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MANAGEMENT ACCOUNTING

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MANAGEMENT ACCOUNTING

 

Task 1

LO1 Demonstrate an understanding of management accounting systems

Management accounting system (P1)

The management accounting system is also termed as managerial or cost accounting that analyses the business operations and costs to prepare records, internal financial reports and also account to aid the managerial people's decision making process to achieve business goals. In these terms, it can be defined as the act of making sense of costing and financial data and translate it into useful information for the use of management and organization.

Andre et al. (2016, p.150 and financial accounting phenomenon help the organization to formulate the policies, control, planning and decision-making process in the organization.

Major functions of management accounting

There is four basic functions of management accounting system are listed below.

1. Planning:

Though this function, formulation of long term and short term plans and proper actions in this regard will be taken. In the budget, the financial planning has been done showing that the resources are used and acquired over a specified period of time interval (Anelli and Puglisi, 2015, p. 409). Management accounting is helpful in this case for planning activity as it provides information to the decision making process. This technique also helps in estimating alternative actions to be taken for achieving the desired financial goals.

2. Organising:

Organising is a process of assigning responsibility to the worker and establishing the organizational framework in the organization. This in term helps in achieving the business objectives and goals (Avenali et al. 2017, p. 130). Management accounting system helps the managerial people to organize necessary information by providing reports.

3. Controlling:

Control is a process of evaluating, measuring, monitoring and correcting the actual results of business plans. Management accounting system helps in producing control reports and performance reports and this highlights the variance between the actual performance and expected performance.    

4. Decision making:

Management accounting system contains valuable information of various courses of actions and predicts the results required to achieve business goals.

Benefits of management accounting systems

  • Increases bar of profitability
  • Increase efficiency of the organization
  • Maintenance cost transparency
  • Assist the goal of completion
  • Simplifies decision making
  • Increase flexibility

Application of management accounting systems within an organisational context (M1)

This technique helps the Tata Motors to formally structure the decision problems and to place alternative consequences. Management accounting system also provides production report, sales report by the managers of Tata Motors through taking suitable actions about the production position (Cooper et al. 2017, p.995). Using this technique the managers of Tata motors will be able to decide whether to eliminate or add the product line and the production report. In Tata Motors the accounting management system helps the managers to identify more profitable products as well developed data for it (jaguar.in, 2018). Accounting management system helps to prepare budgeted financial statements.

Critically evaluation of integration of management accounting report and management accounting system within organizational process (D1)

Integration of management accounting reports and the management accounting system within the organization process deliveries the desired success for the targeted organization. The management accounting reports help the organisation to identify a social and environmental trend which impacts the ability of the companies to create value over the time period. Sustainable business challenges can be linked to the company's strategy, performance outlook and business model through this integration.

 

 

Essential requirements of different types of management accounting systems used by Tata Motors

Management accounting system extracts internal information from the various sources and makes this information available to the managers of Tata Motors. In order to apply the accounting method in the organization the managers must focus on fulfilling the following three requirements.

I. Organisation structure:

It defines the range of information needed for the organisation and this can also be classified into two further type’s namely functional structure and Flat Structured (Flannery, 2016, p. 200). In the functional structured managers use the information to the extent their own function whereas in Flat structure managers deliveries wide range of information to based on the made critical decisions.

II. Management style:

Management style directly affects the accounting management system. It defines how and whom the information needs to be processed in order to yield expected results (fool.com, 2017). Autocratic style of accounting management is handled by the top level manager’s decision-making process whereas Democratic style includes individuals and lower level management.

III. Information:

The requirement of the information in the accounting management method helps the Tata motors manager to decide what information needed to be used for the organisation. The source of information will be recorded and listed either it is an external or internal source. Reliability, accuracy, and relevance of the information will be gathered (Fürst et al. 2014, p. 1440).

Different methods used for management accounting reporting in relevant to the Tata Motors (P2)

Three of the management accounting report has been listed in relevant to the Tata Motors.

I. Budget report:

This management accounting report analyses the Tata Motors performance and controls cost.

II. Job Cost reports:

This report shows specific projects expenses of Tata Motors. The company will be able to evaluate the job profitability.  

III. Inventory and manufacturing:

Using this report the Tata Motors evaluates the inventory wastes, per unit overhead costs and hourly labour costs.   

Task 2

LO2: Apply a range of management accounting techniques

Income Statement

Absorption costing method

Absorption costing method is under GAA accounting standard system and also termed as full costing method. As per the comment of (Hackett and Hand, 2016, p. 368), the absorption costing method includes detailed costing of variable cost, fixed cost, production cost and operating expenses.

 

The absorption costing method helped to calculate the fixed cost for Tata motors. The absorption method calculates the sales per unit through sold goods amount. The absorption cost method is treated as variable cost method by the generally accepted Accounting period principle. The net income has been calculated through unit sold by the company to the additional incurred expenses.    

The margin contribution by the Tata Motors at the end of the year is of £21250.

In order to prepare the income statement for the Tata motors marginal costing method following points has kept in mind.

  • Costing method has included only variable costs which have been increased as per the production volume.
  • In this method, the fixed cost has been excluded and the fixed overhead has been observed as not constant for every month.
  • The marginal costing method calculates the cost by the value of sales. The net income and the total production have been calculated following the basic sales per unit.

     

It has been recommended for the Tata Motors to undertake the absorption costing method to prepare the yearly financial statement. This involved the manufacturing process of the new product.  

Task 3

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

P4: Planning tools used by Tata Motors

There are three important tools has been used by the Tata Motors for managing the budgetary and financial controls.

Budgetary control tool:

This tool provides a detailed plan for operation and management policy for the given time period. Though the budget plan does not advance the future courses of actions however it can help to control the exercised plan. Tata Motors using the budgetary control tool for comparing the budgeted figures with the actual performance and also helps in calculating the variances. The performances are evaluated using the budget reports (Hill et al. 2018, p.70). The budget involved things followed by the Tata motors are represented in the below diagram.

Return on Investment:

It is one of the financial control tool used by the Tata motors to evaluate the efficiency of the investments.Above formulas has been used by the Tata motors to gain the return from various investments. Comparing the ROCE and ROE values the company evaluates the efficiency on long terms utilised funds.  

Break Even Analysis:

Tata Motors uses this financial control tool to show the relationship between the revenue and costs in order to formulate planning. At this point, the sales are equal to the costs and no loss and no profit occurs at this concerns.

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

Two of the organisation of same automobile industry has been taken for comparison of management accounting system related to their respective financial problems (Özdamar and Ertem, 2015). Tata Motors and Ford are two of the automobile giants which are facing the serious issues in financial handlings. In Tata Motors it has been observed from the recent years that the company is facing an issue in financial controlling. Implementing the return on investment plan in the financial analysis the company is able to overcome the capital inefficiency issue.

The Ford Company has facing serious issues on the preparation of budget reports. In order to overcome these issues, the company has adopted the budget control tool through which the organisation is able to control the financial issues based on nature and function. The fixed budget and flexible budgets are categorized by nature and handled whereas sales, purchase, masters and cash budget has classified in the Functional nature and handled properly.

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

M3: Usage of different planning tools and their application for forecasting and preparing budgets

The budget control tool determines the performance target of each of the departments of the organisation. The budget produced estimates the future. Return on investment produces the best possible profit from the capital returns (Rogoff, 2015, p.450). Break-even analysis helps in determining the profit at different levels of the activity performed in the organisation.

M4: Analysis of sustainable success lead by the organisation in regard to financial problems using management accounting system

Sustainable success has been delivered by the organisation using the above financial tools. This tool helps in forecasting the future issues of financial problems.   

References

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.

Avenali, A., Boitani, A., Catalano, G., D’Alfonso, T. and Matteucci, G., 2017. Assessing standard costs in local public bus transport: A hybrid cost model. Transport Policy. p.120-130

Cooper, D.J., Ezzamel, M., and Qu, S.Q., (2017). Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research, 34(2), pp.991-1025.

Flannery, M.J., 2016. Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance6(02), p.165-200.

fool.com  (2017). Types of Budgets. Available at: https://www.fool.com/knowledge-center/5-types-of-budgets-for-businesses.aspx [Accessed on 23rd April 2018].

Fürst, C., Opdam, P., Inostroza, L. and Luque, S., 2014. Evaluating the role of ecosystem services in participatory land use planning: proposing a balanced score card. Landscape ecology29(8), pp.1435-1446.

Hackett, J. and Hand, L.S., International Business Machines Corp, 2016. Routing service requests based on lowest actual cost within a federated virtual service cloud. U.S. Patent 9,330,368.

Hill, P.G., Allan, R.P., Chiu, J.C., Bodas-Salcedo, A. and Knippertz, P., (2018). Quantifying the contribution of different cloud types to the radiation budget in southern West Africa. Journal of Climate, (2018). 97, pp.76-92.

jaguar.in (2018) EXPLORE JAGUAR Available at: https://www.jaguar.in/index.html [Accessed on 23rd April 2018].

MITCHELL, F. and NØRREKLIT, H., 2017. Introduction. In A Philosophy of Management Accounting (pp. 15-34). Routledge.pp. 140-190

Özdamar, L. and Ertem, M.A., (2015). Models, solutions and enabling technologies in humanitarian logistics. European Journal of Operational Research244(1), pp.55-65.

Rogoff, K., (2015). Costs and benefits to phasing out paper currency. NBER Macroeconomics Annual29(1), pp.445-456.



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