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Management Accounting: Various types of managerial accounting systems

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Various types of managerial accounting systems

Introduction:

The field of management accounting deals with aids which is important for management and performance of control function. Managers use accounting information to get better decision. It devises planning as well as performance management systems and also it creates expertise in financial reporting. In this report there will be some essential requirements regarding management accounting, several methods which are used for evaluating management accounting, some mathematical terms regarding managerial accounting and planning tools. This report will also provide the use of different planning tools of budgetary control. A case study will also solved through monitoring and controlling finances for a new product in the market.

Management Accounting and the essential requirements of various types of managerial accounting systems

As Mr. Zang has little information and understanding about accounting and finance it is mandatory to explain those terms which are related to management accounting.

Management accounting is all about the procedures and process which involves in creating documents and reporting about the aids in the decision making process. By the help of management accounting managers can measure the probability of success and failure of the organization. Cost cutting is also included in the goal of management accounting.

There are differences between management accounting and financial accounting. Management accounting acts for internal purposes where financial accounting is used for external uses also. Specific projects, Departments and processes are included within the field of management accounting. Where financial reports help investors in case of making investment decisions, management accounting helps the managers to improve their business (Mohammad,2016).

Management accounting don’t have headache about following protocols like GAAP. But financial accounting need to follow it. Management accounting has to look for transactions like inventory turn reports, work efficiency reports and account receivables.

Management accounting has many topics regarding cost accounting. Management accounting is quite important for an organization (Vanderbeck,and Mitchell,2016).

Importance of Management accounting:

  • It helps to forecast the future condition of the organization. It protects the organization from risky investments and helps to find out critical questions regarding the trends of business.
  • It is important to make buying decisions. It serves both the strategic and operational level to take decisions.
  • Management accounting provides effective way of management control. Different techniques and tools of it help the management to plan and control activities of the business.
  • Management accounting provides better services toward customers. The cost control system of management accounting can help to minimize the price of products.
  • It determine the aim of the business and find out the easiest way to reach the goal.
  • Management accounting helps to take easy judgment. It decides which plan or policy is the most suitable one for the business.

The Cost Accounting Systems-

This method is basically a framework which is used by the business to estimate the cost of production and inventory valuation. It controls the cost of production. By the cost-accounting system firm can get the idea that which product or production is more suitable. It helps to estimate the closing value of inventories, work in process and finished inventory of goods(Mohammad,2016).

There are basically two types of cost accounting systems- Job order costing and process costing.

Price-optimising systems-

It utilizes the analysis of big data with a view to predict the behavior of buyers and this is a model to evaluate pricing of customer segments. This examines how customers will respond to a given price change. It used as a powerful profit lever. It finds out the sweet point of price where the customers are willing to pay (Vanderbeck and Mitchell, 2016).

Activity based costing is a popular costing methodology which defines the activities of an organization and assign the cost regarding activities according to the actual consumption by each of them. It traces resource consumption and the final outcome of costing. It assigns those indirect costs to cost related objects(Kolb and Overdahl,2010).

Here, Manta Sleep Mask and the charcoal Air Purifier use activity based costing to find out the total cost-

Overhead cost and marketing cost is = £30,000

Cost Driver= hours

 Production overhead= Total production overhead/Total hours

                                             £30,000

                    =  ———————————-

                        (30/3*19,000) + (1/6*6,000)

                     = 0.157

Activity Based Costing

 Manta Sleep Mask(£3)Charcoal Air Purifier(£6)
Cost of production£57,000£36,000
Overhead cost£2,983£942
Total Cost=£59,983£36,942

types of management accounting reports to make better decision

Several management accounting reports are used by the management with a view to make the business better. While taking decisions management accounting uses different reporting methods like- budget reports, accounting receivable aging reports and inventory report etc.

 Budget Report-

An internal report which is used by the management with the aim to make a comparison of estimated and budgeted projections. It shows how similar is the budgeted reports to the actual one. Estimation of future projection are shown to make quality decision. But they are not always appropriate which the main limitation of it is. They come to know about however their prediction is close to the realism or not. In general, the format of budgetary report is alike an income statement.

Example- Suppose, management predict that in 2019, This Company will earn 1million but in real it will be .9million. By this way budgetary report compare.

Accounts Receivable Aging reports-       

The task of accounting receivable aging report is to list unpaid customer invoices and customers credits by dates. By the help of this report they come to know about the collections of personnel to determine those invoices which are overdue. A typical budget aging reports follow 30-day buckets. There are different columns like-

As example- the left column of the company contains invoices of 30 days or older than that. In next column it contains invoices that are 31 to 60 days. Then the 3rd column contains 61 to 90 days old invoices (Kolb and Overdahl,2010).

Inventory report-

It is a summary of items which belongs to the business, organization or home. It is alike a comprehensive account to stock or supply. There are some steps which need to be followed under inventory reporting. Those steps are shown with an example-

Suppose a company wants to make an inventory report. It should first list their inventories. They should list them in an organized manner. There must be spaces for description of those inventories. Assign specific prices and make columns.

FIFO method-

FIFO refers to first in last out method. It shows the cost flow assumption that the first good purchased are also considered as the first goods sold. Most of the companies this matches with the actual flows of goods. It is considered as the most theoretically correct inventory correct inventory valuation.

Suppose there are inventory of 100*

DatePurchases  SalesBalances
UnitPriceTotalUnitPriceTotalUnitPriceTotal
November 33060=1800   3060=1800
November 5   2060=12003060=1800
November 114070=2800   4070=2800
November 11      50 =3400
November 14   2070=1400  =1400
November 2130802400     =2400
November 22   2080=1600   
November 24   2080=16002080=1600

So the FIFO method relates that the cost of the last purchase is 80 per unit.

LIFO Method-

Last in first out is considered as LIFO method. It is used with a view to valuing inventory. The assumption of this method is that the last item purchased is about the first item sold. There are some trouble regarding LIFO that is rarely encountered in practice. The cost of inventory increases over time and thus the prices are getting inflated. The cost of the most recent inventory will always get higher than the previous inventory

In case of LIFO, the last sale is considered as 80 per unit also. But divided the unsold inventory according to the segment.

Both methods are calculated but to make a logical outcome we use FIFO. In case of FIFO there are no restrictions of GAAP or IFRS .But it is important to use IRS while calculating using LIFO.

different techniques of cost to prepare an income statement using absorption costs and marginal costing.

This is a report which contain details about different techniques of costing and an income statement which is used to prepare it(Vanderbeck and Mitchell, 2016).

There are two popular techniques for cost analysis – absorption costs and marginal costs. In case of marginal costs it centers on the contribution by the product to fixed costs and profits or the difference between sales and variable costs(Jones,2013).

Under marginal costing method the cost is –

Cost of productionCalculationTotal
Direct Materials 1) Cloth 2) Foam 3) Plastic(35*100000+20*100000+15*100000)7,000,000
Direct cost (packaging)45*1000004,500,000
Direct Labour(2*25/60)*10000083,333.33
Marginal Cost =11,583,333.33

Use Absorption costing method the cost is-

Cost of productionCalculationTotal
Direct Materials 1) Cloth 2) Foam 3) Plastic(35*100000+20*100000+15*100000)7,000,000
Direct cost (packaging)45*1000004,500,000
Direct Labour(2*25/60)*10000083,333.33
Fixed Overhead 32,000
Marginal Cost =11,615,333.33

Suppose, Sale is 600,000 units (20 per unit as RRP)

Income statement using marginal costing-

ParticularsCalculationTotal
Sales20*60000012,000,000
-Direct materials7,000,000 
-Direct cost4,500,000 
-Direct Labour83,333.33 
Marginal cost11,583,333.33 
Gross contribution 416,666.67
Less- Fixed manufacturing overhead32,000 
Net Profit =384,666.67

Those methods are known as marginal costing and absorption costing methods. Under absorption costing fixed manufacturing overhead is considered(Blocher,2016).

types of planning tools for budgetary control with advantages and disadvantages

Budgetary control is the presentation of plans for future period in numerical manner. An organization can prepare this budget for units, different departments and for the overall organization. The usual time for budgeting is 1 year but it can vary. The purpose of budgeting is to help manager to co-ordinate their resources, provide proper guidelines about the management of resources and expectations(Davis and Davis,2012).

The objectives behind budgetary control is strong enough. Like-

  • First of all, it is important to define the objectives of the company.
  • It is important to offer plans for accomplishing various objectives of the company.
  • Coordination of the works of the company.
  • Managing different cost centers and evaluate them efficiently.
  • Eliminating waste through properly utilizing the wealth.
  • Make the managerial system centralized with a view to get information easily.
  • Set standards and correct the system regularly.

There are several tools or techniques of budgetary control-

  • Financial budgets,
  • Operating budgets and
  • Non-monetary budgets.

Financial budgets and operating budgets-

Financial budgets deals with information about the business and how it acquire cash in future. The major part of financial budgets is cash budget and it outlines the upcoming expanses in cash and also incoming cash to cover the area. Capital expenditure is another part of financial budgetary control. Example – new building expansion(Vanderbeck and Mitchell, 2016).

On the other hand, operating budgets is about a period of time to plan revenue and expenses over the time, Operating budgets are – revenue, expense and profit. This provides information about whatever the organization will earn a profit or loss (Jones,2013).

There are some similarities between financial budgets and operating budgets also. Both depend on the revenue of the organization. Revenue of an organization is always used to determine this types of questions and it is mandatory to follow those accounting rules which are focused.

Advantages and disadvantages:

Financial budgets provide financial awareness and create business opportunities. Those opportunities can help the market and help to expand the area of business. This will create a communication tool. Both business owner and investors get benefits from financial budgets. It also review the business and helps to create financial planning(Davis and Davis,2012).

Now there are also some limitations of financial budgets like- Financial budgets take so much time to execute. There is another limitation of financial budgets which is that it is not correct and match properly with the real flow in future. This can make a culture to blame for outcomes. There can be strategic rigidity.

Operational budgets has several advantages. Operating budgets can help to manage current expenses by collecting records. This will help to project future expenses. An operating budget can be liberating rather than restricting. Accountability is another plus point of operating budgets(Drury,2015).

The disadvantages of operating budgets also exists. There should be a need of long term planning which need huge time. It is hard to keep accurate information about expenses as well as income.

Performance measure for the revenue centres-       

The job of revenue center is comparing the actual sales to projected sales. Performance measures is an important tool o evaluate the performance of the business. Marketing department or sales are examples of revenue center. At a specific cost the management team sales their products and make profit. The aim of the center is to meet the target revenue by maintaining a profit margin. Suppose- XYZ Company has separate revenue center trough which is take records of revenue(Eweje, 2011).

Advantages and disadvantages-

The advantages of revenue center are many. Revenue center helps the organization to make proper decision about the company. It can identify the management centers within the business organization that make profits and the ones that are not able to make similar profits. It is a management oriented system and they store data efficiently (Vanderbeck and Mitchell, 2016).

Disadvantages of revenue centre performance measurement includes they can overemphasizing short term outcomes. Sometimes it can reduce profitability by excess competition. It may seem as underutilize competence of corporation.

There are also several disadvantages. But it seems that the benefits of using revenue center is more than its limitations(Blocher,2016).

Job costing and process costing-

Job costing is used to serve unique products while process costing deals with standard products. Job costing deals with small range of production like- customs designed wedding gown is an example of it. Process costing deals with lengthy productions. As example- A production of 100000 gallon of gasoline. So in case of job costing it is quite important to go through standardization.

Job costing is more conscious about the record keeping of the production. Process costing is less used to with customer billing. But both job costing and process costing used in manual as well as computerized accounting (Eweje, 2011).

Advantages and disadvantages –

Job costing allows the managers to find out the profit on separate jobs. One advantages of process costing is that it provides detail information about the production. The process of record keeping in case of job costing is difficult where it is easy to keep records under process costing.

Example- an business contractor of furniture can take records of woods, nails, electronic parts, screws when in case of process costing they maintain the average records (Vanderbeck and Mitchell, 2016).

Those are the advantages and limitations of planning tools which are used for budgeting.

The use of different tools of planning and their application for preparing and forecasting budgets-

  • Control and planning- It helps to make fruitful decisions regarding the business.
  • Pricing– Pricing strategies can understand how the competitors determine the product’s prices with demand and supply implementation (Davis and Davis,2012).
  • Costing systems-Actual costing, standard costing and normal costing are some of costing systems which helps the business to choose the suitable costing.

Adapting management accounting systems in response to financial problems

There can arise different types of financial problems while operating the business, some situations are that much worse. But this is management accounting system can adapt with it (Drury,2015).

Auditing systems and responsibility accounting and their respond to financial problems-

First of all, it is important to identify financial issues. Financial governance should be defined by the company and explain how it works to prevent or minimize financial issues. To monitor the business company can adapt financial governance.

Management accounting skills are also important to mitigate financial issues. There should be enough effective strategies and systems which need proper reporting. For timely reporting and responsibilities those strategies are needed (Bhimani and others,2012).

In this report, there will be some ways indicated by which management accountants provide guidelines to the company.

  • Have a clear knowledge about the environmental and social structure which has an impact on the organization.
  • Describe the sustainable issues with its impact in strong terms comprising of when and how they can affect the company.
  • KPI- Establish it and it will support strategic goals.
  • Applying techniques and tools of managerial accounting and assist sustainable issues within the process of decision making.
  • Make reports including information about sustainability effects and inform it to the pricing and budget making decisions.
  • Liking the sustainable challenges to the strategy of the organization, outlook of business and business functions (Blocher,2016).

Conclusion

Choosing a right administrator to operating a company is very much important. For this purpose it is also mandatory to have a suitable management accounting system. It will then provide reliable and accurate information about the company. Different tools and techniques of costing are used to find out the appropriate budget regarding the company. There is a guideline to operate the business toward its success. Several charts and techniques are shown to give an understanding about the terms and conditions of the accounting system. Financial accounting and managerial accounting are separate terms which is described in this report. Job costing and process costing are two important tools for this business. There are two costing systems – marginal costing and absorption costing.

Overall the managerial accounting is a vital part for every big or medium organizations and it provides guideline toward the profitability of the company.

References

  • Blocher, E.(2016). Cost management: A strategic emphasis.
  • Bhimani,A, Hongren, C, Datar, S. and Rajan, M.(2012). Management and cost accounting. Harlow: Financial Times/Prentice Hall.
  • Brewer, P., Garrison, R. and Noreen, E (2008). Introduction to managerial accounting.Boston: McGraw-Hill/Irwin.
  • Davis,C and Davis,E(2012). Managerial accounting Hoboken NJ: John Wiley & Sons.
  • Drury, C.(2015). Management and cost accounting(9th ED). Cengage Learning.
  • Eweje, G. (2011). Business and sustainability. Bingley: Emerald.
  • Jones, M. (2013) Accounting Chishester: Wiley.
  • Kalpan, R.S., and Atkinson, A.A .,(2015). Advanced management accounting PHI Learning.
  • Kolb, R. and Overdahl, J. (2010). Financial derivatives. Hoboken, N.J: Wiley.
  • Mohammad, A.A .(2016). CHannging role of accounting and its systems: a new vision of accounting as knowledge processing systems. International Journal of Managerial and Financial accounting, 8(1),23.
  • Vanderbeck, E.J.,and Mitchell, M.(2016). Principles of cost accounting.

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