MANAGEMENT ACCOUNTING Management Accounting Systems Chapter 7 - - PowerPoint PPT Presentation

Chapter 7

MANAGEMENT ACCOUNTING

Management Accounting Systems

Prepared and delivered by:

Sithari Herath

What is a Management Accounting System?

Formal frameworks that give information from the internal and external environment to

• administrators. These frameworks would,
• Collect, organise, and communicate data on business activities
• Plan and forecast processes needed to arrange management accounting information

Types of MA Systems

Cost Accounting Systems Inventory Management Systems Job Costing Systems Price optimising Systems

Cost Accounting system

The framework applied by the organisation to approximate the cost of its products for inventory valuation, profitability analysis, and the cost control .

Types of MA Systems Cont….

Advantages Disadvantages Profitable or non-profitable activities can be disclosed and necessary actions can be taken to eliminate those Lack of uniform procedure This method will measure efficiency and helps to maintain and improve it The usefulness of this system is questionable Provides information based on estimates and tenders Implementation of this system is costly Guides for future production policies Increase arbitrary cost allocations Helpful to the government to assess tax incomes Helpful to customers to more value for the

Inventory Management System

The method of controlling and overseeing the ordering, use, and storage of components which the organisation applies in the making of the products it sells.

Inventory management system Description JIT system This is a production model that is created to meet demand without any surplus. The purpose of this system is to avoid waste, waiting and excess inventory. ABC Analysis This is an inventory categorisation method that divides inventory into three main parts such as A, B and C. Firstly, A-items are the ones that has the highest annual consumption value. Then, B-items are the ones with a medium consumption value. Finally, C-items are the items with the lowest consumption value. Two Bin System According to this method, there are two bins to store goods which contain working stock and the other contain reserve stock. When the first bin is empty a replenishment order will be placed. When the company receives material the second bin is refilled and the excess is put into the first bin.

Advantages Disadvantages Improves cash flows When there is too much slow-moving inventory it takes valuable storage space and negatively impacts the bottom- line of the company Better reporting and forecasting capabilities When essential inventory runs out of stock, that can delay the supply chain due to backorders Decrease labour cost Inaccurate documents Better organisation Wasting man hours by tracking items that stored in wrong locations Transparency will be enhanced Improves relationship with stakeholders

Inventory Management System- Advantages and Disadvantages

Job costing system

The system of allocating manufacturing costs to the individual item or batches of the products (If the goods processed are different from one another)

Advantages Disadvantages The total cost attributed for the job is readily available and the management can be able to control the efficiency of operations, machines and materials by suitable comparison This is very expensive as more clerical work is involved in determining cost elements of specific jobs When the job is completed, the cost under each element can be immediately ascertained and compared with the selling price of the product in

• rder to identify whether the job is profitable or

not The costs are ascertained, even compiled promptly, are historical as they are compiled after the incidence This will also help to plan production and estimate costs of similar jobs that will be taken in future The cost complied under this system represents the costs incurred under actual conditions. However, this system does not have any specific basis to indicate what the costs should be or should have been unless standards costing is used.

Price optimising system

The application of mathematical analysis to the organisation to determine how consumers will react to various price for their goods and services.

Advantages Disadvantages Aids to maintain firms’ customer retention May lead to loss of profit since production cost is not taken into account Uplift the profitability of the company Inaccurate results Risk in alienating long-term consumers who are accustomed to certain rates

Management Accounting Reports

Management accounting reports are only for internal use only. Also, these reports are prepared for the use of different levels of management.

Advantages and Disadvantages of Management Accounting Reporting

Advantages Disadvantages Determines its goals Based on financial accounting Helpful to prepare plans Lack of knowledge Easy to take decisions Lack of continuity and coordination Increase the efficiency of the business Lack of objectivity Provides effective management controls High cost Better service to customers Evolutionary stage Performance measurement Effect of the time element Maximum profits can be get It cannot be treated as an alternative to management

Different Types of Management Accounting Reports

Reports Description/ Benefits Integration within other functions Cost accounting systems Labour reports This report needs to be maintained in

• rder to monitor departmental costs and

to control net profit of the company. Labour reports will aid the Human Resource department in the organisation to develop their recruitment plan, salary packages, bonus payments, future labour requirements forecasts and so on. Cost analysis This is the process of reporting separate elements in a cost proposal, such as labour, equipment and materials that will produce a product

• r

service and proposed profit. This will help the company for better utilising available resources and also aids the organisations to demonstrate evidence of accountability Cost analysis will help the departments such as administration as the company will keep the records of all the costs incurred in business

• perations

Status report This report is used to identify the deviations from goals and strategies of the company. Moreover, this can be used for internal management decisions This report will aid the production department. Furthermore, the production department can use this report to prepare documentation of completed projects. Inventory management systems Inventory re-

• rder level and

quantity report This report is used to identify the level

• f inventory at which a re-order for an

exact amount of inventory should be placed. The procurement function can use this report to get facts about the right time to reorder inventory, and the right quantity. Material requisition note This will provide the items that need to be picked from inventory and used in the production process The operations function can use this report to get a knowledge of the average raw materials needed for the production and develop procedures to handle materials.

Job costing system Job cost sheet This is a compilation of the actual costs of a job. This will be completed when the job is closed. This report will aid the finance and accounting function. Moreover, these departments can use job cost sheet to prepare financial statements and calculate the profit of the company Price optimising system Price forecasting reports This report can be used to fix a suitable price based on many variables. The marketing function can use the facts included in this project to determine marketing strategies