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management accounting unit 5
Management Accounting 2
Management accounting systems 2
Management accounting reporting 4
Cost Analysis 5
Flexible budgets 11
Working as a Senior Management Accountant I aim to provide information on the role and function of the management accounts department, including accounting systems and the different techniques used. I will be looking into the essential requirements of different types of management accounting systems and the various methods used for reporting accounts. This will follow onto looking at the benefits and what techniques are used to apply them into an organisation.
Management Accounting uses the provisions of accounting to help managers identify, measure, analyse and communicate relevant information, to make effective decisions to achieve company objectives and goals. Business costs and operations are analysed to prepare internal financial reports these are kept on record and monitored regularly to help assist managers with the decision-making process.
Managerial accounting focuses on producing internal financial information and reports to aid managers with the decision-making and to help identify other ways to run an organisation more effectively. The information managers would need include budgeting, forecasting, product cost analysis, break even charts and trend charts. For example an engineering company could incorporate management accounting to help set up budgets and allocate employees incentives and relevant training, they would also help with decision making.
Management accounting systems
Price optimization system
This system is used in accordance to the price of resources. It uses mathematical programs to calculate how demand can change at different price levels. Once this has been calculated the data collected on costing and the inventory levels can help managers come up with recommended prices to boost sales and profit.
Using a price optimization system allows managers to maintain consistency, it also helps make quick decisions. The entire system of price optimization can be automated this makes it accurate and save time. There is an immediate financial benefit, as systems can be put in place instantly.
If customer demand doesn’t match the price and doesn’t provide the sufficient amount of income, price optimising system wont work well. Competition from other engineering companies could make it hard to break even as you undersell the competition.
Inventory management systems
This system involves the process of ordering, storing and using the inventory. Managers will be dealing with raw materials, components, as well as storage in warehouses and how the items will be processed. This type of management accounts system works well for complex supply chains, manufacturing, retail and food industries. An organisation’s finished products are the core part of making profit, this system ensures there are enough products available for customer demand at the best possible price.
Having an inventory management system in place ensures a business doesn’t spend money on unnecessary product orders. It helps keep on track of exactly what is needed. This system helps achieve efficiency and productivity in operations, this minimises inventory costs, this helps boost sales and profit.
The main disadvantage of inventory management system is the expense of the software required to set the system up. It can also be complex to use and analyse without appropriate training.
Cost accounting systems
This system aims to assess a business’s total cost of production, this is achieved by analysing the variable costs at each stage of production, it also takes into consideration the fixed costs. Cost accounting is used by an internal management team, they are able to identify and discuss all the costs involved in the production process. Once the data has been reviewed the results help measure financial performance and aid future business decisions.
Using this system helps identify the profitable and unprofitable activities, it’s a good way of making guidelines for future production changes and adjustments. This system helps determine the exact cause of increase and decrease in profits and at what stage of production is being affected.
Cost accounting has a lack of uniform procedure, this system can be a costly process. the system can ignore the futuristic situation of the cost of products.
Management accounting reporting
Internal financial and managerial data is collected to produce reports this helps keep track of planning, regulating, measuring performance and making decisions. These reports will be produced on a regular basis to keep all information up to date and relevant to how a business is managing at the present time. Managers will make a lot of decisions based solely on the results shown in the reports, these would be thoroughly examined by managers before making changes. The different methods used for management accounting reporting are:
Budget reports allow companies to measure performance as a whole, this depends on the size of the business, for example for a small company the budget may include all aspects related to the business, whereas with a larger company may draw up budgets for different departments. A budget is created to give an estimate based on previous experience. It would include all sources of earnings and expenditure; a budget may also cater for unforeseen circumstances. The main purpose of budget reports is to achieve a company’s goals and objectives by staying within the amount created in the budget. Managers can use budget reports to allocate the correct amount without exceeding the guidelines, it can also help offer improved incentives for employees, allows room for change and improvement.
Account receivable Aging reports
These reports relate to businesses that rely primarily on extending credit. The report categorises accounts receivable based on the length of time an invoice has been outstanding. The reports can show how fast or slow the receivables are being collected. Managers are able to put precaution on weather to put tighter credit policies as the flow of giving and receiving should be balanced.
Cost Managerial Accounting Reports
These reports work well with manufacturing companies. All the costs involved with the production of a finished product are used for example raw material costs, overhead costs, labour and additional costs. Once the total has been drawn up it is divided by the number of products made. The cost report provides an understanding of all expenses being used, it’s up to the managers to oversee and maintain stability.
(500 units @ £70)
Reduction in Selling price
650 @ 63 £40950
650@ £4 Labour
650 @ £24 Material
650 @ 0140 Selling
c) Increase the Price
Sales 400 units @£80 £32000
Less: Direct Variable Costs
400 Units @ £4
400 Units @ £24
400 Units @ 0.40
Conclusion- The most profitable option is reducing the selling price and selling 650 units.
The buying in price for 10000 units @ £ would be £65000.
The marginal cost of manufacturing 10000 units @ £4.75 would be £47500
The sacrifice in contribution of product FP97 would be £20 per unit (80 selling price-marginal cost) for 1000 units i.e £20000
So the cost to the company of manufacturing 10000 unit of product 2543 would be :
Plus Sacrifice of Contribution
Since this is higher than the buying price of component 2543 by £2500 it is more profitable to buy product 2543.
Variable Cost of component 15k 20.0
The Fixed Costs remain fixed at £50000, units x £3.50 = £175000. These costs would be incurred irrespective of the fact whether the product is produced or bought.
As against buying the manufacturer of the product makes a contribution of £2.25 per unit ( £7.75 buying price less marginal cost of £5.50) and recovers £112500 of the fixed costs.
Hence as a result of manufacturing company is better off by £112500.
Short by £714836
Direct Variable Costs
Net Profit £106250 £71000 £177250
The breakeven sales for the company based on above product mix is:
Fixed cost £560000
Contribution Rates = 36.11% = £1550817
8 a) In marginal costing the entire fixed costs incurred are written off to the profit and loss account. This is during the period when production is significantly larger than the sales resulting in inventories because fixed costs are not absorbed in inventories as it results in lower profits in marginal costing, whilst in absorption costing the fixed overheads are absorbed in inventories and carried forward to the next year, thereby increasing the profits for the next year.
Thus on product A, the fixed overhead cost will be absorbed over £250000 which will result in increased profit. In product B the opening stock was 1000 units which included an absorbed cost of previous years overheads since the inventories at the end of the period were nil, the costs absorbed in opening inventories are written off to the profit and loss account.
Conventional Absorption costing using a labour hour absorption rate.
Labour hours for x = 6000
Labour hours for Y = 16000
16000 labour hours
Overhead costs of £264000 are allocated to X and Y in the ratio 6:16
i.e. to X £72000
to Y £192000
An ABC approach
Overheads relating to production setups are 179000 and will be absorbed based on setups in periods which are 60 in the ratio of 15 for X and 45 for Y. £44750 will be absorbed in product X and £134250 for Product Y.
The order handling overheads are £30000 and will not be allocated to product X and Y in the ratio of 12:60. This £5000 will be allocated to X and £25000 to Y.
The total machine hours worked for X are 24000 and 16000 for Y totalling 40000 hence the fixed overheads relating to machine activity will be allocated in the ratio of 24000:16000 thus £24000 will be absorbed in X and £16000 absorbed in Y.
Cost sheet for 150000 electric thermostats
Cost sheet for 160000
Less Direct Labour
Less Fixed Cost
Direct Labour Cost/Unit
= £4.33 Unit
For the additional 50000 units the unit labour cost will be £5.20
Material cost/unit= £525000 = £3.50
Which will be reduced by 3% discount giving a revised unit price of £3.40
Costs for Batch X37 for 1000 units
Dept A £1470
Dept B £2058
Direct Material £3280
Gross Profit @ 25% of sales
The selling price per unit is £18131 divided by 1000= £18.13 per unit.
Admin costs of £1813 are recovered by batchx37.
The notional profit per unit is £2.72
Budgeted overheads directly incurred by departments A,B,C and service department D are (261745 + 226120 + 93890 + 53305 = 635060) The balance overheads of £338500 (973560 less 635060) are apportioned to
The total budgeted overheads of service department are £16925 plus £53305 = £70230 which are apportioned equally i.e. 23410 to dept A, B and C.
Overheads of Dept A
Overheads of Dept B
Overheads of Dept C
A flexible budget can be used for planning and control purposes for example at an engineering company, producing a flexible budget would not only take into consideration the fixed costs but it would also give emphasis on cost behaviour at various stages of activity. These budgets can provide a quick response and adjust to daily changes according to the business functions.
A flexible budget is a financial plan that is adjusted to the needs of the company. By flexing its budgets an organisation can anticipate and accommodate to its needs.
The advantages of using flexible budgets is it increases sales, cost and profit estimation at various levels of the operating capacity. It also helps determine the units to be produced and maintained at the desired profit levels, this can help with production levels in different markets and business conditions. Managers can easily identify areas of profit and loss enabling them to act accordingly. A flexible budget can be changed and adjusted on a regular basis.
Some of the disadvantages of using a flexible budget is that it can be difficult to formulate and put into practise, it can also be time consuming to analyse the variable costs. It can be hard to determine the forecast for flexible expenses as this can lead to undermining the value of a flexible budgets. Sometimes compared to the actual figures, revenues can be overshadowed. Forecasting budgets can become complicated if they don’t stay within the boundaries predicted.
A contingency plan would include a set of actions a business would turn to in case of an unexpected situation occurring, for example natural disasters, breach of data, network failure etc. these plans are used as a back up solution to when a sudden change may occur, or as an alternative to the current plan. The main purpose of a contingency plan is to safeguard data, keep any disruptions to a minimum and to keep everyone connected to the business safe. The plan would have to be updated regularly in order to keep up with changes.
Having a contingency plan in place helps minimise loss of production, in the case of unforeseen circumstances it can become the difference between surviving and being in loss. When dealing with sudden or unexpected change a contingency plan prevents panic and provides a recovery mode rather than disorder. This also helps with continuity of work and reduces the risk of uncertainty.
Putting a contingency plan into place can be costly and time consuming, adequate training and drills need to be assessed. The plans would need to be updated on a regular basis this may take up time and resources.
Incremental budgets is a budgeting process used on the idea that new budgets can be produced by making small changes to the current budget. The changes added or adjusted are done by using assumptions based on previous budgeting and expenses.
Incremental budgets are simple to use and implement, as it uses the current budget calculations, this makes it easy to produce new budgets. This method also saves a lot of time as it doesn’t require specialist training. It is also a consistent method to use as the budgets depend on figures from previous budgets, this keeps it realistic and consistent. This provides stability over time.
Incremental budgeting can lead to unnecessary spending, previous budgets may be fully used up on purpose, incremental budgets will generally increase the budgets slightly, the extra money may end up getting wasted. Incremental budgeting reduces the chances of innovation of new ideas and financial figures. It also doesn’t take into account changes and external factors; the main purpose of incremental budgets is to achieve a stable budget of the company’s operations. This makes the budget unresponsive to changes that occur unexpectedly.
(corporate finance institute 2015)
Businesses use various management accounting techniques and tools to assist with the financial gains of their business. Each business will adapt and use different management accounting systems according to their individual needs. Morrisons is a leading supermarket brand in the UK, they use the price optimisation system to analyse and predict the buying habits of potential buyers to various prices of products. Morrisons would use the system to determine pricing strategies such as initial pricing, promotional pricing and discount pricing.
Dell inc is an American multinational computer technology company they develop, sell, repair computer, laptops and other technology products. They use inventory management systems to help with inventory control and supply chain management measures, this includes monitoring inventory trends, stock on order and supplier on time performance. This system helps manage large scale tasks and helps managers make important decision regarding their products.
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Bain. 2020. Price Optimization Models. [online] Available at: <https://www.bain.com/insights/management-tools-price-optimization-models/> [Accessed 14 February 2020].
Investopedia. 2020. The Ins And Outs Of Inventory Management. [online] Available at: <https://www.investopedia.com/terms/i/inventory-management.asp> [Accessed 9 February 2020].
Investopedia. 2020. Cost Accounting Definition. [online] Available at: <https://www.investopedia.com/terms/c/cost-accounting.asp> [Accessed 12 February 2020].
Controller, C., 2020. Types Of Managerial Accounting Reports | Complete Controller. [online] Completecontroller.com. Available at: <https://www.completecontroller.com/types-of-managerial-accounting-reports/> [Accessed 16 February 2020].
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