Management Accounting

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Introduction

There are different management departments to run a business effectively and the

departments are related with each other to take decision about their operations. Imda Tech

(UK) Limited who is the maker of special charger for carry-on gadgets also has to make

effective decision making process based on financial information(Wagenhofer, 2016). In

order to do this, the Trainee Management Accountant has to make a report on Management

Accounting as per the instruction of Director of Finance in Imda Tech, UK. The income

statement of September based on cost card of the month also has to be prepared by the

Trainee to help to make managerial decisions in different departments. Department budgets

are also vital for decision making process, so that the report will consist brief information

about budget tools along with Balance Score Card approach and its implementation.

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Task 1

a) Prepare a well-researched written report on the functions of Management

Accounting (P1)

i. Definition of Management Accounting and to distinguish Management Accounting from

Financial Accounting.

Before making the report on management accounting it is vital to make the clear concept

about the matter among all the managers of the firm. In this regard explanation of

management accounting has to provide(Ax, and Greve, 2017). This practice can be define as

the process of providing management informationand accounts, which will able to provide

real and timely statistical or financial data that are important for managers to take day to day

decisions. Management accounting and financial accounting are different from each other.

The purpose of both the system is also different.

 The management accounting provides weekly or monthly reports to the internal

audience such as managers or chief executives to help them for taking effective

decision. Whereas, the financial accounting makes annual reports about all the

financial transaction generally for external stakeholders of the business.

 Financial accounting is based on Generally Accepted Accounting Principles

(GAAP),however the management accounting depends on estimate or guess, as most

of the managers do not have more time to gather actual statistic while taking day to

day decisions(Messner et al., 2016).

 Financial accounting give importance on potential and current investors and

management accounting takes care of future and current financial verdicts.

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ii. The importance of management accounting information as a decision making tool for

department managers.

Management accounting is important for the business to make relevant cost analysis about

different operations in business. Management accounting information benefits the

management to determine the activities of all the departments against the cost of the

operation. Management accounting also can be define as activity based costing method, a

business can take decision about requirement of production based on current internal

financial information. It will ensure the potential of the activity to achieve the short term

financial goal of the organisation(Hasnah et al., 2016). This process also provides

information regarding manufacturing, and helps the managers to take decision whether they

have to buy or make the component that are needed to produce the primary product.

Management accounting also important to make data driven decisions, it helps the business to

make budget and produce the projection of financial statement based on previous and current

data. Based on this projections the management takes decision that focuses on continuous

improvement of the business.

b) Explain the different types of Management Accounting Systems and how it can be

used by other departments to improve their reports (P2)

There are different types of management accounting systems, all the systems are useful for

business without considering the industry. All the departments of a business can use this

process to improve their reports.

i. Cost accounting systems (actual, normal and standard costing)

Cost accounting system is one of the popular management accounting tool that has used by

the organisations to make the structure of the product. It mostly concerned about to control

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the cost system to analyse the future profit. The system also consist three major types that are

normal costing, actual costing, and standard costing.

The normal costing gives importance on each unit production cost to gain the information

about normal cost of production. It is useful for the manufacturing department to make the

production sheet and measure the cost of per unit production(Messner et al., 2016).

The actual costing process considers all the amount that have spent to convert the material

into the end product. It considers both the direct and indirect cost of production, and

operation department uses this process to make their report on material and labour cost.

Quality management department mostly uses standard costing tool to evaluate the actual cost

against the standard cost to get the information about cost and quality. Since this method is

concerned about comparison between actual and standard cost(Curry, 2014).

ii. Inventory management systems

Inventory management system is the process that focuses on all the stages after production. It

gives importance on needs of goods and supply them accordingly to fulfil the demand

without making any shortfall or stock surplus. Inventory department use this practice to run

the process flawlessly. The most important aspect of inventory management system is to

supervise the movement of products from manufacturers to end users.

iii. Job costing systems

The job costing system allows the manager to allocating the production cost to the individual

product or a batch of the product. This method is most useful while making different types of

product as finished product(Nasseri, Yazdifar and Askarany, 2016). In this process the cost of

production differ from one to another. This method helps the production manager to make the

report about cost of production against the product type and also beneficial to make overall

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cost report based of all the data. Job order costing method also record the data of direct

labour, direct materials and manufacturing overhead for each job.

iv. Price optimising systems

Price optimisation is the process that uses several mathematical procedures to assume the

customer reaction regarding the price of the product. This method is helpful to make the

analysis about customers demand against the price of the product. Operation cost, historic

price, and sales data are the vital information for price optimization process. Sales department

of an organisation uses this process to set the certain price of the product to ensure the

moderate profit and achieve the financial goal of the business against a specific

product(Wagenhofer, 2016). Price optimisation process uses the market data to predict the

customer behaviour towards a product to determine the pricing policy in initial stage of

pricing.

Evaluate the benefits of management accounting systems and their application within

the context of Imda Tech (UK) Limited (M1)

Based on above discussion it can be said that, there are various benefits of management

accounting, and it can improve the reporting process of different departments. Imda Tech

(UK) Limited also believes that the process of management accounting is effective for

continuous improvement of the business.

 The management accounting process can be useful for Imda Tech to take effective

decision in all the functional departments. The sales department will use the process

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 of price optimisation to set their sales target. It will help the production department to

set their target against the demand of the market.

 Decision making is the most important job for managers, and the managers of

different departments have complain about lack of financial information, so that the

management accounting will infer this complain by providing the required internal

financial data to all the departments of Imda tech (UK) Limited(Ax, and Greve,

2017).

 The manufacturing process of Imda Tech (UK) Limited also will be improved through

the management accounting process(Strumickas, and Valanciene, 2015). Since, this

process will monitor all the costs like material cost, labour cost, to evaluate the actual

cost of the product, and managers will be aware about the same through actual data. It

will help them to find the gap through which they will be able to reduce the cost of

production.

 Management accounting also will be effective for the operation department as they

will be able to track actual costing of overall operations based on information of

management accounting.

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Task 2

Prepare income statements for the month of September (P3)Absorption Costing Income

Statement

Table: 1. Absorption Costing Income Statement of Imda Tech Limited

(Source: Author)

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Workings

(Source: Author)

(Source: Author)

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 (Source: Author)

The above tables give an overview of the income statements of Imda Tech Limited, along

with manufactured product units. The company has manufactured 2000 units and sold 1500

units. However, upon applying Absorption Costing Method, the company has incurred losses

of -£ 375.00.

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Marginal Costing Income Statement

Table: 2. Marginal Costing Income Statement of Imda Tech Limited

(Source: Author)

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Workings

(Source: Author)

As per the above analysis it can be said that the organisation has sold 1500 units product in

September. The gross profit of the month is £ 17,500.00, so that they have made high profit

from the business in September. It seems that they have generates high profit as per the gross

profit, but the later section of the calculation shows that there two significant costs that are

fixed expense and variable expense by 15% of the sales. After deducting the expenses that are

associated with business process it has come know that the organisation has made moderate

profit in September. Since, they have made the net losses of -£ 375.00 as per Absorption

Costing. On the other hand they have made net losses of -£ 2,875.00 as per the Marginal

Costing Income statement.

Accurately apply the techniques and reconcile the profits to produce appropriate

financial reporting document (M2)

The report has made the profit and loss statement according to both the methods such as

managerial and absorption costing. This section of the report will reconcile the profits of the

organisation. Reconciliation is the process that can be used to re calculate the profit statement

to tally both the statements of different methods(Fullerton, Kennedy and Widener, 2014). As

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per the absorption method Imda Tech limited has faced net losses of -£ 375.00 in September,

on the other hand as per marginal costing it has faced net losses of -£ 2,875.00, therefore the

net losses as per marginal costing is -£ 2,875.00 for Imda tech (UK) Limited in September.

Table: Reconciliation Statement

(Source: Created by Author)

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Task 3

Written report on planning tools (P4)

Planning is the vital part of management process, all the managers are responsible to make

strategies for future step of the business. In order to make planning about financial functions

of Imda Tech (UK) Limited the management has to ensure that the expenses of the business

have been analysed effectively(Otley and Emmanuel, 2013). There are different types of

budgets and the firm has to implement the budget system after evaluating the advantages and

disadvantages of the same. Types of budgeting tools and their advantages and disadvantages

are discussed below:

Master budget: This system allows the firm to analyse all the financial documents like overall

financial planning, cash flow, and financial ratio to make the budget.

 Advantage of this process is that, it allows the firm to identify the financial problem

from the lower level and give the chance to make the plan according to the

same(Suomala, Lyly-Yrjänäinen and Lukka, 2014).

 However it has problem about time to time updating, as it includes several categories

of budget within itself and becomes difficult to read and comprehend by all the

departments.

Cash budget: Cash budget helps the management to make the plan about costs and earnings

of the organisation for a certain time period.

 This process help the management to make the standard cost of the business as per the

market situation, it also benefits the firm to identify the escapes of all the departments,

and these are the advantages of this budget.

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  Cash budget needs effective cooperation of operation staffs to achieve the goal and it

is also expensive to operate the budget as per the plan.

Sales Budget:Sales budget is concern about to forecast the estimated sale of untint for a

certain time period. It also focuses on expected price of the product to optimise the price.

 Sales budget gives the advantage to the organisation to drive other budgets like

production, labour, and distribution of the product. It helps to make future financial

decision based on sales amount(Fullerton, Kennedy and Widener, 2014).

 However, it shows the negative figure in terms of business profit if the firm fails to

achieve the target, even the firm has made profits from present sales figure.

Process of preparing budgets:

 Clear moulds concerning about the budget should be done.

 Departmental budgets have to be prepared within the specified time.

 Reviewing of budgets is the vital aspect to make effective budget.

Pricing Strategies:

Examination of pricing strategy is important before executing the same, as pricing of the

product can increase or decries the market reputation of the business (Otley and Emmanuel,

2013). The firm can use pricing policy from several pricing strategies as per their master

budget plan.

Analyse the use of the different planning and their application for preparing and

forecasting budgets (M3)

As per above discussion planning is integral part of management process and the

management team has to focus on this all the time. There are different types of planning that

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can be considered as vital for business process. Three types of planning to forecast or prepare

the budget are discussed below: -

Operational Planning:This planning is vital at the time of making the budget as things are

have to be planned as per the operation management system, as other departments cannot

assume the need of this particular department(Ax, and Greve, 2017).

Tactical Planning: At the time of making master budget it is important to make tactical

calculation, without proper tactical planning the organisation should not be able to implement

the master budget effectively.

Strategic Planning: strategy is the most effective part of management process and the

management team of the organisation has to implement the budget as per the strategic

planning to get positive outcome of the business(Suomala, Lyly-Yrjänäinen and Lukka,

2014).

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Task 4

a). Explain what a Balance Score Card approach is and describe how the

implementation of a balanced scorecard can deliver a range of performance measures

(financial and non -financial) (P5)

The management accounting is concerned about internal activities of the firm and the related

outcomes of the process deal with the Balance Score Card (BSC) of the business. BSC is

concerned about to analyse all the internal happenings and situation of functional departments

of the establishment(Strumickas, and Valanciene, 2015). The vital objective of BSC

framework is to make the alignment among all the strategies and business actions. There are

four major areas that are covered by the system of BSC, they are customers, implemented

processes of the business, financial activities, and business growth and learning.

Figure 1Balance Scorecard

(Source: author)

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The process of BSC allows all the organisations to amend all the financial and non-financial

measures of their business activities.

Financial Performance Measures: Application of BSC enables the finance department to

comprehend all the need of financial requirements of all the functional departments in an

effective manner. The process of BSC track and highlight all the requirements as per the

urgency and effectiveness. It allows the business to give importance on most essential area of

financial functions.

Different budgets keeps the data about day-to –day expenditure even it is petty in terms of

amount. It get huge support from BSC, because there are some expenses that have not

assured return, based on BSC the organisation can reduce small expenses to minimise the

cost of the business(Wagenhofer, 2016). BSC can track the unnecessary and less essential

financial activities easily, it is not only useful for reducing the cost of business, and rather it

benefits to make the budget more effective to achieve the goal.

Non- financial performance measures: Application of BSC also makes positive result for

HRM department, as it allows the firm to employ deserving applicants. The process of BSC

helps the HR management team to track the non performing and high performing employee,

based on this data the department can replace the non performing employee with new

candidates(Nasseri, Yazdifar and Askarany, 2016). Therefore, the BSC process helps the

organisation to improve the non financial area of the business effectively.

The BSC process also helpful to measure the sales activities of the business, as it categorise

all the customers according to the different segments of the market. It is useful to track the

customers from the market who are interested to buy the products from the firm. It will allow

the sales department to maximise the sales and it will not demand extra effort to increase the

revenue of the business.

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Analyse how, in responding to financial problems, management accounting can lead

organisations to sustainable success (M4)

All the business without considering the industry have to face financial problems, and no one

is able to avoid financial issues while operating the business to achieve the organisational

goal(Hasnah et al., 2016). It has discussed that the process of management accounting is able

to tackle all the financial issues of a business. The management accounting provides

sustainable success for the business by implementing data based decision making process.

 The management accounting creates value for all the stakeholders by recognizing the

environmental trend of the market that can effect on the business in different

ways.The business environment effects on both the financial and non financial

business performance and management accounting helps to categorise the effects and

implement the effective policy to overcome the any issues(Curry, 2014).

 Decision making process is also related with sustainable growth of the business and it

depends on management accounting process to ensure the sustainable success of the

firm. Management accounting provides data about all the departmental actions and

managers depend on this data to make future strategies for the business.

 Performance Indicator is also one of the essential part for the business management

and it bring quality outcome for the business. The management accounting also makes

effect on performance indicators by keeping the data about overall performance of all

the functional departments of the business(Messner et al., 2016).

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Conclusion

Based on the above discussion it can be said that management accounting is the effective

concept of management that plays vital role in making financial activities of a firm. Imda tech

(UK) Limited also uses this process to make sustainable growth in business. The process of

Balance Score Card(BSC) also has implemented by the organisation to measure both the

financial and non financial activities. It also maximise the performance level of the respective

firm in terms of financial activities. Several types of costing methods and budgets also have

used by the firm to get desire outcomes from different departments. It also has come to know

from the above discussion, that management accounting and financial accounting seems to be

comparable, but in reality they have significant difference.

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