P1: Explain management accounting
The current business scenario requires the managers to make decision on a consistent basis. That involves decision relating to the day-to-day activities, planning and management of strategy. In order to make this decision the managers are required to obtain information that are reliable and based on sound or tested process (Wijaya et al. 2015). In the context of accounting, the information that is required for making decisions comes from the Management Accounting. Therefore, it is important for the management in Zara to gain an understanding of the Management Accounting.
The Management Accounting can be described as the process that involves identification, measurement, analysis, interpretation and communication of information in order to attend the goals of the organization. The management accounting is the combination of finance, Accounting and Management that helps to add value to the organization (Fullerton et al. 2014). The Management Accounting are not just crunching of numbers it involves advising managers on the financial implication of major business decisions, formulating strategy for the business and monitoring of risk. The management accounting and financial accounting are slightly different from each other based on the primary objective. The information obtained from Management Accounting is aimed at helping the management of the organization to make business decisions. On the other hand, the main objective of the financial accounting is to provide information to the outside stakeholders of the organization (Renz 2016).
In Zara, the adoption of Management Accounting will help in the collection of information like revenue, outstanding debts and cash flow so that a timely train report can be developed. This trend reports and statistics are the vital information that the managers should evaluate before making business decisions. In addition to this, the Management Accounting helps to gain a complete picture of the business by combining the financial and nonfinancial information. It is a very critical factor for the success of the business (Otley 2016).
Different types of management accounting systems
The management accounting system collects data from the business operation and converts information into valuable reports that are useful for analysis. The benefit of Management Accounting system is that it provides timely and accurate information to the manager for making appropriate decisions (Chenhall and Moers 2015). There are different types of Management Accounting systems:
- cost-accounting systems;
- inventory management systems;
- job-costing systems; and
- Price-optimizing systems.
In order to determine the management accounting system that is appropriate for Zara it is essential to determine the requirements of the different types of management accounting system and their benefits.
Cost Accounting system
The cost accounting system can be defined as a framework that is used by the organizations to estimate the cost of the product. The estimation of the cost of the product is useful because it helps the organization to perform profitability analysis, inventory valuation and controlling the cost (Otley and Emmanuel 2013). It is critical that for the operation to be profitable the cost of the product should be accurately estimated. There are certain essential requirement for the implementation of good cost accounting system, the factors that should be considered are:
- The information need of the management.
- The type and frequency of information provided.
- The organizational structure and method of production.
- The speed and accuracy with which the information is required.
- The information that are required in different cost centers.
- The system should be easy to operate and simple.
The implementation of appropriate cost accounting system offers certain benefit to the organization. These are:
- The implementation of cost accounting system helps to improve the measurement process.
- The good cost accounting system helps in elimination of wastage, loss and efficiency.
- It helps in reducing cost by improving a method of production.
- It helps in identifying the reasons of increasing or decreasing profit or loss.
- It helps the management to make decisions whether to make or buy products from open market.
- It is helpful in fixing the price of the product.
- It plays an important role in controlling cost and unwanted expenditures.
Inventory Management System
The process of controlling the ordering, storage and use of items of inventory is known as inventory management. The item of inventory can include raw material or finished goods. The inventory represents major assets for the company. The mismanagement of inventory can create financial problem to the company. Therefore, it is essential for a business to have proper management of inventory (Granlund and Lukka 2017).
The inventory management involves development of purchasing plan which ensures that the inventory are available at the time of their need. The main benefit of the inventory management system is that it helps to track the existing inventory and the use of those inventories. There are primarily two most common types of inventory management strategies. These are the just in time method and the material requirement planning (Cooper et al. 2017). In the just in time method of inventory management system the company plans to receive inventory as per the requirement rather than marinating high level of inventory. In the system of material requirement planning the material are delivered as per the sales forecast. The company Zara can implement the Just in time method if the materials supply are easily available. The company should apply the method material requirement planning for inventory management if the sales can be forecasted based on the reasonable certainty.
Job costing system
The job costing system is a method in which the cost are measured in terms of completed job. In job, costing technique the amount of work done is measured in terms of works or jobs that have been completed. The job system are mainly appropriate for large industries and is useful in checking whether overhead exceeds the cost of production (Suomala et al. 2014). The essential requirement for the implementation of the job costing system are the production order, costs sheet and other documents. The different benefits of the job costing are:
- It helps in analyzing the different types of costs;
- It helps in determining the profitability of the job;
- It helps in controlling of the cost’
- In this system the measurement of the overhead are more precise;
Price optimization systems
The price optimization is a technique of determining the response of customers at the different level of price of the product and services offered by the company. This technique is also implemented by the company to determine the best price of the product for maximization of profit. The essential requirement for a successful implementation of the price optimization systems is a strong back end analytics that constantly process and analyses the customer and sales related data for fine-tuning the pricing strategy (Fullerton et al. 2013). The primary benefit of the price optimization strategy are:
- It helps the business to remain competitive;
- It is crucial for marinating profitability;
In the discussion above the essential requirements and the benefits of the different management accounting system have been briefly explained. Therefore, it can be said that the Zara can implement all or any of the management accounting system that suits its purpose.
P2 Different methods used for management accounting reporting
The management accounting reports are useful for the owners and managers of the business to monitor the performance of the business. These reports are prepared throughout the accounting period as per the requirement of the management. The different types of management accounting reports are:
- Budget report;
- Accounts receivable aging;
- Job cost reports;
- Inventory and manufacturing report;
The budge report helps the company to analyze the performance of the business for elimination of inefficiency and controlling of cost. The estimated budget are generally prepared from the actual result of the earlier years that are adjusted for the future years. Therefore, it can be said that the budget is an essential management accounting report that is necessary for the evaluation of the performance (Wagenhofer 2016).
Accounts receivable Aging
The accounts receivable aging is an important management accounting report for the organizations that extends credit to the customers. In this report, the balance of the customers is classified depending on the duration that the customer has owed the money to the company. These report is used by the manager to analyze and determine the shortcoming in the collection process of the organization. If the result of the analysis shows that the large number of customers has unpaid dues for long period then the company will have to adopt strict credit policy. The periodic analysis of the accounts receivable aging report helps the business to reduce loss due to bad debt.
Job cost reports
The job cost report is a management accounting report that shows the cost associated with the specific project. These costs are matched with the revenue to determine the profitability of the project. The job cost report are useful analyzing the expenses so it helps the managers to take corrective actions at the early stage (Messner et al. 2016).
Inventory and Manufacturing
The managers uses their management accounting reports to make the process of manufacturing more efficient. The managers with these reports can compare different production and supply line thereby improving the overall performance of the business.
P4 Management accounting is an integral part of management. In order to efficiently run an organization management accountants have huge responsibilities that include using the resources of the organization strategically, to manage the customers and costs along with implementing a strategy to achieve the above purposes. Over the years new and better tools have been developed to help the management accountants to deal with numerous issues that are generally faced by them while running and managing an organization (Schwalbe 2015). It is true that there are no shortages of tools to help the management accountants to develop an effective and efficient strategy for an organization to make optimum use of the available resources to manage the customers and costs effectively. However, the usefulness of a tool to an organization would be dependent on the ability of the management accountants to select and use most suitable tools for the organization keeping in minds its requirements, objectives, available resources, strengths and constraints.
In this document, a brief discussion shall be made on different types of planning tools available to the management accountants along with their advantages and disadvantages to assess how these tools can help different organizations in their endeavor of achieving their desired goals and objectives. It is crucial for the management to understand the different nuances and underlying conditions of different planning tools. In order to select and chose the best possible alternative for the organization to contribute immensely to the success of an organization (Renz 2016).
Governance and risk management:
Governance and risk management tool helps an organization and its management accountants by providing them with CIMA strategic scorecard that can be used in management of the organization. The management accountants can also make use of enterprise risk management strategy. Checklist to manage the ethical issues and use of risk heat map will help the management in running the operations better (Schwalbe 2015).
Advantages of using governance and risk management tool are as following:
The use of scorecard would help the management to properly assess the performances of different departments with the help of the CIMA strategic scorecard.
The use of checklist will help the management to take cognizance of each and every single ethical issues associated with the business operations of an organization (Heizer 2016).
Governance and risk management will help the organization to keep the risks of operations under control by governing the organization better.
However, despite number of advantages there are certain limitations of the above tool and these are mainly as following:
Governance and risk management tool is very sophisticated and thus, many management personnel may find it difficult to understand and operate this tool.
It’s a very costly tool to use and hence, for a small and medium sized enterprises this tool may not be the right way to go about doing business.
Performance management and measurement:
Managing the performances and using appropriate measurement techniques to measure the performance of an organization is a very effective planning tool for the management accountants. The management accountants to manage and measure the performances in an organization use Mission and vision statements of an organization, goals and objectives, strengths, weaknesses, opportunities and threat analysis along with PEST analysis. Balance scorecards are along with strategy mapping is also used to manage and measure the performances in the organization. Use of Porter’s five forces analysis is also made efficiently by the management accountants to manage the organization (Christopher 2016).
Advantages of using performances management and measurement tools are mainly;
The employees and the workers along with each and every other stakeholders of an organization will be on their toes knowing that their performances are under continuous scrutiny and being measured by the management accountant. Thus, the employees and workers will be motivated to give their best for the success of the organization knowing very well that their performances are being measured and necessary rewards will be showered in case their performances are beyond expectation. Use of SWOT and PEST analysis will help the management accountants to understand the organization better and accordingly, they will be able to take decisions to influence the functioning of the organization to achieve better performances in the future (Grant 2016).
Disadvantages of using the above tool:
There are no inherent limitations to this particular tool however, use of performance management and measurement could very well work as a tiring factor for the employees and workers as they will be under immense pressure to perform. This might end up making the workforce a mere worker and they will not feel free to express their selves in the workplace. This would mean that the workers will not freely express their thought process which could have been very beneficial from the innovation and development point of view (Johnston and Marshall 2016).
Planning and forecasting:
Planning and forecasting is a tool that in recent times have enjoyed huge amount of support from the management accountants from all over the world due to its simplicity and easy to use approach. The management accountants on the basis of past performances and information about the organization makes plan and sue forecasting ability to manage their part of management responsibility efficiently (Johnston and Marshall 2016).
Advantages of using planning and forecasting tool are as following:
The use of planning and forecasting tool is very simple and easy thus, even relatively new accounting managerial personnel will also be able to use this tool in an organization. In case the management accountants have great forecasting ability then managing the organization would be relatively easy.
Limitations of planning and forecasting tool are as following:
It is a too simple a tool to be used by highly qualified management accountants. Apart from that in case there is any mistakes in forecasting certain events on which the financial condition and position of an organization is very much dependent then the organization might suffer irrevocable recovery from which might not be possible (Gitman et al. 2015).
Value recognition tool:
Value recognition tool uses value chain analysis along with management of relationship with different customers to achieve the desired goals for an organization. Value chain analysis helps the management accountants to analyze the value different operations and departments are adding to the overall organization to make necessary changes in the operation process and management of an organization.
Advantages of using the value recognition tool are as following:
It will help the management accountants to cut off processes and procedures that are not adding any value to the organization. Value chain analysis will help to understand the most valued as well as least value services and operations in an organization. The customer relationship management will be better.
Disadvantages of using the above tool are as following:
Often certain operations and processes may not add some value to the overall organization however, the importance of such processes and operation may have substantial historical value to the organization. Often such value if overlooked and given way to the profit oriented and value based processes and procedures (Van Dooren et al. 2015).
P5 Organizations in all across the globe are increasingly using management accounting systems to reduce financial problems of different sought and deal with them appropriately. Compare to erstwhile manual accounting systems organizations are now using management accounting systems to respond to financial problems of different types. Financial problems are of different natures and to face these problems management accountants need modern generation management accounting systems. Compare to earlier when huge amount of time was required to deal with numerous issues such as preparation of financial reports after recording financial transactions from data collection have changed significantly. Modern management accounting system not only has enabled the business organizations to quicker the overall process of book keeping and maintenance of accounting records but at the same time the preparation and presentation financial statements have improved significantly (Taticchi et al. 2015). Compare to earlier when accounting system was merely used to report the financial outcome of an organization now adoption of management accounting system has completely changed the perspective of accounting system (Peppard and Ward 2016). Modern management accounting system is more than a mere record keeping system. It now works as an enabler to an organization as it helps the management accountants by providing important information timely to take important decisions in relation to the operations of business in an organization. The ability of the management accounting system of present age to compare different accounting data and information of an organization for the current financial year with previous years to show important variations have helped the management accountants to take important decisions in running an organization efficiently. Use of graphical images in modern accounting system has helped the management to identify important elements of performance and financial position of an organization that were not possible in earlier accounting system. Management accountants have been blessed in today’s time to have such varieties of accounting and management system that are much more than a normal book-keeping and accounting system. Thus, more and more organizations are constantly shifting from their earlier accounting system to management accounting system. This has also helped the management to make optimum utilization of their resources in running an organization efficiently (Fayol 2016).
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