a) Requirements for the different types of management accounting
Bhattacharyya (2011, p.1) defines management accounting as a branch of accounting that deals with presenting and providing accounting information to the management in order to facilitate its operations effectively and efficiently. Woodruff (2018) identifies three variants of management systems in existence. These include: financial accounting, cost accounting and forecasting and budgeting. Additionally, aspects such as constraint analysis are as well considered.
TuffenMark company deals in the design, manufacture and sale of air ventilation systems. As such, requirements to ascertain the sales performance of the products necessitate cost accounting systems to be implemented in the company. Cost accounting enables the organization to make decisions regarding the expenditure incurred in designing systems, procuring materials, manufacturing them and putting them out for sale.
Secondly, the need to project the performance of the products in the market necessitates forecasting accounting systems. Such tools enable the organization to make an estimate of performance over a given period thereby influencing major decisions made in the organization. Thirdly, the need to plan and budget on the different expenditure and revenue streams calls for budgetary systems at the company. The systems enable the organization to plan beforehand for any requirements that facilitate the production of the ventilation systems.
Fourth, inventory management systems are also required in order to enable the organization to manage its stock and plan effectively on the quantities that should be manufactured in order to meet demand.
b) Types of management accounting available for Tuffen Mark Ltd
Bendrey, Hussey and West (2004, p.12) identify various management accounting methods that are useful in TuffenMark company. First, are reports on financial analysis such as profit and loss statements as well as balance sheets. Such reports help the organization to determine how the business is growing on a periodical basis such as annually.
Second, are cash flow analysis methods such as cash flow statements to inform the business on the movement of cash from one period to another. Additionally, the reports help the business identify reasons for changes in cash balances thereby making appropriate decisions. Third, are standard costing methods such as job costing that help the organization to identify predetermined costs of raw materials and other requirements of the business.
Fourth, are decision making methods such as ratio and variance analysis which help the business make sense of different financial values recorded periodically.
c) Benefits of management accounting systems and their application within Tuffen Mark
Heidmann (2008, p.64) notes that a major importance of management accounting systems is that they help improve the efficiency of a given business. A reason for the observation stems from the fact that the different systems help present an accurate picture of the performance of the business thereby facilitating decision making. TuffenMark company benefits from such systems as they help owners identify where sales perform well and where they should distribute their products further.
Secondly, such systems help ease the decision making process by providing a simplified interpretation of the company’s financial performance. For instance, by using profit and loss as well as cash flow statements, TuffenMark company owners are able to make more informed decisions regarding the sale and distribution of their products.
Third, the systems provide a sense of transparency in the company’s operations thereby enhancing trust and confidence among employees. For instance, as TuffenMark company releases information regarding its annual performance, employees are able to increase their confidence on the operations of the firm. Fourth, management accounting systems help the business plan the future appropriately through forecasting methods. Forecasting is important for TuffenMark in order to ensure high financial performance.
d) Integration of management accounting and reporting within Tuffen Mark
The integration of management accounting systems and reports at TuffenMark company involves identifying areas where the systems can facilitate solutions, procuring the different systems and implementing them in the organization. First, the company requires to determine the different financial needs to be served by the management accounting systems. The needs include planning, decision making, and controlling the operations of the business.
Procurement of the systems is then done where information systems providing an array of functionality is preferred. For instance, implementing an accounting system such as QuickBooks enables the firm to generate different types of reports such as cash flow statements, profit and loss statements as well as balance sheets. With the systems in place, different management reports can then be generated to facilitate managerial operations.
Further, in order to enable the systems to improve the current operations in the company, training ought to be offered to the different accountants in order to work collaboratively with the management in interpreting the different reports generated. However, due to challenges anticipated with introducing such systems for the first time in the company, it is recommended that a consultant is hired to provide smooth implementation.
Task 2
a) Standard cost per ventilation system
According to Lal and Srivastava (2013, p.628), marginal and absorption costing differ from each other based on three aspects. First, is in the treatment of fixed manufacturing costs. Second, is in the influence the two costs have on inventory values and third, is in the treatment of the net income.
In essence, the authors describe absorption costing as a costing system that treats all manufacturing costs, both fixed and variable as product costs while on the other hand, they describe marginal costing as a costing system that treats only variable manufacturing costs as product costs and in effect, treat manufacturing overheads as period costs.
Calculating standard costing of ventilation systems using absorption costing
Direct materials £12
Direct labour £18
Variable overhead £9
Fixed overhead £7.2 (180,000/25,000)
Total unit production cost £46.2
Calculating standard costing of ventilation systems using marginal costing
Direct materials £12
Direct labour £18
Variable overhead £9
Total unit production cost £39
b) Income statement for the budgeted results
Income statement using absorption costing
Sales Revenue (23,000 x 80) £1,840,000
Less cost of goods sold (46.2 x 23,000) £1,062,600
Direct materials £12
Direct labour £18
Variable overhead £9
Fixed overhead £7.2 (180,000/25,000)
Total production cost £46.2
Gross margin £777,400
Selling and Admin expenses £60,000
Operating income $717,400
Income statement using marginal costing
Sales Revenue (23,000 x 80) £1,840,000
Less cost of goods sold (39 x 23,000) £897,000
Direct materials £12
Direct labour £18
Variable overhead £9
Total production cost £39
Contribution margin £943,000
Selling and Admin expenses £60,000
Operating income $883,000
c) Financial reporting documents
Cost Analysis
Based on budgeted costs (using absorption costing):
Total revenue £1,840,000
Total costs £1,122,600
Cost benefit ratio (1,840,000 / 1,122,600)
1.639
A positive ratio implied that the business was successful
Based on actual costs (using absorption costing):
Total revenue £3,500,000
Total costs £835,700
Cost benefit ratio (3,500,000 / 835,700)
4.099
A positive ratio implied that the business was successful
CVP Analysis
Based on actual costs:
Total units produced 20,000
Sales price per unit £175
Variable cost per unit £18.85
Total fixed costs £230,000 (£175,000 + £55,000)
Profit
= (175*20,000) + (18.85*20,000) – 230,000
= 3,647,000
Calculating the breakeven point:
in terms of units to be sold
= (175x) + (18.85x) = 230,000
= 230,000 / (193.85)
= 1,187 units required
in terms of revenue to be generated
= 1,187*175
= £207,725
d) Financial reports
Profit and Loss statement
Operating Revenue
Product sales £3,500,000
Total operating revenue £3,500,000
Operating Expenses
Cost of goods sold £377,000
Gross profit £3,123,000
Overhead
Administration £55,000
Fixed costs £175,000
Total overhead £230,000
Net income £2,893,000
Income statement
Sales Revenue (20,000 x 175) £3,500,000
Less cost of goods sold (27.6 x 20,000) £552,000
Direct materials £1.05
Direct labour £8.8
Variable overhead £9
Fixed overhead £8.75 (175,000/20,000)
Total production cost £27.6
Gross margin £2,948,000
Selling and Admin expenses £55,000
Operating income $2,893,000
Task 3
a) Advantages and disadvantages of different planning tools
Das (2011, p.60) defines a budget as a formal quantitative statement of resources for carrying out planned activities over a period of time. As such, planning tools for budgetary control help develop budgets and compare them with actual performance in order to determine variance in the objectives of budgetary control.
Koontz and Weihrich (2010, p.405) note that different planning tools are advantageous to a firm in that they facilitate the creation of budgets thereby leading to effective planning, forecasting, coordination and control. The authors note that the different tools capture different types of financial information thereby facilitating the budgeting process.
A second advantage in using the tools is that the tools are easily customized thereby fitting the needs of any organization, independent of size. As a result, they are easily adopted across different sectors. Thirdly, the tools are inbuilt with complex functionality thereby enabling organisations to easily plan and make forecasts at the touch of a button without any previous background in statistics or mathematics.
However, the tools are also challenged by several disadvantages. First, given that most tools are packaged in form of software applications, they often make it difficult for individuals without computing backgrounds to utilize them in their planning activities. Secondly, most are bundled with complex tools and as such, require a high level of knowledge in order to interpret the results produced. Finally, most of the budgeting tools are expensive to purchase given their high functionality.
b) Analysis of planning tools
Planning tools such as budgets and statistical tools are widely used in organisations in their different decision making activities. In particular, such tools are important in making tactical and strategic decisions which have an impact on the short and long term performance of the business. Budgets are utilized as a major planning and forecasting tool given that they enable an organization to project the usage of resources at a later date and in effect, producing a means of comparing actual performance to predicted performance.
As a result, budgets not only help the organization to forecast future spending, but as well, plan effectively about the future. Such planning activities are important in organisations such as Tuffen Mark where the business depends on manufacturing sufficient product quantities that generate profits and cover costs incurred to produce them.
An organisation such as Tuffen Mark uses planning tools to forecast its sales revenues and its growth curve in terms of market reach. For instance, statistical tools may be used by the organisation to forecast its market reach within a given period and in effect, impact the actual product quantities produced to meet the given demand. Similarly, the tools may be used to project sales revenues on a periodical basis thereby enabling efficient performance evaluation.
In summary, different organisations use planning and forecasting tools differently. However, an important point to note is that the tools are important in facilitating the creation of budgets in order to aid planning on resource usage and the generation of different forecasts.
c) How planning tools solve problems
Accounting planning tools include diverse budgets and financial ratios which provide insight on the performance of the business. For instance, an operating budget enables an organisation to plan on the expenses used in facilitating the daily operations of the business. Such a budget helps an organisation to respond appropriately to any misuse of funds particularly when analysis of budgeted and actual costs is performed.
In such an instance, the organisation is able to identify aspects where finances are misaligned with the business goals thereby facilitating corrective action. A similar illustration is observed with a cash flow budget where an organisation is able to identify aspects requiring further improvement in addition to those that are performing efficiently thereby informing their decisions.
Other types of budgets such as financial and master budgets are as well utilized in gauging the performance of an organisation and in effect, determining future corrective action. Similarly, other forecasting tools that utilize statistical approaches enable organisations to evaluate projected performance against actual performance thereby facilitating corrective future action.
Consequently, the argument advanced is that, accounting planning tools such as budgets and statistical tools provide a way to examine projected and actual performance thereby providing a useful way to solve financial problems. In instances where actual performance diverges away from anticipated performance, the business formulates corrective action to help restore performance. On the other hand, where actual performance supersedes projected performance, the organisation is assured that it should continue with its efforts which generate the given performance.
d) Adoption of management accounting by organisations
A study by Ahmad (2013) revealed that management accounting practices such as conventional budgeting, financial performance and traditional costing had been widely adopted by small scale businesses in Malaysia. However, the findings offered an acceptable level of generalization where the author argued that management accounting is widely adopted across organisations of different sizes.
In the study, Ahmad (2013) revealed that businesses used management accounting to facilitate decision making, strategic analysis and to enhance the performance of their organisations. A different study by Chia and Koh (2007) revealed the wide scale adoption of management accounting in the Singapore public sector.
From both studies, it is apparent that managerial accounting practices are applicable in both the private and public sector. Consequently, the argument advanced is that, the practices are adopted to serve similar functions despite differences in the nature of organisations. For instance, financial statements such as income and cash flow statements both advice managers on the best course of action to take for an organisation in order to generate higher revenue or maintain the status quo..
e) How management accounting leads to sustainable success
Hutcherson (2018) notes that, unlike financial accounting which presents an elaborate summary of the financial transactions of a company, managerial accounting provides useful insights that aid in the management of the business. Consequently, the author notes that since management accounting facilitates activities such as planning, controlling, problem solving, and goal setting, it in effect facilitates the attainment of sustainable success by helping such organisations respond to financial problems.
For instance, an illustration is observed with the different managerial financial statements such as cash flow and profit and loss statements. Once the given reports are generated, the management is able to identify aspects of the business that generate highest revenue and those that perform below expectation. As such, through the examination of such documents, strategic and tactical decisions can be made in order to facilitate future growth.
Secondly, management accounting similarly facilitates goal setting, planning and forecasting operations thereby enabling organisations to assess their actual performance against projected performance. Thirdly, different financial reports facilitate control and decision making efforts thereby having an influence on sustainable organisational success.
References
Ahmad, K. (2013). The Adoption of Management Accounting Practices in Malaysian Small and Medium-Sized Enterprises. Asian Social Science, 10(2).
Bendrey, M., Hussey, R. and West, C. (2004). Essentials of financial accounting in business. London: Thomson Learning.
Bhattacharyya, D. (2011). Management accounting. Noida, India: Pearson.
Chia, Y. and Koh, H. (2007). Organizational culture and the adoption of management accounting practices in the public sector: a Singapore study. Financial Accountability " Management, 23(2), pp.189-213.
Das, S. (2011). Management control systems. New Delhi: PHI Learning.
Heidmann, M. (2008). The Role of Management Accounting Systems in Strategic Sensemaking. Wiesbaden: Gabler.
Hutcherson, A. (2018). The Advantages of Managerial Accounting. [online] Yourbusiness.azcentral.com. Available at: https://yourbusiness.azcentral.com/advantages-managerial-accounting-21281.html [Accessed 4 May 2018].
Koontz, H. and Weihrich, H. (2010). Essentials of management. New Delhi: Tata McGraw Hill Education Private Ltd.
Lal, J. and Srivastava, S. (2013). Cost accounting. New Delhi, India: McGraw-Hill Education (India).
Woodruff, J. (2018). What is A Management Accounting System?. [online] Bizfluent. Available at: https://bizfluent.com/facts-5460765-management-accounting-system.html [Accessed 29 Apr. 2018].
