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    Unit 4 level 6 Management Accounting

    Introduction

    Management accounting is the main process that can be used by the organisation in order to gain sustainable development in an effective manner. there are so many tools which can be used by the organisation in order gain the sustainable development effectively. Although, this can be rightly said that the management accountant uses various kinds of accounting systems which can further be used by the Tech (UK) organisation for attaining their business objectives in an effective manner. Net profit by using a costing methods such as net absorption costing and marginal costing method. On the other hand, this is rightly said that the management accountant need to explain their business objectives in an effective manner. Various planning tools for budgetary tools. Financial tools are used by tech UK in order to overcome the financial problems in an effective strategy in an effective manner (Vinayagamoorthi and et. al., 2012). Tech (UK) company would gain an effective and efficient information that could lead to make sustainability in an effective manner. However, management accountant would use various tools that can be used by the organisation in an effective manner.

    Task 1

    A). Meaning of the management accounting and its types:

    Management Accounting reflects of accounting information of an organisation in this way assist the management for formulating the policy and regular work of the organisation in an effective way. This has been concerned that the accounting information which is formulating to the management of the cited organisation. This is rightly said that the accounting information which is crucial to the management of the cited organisation. It is concerned with the accounting information that is essential to the management of the company (Macinati and Anessi-Pessina, 2014). It means that all the accounting information are not presented to management but only that information is collected, analysed and interpreted which is useful in operating the business.

    1. Financial accounting vs. Management accounting

    Basis of difference

    Financial Accounting

    Management Accounting

    Purpose

    Financial accounting purpose is to communicate the financial position of the company to external.

    Management accounting purpose for decision making for the internal so that the financial position is become strong.

    Requirement

    Mandatory

    Optional

    Primary audience

    In financial accounting the users are the external who uses the financial information to take the decision on the investment in the company.

    Management accounting the users are the internal who makes the decisions, policies, etc. and uses in internally to achieve the targets.

    Frequency

    Financial statements in the financial accounting are prepared at the end of the month.

    Management accounting the statements are prepared at regular intervals.

    Focus

    Financial accounting focuses on the past data.

    Management accounting focuses on the information to aid decisions for the future achievements.

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

    The present rigid industrial world, the management accounting has become an essential part of management. The management accountant guides and advises to the management at every step. Management accounting not only improves the efficiency of the management but also maximize the efficiency of the workers of the company.

    1. It determines the aim for the company and also tries to find out the route through which it can reach to the goal.
    2. Helps in the preparation of plans to the departments so that these plans satisfy the needs of the consumers. Before taking any plan the manager must study and investigate the present and future scenario for the business (Amoako, 2013).
    3. Provides better services to customers by providing quality product and services to them. The customers are supplied goods and goods quality at affordable price.
    4. Maximum profits can be obtained by using the management accounting system. In this process every possible effort is made to make control on the unnecessary expenses.
    5. Cost accounting system: (ACTUAL, NORMAL an d Standard Costing):

    This system gives useful information about the management and financial accounting to the manager of the company. The cost accounting system helps out the managers to find out the cost of the units which they are produced in the manufacturing process (Management Accounting, 2017). This system controls the operation expenses and helps to generate the operational profits for the business concern. This system helps the manager to take the decisions regarding the cost for the future product which they want to produce.

    By using the actual, normal, and standard costing in the product costing are:

    ACTUAL COSTING

    NORMAL COSTING

    STANADRD COSTING

    1. The cost of the product is determined by the actual direct material, direct labor, and employed overhead by using the actual overhead rates.

    2. The cost of product is determined by the actual direct material, direct labor, and employed overhead by using the predetermined overhead rates.

    3. The cost of the product is determined by the standard direct material, direct labor, and employed overhead by using the predetermined overhead rates.

    This can be calculated by “Actual variable indirect rates x Actual quantity of cost- allocation bases used”.

    This is measured by using “Budgeted variable indirect rates x Actual quantity of cost allocation bases used”.

    This is measured by using “Standard variable indirect rates x Standard quantity of cost allocation bases allowed for output for actual output achieved”.

    1. Inventory Management System: The inventory management systems keep track the resources which is used in the manufacturing the product in the business activities. This system monitoring the stock levels, orders, deliveries and sales of the product. TECH (UK) LTD. integrated with this system to smooth functioning of their stock in whole system. This system shows the over stock and under stock to the manager of the company so that deficiency or outdated stock problem does not arise in the production process.
    2. Job costing systems: A job costing system provides the information relating to the job which is gathers from the various useful sources within the organization. This information used by the customer to make the order to the company regarding the particular product which they want to manufactured. In this information the price, quantity and material are used is the previous particular job is shown to the customer so that they accordingly tailored the product and price of the job (Lim, 2011). This system used by the cited company to keep monitoring on the identical or specific job order and related expenses.

    B). Presenting financial information:

    The various different types of reports which helps the management of the company by providing them the essential and useful financial information to them which is described below:

    1. Job cost report: This report shows the various list to the management regarding the each specific job to the user of this report. In this report all the previous and present transactions are recorded in most effective manner so that the management tracks unnecessary costs and reduce on the spot.
    2. Inventory report: In this statement the items relating goods produced and other raw materials are track down in this report. A quality inventory or stock should be precise in clear and simple. By utilizing this report, the management rectifies the flow of inventory in the whole system of the company. The monitor and eliminate the unnecessary wastages in the storehouse of the company.
    3. Budget report: It is utilized inside the company by the management to do comparison in between the estimated and actual performance by the various divisions or departments and note down in the budget report for future use. The report shows the entire past budget in which all the success and failure are prescribed in the appropriate manner.
    4. Importance of using above accounting reports systems:

    By utilizing the above reporting system in the company makes the business operations flows effectively and efficiently. These reports contain all the useful information which the manager wants to make the effectively useful strategies for the company. All the reports have their own advantage and they give appropriate information to the user of the report. All the failure and success of the business operations are recorded in this report.

    M1: By applying the management accounting system tools and techniques helps TECH (UK) LTD. to run their business functions effectively and efficiently together achieving the goals and objectives. Management accounting system gives an idea and useful methods to make the strategies and objectives to the company (van Helden and Uddin, 2016). Under this, management of the company uses the Job, inventory and costing system to generate the more profits, reduce the unwanted cost and avoid the unnecessary wastages in whole management system of the company.

    D1:The management accounting system assists TECH (UK) LTD. to prepare the useful and informational full management accounting reports for them in order to make success of the business operations. With this reporting the manager of TECH (UK) LTD. makes decisions so that they could achieve predefined objectives. This is the most appropriate procedure used by the company for the level functioning in the business operations. Hence, both the management accounting reporting and system is necessary or important to integrate with each other so that the company attain their pre- set objectives and goals.

    Task 2

    A & B). Calculate the net profit under the marginal and absorption costing:

    Income statement on the basis of Marginal costing method:

    Working 1: Calculate variable production cost £

    Direct material cost 8

    Direct labour cost 5

    Variable production Overhead 2

    Variable production cost 15

    Working 2: Calculate value of inventory and production

    Opening inventory Production Closing

    Nil 2000*15=30000 500*15=7500

    • Income statement on the basis of Marginal costing method:

    Income statement on the basis of Absorption costing method:

    Selling Price per unit

    35

    Unit costs

     

    Direct materials cost

    8

    Direct Labour cost

    5

    Variable manufacturing overhead

    2

    Total variable production cost

    15

    Fixed production overhead

    Fixed production overhead incurred actually

    Fixed selling & distribution expenses

    Variable selling & distribution expenses

    Sales

    5

    15,000

    10,000

    15% of sales value

    2,000 units

    Absorption costing working notes

    Working Note 1: Calculate full production cost

    Direct material 8

    Direct labour 5

    Variable cost 2

    Fixed cost 5

    Total 20

    Working Note 2: calculate value of inventory and production

    Opening inventory Production Closing inventory

    0 2,000*20 = £40,000 500*20 = £10,000

    Working Note 3: under/ over absorbed fixed production overhead

    Actual fixed production: 15000

    Fixed overhead: 10000

    Total £ 5000 (under absorbed)

    Net profit using absorption costing

    Amount 

    Amount 

    Sales value

    Less: Cost of Sales:

    Opening stock

    Cost of production

    Closing stock

    (Under)/Over absorbed fixed production overhead

    Gross Profit

    Less: Selling Expenses

    Variable sales expenditure

    Fixed selling expenditure

     

     

    NIL

    40000

    (10000)

     

     

     

    7875

    10000

    52500

     

     

     

    (30000)

    (5000)

    17500

     

     

    17875

    Net loss

     

    -375

    M2

    In the above case, the company is applied the important management accounting tools and techniques to maximize the profitability of the business operation which they are conducted. This technique helps the TECH (UK) LTD. to full concentrate on their business and makes the effective strategies for the upcoming projects. By using above two methods of the cost management system, the company increases their profits and product sales in the market. These techniques of management accounting assist all departments to prepare the effective goals and targets for the company and for them.

    D2

    By using the cost management method in the company, the net profits which are arise in different way because both the methods have different procedure to give the profits outcome to the company. In the marginal costing method, the company faces a loss of (£) 2,875 and in the absorption costing the loss of (£) 375 is faced by the business. So, it is beneficial to the company to adopt the method of absorption costing because the loss is less than the marginal costing.

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    Task 3

    A). Budget and its types

    Budget is the important source of planning which assist the company to maintain the financial position in the market (Gates, Nicolas and Walker, 2012). It includes the preparing and applying the budgets so that the company utilized its resources in the proper way so that they achieved their targets on the predefined time. The budget reflects the estimated amounts which are just opposite to the old financial data of the company’s performance. The differences or variances from the budgets are get from the performance of the departments and business operations which should be frequently identified by manager by doing effective monitoring and also find out the reasons behind such deviations which should not occurs on the future.

    Some different useful budgets are mentioned as under:

    Sales Budget: This budget involves the estimated sales volume and selling expenses. The sales volume budget is derived from the company’s sales forecast and selling expenses budget consists of sales and administration expenses. It gives detailed break-down of estimates of sales revenue and selling expenditure to the manager of the company.

    Advantages: -

    • It is helpful to estimate the future sales to the business.
    • It is useful to the manager of the company to forecast sales and selling expenses to the particular product which they want to sale in the future.

    Disadvantages: -

    • This budget does not always forecast the accurate future events which occurred any time.
    • It uses so much time to prepare and does not simply adopted by the all members of the company.

    Production budget: After the sales budget is completed, the company can prepare the production budget. This budget is based on the expected level of sales, changing levels of inventory and also includes the decisions about outsourcing production, if the company will purchases finished products or parts from an external supplier (Hiebl and et. al., 2015).

    Advantages: -

    • Resources, machinery, and labor hours can be used to the maximum extent.
    • This budget uniforms the production process without any interruptions.

    Disadvantages: -

    • It increases the cost of the product if the resources are not effectively utilized and there are wastage in the production.
    • When the production process cannot attain its targets, it unbalances whole the process of the production.

    Cash budget: A cash budget is a statement in which estimated future cash receipts and payments are calculated in such a manner as to reflect the forecast cash balance of a business at defined intervals. A cash budget can give warning of potential problems that could arise so that manager can be prepared for the situation or take action to avoid it.

    Advantages: -

    • This budget helps to forecast the future cash inflow and outflow to the manager of the company.
    • It helps to maximize the profit because the flow of cash inside the company.

    Disadvantages: -

    • It ignores time value of money.
    • It ignores cash flows after the payback period and also does not measure the profitability.

    B). Different types of costing systems which are used for preparation of budgets:

    Actual costing system: The estimated cost of the actual costing assists the company to make the budget which involves the actual cost and used the actual amount. It does not consider the standard cost in it.

    Normal costing system: The normal costing involves the actual direct material, labor but the manufacturing overheads are involved in the budgeted form in the budget. In this system the manager is concern on budgeted or estimated cost of the operations which is include n the product development.

    Standard costing system: The costs which are standard or estimated are charged to production processes which help the company to control the cost while making the budgets. It is best system for the company for achieving its targets on the time.

    C). The importance of budget as tool for planning and control purposes:

    The planning tool helps the company to make the budgets so effective which is easily adopted by the departments or divisions (Jalaludin, Sulaiman and Nazli Nik Ahmad, 2011). The SCORO and PROPHIX are two effective software which reduces the work load on the company. This software helps in planning of strategy, reporting of the management accounting and information, budgets forecasting, etc. This software is easily used by the users to access the information which they want. All the data are stored in the cloud- based management system.

    M3

    Planning tools helps to forecast and scenario which could assist in forming the organisational activities in a most effective manner. Forecasting tools also assist to plan future transactions and subsequently scenario tools for contributing in evaluating the risk which are linked to them. Which ultimately assist the organisation in order to make the business in order to make an efficient strategies.

    D3

    There are different and effective financial tools which are utilized by the company to keep check on the financial error in the whole business (Zang, 2011). Key performance indicators, financial governance, Benchmarking, and Budgetary plans are used by the company in order to prepare a good financial system in the company and also rectify the financial problems in whole process of the business. By using these tools, the company would generate its ability to find out the risk and also respond to this risk in most appropriate manner.

    Task 4

    Balance Score card approach for responding financial problems and compare:

    Balance score card approach is the tool through which financial problems in a business can be respond in an effective manner. Tech(UK) is implementing BSC approach which is the evolutionary process.

    Tech(UK) produces particularly have special charger for retail outlets. This is observed from their past year financial statements which firm achieve the loss of £1.5 million. Management accounting renders high number of tools and approaches that assist to overcome from the financial related problems. This is highly said by the auditors which balanced scorecard approach assists Tech(UK). To efficiently respond finance related issues.

    Balance score card approach: This approach is implemented in the strategic management that could assist in determining and enhancement of the internal functions of the organisation and concentrates on the achievement of the better external outcomes (Vakalfotis, Ballantine and Wall, 2013). This kinds of the tools assist in calculating and also provide feedbacks to the company. Data gathering tool in quantitative terms is crucial process for manager that could improve their decision making power. There are various aspects which assist the Tech UK to overcome their losses which are mentioned hereunder:

    • Render emphasis on the crucial aspects.
    • Emerge strategies to guide employees.
    • Setting of the pre-set objectives.

    There are four perspectives have been elaborated as under:

    1. Financial Perspective: BSC approach implements financial performance measures, like net income and return on the investment, as whole for the profits firms apply them. Financial performance measures a common language for assessing and comparing organisations. People who renders funds to the organisations, like financial institutions and shareholders, based upon financial performance which elaborates in identifying whether to lend or invest funds. Appropriately designed financial measures could render total view of a company success.
    2. Customer perspective: In this, managers of the Tech (UK) determine customer and market segments through which organisation unit would compete and elaborates of the business unit's performance under these targeted segments (Bodie, 2013). This kind of perspective normally covers diverse core or generic measures of the prosperous outcomes from a most renowned and applied strategy. The main outcome calculates customer satisfaction, customer retention, new consumer acquisition, consumer profitability, and market shared in the targeted segments. But customer perspective must likewise specific measures of the value propositions which an organisation would deliver to consumers in the targeted market segments.
    3. Internal-Business-Process Perspective: in this thing, managers of the cited organisation determine the critical internal processes through which an organisation must need to excel.
    4. Learning and growth perspective: For incentive aims, learning and growth perspective concentrates on the capabilities of the people. Crucial measures for assessing managers' performance will be the employee satisfaction, employee retention and employee productivity.

    a). Employee Satisfaction: This identify the importance of the employee morale for enhancing productivity, quality consumer satisfaction and responsiveness to the situations.

    b). Employee retention: Organisations committed to retaining employees identify that employees emerge organisation-particular intellectual capital and render a valuable non-financial asset to the organisation. In addition to this, organisations occur costs at the the time when they must find and hire sound place people who leave.

    c). Employee Productivity: This identifies an importance of the output per employee. Employees form physical results, or financial output (Lukka and Vinnari, 2014).

    These four perspectives helps to overcome the financial constraints in an effective manner. This can be rightly said that the management of the organisation would requires to make a business objectives in an effecti

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