Managing Accounting Information
Decision Making in Organization
Management accounting is the procedure for rendering financial figures and data that can be used for taking decisions of the enterprise. Effective action plans and strategies can be formed by making use of management accounting information (Ramanathan, 2014). In addition to this, it is vital that facts and data should be collected from authentic and reliable sources. Present assignment describes significance of management accounting information in the decision-making the process of the company. Moreover, diverse range of management accounting techniques which can be used in business is mentioned in the Instant Assignment Help UAE report. Critical evaluation of different management methods and their application has been described, and their applications are mentioned.
Decisions in an organisation are taken for running operational activities of the enterprise and executing the desired function. Under management accounting data, facts and figures are used for making strategies for the business and running business activities (Soin and Collier, 2013). There are various advantages for using this information for carrying out operational activities of the enterprise. By making use of this knowledge, the growth of the company can be analysed, and it will support in evaluating the performance of the enterprise against set targets. For example, if it is observed through management accounting information that business is not doing well than effective strategies can be made for stimulating the growth of the organisation (Fullerton, Kennedy and Widener, 2013). It will aid in enhancing sales and profitability of the enterprise. The decision can be taken related to purchasing operations. It is vital to purchase raw material for running business activities, and management accounting information will support for taking decisions related to making and buying.
Decisions can be taken for adopting new technology for running, manufacturing and for production related activities of the corporation (Hopper and Bui, 2016). Management accounting information provides details about a direct and indirect cost that is associated with producing goods. Cost related decisions can be taken, and the marginal cost of commodities can be determined by making use of management accounting information. This information also supports in preparing an action plan and for arranging logistics and supply chain activities (Malmi, 2016.). Moreover, better and effective services can also be provided to the consumers. Cost control devices also support for reducing prices of products and services, and it will aid for rendering commodities and services at the reasonable price to consumers (DRURY, 2013).
It becomes easier for taking judgements related to the diverse range of business activities. Budgetary control procedures support in analysing the performance of business against the set standards (Coyne and et.al., 2010). Deviations can be assessed by the enterprise in the actual cost, and standard cost and effective measures can be taken for rectifying weak performing areas. The efficiency of employees can also be assessed by making use of budgetary control procedures, and it will aid for measuring the performance of the staff members (Faÿ, Introna and Puyou, 2010). Management accounting information provides effective management control techniques that support in carrying out planning, controlling, coordinating and regulating business activities in an effective way (Caglio and Ditillo, 2012.). Unnecessary expenses can be controlled, and the maximum amount of profits can be obtained. New techniques and technologies that can be adopted for modifying business activities can also be identified by making use of management accounting information (Håkansson, Kraus and Lind, 2010).
A different set of assumptions are used under accounting methods, and it supports for getting accurate data and figures for making appropriate decisions for the enterprise. Some common methods that are used in organisations are as described:-
Ratio analysis: - It is the quantitative analysis of figures that are mentioned under the financial statements of the enterprise. Information is collected from the income statement, balance sheet, cash flow statement and profit and loss sheet. This technique is mainly used for assessing the financial performance of the enterprise. Moreover, operating efficiency of business is also analysed by doing ratio analysis. Various performing areas which are calculated through ratio analysis are profitability, solvency, liquidity and efficiency. Various ratios which are calculated are the current ratio, debt-equity ratio, price earnings ratio and return on equity ratio. The formula which is used for calculating a current ratio of entity is as mentioned:-
CURRENT RATIO = CURRENT ASSET/ CURRENT LIABILITY
Activity-based costing: - This method can also be used for identifying the cost of the individual activity which is performed in the enterprise. There are diverse ranges of operational activities that are performed in business and cost of each activity is determined by making use of activity-based costing technique (Jansen, 2011). This methodology can be adopted for identifying unprofitable processes and services which create unnecessary expenses for the business. The overall cost that can be occurred in the enterprise can be assessed by making use of activity-based costing. The cost for products, services, and different tasks can be assessed by making use of activity-based costing method (Setthasakko, 2010). In addition to that, resources that are required for completing an activity can also be assessed by making use of this approach. There are various benefits which are associated with this method, and it provides a better medium for identifying and assessing commodities that are unprofitable and creating unnecessary expenses for the business.
And true and accurate cost of products can be identified by making use of this method. Unnecessary cost and expenses of an enterprise can be removed, and profitability and financial revenues of organisation can be enhanced by making use of this methodology (Zaleha Abdul Rasid and et.al., 2011).
Budgeting system: - It is also a useful medium that supports for rendering effective data and information so that effective decisions can be taken in enterprise. Predictions can be made by making use of this system about future expenses that can occur in an enterprise. It also supports for comparing the actual performance of business against the set standards and targets (Schaltegger, Gibassier and Zvezdov, 2013). Companies can make use of this technique for evaluating future expenses that can occur in the entity and it will also aid for rectifying weak performing areas of business.
All the above-mentioned methods provide an effective medium for collecting management accounting information which in turn supports for taking appropriate decisions for the enterprise (Kachelmeier, and Williamson, 2010).
Management accounting methods provide an effective medium for collecting data and information that can be used for making effective strategies and carrying out business functions. There are advantages associated with the systems, and it is as described:-
Ratio analysis method:- Ratio analysis method provides an effective medium for the analysing financial performance of enterprise and by that further decisions can be taken in the company. Moreover, ratio analysis method also provides a medium for the analysing operating efficiency of enterprise and assessing the financial performance of business (Coyne and et.al., 2010). Profitability, liquidity and solvency related data and figures can be assessed by making use of this system. This technique supports for judging the efficiency and analysing financial statements of business. Company's efficiency can be judged by making use of this techniques, and it also describes manner how a better entity is making use of existing assets and liability of enterprise. Identifying weak performing areas can become easier by making use of this system, and remedial actions can be taken for modifying weak performing areas of enterprise (Jansen, 2011). It also provides a useful medium for formulating action plans and strategies for the business, and past financial performance of enterprise can be assessed by making use of accounting ratios. Ratio analysis method provides the effective medium for comparing the performance of entity against the set targets. This method provides effective medium for
Activity based costing method:- Activity based costing method provides the effective medium for controlling fixed cost and variable cost of the enterprise. The cost associated with each activity can be assessed by making use of this system, and it will support for regulating overall investment cost for the enterprise. An effective relationship between various factors of cost can be made by making use of this method, and it will aid in taking effective and appropriate decisions for the business (Kachelmeier, and Williamson, 2010). Decision-making process becomes easier by adopting this system and strategic action plans can be formed for carrying out business functions.
Budgeting system:- Future estimation about expenses that can occur in business can be made, and it supports for doing predictions. It will support for allocating financial, human and other resources in an optimum manner for carrying out business functions. Comparison of actual performance of enterprise and standard performance of business can be done, and it will aid in assessing weak performing areas of business (Setthasakko, 2010). Moreover, regulating the business functions becomes easier by making use of this techniques and it unnecessary expenses of business can be reduced by making use of this technique.
Comparative income statement, According to absorption costing method, both types of cost including variable cost and fixed cost are distributed to the production units on a common basis. There exist a relationship between sales and another related cost. In this method variable and fixed cost are not considered differently. Profit volume relationship is described under marginal costing system and this method net profits are calculated. Marginal costing method defines about changes in total cost that occur when the total amount of quantity produced is enhanced by one unit.
According to absorption costing method, it has been observed from the above data that organisation is facing losses in Quarter 2 . in addition to this according to marginal costing it has been referred that losses are suffered by the enterprise in both the quarters. Different outcomes have been received when two different methods such as absorption costing and marginal costing are used.
(b) Justifications for Differences in profits , Absorption costing and marginal costing methods are used for calculating different profits and treatment of fixed cost are done in a different manner. Under absorption costing method cost is distributed on each factor of production. Whereas in marginal costing deduction of total fixed cost from contribution is made? According to absorption costing method profitability increases when closing stock increases. On the other hand in absorption costing method profitability reduces when closing stock increases.
It has been observed from above calculation that marginal costing difference in both the values comes out as £144000 in Quarter 1. In Quarter 2 difference in marginal costing comes out as£96000. According to absorption costing method difference in values during Quarter 1 comes out as £228000 and it is -£22000 in Quarter 2. Absorption costing and marginal costing method both deliver different outcomes. Moreover, reconciliation is a tool that is used with the objective to reconcile and evaluate different items of cost profit analysis and their relationship. Costs as per marginal costing and absorption costing are different from each other.
Management accounting help in eliminating financial problems. Fund are required to perform internal business operations. By using management accounting areas where firm is making extravagance are identified. By preparing cost control strategy expenses are controlled by the business firm. Hence, less amount of money is required to fund firm internal operations. For instance firm by using process reengineering can evaluate its business operations and simplify production process which may lead to less consumption of energy. This reduce firm electricity bills and firm will need less funds to finance its internal operations.
A budget is a forecast of what is expected to happen in business during the next year
Budgets are prepared in the entity for forecasting future income and expenditures of organisation. Budget is prepared on the basis of past performance of the organisation and cash inflow, and cash outflow information is used for preparing budgets. It is prepared in quantitative terms and is made for a specific period (Jansen, 2011). Various elements are included under budgets, and it consists of revenues, cost and expenses and details about assets and liabilities. The major objective of preparing a budget is to control resources of an organization and for allocating all the resources in an optimum manner. Budgeting tools provide details about expenditures and revenues that can be used in the enterprise (Setthasakko, 2010). It provides directions for carrying out business activities in the effective and planned way. Actual performance of enterprise can be compared with the forecasted, and it will provide a medium for taking effective measures for making improvement in weak performing areas of the entity.
Incremental budgeting:-- Existing efficiency and performance of an enterprise are compared against past performances. This type of budget provides Ann active medium for comparing the actual performance with forecasted facts and figures (Schaltegger, Gibassier and Zvezdov, 2013).
Zero-based budgeting: - In this technique, a budget is prepared by. In this process budget is prepared on and estimation of the base year. Estimations are not made by base year, and budget is prepared on the basis of zero bases. Previous year's data and facts are not considered while doing zero-based budgeting.
Comparison and contrast of three planning tools that are used in management accounting
Management accounting tools support for doing financial planning and taking appropriate decisions for the enterprise. Three general planning tools that are used in management accounting are as described:-
Budgetary control: - Financial requirement of future are estimated under budgetary control, and financial performance of enterprise can be regulated effectively by making use of this accounting.
Budgetary control defines methods which can be used for utilising budgets for monitoring and cost control (Budgetary control . 2016). Under budgetary control, financial goals are set in the enterprise, and actual results are compared with forecasted results. It provides a medium for effectively monitoring and controlling the overall cost of various operational activities in the enterprise. Financial goals are set, and strategies are formed for accomplishing the set targets. Budgets are prepared, and actual performances are measured against the set targets. The budgetary system provides the system for controlling cost so that required operations of the enterprise can be performed effectively. Coordination among various departments can also be established, and it will help for achieving maximum profitability for the enterprise (Kachelmeier and Williamson, 2010).
Variance analysis: - Variance analysis is the quantitative method that is used for comparing actual data with budgeted data. Variance analysis also provides a method for finding out deviations that can be found in the financial performance of enterprise (Tucker and Lowe, 2014). Various types of variance include sales volume variance, direct labour rate variance, fixed overhead spending variance. Variance analysis provides a medium for identifying variation in overall expenses and net income during a specific period.
Capital budgeting: - It is an effective planning tool that is used in the enterprise for determining and taking long term and short term decisions for the enterprise. Moreover, decisions about operational activities of an enterprise can be taken by making use of capital budgeting. It judges the viability of a project and net present value, internal rate of return, payback period and the average rate of return methods are used in capital budgeting. Decisions related to the purchase of new machinery, plant, equipment and other products are taken under this (Schaltegger, Gibassier and Zvezdov, 2013).
Management of an organisation takes decisions whether cash invested by them in a project would deliver a better rate of return or not. In addition to that allocation of resources can also be done properly by making use of this technique. Some other techniques that are used in capital budgeting are the Internal rate of return, payback period, net present value, profitability index and equivalent annual cost are included under this method.
Comparison of ways through which management accounting information can be used for dealing with financial problems of an enterprise. Management accounting information can be used for dealing with financial problems of business, and it will also support for resolving diverse issues that are faced by the enterprise. Variance analysis method can be adopted for the performance of the company against the set standards can be measured, and it will provide the medium for identifying a deviation in variance (Zaleha and et.al., 2011). Initially, some standards are determined and by that strategies can be formed in the enterprise. Actual performance is compared against standards, and corrective and remedial actions can be taken on the basis of that. Variance analysis is a significant tool that supports for assessing the difference between actual and planned budgets.
Management of organisation can identify about reasons of the variance in income and expenses during a specific period. This tool helps for planning budgetary targets and by that performance of an organization can be compared with actual data and figures. Performance management of an organisation becomes easier, and regulation of activities of diverse departments can also be done by making use of such technique (Kachelmeier and Williamson, 2010). In addition to this budgetary control, process can also be used for finding out discrepancies that occur in actually budgeted data and estimated data. Initially, it is required that budgets should be prepared and actual results should be recorded. It will support for assessing deviations in weak performing areas, and remedial actions can be taken for removing those.
It provides the productive system for controlling cost and budgets can be prepared by making proper coordination between different departments. Moreover, capital budgeting procedures can also be adopted, and this method can be used for dealing with financial issues that are faced in the enterprise. Management of organisation can take decisions for whether to invest money in the project or not (Håkansson, Kraus and Lind, 2010). For example, if there are two options to select from two different projects including Project A and Project B. if in project A net present value is lower as compared to the second project than feasibility of the second project would be considered better. Management accounting planning tools such as capital budgeting, budgetary control and variance analysis can be used for resolving the diverse range of financial issues that are faced in the enterprise. Management accounting information renders specific facts, figures, details and information that can be used for taking decisions for the enterprise.
Summing up the present report it can be concluded that management accounting information provides effective medium for taking decisions for carrying out business activities. It is assertive and critical that data and information should be collected from authentic sources so that better judgements can be taken for the enterprise. Management accounting information is varied significant for carrying out business activities and by making use of this information analysis of growth and actual performance of entity can be made. Activity based costing technique also renders effective medium for taking sales and cost related decisions for the enterprise. Management of an organisation can decide about methods of selling and the different mechanism through which products and services of the enterprise can be sold. There are different types of management accounting methods, and it includes the marginal system, activity based system and budgeting system. All the methods provide better ways for taking decisions for the enterprise.
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