Understanding And Applying Management Accounting Techniques: Marginal Costing, Budgets And Variance Analysis In An Essay.

Demonstrate an understanding of management accounting systems.

Apply a range of management accounting techniques.

Calculate costs using appropriate techniques of cost analysis to prepare an income statement using marginal and absorption costs.

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

Produce financial reports that accurately apply and interpret data for comp.

Marginal Costing: In the marginal costing approach only variable cost are charged to the unit of cost and all the fixed cost is written off against the contribution.

The main difference between the marginal and absorption costing is that fixed manufacturing cost is included in the product cost in case in absorption costing while in case of marginal costing all the fixed costs are charged to the contribution.

Comments: The above results a show that overall loss reported under the absorption costing approach is less that the overall loss reported under the marginal costing approach. It is because in absorption costing only those fixed manufacturing cost is charged to the cost of production that is actually consumed by the unit sold while in case of marginal costing all the fixed production cost are charged to the contribution and it is not based on number of units sold or produced. In marginal costing fixed cost are charged on the basis of the period not on the basis of the actual unit sold (Bromwich and Bhimani, 2005).

Budget is refers to the financial tool that is used for preparing the projected financial statements and also to make decisions. Budgets uses the past results and variances to prepare the financial statements for future period. The main motive to prepare the budgets is to help the management for making the future planning and to measure the future performance of the company. It helps to evaluate the performance of the individual as it is compare the actual performance with the budgeted performance of the individual. So in short it can be said that it is used to make decision regarding the expenditures that has to be occurred for the fixed expenses, cash flow management, expansion plans and many other important managerial decisions (Lalli, 2011). Various planning tools are used to create the budgets such as ratio analysis, variance analysis, and benchmarking. All these planning tools provide the base for preparing the budgets. Planning tools uses historical data to make the analysis and provides information that is needed to prepare the budgets. The important budgets that are produced using the past information are sales budget, purchase budget, cash flow budget, budgeted income statement, budgeted balance sheet and other flexible budgets (Davies and Crawford, 2011).

Budgets also include various process that need to be undertake in order to help the managers to take managerial decisions. The preparation of budget involves proper use of proper planning tools and use of budgetary controls methods. Budget can also be defined as the process for statements of different management information is prepared for the future period and actual results are compared with past results in order to find the variances. The variance helps the management to make corrective actions for the future period and improve the financial and performance (Malina, 2017).

Budget is the most important planning tool that is used for the budgetary control decisions. It is defined as the financial tool that helps the management in gaining an estimate of the future financial performance. Budget performance is based on the past results that have been derived using the trend analysis of the financial statements. Budgeted financial statement are made using the financial statements of the company, while other financial budgets such cash budget, sales budget, purchase and raw material purchase budget are prepared using the sales growth rate, management expectation of closing inventory and other financial decisions for the future period. Sales of the company can be estimated using various methods and using the sales units for the future it is easy to estimate the budget performance of the company in future years (Lumby and Jones, 2007).

The most important advantage of using the budget as the planning tool for the budgetary controls is that it helps in controlling the overall cost and also helps the management for profit maximization. It helps to define the business plans, objectives, policies for the future year based on past performance of the company. It can be said that budget provides accurate information for the future period as it based on the past results and use of estimation methods. It helps to prepare to prepare the future activities and provide the performance standards for the entire managerial person in the organization (Malina, 2017). Using the budget it is easy to allocate the specific targets and goals for each business department and it is most important part of the budgetary control process. So it can be said that process of budget helps in effective management of different business activities and allow the proper coordination of between the various business departments. The actual results of the business department have been compared with the budgeted results and any unfavorable items are being sorted in order to know the possible cause for the same. So it is easy for the managers for to identify the issues in each business department and to develop the effective strategies to overcome the particular issue. Management can determine the responsibilities and duties of managerial persons on the basis of budgetary targets and objectives. In short it can be said that overall reduction in the production cost through using the proper budgetary control techniques helps the management to improve the overall economic performance and efficiency of the company (Moles and Kidwekk, 2011).

Analysis of Adoption of Management Accounting Systems by Organizations in Responding to Financial Problems

Every budgetary control process has some drawbacks and it limits the use of planning tools in the management process. Budgets are based on the past performance and future results are estimated using the past trends but it is certain that future estimation can be fluctuated due to inflation rate. So it can be said that budgets that are prepared using the past performance can have some deviations and can provide unrealistic outcome only in few cases. Budgets are also prepared using the help of top management, so it can be said that if top manager fails to provide the help to the top management that there will problems in making the budgets (Rasmussen,  2003).

The method of variance analysis is used for identifying the deviations in performance by comparing the actual results with the budgeted results. This helps in development of strategies to overcome the differences and taking corrective actions for future development and growth. It helps in identification of the material variances, overhead variances and labor variances. Thus, the accurate determination of the problem areas with the help of technique of variance analysis enables the managers to plan and take actions to overcome the issues identified. The main aim of the use of technique by accountants is to minimize the deviation in budgeted results and achieving the long-term goal and objectives of the company (Warren, 2016).

The main advantage of variance analysis is that it assists the business managers in performance measurement. The overall performance analyses will help the management in gaining an understating of the root cause of the problems and then developing solutions so that the problematic areas can be completely removed. The analysis also helps in assigning the responsibility to managers for improving the performance of the company to maximize the operational efficiency. Also, it assists the manager in taking quantitative investigation of the deviations in performance rather than only providing a theoretical estimation. Thus, the quantitative investigation provides a more accurate estimation of the problematic areas which help the manager in developing effective control measures for their resolution (Weygandt, 2015).

There are many disadvantages along with the numerous advantages that limits the use of variance analysis in the applying the budgetary control techniques. Variance analysis is done for two or more period and there is some time gap in each of period. So it can be said that variances does not provide useful information because it does not consider the time vale of money concept which is very important for making the managerial decisions. So it is important to pay attention to various factors that can impact the overall results of the variances. Factors can be change in material price, government regulations, technology changes and change in market conditions. So it is important to incorporate all the external factors while applying the variance analysis method in the budgetary control (Soyka, 2012).

Management accounting can be regarded as the process of developing management reports to extract accurate and timely financial and statistical information for decision-making. The management reports prepared leads to analysis and interpreting of the relevant information to enable an organization to achieve its goals and objectives. The field of management accounting has considerably evolved over the past few years and has traditionally being changed from cost identification to facilitate decision-making. The considerable evolution of management accounting over the past can be discussed as follows:

• Prior to 1950: The major focus of management accounting before 1950’s was only determination of cost and financial control. The management prepares financial reports only for identification of costs involved in carrying out different business activities. This facilitates the managers in achieving financial control through taking significant measures for cost reduction and development of budgets. The business managers do not adopt the use of management reports in strategy planning and execution. It was only used for gaining an overview of the internal processes and cost accounting practices.
• 1950’s to 1970’s: The role of management accounting has been significantly changed during this stage and involves extracting information for planning and controlling of internal processes. The management activities during the period involves the use of management controls in optimizing the production processes and seek to develop effective ways for managing the resources to achieve the organizational objectives and goals. Therefore, the role of management accounting has shifted from only cost allocating to using the information for improving the operational efficiency during this phase. For example, Nokia adopted the use of cost accounting for estimating the direct and indirect cost involved in its operational functions. The company integrates the use of account analysis method to classify various cost accounts as variable, fixed or mixed as per the individual level of activity (Weygandt et al., 2015).
• 1970’s to 1990’s: The stages involve the use of information for managerial planning and control by the use of information technologies and devices. This is largely been due to increase in competition and technological development that has assisted the management in developing strategies for reduction of cost and reduction of waste to increase profit. The management reports adopted the use of accounting techniques such as Activity based costing for allocation of costs to each department activities and maximizing the operational efficiency. For example, H&M adopts the use of activity based costing to allocate cost as per the department activities and therefore accurate pricing of its products and services (Warren et al., 2016).
• 1990’s onwards: This period has resulted in causing major changes in the management accounting functions within organizations. The stage involves adoption of information from the management reports to create value by better management of resources. The information is used for strategic planning and decision-taking by the organizations. The management reports involve the use of financial information for forecasting the future growth potential in order to take strategic decisions regarding the investment in equipment and other strategies adopted for promoting its financial growth. It aids the management in taking decisions reading the procuring of materials either from outside or manufacturing in-house (Warren, Reeve and Duchac, 2011). The insights developed by the management personnel’s assists in taking effective decisions for maximizing the operational effectiveness. It aids in budget planning and development by estimating the future cash flows and as such assist the managers in allocating financial resources for generating more revenue and promoting the growth of the company. Therefore, the role of management accounting has shifted from only taking decisions regarding allocation of resources to that becoming a strategic business partner. Thus, the changing role of management accounting over the past few years has caused larger changes in financial reporting and development of effective cost management system to enable an organization to attain competitive advantage (Moles and Kidwekk, 2011).

Business managers are adopting the use of information gained from the management reports to promote sustainable growth and development of business entities. This is because the financial and statistical information gained from the management reports will help in identification of a financial risk in advance. The identification of a financial problem by the development of budgets will helps the company to plan appropriate strategies for overcoming the problem identified. Also, the analysis of the overall internal processes of a company with the help of management report developed will lead to identification of Key Performance Indicators (KPIS’s) to support its long-term business goals and objectives. The management on identifying its KPIs’ can develop sustainable strategies incorporating the use to promote its growth and development (Malina, 2017).  

For example, IKEA have improved the competency of its value chain with the use of management accounting systems. It adopted the use of two planning control systems that are, budgets and business plans. The information extracted from the reports developed by the management accountants is shared equally at all level. The management at higher level provides guidance to lower level management team about the key focus area to improve the operational efficiency. This can be price reduction, decrease in the waiting time or improving the production processes.. The selection of the key problematic area is followed by determining target figure to be achieved by the use of a management accounting system. This is followed by developing a business plan for achieving the determine target and developing action plans for achieving them. The information provided by the management accounting reports is used to make forecast about budgeted sales and them comparing it with actual sale figure to identify the deviations and taking suitable actions for overcoming them. The reports are also used by stores manager to compare the sale figures with the last year figures and budget figures to determine the percentage increase or decrease in the financial growth. Therefore, it can be said that IKEA is using management accounting system to identify its KPI’s that leads to its sustainable growth and success (Adler, 2013). 

The identification of the operational and financial risk that a company can face I the future context will enable in developing a risk management framework for mitigation of the respective risks. The risk management framework will define the roles and responsibilities of different management personnel in identifying, measuring and controlling the risks. The action plan can be developed in advance against each of the identified risk so that it can be mitigated properly. It also assists in developing an effective financial governance system to meet the financial goals and objectives of the company. The presence of a financial governance system is essential to prevent the occurrence of any fraudulent activities impacting the achievement of financial goals of the company. The management reports will lead to easy identification of the loopholes and also any unethical practice and procedures in advance by the company (Lumby and Jones, 2007).

This will help in its early mitigation so that stakeholders are provided with only reliable and accurate information. The error in the financial reporting process will also be identified accurately by development of management reports. This assists the financial accountants to disclose the information to the external stakeholders that is neutral, error-free and complete in all aspects. The estimation of the costs involved in operational activities assist the management in taking accurate decisions reading the pricing of products and better inventory planning. The identification of the wasteful activities will help in reducing the inventory costs and thus improving the operational efficiency. This will enable the company to price its products at lower price and achieve customer satisfaction that will promote its long-term growth and development (Lalli, 2011). For example, Wal-Mart adopt the use of inventory forecasting for taking future business decisions by estimating the amount of inventory required and therefore helpful in cost assessment. 

The different tools of accounting are used effectively by the management for resolving the financial problems and promoting its sustainable success and growth as follows:

• Budgetary Control: This is the most important and significant tool of management accounting used planning and control of financial resources. The budgets are developed with the use of past accounting data by keeping into account the future expectations of growth and development of the company. The budgeted data is compared with actual data in order to identify the deviation in the performance and planning strategies to overcome the deviation.
• Decision Accounting: Decision-making is also one of the most important tools of management accounting. The development of financial reports assist the managers in taking decision about the activities that need to be undertaken and that need to be eliminated. The development of alternatives for improving the operational efficiency helps in selection of the best possible methods to improve the productivity and profitability of the organization. It also assists in accurately determining the product prices by taking into account the overall operational costs (McWatters and Zimmerman, 2015).
• Management Information system: MIS is an integrated tool used by the management in order to record and stores the information accurately for use by the management. MIS tools and device scan be sued by the management in collection, storing and retrieving the information accurately so that it can be extracted easily at the time of its use (Davies and Crawford, 2011). For example, Starbucks adopts the use of management information system for maintaining communication flow across its different department in order to take effective decisions. The company has developed a web portal that disseminates the management accounting information to the people working in the organization. The tool serves the function of providing different type of information to varying departments as per their needs and requirements. This facilitates the department manager to plan the consecutive strategies for driving its growth and development. The use of MIS enables the management to gain timely information for strategic planning to promote the business growth and development. The improved communication flow across different business departments has improved its productivity. This has enhanced the supply chain capability of the company and therefore optimizing the time involved in carrying out different supply chain activities. It has having large number of stores and therefore the use of MIS systems enables it to achieve success by effectively disseminating the information across various departments. Therefore, it can be said that the use of accounting tool has largely enabled Starbucks to resolve various financial problems (Marco, Te'eni, Albano and Za., 2012).
• Capital Structuring: It is management accounting tool used by the business managers to develop an appropriate capital structure consisting of balanced proportion of debt and equity. This is possible by the use of management reports that provides a complete overview regarding the financial resources and constraints possessed by the organization. Thus, the business managers can accurately take the decision whether to incorporate the use of equity of leverage financing for promoting the future growth and development of the company. It also provides an analysis of the working capital management of the company. Thus, it helps in determining the ability of a firm to effectively use is resource to convert into cash to meet its financial obligations. Thus, the managers can plan of strengthening its current asset base for meeting the liabilities in case the current assets are comparatively less in amount to meet the financial obligations as they become due (Bromwich and Bhimani, 2005).
• Variance Analysis: It is also regarded to be the most important tool of management accounting for identifying and overcoming the deviations in the actual behavior as compared o the forecasted behavior. This consists of two stages, that is, calculating ad recording individual variances and gaining an adequate understanding of the cause of each variance. The reasons for variances can be due to material deviations, labor changes or overhead fluctuations. The material differences can be due to difference in the quantity consumed and that allocated for production whereas labor variances can be due to fluctuations in the actual wage paid to the workers and the standard wage specified. Lastly, the overhead variances can be due to difference between standard overhead costs budgeted in comparison to that incurred (Wickramasinghe and Alawattage, 2007).

References

Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Lalli, W. 2011. Handbook of Budgeting. John Wiley & Sons.

Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.

Malina, M. 2017. Advances in Management Accounting. Emerald Group Publishing.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.

Rasmussen, N. et al. 2003. Process Improvement for Effective Budgeting and Financial Reporting. John Wiley & Sons.

Soyka, P. et al. 2012. Building Sustainability Into Your Organization (Collection). FT Press.

Warren, C. et al. 2016. Financial & Managerial Accounting. Cengage Learning.

Weygandt, J. et al. 2015. Financial & Managerial Accounting. John Wiley & Sons.

Wickramasinghe, D. and Alawattage, C. 2007.  Management accounting change: approaches and perspectives. London and New York: Routledge. Taylor & Francis Group.

Adler, R. 2013. Management Accounting. Routledge.

Marco, E., Te'eni, D., Albano, V. and Za. S. 2012. Information Systems: Crossroads for Organization, Management, Accounting and Engineering: ItAIS: The Italian Association for Information Systems. Springer Science & Business Media.

McWatters, C., and Zimmerman, J. 2015. Management Accounting in a Dynamic Environment. Routledge.

Warren, C., Reeve, J. and Duchac, J. 2011. Financial & Managerial Accounting. Cengage Learning.