Integration of Management Accounting System at Galway Plc

Question

Task: LO1- Demonstrate an understanding of management accounting systems.

LO2-Apply a range of management accounting techniques

LO3- Explain the use of planning tools used in management accounting

LO4- Compare ways in which organisations could use management accounting to respond to financial problems

Assignment Brief and Guidance:
Learners need to have read carefully the instructions before attempting any of the questions. The assignment is to be addressed with reference to the scenario addressing all learning outcomes. The learners will be assessed through the written report submitted by them addressing the Pass, Merit and Distinction criteria. Contribution: 100% of the module.

Scenario 1
Management accounting plays a key role in organizations today and therefore decision makers in the organization must understand how to create and use good management accounting information. In today’s business environment, business wants to track performance information that goes beyond just the cost-based information of historic general ledger systems provided by traditional financial accounting information. Good management accounting involves responsibility to manage a wide variety of critical management accounting information using management accounting system and management accounting techniques such as cost-volume- profit (break- even) analysis, budgetary control, cash budget, marginal costing and absorption costing to produce relevant management reports for informed decision making. You are applying to work as a Trainee Management Accountant in a medium sized financial consultancy organization that has a client base of 50 small and medium sized business. The organization serves clients operating in a variety of sectors such as Manufacturing, Retail, Hospitality or Construction and provides them with the crucial information they need for managerial decision-making. As part of the selection process, you are required to write a report demonstrating your knowledge and understanding of the management accounting function and management accounting systems as well as the importance of presenting information to internal stakeholders such as the management. They also want to see your understanding of planning tools and how planning tools help organisations to resolve their financial problems.

Guidance
In completing the report, you must explain what is management accounting and the requirements of different types of management accounting systems. Also explain the different methods used for management accounting reporting. Furthermore, your report must evaluate the usefulness of using management accounting systems and its application in an organization. The report must critically evaluate how management accounting systems and management accounting reporting are integrated within your chosen organization. The second part of your report must explain the advantages and disadvantages of various planning tools used in budgetary control and analyse their use and application for preparing and forecasting budgets. You must also be able to evaluate how planning tools in accounting help the organization to respond appropriately to solving financial problems leading to sustainable success for organizations.

Scenario 2
Based on your report in relation to scenario 1 the firm has now hired you as a Trainee Management Accountant. Your line manager now wishes to assess your ability to apply a number of management accounting techniques and how organisations can apply management accounting as a solution to resolve financial problems.

Guidance
The report should demonstrate your ability to calculate costs using appropriate techniques of cost analysis to prepare an income statement using marginal and absorption costing techniques (See Appendix 1). After appropriately applying a range of management accounting techniques, you must also include appropriate financial reporting documents and interpret the data in the report for a range of business activities. In your report, you must show a comparison of how organisations are adopting management accounting systems to respond to financial problems. The report also requires you to analyse how management accounting tools can be adopted by organisations to respond to financial problems (See Appendix 1, Tables 1and 2).

The module will be assessed and graded against the Pass, Merit and Distinction criteria as specified in the assessment grid below issued by the awarding body, Pearson Edexcel.

Galway Plc manufactures and sells a single product .The following budgeted/ actual information is provided in relation to the production of this product: All costs are in GBP. Show all workings very clearly.

Details for the months of May and June 2018 are as follows:

Fixed production overheads are budgeted at £4,000 per month and are absorbed on a unit basis. The normal level of production is budgeted at 400 units per month.

Other costs
Fixed selling £4,000 per month
Fixed Administration £2,000 per month

Variable sales commission 5% of sales revenue
There was no opening inventory of Product A at the start of May.

You are required to prepare a profit statement based on both absorption costing and marginal costing techniques and show the reconciliation of profits between the two methods.

In order to produce this single product, Galway Plc uses two raw materials – metal and plastic of which metal is an expensive item of material and Galway Plc is interested in the cost variances of this raw material. The information pertaining to budgeted and actual costs of the raw material (metal) is given below and you are required to show the calculation of material variances.

During the month of May, the following purchases and issues of the raw material (metal) were made and the store assistant wishes to know the closing value of the raw material inventory at the end of the month. He provides you with the following information relating to the purchases and issues during the month. You are required to show the inventory ledger record for the month of May using the LIFO and Average Cost methods of inventory accounting.

Table 2: Purchases and issues of raw material (metal) during the month of May

The financial report produced must accurately apply and interpret data for a range of business activities in Galway Plc.

Answer

Executive Summary
Management accounting has undergone a vital alteration in the past decade. New and varied tools have come to the forefront that helps in providing a better focus and explanation. The present report is solely based upon management accounting and its tools and techniques and studied in the light of Galway Plc. The present report studies the concept of management accounting in an in-depth manner followed by the requirement of the different management accounting system. The different methods are explained and the usefulness of management accounting system in the present day organization is briefly explained. The report sheds light on the fact how such reporting and system is integrated into the organization. It is then followed by the advantages and disadvantages of various tools. Finally, the concept of marginal and absorption costing is applied to solve the financial problem that arises in the course of business.

Introduction
Management accounting plays a vital role when it comes to the performance of the organization and hence, aids decision making process. Thereby, it is imperative that the organization should know properly how to utilize management accounting information. In the present scenario, it has become important for the business to take into consideration the performance and the information that goes ahead of the information that is cost based on a historic general ledger system. Good management system and process imply a responsibility to tackle different critical management accounting information by using the system of management accounting and a variety of techniques such as budgetary control, marginal costing, break-even analysis, marginal costing, cash budget, etc. The present report is based upon the organization that serves different sectors such as Retail, Manufacturing, and Hospitality and provides them with the main information that is needed for managerial decision-making.

Management accounting
Management accounting is one of the most important processes that are being conducted by the organizations in order to get detailed financial information and resources that will be helpful for the process of decision making. It is also known as managerial accounting and is generally used by the internal team of the company for taking different decisions in relation to the financial prospects of the company. Various kinds of statistical data and other financial invoices and balance statements are being presented by the organization to the management team. The most important aspect of management accounting is to fulfill the needs of the statistical data by the financial decision-makers in order to make accurate decisions and conduct all the business activities fluently and smoothly (Robinson & Last, 2009).

Important tools and techniques that are used in management accounting
There are various types of tools that can be used to fulfill the management accounting needs:

Financial planning
The vital feature of a business organization is to maximize is prepared by achieving proper financial status in the market. Hence, the function of financial planning is considered one of the most important tools for achieving goals.

Financial statement analysis
The organizations are asked to properly study the financial statements like profit and loss account, balance sheet and another important document so as to analyze data of different periods. Proper analysis of the financial statements will also help the organization to determine the rate of growth of the company (Robinson & Last, 2009). This analysis can be carried out with the help of comparing the financial statements of different years and also analyzing the ratios and size of the statements.

Cost accounting
Cost accounting helps to present data in segregated departments like the product, process, department, branch, etc (Robinson & Last, 2009). The comparison of the costs of the management also helps the financers to determine the difference in the costs of various activities that needed to be carried out for manufacturing for selling the product.

Find a flow analysis
This type of analysis helps the organization to find the movement of the financial funds from one place to another. A proper point analysis will also help the organization to determine whether the capital is being utilized properly in comparison to the data of the previous year. Various changes in the working capital and other operations can be observed with the help of this type of analysis.

Cash flow analysis
It is very important for an organization to keep track of the movement of cash that is taking place in the organization. Various reasons for the change in the cash balances can also be determined with the help of a clear cash flow analysis. The up and down movements of the total cash because of the operations taking place in a particular period can be determined with the help of cash flow analysis (Lynch, 2011).

Advantages of management accounting
There are various kinds of advantages that can be observed with the help of management accounting because it provides an effective system that will help to enhance the overall efficiency of the organization. Some of the most important advantages of a managerial accounting system are:

Increases efficiency of the company
Management accounting has been observed to be a very efficient process for the organization because it helps them to analyze the data and compare it with the data of previous years. Management accounting also forces the employees to improve their efficiency and hence health Organization to attain maximum profit (Lynch, 2011). The employees can be boosted with the help of additional funds, bonuses or incentives. Therefore, management accounting not only helps the organization to improve eyes their performance but also it helps them to expand in the market.

Business decisions
Proper management accounting skills will help the organizational teams to determine various types of decisions and information that are related to the financial functions. There is a wide range of techniques and processes that can be used by the organization to improvise their managerial skills. Proper variance analysis will also be very helpful for the company to keep it on the right track (Horngren & Foster, 2018). Budgets are also very important for the organization because they will help them to off to determine the total flow of cash and the total profit that is being earned by them.

Operational planning
Budgeting can be termed as a task of allotting money to different departments for a particular period of time so as to fulfill the needs of a particular activity. Budgets are made annually by determining various historical trends in revenues, expenses and cost overheads of the organization. The different type of trends present in the organizational statements helps them to determine the future which is further used to build a budget. Every department of the organization is provided with a separate budget that can be used by them to complete the set of activities that have been incorporated into them (Fisher et. al, 2003).

Going concern
The utilization of management accounting can be done to evaluate the business results of an organization better than the financial statements. Financial statements are made on the basis of a particular time period in which the organization is working whereas managerial accounting will help them to determine the actual efficiency of the organization and completing all the tasks. Determination of all these financial values can be made with the help of the financial ratios. These ratios can further also be used by the company to ascertain the liquidity position and fulfill the other obligations. This creates a need for going concern policy where the organization undermines itself to work for an indefinite period of time.

Cost management
Cost management is stated to be as the process of using cost accounting techniques in order to ascertain the actual cost of procedures and processes of production. Cost accounting can also be termed as a basis of cost control that is used to determine the true unit cost of a particular process or product. There various types of posts related to a particular process or product after it is manufactured. The process of cost management helps to remove different types of extra charges by eliminating waste of material, time, inventory and energy.

Identification of relevant methods used in Management Accounting reporting

Job costing system - This system involves allocating different manufacturing cost faces of individual products that are being manufactured all the batches. This system is applied only if the goods that are produced are completely different from each other. An accumulated data about these costs are recorded relating to a particular production of products or services. This information may be required by a consumer if there is any contract where the cost has to be refunded. It also helps in determining the correctness of the estimating system which is used for calculating the selling prices which will provide the company with adequate returns.

Price Optimisation system- This system helps to calculate and know the consumer's reaction to various products and services as well as their prices with the help of different mediums. It also helps to set up the selling price of a particular product so that the company can earn an adequate operating profit. An alternative is found with the help of this system which would encourage the company to achieve its organizational goals by increasing a very less amount of expense.

Inventory management- This approach includes the ordering system, uses as well as storage of components which the company required during the production process. it also includes the applicability of barcode scanners, mobile devices, desktop software and barcode printers for managing the inventory. It also overlooks and controls the number of finished goods. This management system gives a brief idea about the present inventory levels and the ways to minimize overstock as well as understock situations.

Galway PLC manufacturers
Proper use of managerial accounting techniques will not only help the organizations to maintain the qualitative and quantitative status of financial performance. Financial accounting also focuses on the external use of data by the investors for the process of decision making. Proper managerial accounting system of an organization also empowers it to control and plan operations that us effective for decision making.

Continuous improvement
Constant improvement in the quality and efficiency of the goods and services should be conducted. Elimination of useless effort, time and materials can be done with the help of managerial accounting techniques.

Cost management
Cost management is one of the most important managerial accounting systems that can help the organization to develop its financial stability and also eliminate any kind of inaccurate or inadequate expenses from the value of the products. Cost management also helps to evaluate the effectiveness of various activities that are being carried out by the organization and further enhance their efficiency and performance.

Example
An accounting manager of an organization tries to determine the total sales and further tries to match with the cost that has been incurred by the organization. After carrying out all the activities it was observed that the time and effort used by the manager were not useful for determining the material cost. Further, the manager tries to lessen the frequency and order size from the suppliers.

Quality management
Proper management accounting skills will not only help the organization to distribute costs professionally but also improve the quality of the services or products manufactured by them. A positive impact on the quality will be observed a proper management accounting skills are being utilized by the organization. High-quality service and proper product will help them to focus on building a proper base in the market.

Advantages and disadvantages of different tools
  Financial Budgets
Financial budget depicts the probable consequences arising out of the financial decisions undertaken by an organization. Financial budget highlights the sources of cash inflows and outflows for an organization. Loans, revenues from sales proceeds, issuance of stock, and sales of assets are the general sources of cash inflows in an organization. Payment of dividend to stockholders, purchase of new assets, repayment of debt obligations, and etc are the general uses of cash in an organization.

Below are the types of financial budgets:

• Cash budget – Cash budget is of great utility for an organization as it helps in the effective planning for profit-making investment of excess cash in hand. Cash budget is also used to determine the total cash in hand after all the outflows are taken care of. It becomes easier for an organization to track and regulate the pattern of its cash inflows and outflows and compare the same with the former period.
• Capital expenditure budget: Capital expenditure budget focuses largely on capital assets which can be plant and machinery, land, buildings, and etc. Most entities prefer to acquire such capital assets by means of undertaking borrowing options such as long term bonds, loans, etc. This makes it crucial for all the entities irrespective of its size to keep a check on its borrowings through capital expenditure budget system so as to avoid getting trapped into huge borrowings.
• The balance sheet budget: This budget is designed when it is confirmed that all the other budgets are performing in the best interest of an entity. This budget depicts that how the balance sheet of an entity shall look like once purpose of all other budgets is achieved.

Operating Budgets: Operating budgets is used to represent the budgeted revenues and expenses of an organization from various operational activities for an upcoming period.

• The sales or revenue budget: This budget represents the revenues an entity is supposed to receive from basic operational activities. The sales or revenue budgets allows the management of an entity to predetermine the upcoming financial wellbeing of the same.
• The expense budget: This budget forecasts the expenses of an entity for a particular period. The expense budget also allows the management of an entity to predetermine the future expenses of the same (Drury, 2011). This will ultimately make it easier for the management to tackle and regulate unnecessary expenses.
• The project budget: The project budget is used to forecast the expected profits from a particular project. The management can increase the forecasted profits by means of either reducing the expenses or enhancing sales and revenues or both.

Non-monetary budgets:
Non-monetary budgets are expressed in non-financial sales or revenues and expenses, which means profit. The management can enhance the forecasted profits by means of either uplifting sales and revenues or reducing the expenses or both.

Fixed and variable budgets:
Below are the following kinds of costs that every budget must account for irrespective of their purpose-

• Fixed costs: Such costs are fixed in nature. These costs will accrue irrespective of the fact that the organization is functioning or not. A fine example of fixed costs is salaries of managers, employees’ salaries, etc.
• Variable costs: These are the costs that keep fluctuating. These costs fluctuate depending upon the scope of operations. A fine example of variable costs could be the raw materials used in production.
• Semi-variable costs: These costs are less likely to fluctuate. Repairs and maintenance costs, advertising costs are some glaring examples.
  Whilst preparing a budget, the management must always consider all the fixed, variable and semi-variable costs. It is easier for the management to tackle fixed costs as it remains unaffected. Regulating semi-variable costs is also easier for the management to a lot of extent as it can be easily forecasted (Charles, 2012). Tacking semi-variable costs is bit tricky and it becomes a task for the management to carefully handle the same. The management must use their best knowledge, experience and judgment so as to tackle the behavior of semi-variable costs while developing a budget.

Variable costs:
These are the costs that keep fluctuating. These costs fluctuate depending upon the scope of operations. A fine example of variable costs could be the raw materials used in production.

Management accounting tools in resolving problems
Management accounting tools helps an entity in enhancing the investors’ value as well as uplift the financial well being of the same. Tools like Balanced Scorecard, Activity based costing, and performance measurements are modern day tools that help an organization in enhancing its financial wellbeing. An organization can benefit a lot from these modern day MATs. The decision making process of an organization can be enhanced by means of activity based costing while the financial wellbeing and sustainability of the same can be attained through BSC and performance measurement. The functions of all the tools are different from one another and therefore, the management accountant must opt for the right tool based on the best possible knowledge, experience and professional judgment (Charles, 2012).

ABC
Activity based costing tool helps an organization in making effective decisions. This tool is opted by entities that have a varying and a complicated level of outputs. It is also preferred by organizations that offers its consumers various types of goods or services (Brown et. al, 2017). This tool enables an enterprise to evaluate the level of resources consumed by every single activity. It is easier for the management of an organization to ascertain the effectiveness of all its operations and activities and construct releavant decisions so as to eliminate the occurrence of unnecessary expenditures (Emmanuel, 2014).

Balanced Scorecard
BSC approach was developed by Balanced Scorecard (BSC) Kaplan and Norton (2005). BSC approach is developed on the basis of four factors that are internal operations, financial operations, consumers, learning and growth. BSC helps in balancing financial performance, innovations and internal operations of an organization. The financial performance and sustainability of an organization can be enhanced only through internal operations, financial operations, consumers, learning and growth. The financial status of an organization can be tracked through benchmarking (Brown et. al, 2017). The managers might also receive incentives owing to benchmarking which will motivate them to enhance their operations. Benchmarking helps in the achievement of pre-determined standards with the help of internal as well as external information.

Merits of budgetary control: This is considered to be a very significant Management Accounting tool in a company as it helps in cost reduction and maximizing profits. The few advantages of budgetary control include: it hurts to provide a roadmap for achieving the goals of the company. Every department of an organization is expected to work efficiently for achieving the organizational goals.

Disadvantages of budgetary control
There are certain limitations of a budgetary control such as difficulty in preparing an accurate budget under a situation of inflation. There are large expenses incurred in a small entity which me not be affordable. Budget is prepared on estimates and therefore there is no certainty. There might be a circumstance which was not taken into consideration while preparing the budget.

The problem can be solved by using any of the appropriate tools such as marginal or absorption costing. However, the utilization of the two methods provides a difference owing to the fact that each has its own specialty. Marginal costing does not consider fixed costs when it considers the product costing or inventory valuation while absorption costing considers both fixed and variable cost.

Another major point of difference is that the marginal costing can be segregated as fixed and variable cost while the absorption costing can be stated as production, distribution and administration. Marginal costing deals with projecting the product cost contribution while the aim of the absorption costing is to allow a genuine reflection of the profits. Marginal costing can be defined in terms of contribution per unit while absorption costing can be done as net profit per unit (Barnat, 2014). In reality, marginal costing can be commented as a conventional manner of checking at the method of costing while absorption costing is mainly required for tax reporting and is one of the traditional methods.

Compare ways in which organisations could use management accounting to respond to

Financial problems:
 Woolworths: In the present scenario, the companies are facing use difficulties in adapting the business strategies, models as well as a procedure for responding to the dynamic environment in which the business is existing. it is becoming difficult for the company to maximize the wealth of shareholders and achieve financial success. Some companies are well experienced and know how to sustain in the competitive environment. There is an argument existing which states that many companies are missing out some important analysis and advantages of the management accounting tools.

Coles: It prepares operational as well as capital budget. The preparation of such budgets and behavioral inferences help the management to make quick decisions.

The pricing strategies can be obtained understanding the strategy adopted by the competitors and not relying on demand and supply only.

The best costing system has the characteristics of maximizing the companies profit. This cost system depends on batch costing, process costing, job costing and contract to cost.

The process of strategic planning includes porter's five forces, SWOT, PEST which helps the management to understand the requirements for expanding its business.

Conclusion:
On application of both the methods for Galway Plc, it can be seen that the process of marginal costing yields profit in May and June while absorption costing projects loss in May while profit in June. Going by the case study it can be commented that the use of marginal costing is better placed for the company as it yields better result. The only consideration is that only variable cost is assumed as products costs. Hence, it can be commented as the appropriate method for the contribution in product and hence, solve the problem easily.

References
Barnat, R. (2014) Strategic Management formulation and implementation. Available from: http://www.strategic-control.24xls.com/en205 [Accessed 3 July 2019]

Brown, J. L., Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2017) The effect of budget framing and budget-setting process on managerial reporting. Journal of Management Accounting Research, 29(1), 31. Available from:

https://search.proquest.com/docview/1967368440?accountid=30552 [Accessed 3 July 2019] Charles, T.S. (2012) Cost Accounting: A Managerial Emphasis. Pearson Education

Drury, C. (2011) Cost and management accounting. Andover, Hampshire, UK: South Western Cengage Learning.

Emmanuel K. O. (2014) Activity based costing (ABC) in the public sector: benefits and challenges. Problems and Perspectives in Management. 12(4). Available from: https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/6179/PPM_2014_04cont2_Oseifuah.pdf [Accessed 3 July 2019]

Fisher, J. G., Peffer, S. A., & Sprinkle, G. B. (2003). Budget-based contracts, budget levels, and group performance. Journal of Management Accounting Research, 15, 51-74. Available from: https://search.proquest.com/docview/210169229?accountid=30552 [Accessed 3 July 2019]

Horngren, C T & Foster, G. (2008) Cost Accounting: A Managerial Emphasis: United States Edition

Lynch, S.G. (2011) The Problem with Traditional Budgeting. Available from: https://finance.toolbox.com/blogs/stephenglynch/building-a-better-budget-part-2-the-problem-with-traditional-budgeting-020911 [Accessed 3 July 2019]

Robinson, M., & Last, D. (2009) Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press

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