Management Accounting Techniques

This is a solution of Management Accounting Techniques that describes about  management accounting IT strategy can help your company cope with aging systems and limited resources that can lead to fragmented IT solutions.

LO2: Apply a range of management accounting techniques

Management Accounting Techniques(a) Calculate the number of units completed and packed in the period.

As per the information provided, the number of units produced by Tata Motors = 3000 units

However, the number of units sold by it = 2500 units

This means that 500 units of products produced in the company are remaining in its closing stock.

As a result, the goods remaining in closing stock do not require being packed.

They require being packed only once they are sold to customers.

Hence, the number of units completed and packed in the period = 3000 – 500 = 2500 units

(b) Produce a budgeted Manufacturing and Trading Account for the period using:

(i) Absorption costing

In the books of Tata Motors Ltd

Income statement for the period ended…

(As per absorption costing)

Particulars Amount Amount
Revenue from operations (Sales) £ 500000
Less: Cost of goods sold (COGS)
Opening inventories0
Add: Direct material£ 150000
Add: Direct labor
Machining department£ 18000
Finishing department£ 405000
Dispatch department£112500
Cost of packing boxes£ 2500
Add: Fixed overheads
Machining department£ 900
Finishing department£ 2880
Dispatch department£ 2500
Less: Closing inventories£ 114880£ 579400
Net profit– £ 79400

(ii) Marginal costing

In the books of Tata Motors Ltd

Income statement for the period ended…

(As per absorption costing)

Particulars Amount Amount
Revenue from operations (Sales) £ 500000
Less: Cost of goods sold (COGS)
Opening inventories0
Add: Direct material£ 150000
Add: Direct labor
Machining department£ 18000
Finishing department£ 405000
Dispatch department£ 112500
Cost of packing boxes£ 2500
Less: Closing stock£ 114250£ 573750
Margin of contribution– £ 73750
Less: Fixed overheads for the period
Machining department£ 900
Finishing department£ 2880
Dispatch department£ 2500£ 6280
Net profit– £ 80030

 (c) Reconcile the two accounting methods

In the books of Tata Motors Ltd

Statement of reconciliation for the period ended…

Particulars  Amount
Net profit as per marginal costing– £ 80030
Add: Fixed costs in closing stock£ 630
Net profit as per absorption costing– £ 79400

 (d) Suggest the company if they should go ahead with this product

From the calculation of the net profits, that Tata Motors Company has earned individually under the absorption costing method and the marginal costing method indicates that the company will be incurring losses under both these methods no matter whichever method it uses for computing its net profit. Under the absorption costing method, it is found that the company will be having a net loss amounting to £ 79400. On the other hand, under the marginal costing method, it is found that the company will be having a net loss amounting to £ 80030. As a result, it can be noticed that even if the organization manufacturers mel accessory as a new product under its brand name, the company will end up incurring losses. Hence, it is suggested that the company Tata Motors should not be going ahead with this product, as the company will be incurring losses if it manufactures this product.

Task 3

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

P4: Explain the advantages and disadvantages of different types of planning tools used for budgetary control.

Having a sound and strong budgetary control is important for every business. However, in order to make sure that an organization is having a sound budgetary control, the organization requires integrating and applying efficient planning tools. These tools will be helpful for the organization to reduce its budgetary variances and enhance its budgetary control. For ensuring a strong budgetary control in Tata Motors, the organization requires integrating effective planning tools. The planning tools that can be used in the context of Tata Motors are as follows –

  • Variance analysis – According to Chang (2016), variance analysis is an efficient tool for planning, as this tool is helpful for the derivation of the differences, which are called the variances, between the budgeted and the forecasted performance of a company and the actual performance that the company has shown. Tata Motors Company will be able to analyze the variances in the sales, materials, labour and profits.

Advantages –

  • Companies are able to improve their levels of efficiency and are able to achieve better performance due to the implementation of variance analysis
  • This tool is also useful for the development of better strategies in a company

Disadvantages –

  • A company needs to employ skilled laborers and employees in order to perform variance analysis in the company
  • The tool assists in finding out variances in the performance of a company. However, it fails in analyzing the reasons for which there has been variances in the performance.
  • Standard costing – According to Eisenberg (2016), standard costing refers to another planning tool, which uses or applies a predetermined rate, which is called the standard cost, for both the direct costs and indirect costs that a company spends for manufacturing its products and services. Tata Motors will be able to compare its actual costs with the standard costs with the help of this planning tool.

Advantages –

  • Helps a company in product costing
  • Helps companies in reducing and minimizing costs
  • It is an effective tool to making cost reduction decisions

Disadvantages –

  • This tool consumes time to compare and assess standard and actual costs
  • It is also a labour intensive and expensive tool
  • Budgeting – According to Abbott (2015), budgeting is another planning tool essential for budgetary control. Budgeting is the process with which financial plans of a company are prepared and can be used to allocate the costs and the resources of a company in an effective and optimum manner. Tata Motors can be using the budgeting tool in order to plan its funding, allocate its cash and resources along with helping it in evaluating and measuring its performance.

Advantages –

  • It helps a company in thinking for a long term
  • It helps a company in improving its financial efficiency

Disadvantages –

  • Budgeting is quite a time consuming tool
  • Budgeting is done completely on the basis of forecasts and assumptions, which might not be the real outcomes

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

P5: Comparison of two organisations which has used management accounting system to solve the financial problems

Management accounting plays several roles within the context of an organization. Apart from all other functions such as making decisions and aiding in financial reporting, another function that management accounting plays within an organization is solving the financial problems that arise in the organization. The different types of financial problems that arise in an organization, for example, poor amount of net income, large amount of net loss, high cost structure and high operational expenses, can be solved easily through management accounting.

The Tata Motors Company is one of the biggest examples of an organization that uses management accounting and its systems in order to resolve its financial problem. The main system that Tata Motors Company uses to resolve financial problems is the balance scorecard. According to Valmohammadi and Ahmadi (2015), a balance scorecard, also called the BSC approach, is a metric in management accounting that is used within the context of an organization to measure its performance from four diverse perspectives, which are the customer perspective, the financial perspective, the internal business processes perspective and learning and growth perspective. The following are the ways in which balance scorecard is applied in Tata Motors Company to respond to its financial performance –

  • The balance scorecard helps Tata Motors Company in strategically planning its finances
  • It helps the company in the alignment of its daily operations and activities with its financial strategy
  • The balance scorecard also helps the Tata Motors Company in achieving its long-term goals and objectives through the setting of suitable short-term objectives
  • It helps Tata Motors Company in improved performance reporting along with helping it in better management of its financial information
  • Balance scorecard also helps the company’s employees in identifying the key goals, enables them in understanding strategic elements to work upon, and sets clear goals for them along with enabling them in seeing how objectives influence one another.

Through the points that have been mentioned above, the Tata Motors Company is able to solve, respond as well as pre-empt its major financial problems. Another organization that uses management accounting systems in order to respond to financial problems is the Ford Company. The following are the ways in which budgeting helps the Ford Company in responding to its financial performance –

  • The system of budgeting helps the management of a company in thinking about its financial position and stability for a longer term
  • It helps the company in reviewing its profitability
  • Budgeting helps the Ford Company in evaluating its performance for the budgeted period against the set objectives and goals
  • It helps the company in planning its funds
  • Budgeting will also be helpful for the company in allocating its cash in an effective manner
  • The Ford Company is also able to conduct the bottleneck analysis, which hampers the financial performance of the company

Thus, in this way, management accounting system is assisting the Ford Company in responding to the financial problems arising in the company.

References

Abbott, R.J., 2015. Overview of Budgeting Planning.

Andre, S.M., Lam, M. and O’Donnell, M., (2016). Budgetary Slack: Exploring the Effect of Different Types, Directions, and Repeated Attempts of Influence Tactics on Padding a Budget. Academy of Accounting and Financial Studies Journal20(3), p.147.

Anelli, M. and Puglisi, R., 2015. The Actual Cost of a “Forced Switch” of Psychiatric Patients to a New Therapy: a Markov Chain–Monte Carlo Simulation. Value in Health18(7), p.A409.

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