Loading loader

To Improve Your Grade We Always Ready To Help You

  • 60,000+ Completed Assignments

  • 3000+ PhD Experts

  • 100+ Subjects

PM201 Management Accounting

Published : 16-Sep,2021  |  Views : 10

Question:

Management Accountants are more involved in financial planning rather than historical accounting.

Analytically discuss how management accounting varies from financial accounting.                                                       
Analytically discuss the importance of break-even analysis with the help of a break-even chart.                                                    
Evaluate the importance of any six operational budgets for a limited company.                                                         
Discuss analytically the importance of variance analysis as a cost controlling and decision making tool. 

Answer:

Introduction:

This report has been prepared to analyze the managerial accounting role in an organization. Managerial accounting and financial accounting are different from each other. Managerial accounting helps the management of an organization in taking decisions and reduction in extra cost. It is prepared for the internal stakeholders to understand the business nature and make decisions accordingly.

1) Financial accounting:

This is the main element of accounting. Preparation of financial report is mandatory for the organizations as these reports help the external stakeholders to make decisions regarding the organization. Mostly, annual reports such as income statement, balance sheet, fund flow and cash flow statements are prepared in financial accounting (Bromwich and Bhimani, 2005). For making this report more reliable, auditing are done by the organizations.

Management Accounting:

Managerial accounting is significant for an organization to decision making. Preparation of management accounting is not mandatory but still organization prepare these reports to take some internal decisions regarding the production, control over expenses, budgets etc. (Ahmed and Duellman, 2013) In managerial accounting, budgetary statements, cost sheet, break even analysis etc is prepared. These reports are prepared on the basis of fair value to take a better decision.

Difference between management and finance accounting:

Both the management and financial accounting are important for an organization. Both of these provide different services to the organization. Management accounting offer the decision making and cost controlling techniques whereas financial accounting offer more investment and goodwill in the market.

Management accounting is important for an organization because it offers the managers, some strong reports to make decisions regarding the internal operations whereas financial accounting is important for organizations as it offers the external stakeholders, some strong reports to make decisions about the investment in the company (Besley and Brigham, 2008). Management accounting shows its concern about the internal factors like operating statement, cost sheet, breakeven analysis, budgets etc. whereas financial accounting shows its concern about the external factors like income statement, fund flow and cash flow statement, balance sheet etc.

Management accounting reports help the managers into making some strong policies, strategies for enhancing the operations of the business and enhancing the profit whereas financial accounting reports help the external stakeholders into making decision regarding the divestment or investment in the company (Brown, Beekes and Verhoeven, 2011). Management accounting reports need not to be audited whereas it is compulsory for every organization to audit their financial report.

Managerial accounting reports are prepared for the easiness of the managers whereas financial accounting reports must be prepared due to the regulations of accounting board. Managerial accounting shows its concern about the internal stakeholders such as employees, managers, labor, board of directors etc whereas financial accounting shows its concern about the external stakeholders such as shareholders, customers, creditors, debtors, suppliers etc (Graham, Harvey and Puri, 2013).   

For preparation of managerial accounting reports, no specific rules and regulations are applied but financial accounting reports must be prepared by concerning all the norms and rules. This it could be said that financial accounting is different from managerial accounting. Both are not directly connected to each other and serve the different people.

2) Break Even Analysis:

This is a managerial technique used for calculating a point where company could meet all the expenses by its revenue. It is a part of managerial accounting prepared by the company to set a relationship among many internal factors such as cost, profit, variable cost, fixed cost, loss, sales units, sales revenue etc (Juan García-Teruel and Martinez-Solano, 2007). These reports are prepared by the organization to find out the sales unit which is required to sale out the company to meet all the expenses. Normally, all the organization whose goal is profit making makes this report to find out the minimum sales and it also helps them to cover all the expenses through the revenue.

This report helps an organization to save itself from loss condition. These reports are mainly prepared under the assistance of top level management by production manager. The following reports could explain it more briefly:

Unit

unit price

V.C.

F.C.

Total Cost

total sales

0

7.5

0

15000

15000

0

500

7.5

3750

15000

18750

7500

1000

7.5

7500

15000

22500

15000

1500

7.5

11250

15000

26250

22500

2000

7.5

15000

15000

30000

30000

2500

7.5

18750

15000

33750

37500

3000

7.5

22500

15000

37500

45000

3500

7.5

26250

15000

41250

52500

 
                       

The above table and chart explains that if company would be able to sell 2000 units, than company would cover all its expenses by sales revenue. This analysis is quite helpful to understand all the factors of production.

Importance of Breakeven Analysis:

It is crucial for every profit making company to understand the profit and loss criteria. This is identified by the organization to find the total needed units to meet all the expenses of company. It helps the manager of the company to make decisions regarding the cost such as fixed, variable and semi variable, manufacturing, pricing etc. this is very helpful in making decisions.

                     

This graph is explaining all the factors of a production house very well. It would help to understand the importance of this technical analysis in a broad and clear manner. This graph is explaining about the profit area, loss area, breakeven point, breakeven sales, fixed and variable expenses, sales revenue, total revenue etc.  These all factors have a direct connection with production. This helps the company to find the breakeven point where company would be able to cover all the losses (Weygandt, Kimmel and Kieso, 2015).

This analysis helps the manager to make such strategies through which all the expenses could cover. It shows that if the sales would enhance more than 2000 units than company would make the profits.

It also helps the company to find the total profit; a company could get to sale a specific unit of products. As shown, if organization would sell 3500 units than it would earn a profit of Pounds 20000.

This analytical technique helps the organization in making the decisions about the production. It explains that if company would not reach at break even sales than company must not produce a single unit because company would not be able to cover the fixed expenses.

This analysis helps a company to recognize that how could it reduce the fixed cost to decrease the level of breakeven point. This helps the organization to reduce the risk. It explains the difference among the fixed and variable cost.

Thus it can be say that break even analysis is essential for manufacturing company to make decisions, strategies and policies.

3) Operational Budget:

Operational budgets are prepared by the company to forecast the future scenario of company in relation with future expenses and income. Budgets are prepared by the companies in advance to make strategies and policies accordingly. This is the main budget among all the budgets. This helps the company to identify the future sales unit, material required, labor required, operational expense and general expenses. It helps the company to make strong decisions.

Importance of operational budget for “Coca-cola Amatil”:

Sales budget:

This is the main budget, all other budgets of operation depends upon the sales budget. It is made by the managers to identify the future sales units, company would sale. This budget is prepared by the companies on monthly, quarterly and yearly basis.  

“Coca-cola Amatil” prepares this budget to analyze the future sales units. The demand and market situation is analyzed by the company to prepare this budget (Stevenson and Sum, 2002). With help of this budget, company forecast the sales unit of future and makes the new strategies and policies accordingly. This budget also help “Coca-cola Amatil” to make other budgets.

Production budget:

This budget is prepared on the basis of sales budget. According to the budgeted sales units, company makes the budget of production. Stock of finished goods and future budget sales unit are considered for making the budget.

“Coca-cola Amatil” prepares this budget to calculate the need of organization connected to the production. It also helps the “Coca-cola Amatil” to analyze the accurate units of material. It helps the company to manage the inventory and reduce the extra cost.

Direct material budget:

This budget is prepared on the basis of sales and production budget. According to the budgeted sales units and ordered production units, company makes the budget of direct material required (Horngren, 2009). Stock of finished goods and future production unit are considered for making the budget.

“Coca-cola Amatil” prepares this budget to calculate the total need of raw material units for the production. It also helps the “Coca-cola Amatil” to analyze the accurate units of raw material. It helps the company to manage the inventory and reduce the extra cost.

Direct labor budget:

This budget is prepared on the basis of sales and production budget. According to the budgeted sales units and ordered production units, company makes the budget of direct labor required. Stock of finished goods and future production unit are considered for making the budget.

“Coca-cola Amatil” prepares this budget to calculate the total need of labor hours for the production. It also helps the “Coca-cola Amatil” to analyze the accurate hour of labor (Davies and Crawford, 2011). It helps the company to manage the extra labor hour and reduce the extra cost.

Overhead Budget:

This budget is prepared on the basis of production budget. According to the budgeted sales units and ordered production units, company makes the budget of overhead expenses (Datta, ISKANDAR?DATTA and Raman, 2005). Stock of finished goods and future production unit are considered for making the budget.

“Coca-cola Amatil” prepares this budget to calculate the total overhead expenses for the production. It also helps the “Coca-cola Amatil” to analyze the accurate amount of overhead. It helps the company to manage the cost and make decisions.

Administrative Budget: 

This budget is prepared on the basis of sales and production budget. According to the budgeted sales units and ordered production units, company makes the budget of administrative budget. All the indirect expenses fall in this category (Niu, 2006).

“Coca-cola Amatil” prepares this budget to calculate the total administrative expenses for the production. It helps the company to manage the inventory and reduce the extra cost. It also helps the company to manage over all the indirect cost.

4) Variance Analysis:

It is an investigation technique to identify the total difference between the actual and planned behavior. This analysis technique is used by the companies to evaluate the difference and take decisions accordingly (Hoque, 2002). Variances are calculated through many techniques but “trend analysis” is the best among all the other techniques. The result of trend analysis is more effective. Variances are of following types:

  • Labor rate variance
  • Purchase Price variance
  • Variable overhead spending variances
  • Fixed overhead spending variances
  • Labor efficiency variance
  • Material Yield Variance
  • Selling price variance

Importance of variance analysis:

Every kind of variance analysis has different importance in an organization. Some helps the company to reduce the cost whereas some help it to enhance the profit (Horngren, 2009). The importance of variance analysis in decision making and cost reducing are as follows:

Labor rate variance:

This variance helps the company to reduce the labor cost and take decisions for the category of labor such as skilled, semi-skilled or unskilled labor.

Purchase Price variance:

These variances help the organization in setting the price of raw material and take the decisions in selecting the best supplier among all the suppliers in the market (Garrison, Noreen, Brewer and McGowan, 2010).

Variable overhead spending variances:

This variances helps the organization in analyzing the variable cost and reduce the excessive cost as well as it help the managers to make decisions.

Fixed overhead spending variances:

These variances help the organization in analyzing the fixed cost and reduce the excessive cost as well as it help the managers to make decisions (Cadez and Guilding, 2008).

Labor efficiency variance:

These variances help the organization in analyzing the total labor and reduces the excessive labor hour as well as it help the managers to make decisions.

Conclusion:

This report has been conducted to analyze the managerial accounting techniques and its importance in an organization. Managerial accounting and financial accounting plays different role and the role of both is crucial in an organization. Break even analysis helps an organization to find the required revenue to cover all the expenses. Budgetary system of an organization helps it to make policies and strategies. Variance analysis is done by the companies to make the decisions and reduce the cost.

References:

Ahmed, A.S. and Duellman, S., 2013. Managerial overconfidence and accounting conservatism. Journal of Accounting Research, 51(1), pp.1-30.

Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-Western.

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

Brown, P., Beekes, W. and Verhoeven, P., 2011. Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), pp.96-172.

Cadez, S. and Guilding, C., 2008. An exploratory investigation of an integrated contingency model of strategic management accounting. Accounting, organizations and society, 33(7), pp.836-863.

Datta, S., ISKANDAR?DATTA, M.A.I. and Raman, K., 2005. Managerial stock ownership and the maturity structure of corporate debt. the Journal of Finance, 60(5), pp.2333-2350.

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

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Graham, J.R., Harvey, C.R. and Puri, M., 2013. Managerial attitudes and corporate actions. Journal of Financial Economics, 109(1), pp.103-121.

Hoque, Z., 2002. Strategic management accounting. Spiro Press.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Juan García-Teruel, P. and Martinez-Solano, P., 2007. Effects of working capital management on SME profitability. International Journal of managerial finance, 3(2), pp.164-177.

Niu, F.F., 2006. Corporate governance and the quality of accounting earnings: a Canadian perspective. International Journal of Managerial Finance, 2(4), pp.302-327.

Stevenson, W.J. and Sum, C.C., 2002. Operations management (Vol. 8). New York, NY: McGraw-Hill/Irwin.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

Why Student Prefer Us ?

Top quality papers

We do not compromise when it comes to maintaining high quality that our customers expect from us. Our quality assurance team keeps an eye on this matter.

100% affordable

We are the only company in UK which offers qualitative and custom assignment writing services at low prices. Our charges will not burn your pocket.

Timely delivery

We never delay to deliver the assignments. We are very particular about this. We assure that you will receive your paper on the promised date.

Round the clock support

We assure 24/7 live support. Our customer care executives remain always online. You can call us anytime. We will resolve your issues as early as possible.

Privacy guaranteed

We assure 100% confidentiality of all your personal details. We will not share your information. You can visit our privacy policy page for more details.

Upload your Assignment and improve Your Grade

Order Now