Understanding of Management Accounting Systems

2070 words (8 pages) Essay in Accounting

23/09/19 Accounting Reference this

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Introduction

The understanding and recording of financial information allow the organization to plan, form strategies and reduce errors in the organization. The corporations recruit management & financial accountants to handle the financial data and record them accurately in the books of accountants. Management accountants play a key role in providing detail financial information regarding the business processes in the organization. Managerial accounting helps the top management of any organization to take rational decisions and implement such strategies that lead to the success of the corporation. In this report, the management accounting techniques & practices are discussed in detail. The report discusses the scope and application of various management accounting techniques which allow accountants to get deep insights about their financial performance.

Management Accounting & Role of Management Accountant

Management accounting provides detail accounting information so that the organization can better understand their operations and can take a rational decision. In simple words, management accounting provides non-financial and financial information to the managers on the basis of which they take decisions of the organization. IMA (Institute of Management Accountants) explains management accounting as an occupation that assists in devising planning, performance management, and Management decision making. Management accountants explore the business activities that happened in the organization and then estimate the cost of those activities. CIMA (Chartered Institute of Management Accountants) is the biggest management accounting institute.

The management accountants are the individuals who prepare financial statements in the organization according to the managerial accounting standards. Management accountants prepare budgets for the organization, handle the taxes, assist in planning & decision making and help the management to set incentive packages for the employees. The management accounts perform various duties in the organization which includes analyzing internal controls, supervising & monitoring the accounting staff, focusing on tax information and management of the general ledger. The management accountants have a strong relationship with the internal auditors & stakeholders of the corporation (Nørreklit, 2017).

The scope of Management accounting

The management accounting plays a key role in the formation of strategies and management of the business activities. The financial accountants usually prepare the financial statements for the organization which only provides detail regarding some specific areas. However, management accounting provides detail information about various internal processes. The management accounting provides information on customers, product lines and various geographic regions. Through management accounting information the management can identify the problems and can create a strategy for mitigating or controlling the problems. Management accounting, however, does not provide 100% accurate facts because managerial accounting information is based on estimations (SINGH, 2016).

For the management accountants there is a clear career path and over the period of time management accountants can experience growth in the organization. The management accounting is as much significance as the financial accounting because through management accounting not only the organization can control its operations most efficiently but also can reduce its costs up to a lot of extents. The management accounting helps the organization to get deep insights regarding its internal operations and how various activities are going on in the organization. If the corporation is not going to implement management accounting practices than it might not get much information about various costs & activities (Nørreklit, 2017).

Difference between Management Accounting & Financial Accounting

The management accounting and financial accounting have various differences due to their approach and practices. The financial accounting is usually focused on past information whereas managerial accounting performs an estimation of the future e.g. budgets (Boyns & Edwards, 2013). The financial accounting information is correct and there are very fewer chances of errors however the managerial accounting information might not be completely correct because it is based on estimations. In financial accounting financial statements are prepared for inside & outside of the organization but managerial accounting is mostly focused on the creation of operation reports.  The financial accounting has to follow various accounting standards such as IFRS, IAS, and GAAP whereas in managerial accounting there are not many standards to follow.  The financial accounting does not pay attention to the system of the organization that it follows for generating the profit conversely managerial accounting pay special attention to the operations of the organization to find ways for increasing the profit of the organization (Needles & Powers, 2010).

Types of Cost Reporting

Various Costing reports are prepared Job costing is the managerial accounting process which evaluates the revenues according to the job. Job costing reports provide brief information about the profitability of each job (Boyns & Edwards, 2013). The business which uses the job order costing provides job number to each item of revenue & expenses. Batch costing is another technique which the organizations adopt for recording the accounting information. Batch costing is similar to job costing. Each batch in batch costing contains similar goods however each batch is different. The individual cost of items in the batch is evaluated using the following formula:

Cost per unit = Total Production cost of batch/Number of units within the batch

The activity-based costing reports, however, focuses on the overhead activities and their costs. The activity-based costing shows the relationship between produced goods, costs and overhead activities. In ABC costing allocation of some costs is difficult which raises issues for the organization. This method is considered complex than traditional approaches but still some organizations implement ABC costing (Weetman, 2010).

Formation of Income Statement through Managerial & Absorption Technique

Income Statement (Variable Costing)
ABC Corporation
 
Details 1 month 2 month 3 month
Revenue/Sales 200,000 200,000 200,000
Expenses (Variable)  
Cost of Goods Sold (COGS) 20,000 20,000 35000
Selling & Admin Expenses (Variable) 15000 15000 18000
Total Expenses (variable) 35,000 35,000 53000
Contribution Margin 165,000 165,000 147,000
Fixed expenses  
Manufacturing overhead (Fixed) 80000 80000 80000
Selling & Admin Expenses (Fixed) 30000 30000 30000
Total Expenses (Fixed) 110000 110000 110000
Net Operating Income 55,000 55,000 37,000

The above table is depicting the income statement formed using the managerial accounting technique known as variable costing. Variable costing is the managerial accounting technique in which fixed manufacturing overhead is not included in the product cost. This technique is the opposite of the absorption costing technique. Variable costing technique is not recommended according to the IFRS and GAAP standards.

Income Statement (Absorption Costing)
ABC Corporation
 
Details 1 month 2 month 3 month
Sales 200000 200000 200000
Cost of Goods (COGS) 90000 70000 60000
Gross Profit Margin 110000 130000 140000
Selling & Admin expenses (variable) 5000 7000 8000
Selling & Admin expenses (Fixed) 15000 15000 15000
Total Selling & Admin 20000 22000 23000
Net Income 90000 108000 117000

 

The above table is showing the income statement prepared using the absorption costing technique. This is the traditional technique of preparing the income statement. In this technique, the manufacturing overhead cost is included in the product production cost.

The break-even analysis

Break Even Analysis provides information to the organization regarding the number of sales that it should be done to achieve the break even. The breakeven analysis has huge significance for the organization from the profit point of view. Through break-even analysis, the organization will know about the number of goods it should sell to achieve the break even. Break-even means that the organization has generated enough sales which have caused no profit no loss situation. If the organization has a sale more units from the units which required for break-even than it means that the business is generating profit. However, if the business is going to sell fewer units than the break-even units than it means that the business is suffering from loss rather than profit. The break-even analysis helps the corporation to determine the sales which have to be done to achieve profit and meet the expenses of the business efficiently (Davis & Davis, 2011).

Breakeven Analysis
 
Selling Price (per Unit) 10
Total Fixed Cost 15000
Variable Cost (per unit) 2
Contribution Margin $8
CMR 0.8
Breakeven Units 1875
Breakeven  Sales 18750

Net Profit Evaluation

The main aim of every organization is to generate profit and that is why organization evaluate their profit to take important decisions of the organizations. The net profit is calculated by identifying the sales and then the expenses are deducted from the amount of revenue. The profit allows the organization to pursue various organizational projects because organizations invest in the various project after checking their profitability. The organizations do not invest in the different project if they are not generating enough profit. The investors also invest in such organizations which are generating a profit because they know that the organization will provide a significant return on their investment (Adler, 2013).

Conclusion

If all the above facts are summarized than it is evident that Management accounting provides detail accounting information so that organization can better understand about their operations and can take a rational decision. In simple words, management accounting provides non-financial and financial information to the managers on the basis of which they take decisions of the organization. The management accounting and financial accounting have various differences due to their approach and practices. The financial accounting is usually focused on past information whereas managerial accounting performs estimation of the future e.g. budgets. The financial accounting information is correct and there are very fewer chances of errors however the managerial accounting information might not be completely correct because it is based on estimations.

References

  • Adler, R., 2013. Management Accounting. s.l. Routledge.
  • Boyns, T. & Edwards, J. R., 2013. A History of Management Accounting: The British Experience. s.l. Routledge.
  • Davis, C. E. & Davis, E., 2011. Managerial Accounting. s.l.: John Wiley & Sons.
  • Needles, B. E. & Powers, M., 2010. Financial Accounting. s.l. Cengage Learning.
  • Nørreklit, H., ed., 2017. A Philosophy of Management Accounting: A Pragmatic Constructivist Approach. s.l.:Taylor & Francis.
  • SINGH, S., 2016. MANAGEMENT ACCOUNTING. s.l.: PHI Learning Pvt. Ltd.
  • Weetman, P., 2010. Management Accounting. 2 ed. s.l.: Financial Times/Prentice Hall,

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