of the performance of the company for a particular point of time.  Additionally these reports help the management of the organization in effective decision making, planning and business operations control. In order to make the management accounting reports the resources that are used includes the financial statements of the organization along with cash flow statement and other accounting reports (Fisher and Krumwiede, 2015). Preparation of these reports helps the managers to critically analyze the financial status of the organization and evaluate its performance as well. The management accounting reports that are used by the management accounts are listed as follows:


  • Job cost reports: The reports of job cost are prepared in order to get a clear understanding of the expenses incurred by an organization for a specific period of time. The attributes of the job cost reports are compared with the variables of the estimated revenue of the organization in order to evaluate the profitability of the company. This not only helps the company in identification of the key areas where they can earn better revenue but provides an insight into the avoidable expenses of the organization that can be reduced as well (Fullerton et al. 2014)
  • Accounts receivable aging:  For the organizations, extending credit to its customers on a long-term basis, accounts aging report serves as a critical tool for analysis. These reports are prepared in order to get a breakdown of the credits allowed to the customers of the organization along with the period for which the credit has been extended. In addition to that, it also helps the account manager of an organization in identification of the key areas where the firm is facing difficulty process in the collection of the credit from the customers (Geiszler et al. 2017). Notably, preparation of the accounts aging reports also help the firm in keep a constant check on the debts owed to the company by their customers. 
  • Inventory and manufacturing reports: The inventory and the manufacturing report are useful to an organization in maintenance of the physical inventory of the organization in the manufacturing process. These reports are usually prepared in order to keeping a constant check on the inventory level in the organization and in reduction of the wastage of stock as well. It helps the management of an organization to get an overview of the required level of stock for the manufacturing process. In addition to that, it also helps the managers in comparing the different assembly lines of the company as well as gets an insight of key areas where the organization needs improvements (Lorenz, 2015)
  • Budgets: Budgets are one of the most critical analysis tools for an organization as it helps in getting estimation of the required level of resources as well as the actual expenses incurred. It is noted that a budget of an organization is prepared based on the prior year estimation and by adjust of the future estimations. It helps the management of an organization to get an estimation of the required level of expenses of the organization as well as compare it with the actual to find the increase or decrease in the expenses level. 
  • Performance reports: Evidently, management accountants of an organization prepare budgets in order to get an estimation of the expenses to be incurred. They compare these budgets with the actual and make a analysis of the increase or decrease in the expenses level of the organization the information derived from that analysis are noted to be listed in the performance reports of the organization (Lueg and Malmmose, 2014). Performance reports of an organization are prepared to evaluate the performance level of the organization in all aspects as well to evaluate the increase or decrease the productivity level of the organization. 


Task 2: Application of range of management accounting techniques

2.1 Income statement by considering marginal costing technique

Income statement, when production and sales are 10000 units 

Income statement under marginal costing technique  


Income statement under   marginal costing technique
Particulars
Amount
Sales 
£  250,000.00


Direct material 
£      50,000.00
Direct labor
£      30,000.00
Variable manufacturing   overhead 
£      20,000.00

£  150,000.00
Less: Closing inventory 
            -  


Less: Variable selling   and administrative expenses 
£      30,000.00
Contribution 
£  120,000.00


Less: Fixed costs 

  Fixed   manufacturing overhead 
£      40,000.00
  Fixed selling   and administrative expenses 
£      30,000.00
Net profit 
£      50,000.00


When production is 10000 units however the sales is 5000 units 


Income statement under   marginal costing technique
Particulars
Amount
Sales 
£  250,000.00


Direct material 
£          50,000.00
Direct labor
£          30,000.00
Variable manufacturing   overhead 
£          20,000.00

£  150,000.00
Less: Closing inventory 
£          75,000.00


Less: Variable selling   and administrative expenses 
£          30,000.00
Contribution 
£          45,000.00


Less: Fixed costs 

  Fixed   manufacturing overhead 
£          40,000.00
  Fixed selling   and administrative expenses 
£          30,000.00
Net profit 
-£   25,000.00


2.2 Income statement by considering absorption-costing technique

Income statement, when production and sales are 10000 units


Income statement under absorption costing technique
Particulars
Amount
Sales 
£  250,000.00


Direct material 
£      50,000.00
Direct labor
£      30,000.00
Variable manufacturing   overhead 
£      20,000.00


Less: Closing inventory 
£                        -  
Gross profit 
£  150,000.00
Less: Variable selling   and administrative expenses 
£      30,000.00

£  120,000.00
Less: Fixed overhead   absorbed 

  Fixed   manufacturing overhead 
£      40,000.00
  Fixed selling   and administrative expenses 
£      30,000.00
Net profit 
£      50,000.00


When production is 10000 units however the sales is 5000 units 


Income statement under absorption costing technique
Particulars
Amount
Sales 
£  250,000.00


Direct material 
£          50,000.00
Direct labor
£          30,000.00
Variable manufacturing   overhead 
£          20,000.00


Less: Closing inventory 
£          75,000.00
Over absorption of fixed   overhead 
£          20,000.00
Gross profit 
£          95,000.00
Less: Variable selling   and administrative expenses 
£          30,000.00

£          65,000.00
Less: Fixed overhead   absorbed 

  Fixed   manufacturing overhead 
£          40,000.00
  Fixed selling   and administrative expenses 
£          30,000.00
Net profit 
-£         5,000.00


Variance analysis:


Labor variances

Budgeted   labor hours 
3000

Actual   labor hours 
3400

Budgeted   labor rate 
5

Actual   labor rate 
5.2




Labor   rate variance = (Standard rate - actual rate ) * Actual hours 
-680
A



Labor   efficiency variance = (Standard hour -actual hour )* Standard rate 
-2000
A



Labor   cost variance (Standard cost - actual cost)
-2680
A


Material variance

Actual   output
1000

Actual   consumption (kg)
2200

Budgeted   consumption (kg)
2000

Actual   rate 
9.5

Budgeted   rate 
10




Material   price variance = (Standard price - actual price ) * Actual consumption 
1100
F



Material   usage variance = (Standard usage - Actual usage) * standard price  
-2000
A



Material   cost variance = (Standard cost - Actual cost)
-900
A


Task 3: Explanation of planning tools used in management accounting 

The management accountants of an organization are involved in preparation of various reports that serves as critical tools for analysis and in the planning of process. These tools includes preparation of budgets, standard cost reports, job cost reports, performance cost reports, accountant aging reports, etc. These reports act as a essential tools in the planning process of the organization. However, it is noted that, these tools used by the management accounts has certain shortcomings that pose hindrance in proper planning of an event (Mazaraki and Fomina, 2016). The advantages and the disadvantages of the planning tools in management accounting are listed below. 


3.1 Advantage of different types of planning tools

The following are the advantages of the planning tools of management accounting:

  • It helps the management accountant to get a clear understanding of the specific expenses incurred by the organization incurred over a period. It helps in understanding of the required level of expenses of the organization as well as makes analysis of the cost implications of the organization. 
  • It helps the managers of an organization in getting the level of inventory maintained in the organization and thus, they are able to plan for procurement of the physical stock for the next term. 
  • The preparation of a budget helps the organization to get an estimation of the expenses that are to be incurred by the organization and thus, helps in proper planning of the cost implications of the organization (McLellan, 2014)
  • The performance reports helps in evaluation of the performance of the organization at a certain point of time thereby helping in planning the way the company need to operate in the next term in order to improve its performance. 
  • The accounts aging reports of an organization helps to get an understanding of the credit structure of the organization. It helps the managers to get an understanding credit that is owed to the company by their creditors. This helps in planning of the credit that is to be allowed by the organization in future (McNeil et al. 2015)


3.2 Disadvantages of different types of planning tools  

The disadvantages of the planning tools in the management accounting process are listed as follows:

  • It is noted that the preparation of standard costing system is a tedious process and involves huge cost implications. Thus, it may be difficult for small organization to adopt standard costing process.
  • Notably, the standard costing process tends to include only the operating expanses of the organization and eliminate out other factors like that of quality, lead-time, etc. 
  • It is noted that lack of standardization of specific job in the job costing process. Thus, the job costing system requires close supervision of the accountant (Soltani et al. 2014)
  • One of the major drawbacks of the costing process it that instead of taking actual data, estimated facts and figures are considered and thus the results derived are an estimation of the amount to be incurred. 
  • It is noted that the budgets of an organization are prepared based on certain assumptions and estimations and the management of the organization attempts to meet the targets in the next term based on the outlined budget. 
  • Another major drawback of the management accounting process is that it takes into consideration only the financial outcomes of an organization. Thus, the subjective issues of the organizations tend to be neglected (Wijaya, et al. 2015)


Task 4: Comparison of ways that management accounting of an organization use to respond the financial problems

Evidently, the management accounting process acts as a important field of accounting within an organization. In light of the growing complexities in the business operations the management accounting process has came to become an integral part of the management of an organization it not only help the manager of an organization  in better decision making but in evaluation of the performance of the organization as well. The analysis derived from the management accounting process helps the management of the organization in increasing their efficiency level and in better decision making. Notably, the process of management accounting is different from that of the financial accounting processes (Mazaraki and Fomina, 2016). The various tools and methods in the management accounting process helps in the helps the management of the organization in getting an insight of the various cost implications of the organization and this helps in better analysis and planning for the future. Evaluation of the performance of the organization helps the organization in the identification of the key areas where the organization needs to improve and accordingly formulate action plan for the same. The ways management accounting process are useful to the organization are given as follows:


  • Notably the management accounting process helps in strategic planning of the organization. It helps the management of the organization in formulation of strategies related to financial aspects of an organization and thereby in the preparation of the financial reports (Wijaya et al. 2015)
  • It is evident that, management accounting process involves performance-based actions that may lead to the enhancement of the operations of the business. In addition to that, it also serves as a critical tool for decision-making process of the managers. This helps the managers of the organization in proper planning and thereby increasing the profitability of the organization (Soltani et al. 2014)
  • The management accounting process also caters to the risk management process of an organization and helps in assessing any future risks or threats that may arise. This helps the financial managers in identification of any kind of risks that may be associated and accordingly prepare the financial statements of the organization. 
  • Evidently, the management accounting process tends to provide relevant information for the planning process within an organization. It helps in the determination of the required level of resources for the business operations (Mazaraki and Fomina, 2016)
  • The management accounting process involves preparation of several kinds of reports that gives an overview of the cost implications of the organization. It helps the mangers to get an estimation of the cost incurred by the organization and formulate measures in order to reduce the cost implications of the organization as well. 
  • The management accounting process involves the preparation of budget that gives van estimation of the expenses to be incurred by the organization. The manager may make a comparison of the budgeted cost with the actual expenses incurred and get an understanding of the increase or decrease in the cost implications. This helps the managers in formulation of policies accordingly (Lorenz, 2015)


Conclusions 

In light of the above study made it can be established that management accounting process serves as an important tools for analysis within an organization. It is evident from the study that management accounting process attempts to focus more on the information and the cost implications the organization. On the contrary financial accounting, process caters to the financial aspects of the organization. Efforts have been made in the study to illustrate the various implications of the management accounting process, the tools and methods applied in management accounting and the advantages and the disadvantages of the management accounting. It is noted in the study that, management accounting process is essential for an organization as it helps the manager in making analysis of the performance of the company and thereby in making better decision. In regards to the given scenario, attempts have been made in the study to give a clear understanding of the accounting systems in an organization, identification of the key areas and the ways of improvements. Thus, it can be concluded from the study that, application of management accounting process is essential for an organization in order to report its various cost implications in a better way as well as take better decisions that will help in achieving of the organizational goals and objectives.

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