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Part A:
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This report develops an understanding of management accounting and the implementation of management accounting systems in manufacturing companies. The principle and role of management accounting will be discussed in this report. Variable costing information will also be provided in this report and calculate variable cost incurred in Rio Tinto company in 2020. How management accounting systems are implemented in business will be discussed and at the end of the report critically discuss the application of management accounting in an organization.
Variable costing calculation:
Portfolio of income statement:
Particulars |
$m |
Revenue |
44611 |
Net Operating cost (Variable cost + Fixed cost) |
(26254) |
Impairment charge |
(904) |
Exploration cost |
(625) |
Profit of underdeveloped project |
1 |
Operating profit |
16829 |
Sharing profit after tax to equity |
652 |
Impairment of investment |
(339) |
Finance items |
(1751) |
Profit before tax |
15391 |
Taxation |
(4991) |
Profit after tax (net profit) |
10400 |
Variable cost means that expenses changes as per the production unit produced. It increases when the production unit increases and vice-versa. Some variable costs in the manufacturing business are:
Variable cost can be calculated by multiplying the total quantity with per unit variable cost.
Rio Tinto, which is a mining company. In the income statement, 2020 of Rio Tinto shows the operating cost that includes variable cost and fixed cost both.
Variable costs are:
The total quantity produced by company is $100000
Variable quantity* Per unit variable cost
per unit variable cost
Variable costing calculation is very important as it informs about the cost per unit and how much quantity produces and sold by the company. It helps in managing the production activity. It also helps in forecasting the demand for the product so that production of the product will be resume. It also helps in cost management, reducing wastage. If correct data is available regarding production activity then the manager can manage it easily. It helps the manager in planning about procurement of raw material, labour so that production will never stop. It increases the profitability of the company and reduction in the cost. Variable costing used by the company to analyse the break-even point of the product. It helps in evaluating the profit and cost of the company. An investor uses the income statement report to identify the operating efficiency of the manufacturing business so it helps the same (Riotinto.com, 2020)
Management accounting deals with preparing the business operations report which helps the manager in taking a long term and short term decision. Management accounting system facilitates in achieving the goal of business by identifying issues, measuring them, analysing them, interpreting them and information to managers. The main objective of management accounting is to provide non-financial and financial information to the management of the company and other members who take decisions in business. The main role of a manager in the organization is planning, controlling & evaluating.
The management accounting system can be integrated into business by using the different accounting techniques in business for decision-making like budgeting, cost accounting, variable analysing, cash budget etc. Managers monitor all the data provided by using these techniques and decide on a business. It helps in improving the efficiency of production by analysing all the cost and budget information. The incorporation of management accounting is very important for every manufacturing business. Management accounting is different from financial accounting. Financial accounting is done for preparing financial statements of the company. It provides all the financial data to managers and management accounting provides financial and non-financial data to the manager. The manager takes decisions in financial and non-financial matters. The manager plans for the business operations and mostly manages the operating activities. Management accounting consist budget report, cost management report. This report shows all the details related to costing and performance of employees and company so manager uses this report for evaluation purpose (Oboh & Ajibolade, 2017)
Management accounting can be implemented in every business whether it is manufacturing, service, retail, and restaurant. It provides a piece of information about business operations. So it assists managers in making important business decisions. Planning and decision-making are very important for every business growth. It helps in running the business activity effectively.
Importance of Management accounting in business:
Limitations of Management Accounting:
Conclusion:
This report has been discussed the management accounting system in a manufacturing company. It is concluded that management accounting is very important to implement in every business for planning and decision-making purpose. This report discussed the role, principle and importance of the management accounting method. Variable costing and limitations of management accounting have also been discussed in this report.
Part B:
Introduction:
This report develops an understanding of planning tools used in management accounting as planning tools is very helpful in every business for planning and decision-making. Three planning will be discussed with advantages, disadvantages and effectiveness of these planning tools in the business. A case study will also analyse the application of management accounting for solving business problems. At the end of this report, recommendations will be provided about the best method of management accounting used in an organization.
Getting the best free sample was written by a Subject expert for talking Accounting assignment help.
Advantages |
Disadvantages |
Manager can estimate cash shortage in future by preparing a budget |
It is estimation so it does not always provide a reliable result. |
It helps in planning the working capital and helps in the distribution of cash in the department of business according to budget |
There is a possibility of theft. |
Effectiveness of Cash budget:
A cash budget is effective to prepare for the management of cash. Cash budget provides details related to inflow, the outflow of cash, availability of cash, allocation details etc. This budget informs the manager about cash needs and the availability of funds in future. It helps in cash management and reduces the issues in business.
Advantages |
Disadvantages |
Cost variance analysis helps in cost management. |
Sometimes manager takes a long time to analyse the variances so it delays taking corrective measures. |
It helps the manager in reducing the wastage of funds and optimum utilization of funds. |
It considers only financial terms. |
Effectiveness of cost variance analysis:
The manager found it a very important planning tool because it informs about the business operations efficiency by monitoring the variances of cost. Cost management is very important in every business. It helps in increasing profitability.
Advantages |
Disadvantages |
By using investment technique manager can able to evaluate the investment project correctly |
The manager must have high knowledge about the usage of investment technique. |
Some investment techniques consider the time value of money which provide correct results |
Some investment techniques do not consider the time value of money so it does not provide the correct result. |
Effectiveness of Investment technique:
It is useful for managers because it helps in selecting the best investment plan for projects. It indicates high returns from investment and has less risk. If the manager considers the time value of money then it will be effective more (Ismail et al, 2018)
As per the case study management accounting has applied in the business for making an important business decision. Management accounting plays a significant role in solving business-related problems and take future decisions. Management accounting information provides insight for forecasting about future. It shows the growth of the business. As it is manufacturing business and management accounting techniques and planning tools helps in solving business problems. Like inefficiency in production, inefficient workforce, fewer resources. So these issues can be solved in business by implementing a management accounting system and by using best planning tools like budgeting, cost accounting, marginal costing, standard costing, financial planning, Return of investment etc. If these planning tools of management accounting is not used in the business then management of the company is not possible. It reduces the profit of the company and increasing the cost and value of the company will get down.
There is four main part of management accounting that is Budgeting, cost management, performance management and risk management.
As per the findings, it is recommended that organization should apply modern management accounting method as it is designed according to today’s era. As in this modern era, competition is very high so every organization wants to reduce their cost and increase their profit so the best method should adopt by an organization that allocates the cost correctly and provide correct information so that it helps the manager in taking important business decisions. The modern technique of costing is Activity-based costing. It is suitable for manufacturing and service organization. It provides reliable information to manager and it is very easy to implement in the organization so the company should adopt this method of cost calculation. Cost is playing a very important role in every business as profit is dependent on the management of cost. So management accounting best tools and techniques help in reducing the cost and increasing the profit (Drury, 2018)
Conclusion:
This report has been discussed planning tools that are used in management accounting. It is concluded that it is very important to apply in every business. Three important tools are cash flow budget, variance analysis and investment technique has been discussed in this report. Its advantages, disadvantages and effectiveness have also been discussed. The case study has been analysed about management accounting method implemented in an organization. Lastly, it is recommended that organization should use modern management accounting method to compete in this modern era.
References:
Abdusalomova, N.B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT OF A MANAGEMENT ACCOUNTING SYSTEM. Economics and Innovative Technologies, 2019(3), p.6.
Annual Report 2020, Riotinto.com, viewed 13 May 2021, <https://www.riotinto.com/invest/reports/annual-report>.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.
Ismail, K., Isa, C.R. and Mia, L., 2018. Evidence on the usefulness of management accounting systems in integrated manufacturing environment. Pacific Accounting Review.
Kastberg, G. and Siverbo, S., 2016. The role of management accounting and control in making professional organizations horizontal. Accounting, Auditing & Accountability Journal.
Oboh, C.S. and Ajibolade, S.O., 2017. Strategic management accounting and decision making: A survey of the Nigerian Banks. Future Business Journal, 3(2), pp.119-137.
Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management accounting perspective on safety. Safety science, 71, pp.151-159.
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