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Management Accounting

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Contents

Management Accounting ........................................................................................................... 1

Introduction ................................................................................................................................ 4

Task 1 ......................................................................................................................................... 5

P1. Explain management accounting and explain different types of management accounting
systems & their essential requirements? ................................................................................ 5

1) Explain what management accounting is (M1)? ........................................................... 5

2) Explain the role and principles of management accounting. ........................................ 6

3) Explain the distinction between management accounting and financial accounting. ... 7

4) Explain the different types of management accounting systems (D1): ......................... 8

P 2 Explain different types used for management accounting reporting?............................ 10

1) Explain different types of management accounting reports and their integration with
organisational processes (D1):.......................................................................................... 10

Task 2 ....................................................................................................................................... 15

P 3 Calculate costs using cost analysis to prepare an income statement using marginal and
absorption costs .................................................................................................................... 15

1) What is meant by cost? &explain different types of costs? ......................................... 15

2) Present cost calculations to prepare an income statement using marginal and


absorption costs. ............................................................................................................... 17

Task 3 ....................................................................................................................................... 25

P 4 Explain any two different types of planning tools used for budgetary control (M3)? ... 25

1) Explain different types of common costing systems which can be used for budgetary
control and how costing systems can differ depending on the costing activity. .............. 28

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2) Explain how budgets can be used for planning and control from preparing a budget to
different types of budgets and explain behavioural implications of budgets for budgetary
control. .............................................................................................................................. 30

Task 4 ....................................................................................................................................... 33

P 5 Compare how organisations are adapting management accounting systems to respond


to financial problems? .......................................................................................................... 33

2) By developing effective strategies and systems which require effective and timely
reporting, which also requires disclosure of all financial positions that are governed and
owned responsibly by those who hold them (D3)? .......................................................... 36

Conclusion: .............................................................................................................................. 38

References: ............................................................................................................................... 39

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Introduction

The report includes a critical discussion of management accounting and its methods as a
planning and measurement tool for the enterprise to evaluate its performance and includes the
explanations about various management accounting systems and their essentials for sound
business activities to be integrated with management accounting reporting. This will create an
understanding of the management accounting system. Further, it includes preparation of
income statement on the basis of absorption costing and marginal costing. The report will
also discuss the uses of various planning tools used for budgetary control as a measure of
enterprise performance appraisal. This will help the user to understand the use of different
planning tool in preparing and forecasting budgets. A comparison has been made to show
how organisations can use management accounting in responding to financial problems. This
will give a clear understanding of how organisational strategies and plans are developed with
management accounting techniques for proper implementation and execution. Sewport Ltd. is
one of the medium-sized clothes manufacturing company in the UK also engaged in
computer-aided production.

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Task 1

P1. Explain management accounting and explain different types of management


accounting systems & their essential requirements?

1) Explain what management accounting is

Management accounting refers to the interpretation, analysis, identification, and presentation


of accounting information which has been obtained with the help of financial accounting and
cost accounting. Management accounting helps the business managers in the formulation of
policies, decision-making process and in the day-to-day operations of the enterprise (Kalpan
& Atkinson, 2015).

Applications of management accounting:

Measurement of performance It helps the organisation in measuring employee


performances and efficiency measurement. The process includes as a comparison of actual
performance with that of standardised performance which sets out the deviations on which
necessary steps can be taken and implemented.

Assessment of risk Another benefit of management accounting is that it identifies and


assesses the risk factors within the enterprise which can be minimised through effective
management.

Allocation of resources Organisations becomes able to achieve efficient and effective


utilisation of resources with the help of proper allocation of resources to the various divisions
and departments within the enterprise. This ensures fulfilment of organisational objectives
while efforts have been made for long-term sustainability (Hart, et. al., 2012).

Financial statement presentation Management accounting provides for proper


presentation of the financial position of the enterprise with required information and data.
Various cost data and financial data makes it easy for the enterprise to present good and
precise financial reports that help for key decision-making.

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2) Explain the role and principles of management accounting.

The various roles and principles of management accounting are:

InfluenceCommunication is the main source which provides insight that is influential.


Management accounting is concerned with effective communication as it improves decision-
making with the availability of all the required information at various stages of decision-
making. This ensures integrated thinking and efficient decisions (Hugh, et. al., 2016).

Relevance Information must be relevant. Management accounting takes into consideration


the best available relevant information available with the enterprise that can enhance the
quality of decision-making for the users and improve their decision style or process being
used.

Value Generation Analysis of impact on value. Management accounting considers


analysing information along with the value generation path while exploiting opportunities
and focuses on costs, risks and Value generation opportunities.

Trust Trust build up by stewardship. The professionals involved in management


accounting processes are expected to be skilful, ethical, and accountable while ensuring
governance and social requirements. This makes the decision-making the process more
objective and accountable (Hugh, et.al. 2016).

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3) Explain the distinction between management accounting and financial accounting.

Management accounting vs. financial accounting:

The various distinctions between management and financial accounting are discussed as
below:

Users- The use of management accounting is internal mainly with managers and employees
whereas external users are concerned with financial accounting including shareholders,
creditors, banks etc.

Set of regulations - No application of accounting standards or external rules is imposed in


management accounting whereas financial accounting is concerned with a various set of
regulations and standards as applicable to the company.

Sources - Financial, as well as non-financial data, is used in management accounting


however financial accounting uses financial data utilized and drawn from the organisation
core transaction-based accounting system.

Nature - The nature of information is mainly historical, current and future-oriented in


management accounting while the source of information and nature is historical related to the
past performance in financial accounting.

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4) Explain the different types of management accounting systems:

The various types of management accounting systems and their role in integration with
various organisational processes related to Sewport Ltd. are discussed. Further last two
systems of management accounting are elaborated and discussed with their essential
requirements as below:

Job costing system This is a system to assign manufacturing cost to each individual
product while keeping track on expense monitoring. Sewport Ltd. can use this system when
the products are identical to keep track of order expenses. Job costing accounting procedure
consists of:

Receiving enquiry The customer is concerned about the quality of the material.
Price of material and time took to complete the order.
Estimate price of job The job costing is done by the accountant keeping in mind
customers tastes and preferences.
Order receiving The order will be placed if the customer is assured of the price.
Production order The production order is placed for beginning the production
process.
Cost recording Every aspect of the cost in the production process is recorded.
Completion of job On completion, a report is given to accounts department for final
costing of the job. The comparison is made with reference to estimated cost.

Price optimising system Price optimizing system is used to take control of the prices of
resources. Price optimizing system can be used in deciding the prices of the multiple products
at a time. The system helps in determining how demand will fluctuate at different price
levels. The company Sewport Ltd. can use this system for tailoring the prices for customer
segments by simulating their responses to different price levels (Weygandt, et. al., 2015).

Sewport Ltd. will use this type of management accounting system as it will help the
organisation in determining pricing structures for promotional pricing, initial pricing, and
discount pricing. Price optimizing system considers factors such as product life cycle,
category goals, and competitors pricing strategies before deciding the prices of the product
within the organisation.

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Cost accounting systemThe system helps the organisation to estimate the cost of the
product while analysis can be made of organisational profitability, inventory and cost control.
The two basic cost accounting systems are job order costing and process costing. The two
essentials for good cost accounting system are:-

Cooperation and participation of executives required by various departments This will


ensure appropriate cooperation and participation in the building process of cost
accounting system which can help the management in correct ascertainment of the cost
of products.
Flexible and simple The cost accounting system developed should be flexible and easy
to understand and execute. It should also meet the requirements of various users and
adapt according to companys requirement.

Inventory management system this type of management accounting system is concerned


with supervision and management of stock and non-capitalized assets of the enterprise.
Organisational processes in Sewport Ltd. can be integrated with this type of system to
achieve efficient and effective flow of inventory within the organisation and at the point of
sale. The two essentials are:-

Forecasting and replenishing strategiesThis helps the organisation in advance


management and planning of cost requirements of the company.
Management of inventory both physically and monetarily Various benefits like cost
reduction and appropriate inventory management is achieved with this.

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P 2 Explain different types used for management accounting reporting?

Explain different types of management accounting reports.

The various management accounting reports help the management in preparation of


appropriate management reports which counts on their forecasts for making critical business
decisions. They provide managers with accurate and reliable statistical and financial
information. The various reports prepared by the management and their benefits are discussed
under:

Budgeting Reports Budgetary Reports sets out the plan to analyse the company
performance while making evaluations about the departments performance and control costs.
For budget preparation, actual expenditure occurred in past periods get utilised. These budget
reports are used to provide incentives to employees that motivate them to achieve desired
objectives. Forecasting future budget based on these reports helps the organisation to
integrate the efforts of various departments towards overall objective of the company.

Accounts receivable aging report This type of report is concerned with managing account
receivables for these companies which are engaged in extending the credits to their
customers. Proper segregations of invoices are made for the customers balances about how
long they have been owed. It points out the problems associated with companys collection
process. An analysis can be made about the companys credit policy and the need to tighten
the credit policy. This ensures reducing old bad debts and maintaining liquidity of the
company.

Job cost reports Job costs reports are concerned with identifying cost, expenses, and
profitability of each particular job. An evaluation can be made about the earning aspect of the
projects and so that the company can introduce its efforts on those concerned while reducing
their efforts on less profitable business activities. These reports also evaluate the cost while
the project is in progress so that areas of waste can be taken care of and the project can be
made profitable and workable.

Inventory and manufacturing reports Companies involved in manufacturing processes


prepare these types of reports so that their manufacturing and inventory process can become
more efficient. These reports contain labour cost, per unit overhead cost and wastages
concerned with inventory which provides managers for the comparison between different

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assembly lines and to see the opportunities for improvement which can be exploited by
various departments and their employees.

Performance reportsThe differences calculated on a comparison of actual results with


budgeted performances are analysed and information regarding this are presented in
performance reports. These are generally prepared yearly however they can be prepared
monthly or quarterly too.

Order information reportThe order information report helps management to see the trends
in their business efficiently and effectively. Various types of reports prepared in this type of
reporting help integrating management operations to achieve low cost on placing of orders
and their management.

A business situation or opportunity reports The reports are prepared for management so
that they can be well aware of the occurrence of a particular event. The preparation of well-
drafted situation or opportunity report helps the management with taking important business
decisions with regard to the events and their understanding.

Benefits of management accounting systems in the context of Sewport Ltd. (M1):

The various benefits of management accounting system in context of Sewport Ltd. is


presented in a tabular format as under

System Advantages
Job costing system It will help Sewport Ltd. in the
estimation of all types of cost
throughout the manufacturing
process.
It will prevent duplication of efforts
as the same work will be reflected.
Helps in the evaluation of the quality
of work done.
Price optimizing system Sewport Ltd. can determine the
attitude of customers based on
different prices.
Helps in maximisation of operating
profit with best prices.
It assists in the segmentation of
customers.
Cost accounting system Sewport Ltd. can measure the
efficiency in processes and then assist
in making improvements with the use

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of this system.
It will help the company in fixation
and reduction of prices.
Provides necessary information
required for planning.
Inventory management system Sewport Ltd. can improve the
accuracy of its inventory orders with
the help of this system.
It will improve the efficiency and
effectiveness and helps in saving time
and money.

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Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes (D1)?
Management accounting reports and their integration with Sewport LTD

Type of reporting Integration with organisational processes


Budgeting Reports The integration between organisational
processes related to Sewport Ltd. and
budgeting reports make a path for the
organisation activities to concentrate on
targeted results and objectives in a better way
(Chenhall& Moers, 2015).

Accounts receivable aging report The integration between organisational


activities of Sewport Ltd. and these reports
can be achieved through making efforts
towards the timely collection of accounts
receivable and the creation of proper
collection policy that should be monitored
time to time for its flexibility and accuracy
(Novas, et. al., 2017).

Job cost reports The activities of Sewport Ltd. should be


directed towards the achievement of cost
objectives and cost reports which can make
easier to decide the pricing strategies of the
company and reducing the overall cost of the
product.

Inventory and manufacturing reports The integration between processes involved


in Sewport Ltd. and this report provides
better management of inventory levels and
manufacturing cost while estimating the
required level of purchase orders to be placed
(Chenhall& Moers, 2015).

Performance reports The integration between these reports and


Sewport organisational activities will help
managers to plan for future productions and
cost increases leading to cost reduction and
high profitability.

Order information report The integration between organisational


processes and this type of reporting can
provide management with an analysis of
sales order information and generate various
reports to track the order of customers and
their fulfilment on time.
Business situation or opportunity reports The integration of business processes with

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these types of reports will allow Sewport
management to critically analyse the
situations and act accordingly for the
decisions to be made.

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Task 2

P3 Calculate costs using cost analysis to prepare an income statement using marginal
and absorption costs?

1) What is meant by cost? &explain different types of costs?

Cost refers to the value of money which has been used to produce anything and represents the
monitory evaluation of materials, resources, efforts, risks incurred, time and utilities
consumed and the opportunity foregone in production and delivery of product or service
(Drury, 2013). The various costs are explained as below:

Fixed and variable costs Fixed cost represents that part of the cost that remains constant
for a certain level of output and does not get fluctuated. However, per unit fixed cost of the
product does get decreased with the increase in production. It generally includes rent,
depreciation etc. Variable cost represents that part of the cost that varies with the variation in
production directly. It has a direct relationship with production, there for it gets increased and
decreases with increase and decrease in the level of output. For example raw material, labour,
etc. (Weygandt, et. al., 2015).

Historical and replacement costs It is that sum of capital which was paid at the time of
purchase in the past and gets considered as a base for financial accounts. However, a
replacement cost is a current price to be paid today for replacing the asset. Replacement cost
or it can be derived as relevant cost concept as it is used for adjusting inflation within the
financial statements.

Opportunity and outlay costs Outlay or actual cost are the real or actual expenses
incurred by the firm for machinery, labour, material etc. These costs are based on accounting
cost concept and hence represented in the books of accounts. On the other side, opportunity
cost implies the cost in terms of earnings foregone in order to select next best alternative, has
the first option be taken. This concept of cost is applied for long-term decisions and capital
budgeting decisions (Novas, et. al., 2017).

Out of pocketbook costs Out of pocket cost involves current cash payment for the expense
incurred and also known as explicit cost. These costs are the actual payments made for the

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product or service. However, book cost or implicit cost does not require immediate payment.
It represents the cost of self-owned factors of production and includes unpaid interest,
depreciation, and salary of owners of businesses. Both the costs are considered for taking
financial decisions and preparing financial reports (Drury, 2013).

Avoidable and unavoidable costs Avoidable represents that part of the cost that can be
controlled or reduced by curtailing business activities concerned with that type of cost and by
regulation executed by the executive concerned with that cost. On the other hand, the
unavoidable cost is those costs which cant be reduced with the reduction in business
activities and are considered as a sunk cost. For example, ideal machine capacity will be an
unavoidable cost.

Total, average and marginal costs Total cost from the name it is self-derived that all costs
get included in it whether it is variable or fixed which is used in production get termed as
total cost. On the other hand average cost is that cost which is incurred for per unit output.
Marginal cost or the cost of marginal unit produced because it is that cost which gets incurred
for producing the additional unit.

Incremental and sunk costs Incremental cost also known as the differential cost is the
additional cost incurred due to change in the business activity level or nature of the activity. It
is calculated by measuring the cost incurred on producing extra units of output. Sunk costs
are those costs which do not change due to anything and remains unchanged. Sunk cost
represents that portion of the cost that has already been incurred and cant be recovered. Sunk
cost is not relevant for decision-making purposes as they are past costs (Manyaeva, et. al.,
2016).

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2) Present cost calculations to prepare an income statement using marginal and
absorption costs.

Marginal costing Marginal costing as a relevant source for decision-making purposes can
be defined as the accounting system in which variable costs are allocated to the cost units but
fixed costs for the period is written off fully to the aggregate contribution (Delis, 2015). This
can also be defined as the cost of a marginal or last unit of output produced.

This costing method is not like process costing or job costing rather it is a simple method or
technique for the analysis of cost information by the management making efforts to find out
the effect on profitability due to change in the level of production or output. In the United
Kingdom, marginal costing is a popular phase and it consists the concept of contribution
(Shepherd, 2015).

Absorption costsAbsorption costing takes into consideration all the resources and expenses
related to the cost of production and hence treats all cost of production as product cost. The
cost here includes direct material, direct labour and both fixed and variable overhead cost.
However, in absorption costing a portion of the fixed overhead cost is allocated to each unit
of the product along with the variable manufacturing cost.

The identification of variable cost and contribution helps the management in utilising cost
information easily for decision-making purposes. It takes into consideration all the cost
associated with the manufacturing of the product (Shepherd, 2015).

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Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents (M2)

Case Law:

The cost card of a company Imda Tech (UK) Limited who is producing special chargers for
mobile telephones and another carry on gadgets for retail outlets in the UK is as below:

Income statement as per absorption costing:

Working Note

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Income statement as per marginal costing:

Working Note: -

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Produce financial reports that accurately apply and interpret data for a range of
business activities (D2)?
Analysis and interpretation:

It can be observed that both the management accounting techniques use different costing
methods for calculation of the unit cost of the product (Delis, 2015). In marginal costing
fixed cost has been written off to the contribution whereas absorption costing has utilized all
the cost in the calculation of per unit cost. Therefore net operating as per marginal and
absorption costing come out to be ( 2875) and 4625 respectively for Imda Tech Limited.

The income statements reports which support the above interpretation are presented below:

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The following reports have been generated for Vodafone UK which represents that company
has encountered a significant growth in revenue as well as EBITA. Due to this capital
expenditure has also been increased.

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2014- 2015-
03 03
Revenue EUR Mil 46,409 48,385
Gross Margin % 27.1 27.5
Operating Income
EUR Mil -4,736 2,073
Operating Margin % -10.2 4.3
Net Income EUR Mil 71,713 7,279
Earnings Per Share
EUR 26.88 2.73

Net Margin % 154.52 13.64


Asset Turnover
(Average) 0.29 0.37
Return on Assets % 45.29 5

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Receivables
Turnover 10.17 11.8
Inventory
Turnover 63.37 70.8
Fixed Assets
Turnover 1.79 1.8
Asset Turnover 0.29 0.37

Interpretation of the financial statement

The revenue of the company has increased from the year 2014 to 2015 which indicates that
the company is growing in the market. Also, the company has paid a dividend during the year
at a higher rate in comparison to the previous year.

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Task 3

P 4 Explain any two different types of planning tools used for budgetary control?

Budget planning tools are used in the business enterprises to manage, plan and forecast the
companys budget which shall then be implemented and managed to achieve targeted
objectives and results. Now a days companies are becoming more advanced in planning their
strategies which has shifted the trends of traditional budgeting tools towards cloud-based
budgeting tools and softwares. Online budgeting tools also provide a great option to the
companies for managing their budgets in an organised and streamlined way (Collier, 2015).
These planning tools require minimum supervision and training and are very easy to be
executed. Types of planning tools and their application for preparing and forecasting budgets
are explained below:

SCORO This type of planning tool helps in combining various features of budgeting g with
other tools to manage the entire company in one system and provides an integrated plan for
the company as a whole. It provides the facility to manage various expenses and resources
available with the company while managing project budgets. The main features of these tools
are as follows:

Planning and forecasting budgets are the main features of this tool.
Financial reports and analysis help in the evaluation of the budgeted targets and actual
performance (Parmenter, 2016).
There is no limit on the project budgets.
Invoicing and professional services automation.
It provides an automated revenue stream from invoices which help in better forecasts
and planning.

Prophix Prophix has been created as a software solution for corporate enterprises to
manage corporate performance (Collier, 2015). It means that the tool involves many smaller
tools for the management of resources available to the company and planning the budgets.
Various features of this tool are:

Helps in planning, forecasting, and managing.


Proper financial, statutory and management reporting which aids in better decision-
making and evaluation of performance.

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Assists in the accurate planning of cash flows which ensures liquidity aspect of the
enterprise.
Optimisation and profitability modelling which objects for high profitability and
sustainability (Parmenter, 2016).
Personnel planning and management which ensures human resource management.

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Analyse the use of different planning tools and their application for preparing and
forecasting budgets (M3)?

Planning tools Applications


SCORO SCORO provides management of Sewport
with multiple budgets and, instead of using
different tools for managing finance, work
and clients it behaves as a single solution for
budgetary control. It also combines
budgeting with CRM and online project
management which in turn helps in the
management of the entire business in one
single solution and access to the entire
financial database at one place only.

PROPHIX The tool will offer Sewport Ltd. with a


wholesome product that upgrades and scales
constantly with the growth of the company
and forecasting becomes much easier due to
flexibility and adaptability of the tool. The
preparation of budgets will be better and the
resource allocation can be evaluated and
analysed in a manner which will ensure that
the company achieves efficiency in
operations.

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1) Explain different types of common costing systems which can be used for budgetary
control and how costing systems can differ depending on the costing activity.

Costing system Overview Use of system in Differentiation


budgetary
control
Actual costing This is a costing The cost It does not take into
system system which is estimated on the account any budgeted
concerned with the basis of actual amounts or standards
recording of cost of costing system rather it makes
the product based on helps the utilisation of actual cost
actual cost of material, management to data.
labour and overhead prepare the
incurred on the budgets and set
product which is targeted
allocated on the basis standards in order
of the actual quantity to achieve the
of the allocation base objectives of
seen during the enterprise which
reporting period. This are practical to
is the simple costing achieve.
system which does not
require any pre-
planning of the
standard cost.
Normal costing Normal costing system The estimation of Normal costing uses
system makes use of a production actual cost for the
budgeted amount of overhead helps in material and labour
overhead for the calculation of components but makes
calculation of product cost related to a use of budgeted
cost. It results in very long-term aspect. overhead. If any
fewer fluctuations as it This will help in difference is obtained
is based on overhead preparation of standard overhead cost
costs expected for budgets for the and actual overhead
long-term fluctuations. future aspect of cost then it can be
It makes the use of the enterprise. charged to cost of
smooth long-term goods sold.
estimated overhead
rate which ensures the
calculation of cost
where sudden spikes
in the cost are not
expected.
Standard costing This refers to the cost Standards costs The cost accounting
accounting where allocated to the here is concerned with
expected cost is units of the estimation of
substituted for actual production helps standard or budgeted
cost in the accounting in controlling the cost for the activities
records and then the cost of related involved in the

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variances are processes and development of product
identified periodically operations and and then creating a base
that represents the preparation of for calculation of
difference between budgets. product cost on the
expected and actual basis of those records.
cost. This involves the
creation of estimated
cost for some or all the
activities of the
enterprise. The system
helps in measurement
and evaluation of the
performance.

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2) Explain how budgets can be used for planning and control from preparing a budget
to different types of budgets and explain behavioural implications of budgets for
budgetary control.

Budgets as a source of planning help the organisation to develop a financial plan which
involves the presentation of how the organisation will obtain the resources required and use
them in various operations during the specified period of time. These represent the expected
amounts as opposed the historical financial data of the performance. Budgets also create a
controlled environment within the enterprise as they have an efficient and effective set of
internal controls which ensure compliance with management policies and procedures built
out for the achievement of objectives (Tsofa, et. al., 2016). Variances from the budgets are
obtained from the performance reports which shall then be quickly identified and the
managers become aware of the significant issues relating to the reasons for deviations in the
performance. The different types of budgeting involve:

Capital budget Capital budget contains capital receipts and payments. It refers to the
budget which allocates money for the question and maintenance of long-term or fixed assets
such as land, building, machinery etc. This helps Sewport Ltd. to control the expenditure
which can affect the long-term decisions of the enterprise and provides strategic direction to
the enterprise. Preparation of capital budget involves certain steps

Preparing a statement of company objectives.


Analysis of the cash flows for determination of costs and revenue.
Estimation of the projected cost of expenditure and evaluation of the funds required
for that investment.
Creation of the spread sheet according to the information collected and making
decisions on behalf of that.

Operating budget Preparation of operating budget is concerned with the portrayal of


company expenses, expected cost and expected income for the definite period of time. In case
Sewport Ltd. the budget will take into consideration operational activities of the enterprise
which ensures that proper system has been followed by the performance of day-to-day
activities of the enterprise and no deviations are noticed (Tsofa, et. al., 2016).

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The expense which falls under operating budgets includes employees wages. Costs related to
running of business, maintenance expenses, marketing, and sales cost. The preparation of
valid operating budget will require learning from past historical performance and them
making considerations to additional costs and market variables.

Behavioural implications of budgets:-

Interdepartmental conflict The budgeting process sometimes becomes informal


bargaining process for the organisation where managers at different departments
compete for the resources in the organisation. This leads to dilution of goals and
managers try for more power and recognition blaming each other for non-
achievement of objectives as required by them.
Top management support Effective budgetary control largely depends on the
participation, support, and cooperation of the top management of the enterprise. The
top management of the enterprise should lead and motivate the lower level managers
to achieve commitment and achievement of desired goals and objectives.
Accountability and clear lines of responsibilities must be established for the efficient
budgetary process.
Budgetary slack Budgetary slack occurs when the difference is noticed in the
revenue or cost projections which are provided and the realistic estimate of the
same. This happens when the managers deliberately overestimate or underestimate
the cost and try to obtain more funds needed to support the budgeted level of
activity.
The excessive pressure created by Budgets Budgets should not create excessive
pressure or stress on the subordinate managers, supervisors and other personnel
working in the organisation. The standards set out for the budgets should be real and
workable and they should not be too high or too low (Armstrong, et. al., 2014).
Participative budgeting The participative approach in the budgeting process
involves the participation of the line managers and lower level employees in the
preparation of budget so that peoples who are affected by the budgets can be
involved in setting up the standards for themselves. It provides them the feeling that
this is our budget and creates a sense of responsibility among them.
Dysfunctional behaviour Due to unrealistic expectations and improper
implementation of budgets, situations arise where the subordinate managers have a

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negative outlook about the budget which in turn affects the achievement of
organisational goals. This is generally due to the conflict between individual
behaviour and organisational objectives (Armstrong, et. al., 2014).

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Task 4

P5 Compare how organisations are adapting management accounting systems to


respond to financial problems?
1) Using benchmarks, financial and non-financial key performance indicators, &
budgetary targets to identify financial problems and financial variances . Explain by
using bench marks and budgeting targets help identify financial
problems and financial variances.

New business conditions have evolved over the past few years where information has been
considered as the most important resource for measuring the performance of the enterprise,
identifying the financial problems related to the variances found in the standardised set of
performance indicators. This has led to the use of various management accounting techniques
that set the benchmarks, utilizes financial and non-financial key performance indicators to
analyse the performance of the enterprise reflecting the way it tends to concentrate on long-
term sustainability aspect. The use of budgetary control in planning and executing various
business activities of Sewport Ltd. will help the organisation to focus on achievement of
standards set for the targeted results aiming to fulfil the desired objectives of the enterprise
(Parmenter, 2015).

Key performance indicators are financial and non-financial measures that most of the
enterprises use to reveal their success in accomplishing their long-lasting goals. Some of
them are discussed below:

Financial Indicators:-

Basis KPI Responses or use in


identifying financial
problems and variances
Liquidity, solvency, debt Current ratio Indicates ability to pay short-
ratio term debts with short-term
assets (Podgorski, 2015).
Quick ratio Sufficiency of liquid assets
with respect to short-term
debt.
Working The ability of the enterprise
capital to remain solvent used for
the availability of day-to-day
requirements.

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The capital structure of the
Debt to equity company indicating the
proportion of debt and equity
utilized for the financing of
assets.
Percentage of accounts
Accounts payable outstanding to the
payable to inventory inventory level of the
enterprise (Parmenter, 2015).
Profitability ratios Gross profit That percentage of sales
margin which a company has left to
pay its operating cost and
makes a profit.
Used in benchmarking, goal-
Selling cost % setting and budgeting.
Used in benchmarking, goal-
Administrative setting and budgeting.
cost % Used in benchmarking, goal-
Total setting and budgeting.
operating cost % Used in benchmarking, goal-
Finance cost setting and budgeting.
% Indicates the net profit
earned by the company.
Net profit
margin
Revenue ratios Sales Provides tracking of part of
sales equation through a
CRM system which provides
the knowledge needed to
affect it (Bai & Sarkis,
Sales growth 2014).
Measurement of trends in
sales and its growth.

Non-financial indicators:

Management of human resources In todays environment businesses have


started viewing staff as a major asset and
considers it as the important factor for
ensuring the success of the business. This
includes staff turnover, % of job offers
accepted, competence surveys etc.
(Podgorski, 2015).
Product and service quality It has been observed that problems
recognized in product or service quality of
the company affects its long-term
sustainability and leads to customer

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dissatisfaction and loss in future sales.
Therefore it should be compared with
competition and customers satisfaction.
Performance on these related dimensions
needs to be combined to reflect an overall
picture.
Brand awareness and company profile The measurement of brand and company
profile can reflect its future growth and
development. This should include
dimensions like high loyalty, name
awareness, perceived quality and other
attributes such as patents or trademark (Bai
& Sarkis, 2014).

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


organisations to sustainable success (M4)?

The role of management accounting in sustainable success of a business organisation can be


summarised in points discussed below:

The managers will be required to support the strategic and sustainable goals with the
strategies and policies to be developed.
Management accounting tools and techniques like marginal costing, standard costing,
break even analysis etc. will help in integration of sustainable matters into the various
decision-making processes.
Management accounting helps in the production of reports that include information on
sustainability impacts which will help in understanding pricing and budgeting
decisions and strategic planning.
Helps in development of reporting strategy that will integrate sustainability issues
which in turn will allow reporting of financial and non-financial information.

35
2) By developing effective strategies and systems which require effective and timely
reporting, which also requires disclosure of all financial positions that are governed and
owned responsibly by those who hold them?

Strategic planning is concerned with the creation of corporate strategy decisions about the
types of markets and businesses in which the enterprise operates and involves competitive
decisions about the strategies to compete in the market. Strategic planning thus uses
management accounting information from various management systems like costing,
budgeting, and performance measurement systems as well as from the internal and external
sources of organisation (Noordin, et. al., 2017). Management accountants of Sewport Ltd.
with the use of various techniques can help in implementing those strategies using the
planning and controlling systems as described below:-

Budgeting systems Long term plans are required to be linked to these systems in order
to produce annual budgets which can support the organisational strategies.
Performance measurement systems These can be used for comparison of actual
outcomes to that of related budgets and various other targets that focus on organisational
strategies (Rothaemal, 2015).

36
Evaluate how planning tools for accounting respond appropriately to solving financial
problems to lead organisations to sustainable success (D3)?
The various planning tools help the management in identification of financial problems with
the help of management accounting techniques and tools. The information acquired from
these planning tools helps in making strategic directions and taking financial decisions that
can contribute to the financial success of the organisation. The tools will help in controls to
be implemented and investment decisions can be taken accordingly. The analysis and
interpretation of financial data will assist in external reporting which in turn will ensure
sustainable growth of the enterprise. The enterprise will have a significant impact in its issues
of sustainability with the execution of planning tools.

Management accounting contributes at various levels of planning and strategic decisions in


the way explained below:-

Planning and controlling This is the vital element of management accounting and Sewport
Ltd. needs to put plans in place to set a direction for the organisation and control system to
ensure that all the operations are executed according to the plans (Manyaeva, et. al., 2016).

Implementing plans Managers through the use of management accounting methods


collects various information including budgets, performance reports and product cost on a
regular basis for the implementation of the plans prepared in the process of budgeting. This
helps the management of Sewport Ltd. to allocate resources according to the requirements of
various departments and divisions including each particular process.

Competitive edge It can be seen that well-managed organisations focus their strategies and
objectives on creating an acompetitive advantage of the enterprise. Therefore the
organisations strategies with the use of management accounting techniques are well focused
on getting an a competitive advantage in the market while focusing on low cost and brand
image (Rothaemal, 2015).

Explain how organizations develop strategies and systems to respond to financial problems and
why they need effective and timely reporting for that. Why they require the disclosure of all their
financial positions in the organization and to know that the people who hold those positions have
governs and pwn those positions responding.

37
Conclusion:

It can be included from the above report that various management accounting principles and
techniques help the organisation to obtain and retrieve the information required by the
managers of the enterprise for carrying out their business functions. Sewport Ltd. needs to
apply and implements these strategies and management techniques for their survival and
growth in manufacturing sector. It provides with data-driven input to managers for taking
decisions and also helps in improving the quality of decision-making. The use of marginal
and absorption costing also assist organisations to prepare financial reports based on the
companys set of preferences. The application of various management accounting tools and
systems provides management with setting sound business strategies and plans which can
concentrate on the long-term sustainability of the business while ensuring profitability and
success. This also helps the organisation to prepare various financial reports based on the
accurate and reliable data which in turn ensures evaluation and performance appraisal of the
enterprise with respect to financial aspects and strategies (Noordin, et. al., 2017).

38
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