Management Accounting: Methods, Difference Between Managerial And Financial Accounting, And Budgeting Techniques

BBA402 Mangement Accounting

Definition and Importance of Management Accounting

Management accounting can be defined as the process in which the costs which are related to the business is analyzed and also related to identifying various activities of the business for which internal business reports are prepared so that it facilitates in the decision-making process (Hilton and Platt 2013). In other words, management accounting is associated with the analysis which is conducted on cost and other financial data of the business so that important decisions can be taken by the management.

In modern times, management accounting process has become quite essential for the purpose of effective decision-making process and strategic management of the business (Fullerton, Kennedy and Widener 2013). There are various management accounting methods which are used by the management for different objectives. Some of the management accounting methods are discussed below in details:

1. Cost Accounting System: The cost accounting system of a business is concerned with recording of cost transactions of a business and using appropriate method to do the same. Most of the business normally use traditional method of costing or activity-based costing for the purpose of recording and maintaining of cost records. Cost accounting is essential for the business as it effectively shows the business how much costs the business incurs as a whole and also on the basis of departmental costs which each department of the business incurs (Klychova et al.2015). The cost accounting practices further segregates the total cost of the business on the basis of material, labour and overhead expenses. Further such cost can be segregated on the basis of direct and indirect expenses of the business. Most of the business uses cost accounting methods with standard costing technique so as to measure any variances which might have occurred between the standard set and the actual expenses of the business. In additions to this, cost accounting also facilitates comparison of results between the past and present year (Laitinen 2014). The cost accounting system can help the business of Ryanair to effectively compute the costs which the business incurs and the management can then control such costs and take corrective actions so as to maintain their principle strategy of cost effective services for the customers.
2. Inventory Management: Inventory Management refers to the process of keeping track of the inventory of the business and also used for the effective valuation of the same. The system is useful for recording inventory movements which occurs due to sale and purchase of inventory (Wild 2017). There numerous number of methods which is used by the business in inventory management such as LIFO, FIFO, weighted average and similar other methods. Moreover, there are two popular system of keeping the records of inventory and maintaining the same which are perpetual and periodic system. In an airline business there are inventories such as engine parts, tires, flanks and similar other accessories which the management of airline industry needs to store as inventory of the business.
3. Job Costing: Job costing refers to the allocation of costs on the basis of different batches of products which are produced by the business (Fisher and Krumwiede 2015). Such a method forms a part of costing techniques and is generally applied when there are a variety of products and the costing for each is done following such a technique. Airline industry is generally providing services, and different variety of services.

The basic thing to remember is that both financial and Management Accounting is concerned with the management of money in a business, however the major difference which lies between managerial and financial accounting is in the approach of the two methods. Managerial accounting focuses on internal aspects of the business whereas financial accounting is concerned with the outer aspects of the business which generate revenues.

In case of managerial accounting reports which are prepared by the management can be on daily, weekly or monthly basis as per the convenience and requirement of the business while in the case of financial accounting reports are prepared on the basis of a fiscal year or a certain period.

Financial Accounting helps a business to account for the financial performance of the business which can be monitored by reviewing the financial statements which are prepared by the business. On the other hand, Management accounting helps business to take appropriate financial decisions for the business.

Financial Accounting are done generally following accounting standards which are established by the accounting board of the country or International Accounting Standard Board (IASB). While Management accounting do not follow any such standards for the methods which are used in case of management accounting.

The different methods which a business can use management accounting reporting are explained below:

1. Cost Reports: These reports are prepared by the cost department of the business which helps the businesses to forecast the expenses which the management is going to incur during the period or which the business has already incurred. The cost reports show the total cost incurred or yet to be incurred and also shows segregation of the same (Wynn, Low and Nauta 2013). The cost of the product or services can then be used by the business in order to estimate the profit which the business can make considering the sales of the business.
2. Budgets: As per the requirement of the business for forecasting of expenses and revenues of the business, budgets are the most useful tools at the disposal of the business. It not only helps in estimating the expenses and revenues which the business might incur and then set targets for the departments but also is used for monitoring the performance of the business in terms of the standards set. The important budgets which are prepared by the management of any company are finance budgets, cost budgets, master budgets and similarly other kinds of budgets as well (Mihalache 2013).
3. Performance Reports: Theses reports are prepared by different departments of the business or the senior managers which can shows the performance of each departments as per the standards set. The department which could not achieve its target is investigated for ascertaining the reasons for lapse in performance on the basis of targets set by the business.
4. Process Costing: It is a technique which is used in management accounting for the purpose of allocating costs of production to the units which are produced by the management. The technique is normally used when there is a similar product to be produced in mass quantity. In addition to this, such a costing technique is applied when the manufacturing concerns produces a product which passes to more than one process in order to get the final output which the business wants to sell to the consumers. The technique transfers the costs of one process to another and also shows the closing inventory of that process. This is an important measure for certain companies and can effectively report the costs which are associated with each process and also show the work in progress.
5. Batch Costing: This is also one of the technique which is used by companies for measuring the costs of the productions of the business. The method is similar to job costing but the difference arises when the final product is produced and the company needs to divide the cost of production on the basis of batch sizes. In such a technique, all raw materials are supplied on the basis of a batch and the expenses are also allowed on the basis of a batch.

Ryanair is an airline company which provides flight services to the customers and is known to charge low fare for its flights in comparison to other airline companies. The airline company is regarded to be one of the successful brand of UK. The benefits which are associated with incorporating management accounting system in Ryanair are given below:

• Cost Accounting System: The airline company is known to be one of the lowest charging airlines in UK and this cost-effective strategy of the business attracts a large number of customers. Implementation of cost accounting system will be useful for the business as this will facilitate the business to control the costs which are incurred by the business. Another benefit of the system is that it helps in forecasting of expenses of the business.
• Inventory Management: The management can use inventory management system to keep the inventories of the business under check. Another benefit is that the valuation of inventory is effectively done while following Inventory management system and the management is also able to determine the costs which are associated with the inventories of the business.

Difference Between Managerial and Financial Accounting

The management of the company should incorporate management accounting techniques such as inventory management and cost accounting system. The cost accounting system can help Ryanair to further keep the cost associated with the business low and inventory management system will help the business to keep track of the inventories of the business. The introduction of management accounting tools will facilitate the business to have a better management system and also improve the decision-making process of the business.

The difference between marginal and absorption costing technique is in the allocation of the cost of the products of the business. In case of absorption costing both fixed and variable costs are considered to be part of the products costs whereas in case of marginal costing only the variable part of the products costs are considered to be part of the products costs (Hamady 2014).

The income statement under both the methods are prepared considering the selling price and the quantity of the product. Then the costs which are associated with the product is deducted to obtain the gross profit of the business (Banerjee 2014). In case of treating the fixed overhead expenses the basic difference lies which in the case of absorption costing is included in the cost of the product and hence the same is not depicted in the statement of profit and loss of the business (Fortuny-Santos, de Arbulo-López and Zarraga-Rodríguez 2015). In the case of Marginal costing the sane is included in the profit and loss account of the business and not just included in the product cost of the business.

The profit and loss account which is shown above is prepared on the basis of absorption costing and marginal costing. The basic difference between the two income statements lies in the treatment of fixed overhead expenses. The profit and loss account which is prepared under absorption costing depicts that there is incidence of losses for the month of March and June which can be attributed to the high cost which the company incurs during the month. In case of profit and loss account which is prepared under marginal costing shows that the business has show the same amount of profits of £ 2,00,000 for the first four month and then there is a rise in the profits of the business as shown in the profit and loss statement of the business. The non-manufacturing overhead of the company remains the same for all months which was £ 1,00,000.

Management Accounting Methods

The advantages of using budgeting techniques in the business of Ryanair are explained below in details:

• The primary advantage of a budget is that it helps businesses to forecast the expense and revenue which the business will be incurring or earning during the year.
• The budgeting techniques of the business helps to plan and classify every activity of the business.
• Budgeting techniques are used by the businesses to communicate with the different department of the business about the plan of the management and the strategic goals which are set by the management.
• The techniques is very useful in measuring the performance of the business in terms of the standards which were set by the management earlier
• Budgets are also very handy when it comes to monitoring the activities of the business and any lapse in the performance can easily be identified by comparing the performance report of the business with the budgets which was prepared by the business earlier.

The disadvantages of using a budget as a management tool are given below:

• The budgets which are prepared by the management are often affected by external factors which in certain cases makes the budget prepared obsolete. Such factors are inflations, change in market condition.
• The cost which is associated with maintaining and implementing a effective budgetary system is costly and might not be applicable to all businesses certainly not the small ones.
• The estimates which are incorporated in a budget depends on the effectiveness and accuracy of the judgements and forecasting ability of the business.

Thee planning tools which can be used by the business of Ryanair are explained below:

1. Application of Budgets: The management of Ryanair can use budgets to plan the business proceedings for the future and also help the business in monitoring the activities of the business also the costs which the business incurs.
2. Pricing strategy: The management can use pricing strategies so as to fix the prices which the airlines will be charging from the customers which will be considering the costs which the business incurs.
3. Strategic Management: The management can use strategic management tools such as bench marking so as to set a desired standard which will be motivating the business to achieve such a level.

Financial Problem

The basic problem which the business of Ryanair faces is related to proper forecasting of the expenses and revenues which the business can generate which in many cases has resulted in under estimation of costs or over estimation of the same.

In the case of Southwest airlines, the management of the company is facing cost problems which is related to high costs which are increasing the fares of the flights and thus affecting revenues of the business. Therefore, the management needs to accurately estimate the costs with the help of costs reports and also identifying the sources to which maximum cost accrue.

Financial Governance

As per the problems which are mentioned above, the management of Ryanair plays a vital role in forecasting of the expenses of the business which needs to be done by senior expert analysts for the purpose of accuracy. The governance of the business and the strategies which the business formulates will be deciding the outcome of the situation. In the case of Southwest airlines, effective governance needs to be enforced on the financial aspects of the business. This can effectively monitor the costs of the business and also provide a solution to the problem which the airlines face.

Effective Management Accounting System and Strategies

The solution to such a problem is implementing a proper budgetary control with standard costing implication which will help the business to effective forecast and also if any variance occurs such can be rectified by the business.

The management of Southwest airlines can also use budgets to estimate the cost effectively and then exercise control so as to reduce the costs which are associated with the business. In addition to this, the management can implement an effective service costing model which recognizes the cost drivers and units effectively and allocate the costs effectively. Moreover, the management needs to exercise strict control over the activities of the business.

If the management of the Ryanair effectively implements the budgeting techniques along with standard costing techniques then the management can analyze the variances and also identify the reasons for such variances. This will help the business to further improve the performance of the business and also achieve the desired level of performance as expected by the management. In addition to this, the implementation of Budgeting tools helps the business in planning and forecasting process of the business.

Reference

Banerjee, B., 2014. COST ACCOUNTING THEORY AND PRACTICE. PHI Learning Pvt. Ltd..

Fisher, J.G. and Krumwiede, K., 2015. Product costing systems: finding the right approach. Journal of Corporate Accounting & Finance, 26(4), pp.13-21.

Fortuny-Santos, J., de Arbulo-López, P.R. and Zarraga-Rodríguez, M., 2015. Relations Between Costs and Characteristics of a Process: A Simulation Study. In Enhancing Synergies in a Collaborative Environment (pp. 189-196). Springer, Cham.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71.

Hamady, F.N., 2014. Costing Methodology for Health Care Services.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Klychova, G.S., Zakirova, A.R., Zakirov, Z.R. and Valieva, G.R., 2015. Management aspects of production cost accounting in horse breeding. Asian Social Science, 11(11), p.308.

Laitinen, E.K., 2014. Influence of cost accounting change on performance of manufacturing firms. Advances in Accounting, 30(1), pp.230-240.

Mihalache, F., 2013. Coordinates of the budgets of revenues and expenditures of the rural localities. Journal of Community Positive Practices, 13(1), pp.129-146.

Wild, T., 2017. Best practice in inventory management. Routledge.

Wynn, M.T., Low, W.Z. and Nauta, W., 2013, January. A framework for cost-aware process management: generation of accurate and timely management accounting cost reports. In Proceedings of the Ninth Asia-Pacific Conference on Conceptual Modelling-Volume 143 (pp. 79-88). Australian Computer Society, Inc..

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