Management Accounting and its importance - EverJoy Enterprises

Introduction

This report will be prepared to discuss 'the concept of management accounting and write a' reference manual for Ever Joy Enterprises (UK) that operates in leisure and entertainment industry in the UK. This report delineates the concept of cost accounting systems, job costing systems, and Inventory Management systems; differentiate between management accounting and financial accounting. This report will also solve a numerical problem to help Ever Joy Enterprises (UK) reviewing its concert event in Manchester region to ascertain its viability by calculating break-even point (i.e. the point at which there is neither profit nor loss) and other profitability related requirement. This report will also advise Ever Joy Enterprises (UK) on using budgeting as a pillar for planning purposes within the organization.

Task – (LO1)

Management Accounting

Management accounting is the presentation of accounting information in such a way as to assist management in the formulation of policy and the day-to-day operation of an enterprise. The management accounting collected the accounting data with the help of financial accounting and cost accounting for the purpose of policy planning, formulation, decision making and control for the enterprises. Management accounting is the vital branch of accounting which assists to the management in the preparation of various reports and strategies for their departments which enhance their productivity and efficiency. Various management accounting tools and techniques assist to the enterprises to achieve their goals and objectives on a systematic manner. In other words, management accounting is an important decision-making tool and technique used internally by the management. Tools and techniques like cost-volume-profit analysis, variance analysis, budgeting, break even analysis are some of the prominent tools and techniques used in the management accounting (Edmonds, et. al., 2016).

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Objectives of management accounting

• Helps to the management of an enterprises in planning and formulation of policies for future
• Helps to the management in an interpretation of financial information
• Helps in coordinating operations
• Helps in evaluating the efficiency and effectiveness of policies
• Helps in controlling performance

Main tools and techniques used in management accounting are listed below:

• Cost accounting
• Absorption and marginal costing
• Fund flow analysis
• Cash flow analysis
• Standard costing
• Budgetary control

Figure: Functions of management accounting By Author, 2018

a. Differences between Management Accounting and Financial Accounting.

The management accounting and financial accounting both are important part of accounting which assists the enterprise to achieve their targets on a time and also provides useful information to their stakeholders. Some of the difference are summarized in the table which are mentioned below:

The above points show some difference in between management accounting and financial accounting. The management accounting assists to the management in preparation of financial accounting for the enterprise in every financial year. The management accounting has a wider scope than the financial accounting. It involves financial accounting and cost accounting which assists to the management in preparation of plans and policies (Weygandt, et. al., 2015).

b. Cost accounting systems (Direct Costs and Standard Costing) 

Cost accounting is an accounting mechanism in which all costs incurred are collected, classified and recorded. Cost accounting helps in allocating cost incurred on producing various products by segregating it into direct cost, indirect cost and fixed cost. Cost accounting computes the unit cost of a product which enables to ascertain cost of stock at the end of the year and cost of goods sold during the year. It analyses the cost structure of the business. Cost accounting helps the management in determining where a business is gaining or losing money. Cost accounting helps the management in determining how the business earns and make use of them. It can be used as a tool to minimize the cost of production by eliminating any unnecessary expenses/losses incurred while producing a product. It provides necessary cost information for planning, implementing and controlling. It is instrumental in assessing the profitability of various products which can be utilized by various banks and financial institutions to provide loans. Ever Joy Enterprises can integrate the cost accounting system with their organizational processes to reduce the costs and expenses and also eliminate the wastages in the manufacturing system of the enterprises (Warren, et. al., 2013).

Figure: Types or Techniques of costing By Author, 2018

Following are the main types or techniques of costing for ascertaining costs:

Marginal costing: Marginal costing is a costing technique in which the variable cost, i.e., marginal cost is charged to units of cost, while the fixed cost for the period is totally written off against the contribution (Kren, 2018). It can be calculated as:

Marginal cost = Direct Material + Direct Labor + Direct Expenses + Variable Overheads

Figure: Characteristics of Marginal Costing By Author, 2018

Absorption costing: Absorption costing is another important costing technique in which all manufacturing costs are absorbed by the units produced. It is also known as full absorption method or full costing. In other words, the cost of a finished unit in inventory will comprise direct materials, direct labor, and both fixed and variable manufacturing overhead.

Figure: Absorption Costing By Author, 2018

Standard costing: Standard costing is a technique of costing in which manufacturers or producers use it to identify the variances or differences in between the costs that should occurred for those goods and the actual costs of the goods that were manufactured.

Figure: Standard costs By Author, 2018

Uniform costing: Uniform costing is the usage of the same costing and accounting principles and standards or methods uniformly by various undertakings in the same industry. In this costing the cost statements and reports are prepared on a uniform basis and the period of accounting is common for all units’ member.

Direct costing: Direct costing is a specialized form of cost analysis that uses variable costs only to make decisions. This costing does not consider fixed costs and useful in short- term decisions making in the company. Direct costing is not useful in long- term decision making because it not considered all costs which are necessary in long- term decision making.

Historical costing: Historical costing is ascertainment of costs after they have been incurred. This costing considered past work done by the manufacturing undertakings and comparisons done by using past data of the enterprises (Kren, 2018).

c. Inventory Management Systems 

Inventory management system is a mechanism through which a business can track all the moving parts of its operations. This covers everything from production of a product to retail stores and from warehouse to shipping the product, all the movements of stock are traded in the inventory management system. In this process system finished goods and work in progress are systematically managed so that optimal use of available resources can be made. Ever Joy Enterprises can integrate its system with inventory management system in which enterprises can use technology to track the inventory level in its business operations (Goddard and Simm, 2017).

Figure: Inventory Management By Author, 2018

Benefits of inventory management systems to the Ever Joy Enterprises are listed below:

• It minimized cost of labor and other expenses
• Reduced dead stock problems in the enterprises
• Transparency improved in the whole system
• It minimized costs of handling or storage
• Enhanced partner relationship, vendor and supplier

There are three types of inventory: work-in-progress, finished goods and raw materials. The enterprises can use inventory control models like ABC (Activity Based Costing), EOQ (Economic Order Quantity), and JIT (Just in time) model to maximize the profits and minimize the inventory expenses. The Ever Joy Enterprises can use this model of inventory to eliminate the wastages and enhance their productivity in entire manufacturing system. Inventory accounting method include FIFO (First in, first out), LIFO (Last in, first out) and other methods can be used by the enterprises to calculate the level of inventory in the manufacturing system (Kren, 2018).

Inventory management also means sustaining the efficient and effective internal controls over stock or inventory which includes safeguarding the inventory from theft and damage, to track inventory movement in the system by using a purchase orders, frequently comparing physical inventory counts with amounts recorded, and maintaining an inventory ledger. The effective inventory management system assists to the Ever Joy Enterprises to track the record of level of inventory in their business operations and helpful to the enterprises to reduce the expenditures which is related to the stock and dead stock in the manufacturing system (Warren, et. al., 2013).

d. Job Costing Systems 

Job costing method is a tailor-made costing method in which work is completed according to each customer’s individual requirement. Each job is undertaken keeping into consideration specific need of the customer. They are nonstandard in nature. Each job belongs to the same category but has different characteristics. For example, visiting cards or marriage cards printed by printing press. Although visiting cards fall in the category but they are designed as per the specific need of the customer (McLaney and Atrill, 2014).

Figure: Job Costing Cost Flows By Author, 2018

Job Costing can be applied in the following areas: -

• Repair works
• Engineering concerns
• Job printing
• Ship building companies
• Interior decoration
• Furniture makers
• Automobile garages
• Construction companies

Features of Job costing

• It focuses on the specific needs of the customers.
• Each job is charged differently.
• Each job is identified clearly.
• Each job is treated as a separate accounting unit.
• Usually the work is done in the factory except in case of interior designing etc.

The job costing systems wants to collect the subsequent three types of information:

Direct materials: The job costing system must be able to record the materials cost that is used throughout the course of the job. For example, if an organization is manufacturing the custom-made a machine, the metal piece costs which is used in the manufacturing must be collected and charged on the job. The system can collect this cost through the manual following of materials on the sheets of cost, or the data can be gathered from the online terminals in the production and warehouse area (Kren, 2018).

Direct labor: The job costing needs to record the labor cost which is used in a job. If a job is associated with the services, the direct labor may include closely all of the job cost. Direct labor is basically allocated to a job with a time sheet, time card or with a time clock application on a computer. In all these cases, the user can easily ascertain the job, so that the data related to the cost can appropriately be applied to the exact job.

Overhead: The system allocates the costs of overhead to one or more costs groups. At the end of the financial year, the total amount in each cost group is allocated to the many open jobs which are based on some apportionment procedure that is reliably applied.

e. Different types management accounting reports

f. The need for a sound accounting system and the importance of the department producing timely, accurate and relevant information

Accounting system is a systematic way of collecting and recording of the financial transactions so that it can enable all the stakeholders to assess the performance of the organization. Accounting can be done either manually or through computerized programs. However, the latter provides high degree of accuracy prepares various reports without much effort and is very effective.

Following are various advantages of a sound accounting system: -

• High degree of accuracy: - A sound accounting provides a high degree of accuracy in the presentation of the final accounts. It minimizes the chances of any embezzlement and exposes the weakness if any. Sound accounting eliminates chances of errors and presents all the financial data precisely and accurately (Pratheepkanth, 2018).
• Helps in decision making: - A sound accounting system assists the management to make better decisions for the business. Since the information provided by the accounting system is accurate so it enables the management to carefully assess and scrutinize each and every single aspect and form the future strategies accordingly (Nørreklit and Mitchell, 2014).
• Improves the efficiency of a business: - A sound accounting system eradicates any chances of discrepancy and presents information timely and accurately which in turn increases the productivity of the business. Now days with the advent of computerized accounting systems various reports can be generated with the touch of a button which enables the management to take the decisions timely that helps in the growth of the business (Goetsch and Davis, 2014).
• Compatibility: - It provides a mechanism for the business to easily share financial data. Suppose a company purchases another company and both of them are having a sound accounting system put in place then it would be very easy to integrate the accounts and would save lot of time and effort (Kren, 2018).

Evaluate the benefits of management accounting systems and their applications in the context of Ever Joy Enterprises.

The various benefits of management accounting systems in context of Ever Joy Enterprises are describes as below:

• Determine the aims:The management accounting system assists to the manager in determining the aims and objectives for the company. With the help of it the Ever Joy Enterprises sets their targets and objectives through which each and every member of the company focuses on this and achieves them in an appropriate manner (Lasyoud, et. al., 018).
• Helps in preparation of plan:The management accounting system helps to the manager in the preparation of plans for the growth and prosperity of the company. With the help of management accounting system, Ever Joy Enterprises prepare the plans after considering all relevant factors which effects the business operations and these plans helps them to achieve their goals and objectives in an effective and efficient manner (Otley, 2016).
• Better services to customers:The management accounting system assists to the company to prepare products and services according to the customers need and want. The management accounting system assists to the manager of Ever Joy Enterprises to prepare plans and polices according to the customers desire and market need for the product and services. With the help of it the company can improve their existing level of production and modify their products and services according to the needs and preferences of the customers (Nørreklit and Mitchell, 2014).
• Measure the performance:The management accounting system helps the manager to measure the performance of various departments according to set target which are fixed by the manager. The actual performances are compared with the planned performance; if any deviations are arising in the performance it will rectify frequently by the mangers. With the help of management accounting systems, the manager of Ever Joy Enterprises enhances the performance of the departments and overall business operations. By doing proper evaluation of the performance, the manager can easily find out the deviations or errors and correct them by applying management accounting tools and techniques (Goetsch and Davis, 2014).

Task 2 – (LO2)

a. The number of tickets that must be sold to break even (i.e. the point at which there is neither profit nor loss)

b. If we want to make a profit of £30,000.00, how many tickets should be sold?  

c. What profit would result if 8,000 tickets were sold? 

Task 3 – (LO3 & 4)

a. You are to evaluate how budgeting can be used by Ever Joy Enterprises as a planning and problem-solving tool in dealing with financial problems, but also for leading the organization to sustainable success.

Budgeting

Budgeting is a process of future planning for business operations by creating goals of performance and placing them into a proper and prescribed plan. In other words, a budgeting is a proper process of preparing a financial goal for entire company and making a plan to achieve those goals in an effective and efficient manner. Budgeting plays a vital role in the effective resources utilization which is available to the company in order to achieve entire goals and objectives for the company (Nørreklit and Mitchell, 2014).

The following benefits of budgeting in the context of Ever Joy Enterprises are discussed as below:

• It helps and guides the manger relating to the formulation of plans and policies.
• It also provides a means of monitoring and controlling all expenditure and income of a company. Budgeting gives a proper spending plan to the manager.
• Budgeting outlines the objectives for the various departments for a specific time period.
• Budgeting is used to measure the plans and policies of the company
• Budgeting includes all the management of different levels to contribute in the goals setting.
• With the help of budgeting the responsibility can easily fixed.
• Budgeting also provides a benchmark that can be used by the manager to measure the performance of department and employees in the company.

The budgeting assists to the Ever Joy Enterprises to prepare the plans and also helps them to solve various financial problems of the company. Budgeting is the effective planning tool which helps the manager to plan for the company growth and prosperity.

Following different types of budget helps to the Ever Joy Enterprises in formulating the plans and policies for various departments which are discussed as below:

b. You are to also evaluate how strong financial governance can help to pre-empt or prevent financial problems for Ever Joy Enterprises and the means by which management accounting systems can contribute. 

Financial governance refers to the way a company manages, collects, monitors and controls the financial information. The financial governance includes how the company tracks its financial transactions, control data; manage performance, operations, compliance, and disclosures (Hosoda, 2018).

The risk of poor financial governance includes:

• Misappropriation
• Fraud
• Regulatory penalties
• Material errors
• Reduced stakeholder confidence, and
• Poor decision making.

Financial governance in action is the procedures and policies which helps the Ever Joy Company to manage the data of business and make sure that this data is accurate and correct. It includes:

• Financial policies
• Data validation and tracking
• Workflow
• Data security
• Internal control

How the Ever Joy Company improve financial governance?

• Conduct the external and internal audits.
• All corporate data use a single data warehouse.
• Financial data and controls are automated.
• Apply unified and centralized corporate disclosure management software.
• Keep up-to-date on all compliance regulations of the company.
• Risk assessments are frequently conducted.

There are various methods which can be used by Ever Joy Company in order to minimize the financial problems and improves the performance level. Some of them are discussed as below:

1. Key Performance Indicators: It is the most important indicators that show how the company is doing or how well an employee is working in the company. It is also known as key success indicators which assists the Ever Joy Company and its employees to achieve their defined goals. Key performance indicators are a form of performance measurement and are commonly used at both an operational level i.e., to guide the business towards the predetermined goals and at the staff appraisal level i.e., to help the employees stretch themselves and have an end goal in sight (Ahmetshina, et. al., 2018).

The cited company can use the ratio analysis as KPI’s to evaluate the financial performance which is mentioned below:

• Liquidity, Solvency, Debt Ratios
• Operating Activity Ratios
• Revenue Analysis Ratios
• Profitability Ratios
• Break-Even Analysis
• Capital Structure Ratios
• Inventory and Purchasing Analysis Ratios.

2. Benchmarking: It is the procedure of measuring the performance of the company’s products, services, or processes against those of another business considered to be the best in the industry. The point of benchmarking is to identify the internal opportunities for improvement. By using the benchmarking, the Ever Joy Company improves their performance and financial problems in the most effective way (Boscia and McAfee, 2014). There are two basic kinds of improvement opportunities:

Continuous improvement is incremental and it’s involves only small adjustments in the whole process in the company.

Dramatic improvement can do only in the case of when the company changes whole internal process according to market trend.

Some of the more useful financial benchmarks involve:

• Gross profits, operating profits, and net profits margins
• Compensation data and sales
• Per employee cost
• Per employee revenue
• Marketing expenses as per percent of revenue.

After doing analysis it can be said that the financial governance improves the company’s performance in the eye of its stakeholders which are an important part of the company’s source of income. With the help of financialgovernance, the cited company can prevent frauds and other financial problems. The Ever Joy Company can use the KPI’s and Benchmarking to evaluate the overall company performance in internal as well as external (Danaei, et. al., 2014).

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Conclusion

This report finally concluded that management accounting is the important part of the company. The management accounting provides effective tools and techniques to the manager of the company to apply in the various reporting system which is easily understandable to all the departments of the company. This report also stated that while using the budgeting technique the manager can easily evaluate that how much expenses are incurred or how much income is generated from the projects. By using the key performance indicators and benchmarking the cited company solve their financial problems in most effective and efficient manner. Finally, it can be concluded that proper use of management accounting assists the company to maximize the profits and achieve the goals and objectives within the specified time period.

References 

• Ahmetshina, A., Vagizova, V. and Kaspina, R., 2018. The Use of Management Accounting Information in Non-financial Reporting and Interaction with Stakeholders of Public Companies. In The Impact of Globalization on International Finance and Accounting(pp. 433-439). Springer, Cham.
• Boscia, M.W. and McAfee, R.B., 2014. Using the balance scorecard approach: A group exercise. Developments in Business Simulation and Experiential Learning, 35.
• Danaei, A., Hemmati, M. and Mardani, M., 2014. Performance measurement of administration services using balance scorecard and Kano model. Management Science Letters, 4(4), pp.703-706.
• Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.
• Goddard, A. and Simm, A., 2017. Management accounting, performance measurement and strategy in English local authorities. Public Money & Management, 37(4), pp. 261-268.