Management Accounting Tools and Techniques
Over the last few decades, there has been significant increase in management accounting importance to business. Users of financial statements are provided with the financial information of companies with the help of financial accounting tools. Nonetheless, it is not considered relevant effective and relevant in decision making process and evaluation of overall financial performance of organizations. Such issues can be resolved using the application of management accounting. Potentiality of any business can be measured using the management accounting tools and taking managerial decisions (Cooper et al. 2017). Some of the analysis techniques used in the management accounting are techniques of activity based costing, make or buy analysis and relevant cost analysis.
Tools and techniques can be classified under several heads as per the purpose and functions of organization (Suomala et al. 2014). In this particular assignment, two method of management accounting are discussed that incorporates cash flow analysis and cost accounting.
Cost accounting is the technique that is used by organization for determining the process, products and cost associated with any project. It helps in reporting of correct amounts of costs in the financial statements and assist management in controlling, planning and ultimately making decisions. It considers several tools and techniques for the computation of cost of products and services that are rendered by organization. Assessment of input costs help company in capturing cost of production allocation of overhead expenses of any particular product can be done by company using the tools of cost allocations. Activity based cost is the most popular method of costing compared to all other techniques are they are used by companies on wider scale (Granlund and Lukka 2016). With the help of this costing method, this particular costing method helps in accurately allocating the overhead costs and appropriate determination of cost of products. Descriptions of allocation of overhead expenses are done in the first part of assessment and allocation is done as per the benefits derived from the allocation of overhead expenses from several activities.
Cash flow analysis is explained and discussed in the second part of assignment. Business will be able to effective manage the cash flow associated with business and the potentiality of new plan can be effectively measured using this particular technique. Analysis of cash flow of organization helps in examination of outflow and inflow of cash in any business during specific period (Fullerton et al. 2014). Analysis of cash flow starts from staring balance and thereafter an ending balance is generated for all the expenses paid and cash receipts that are used for financial reporting.
Requirement a:
|
Activity |
Activity Cost |
Activity Driver |
Annual Quantity |
Cost per Unit of Activity |
|
Process Receivables |
$15,000 |
No. of Invoices |
5000 |
$3.00 |
|
Process Payables |
$25,000 |
Nos. of Purchase Orders |
2500 |
$10.00 |
|
Program Production |
$28,000 |
Nos. of Production Schedule |
1000 |
$28.00 |
|
Process Sales Order |
$40,000 |
Nos. of Sales Order |
4000 |
$10.00 |
|
Dispatch Sales Order |
$30,000 |
Nos. of Dispatches |
2500 |
$12.00 |
|
Load Mixers |
$14,050 |
Nos. of Batches |
1000 |
$14.05 |
|
Operate Mixers |
$45,900 |
Nos. of Kilograms |
200000 |
$0.23 |
|
Clean Mixers |
$6,900 |
Nos. of Trays |
1000 |
$6.90 |
|
Move mixture to filling |
$3,450 |
Nos. of Cakes/Pastries |
200000 |
$0.02 |
|
Clean Trays |
$20,000 |
Nos. of Trays |
16000 |
$1.25 |
|
Fill Trays |
$16,000 |
No. of Cakes/Patries |
800000 |
$0.02 |
|
Move to baking |
$8,000 |
No. of Trays |
16000 |
$0.50 |
|
Set up Oven |
$50,000 |
No. of Batches |
1000 |
$50.00 |
|
Bake Cake/Pastries |
$1,30,000 |
No. of Batches |
1000 |
$130.00 |
|
Move to Packing |
$40,000 |
No. of Trays |
16000 |
$2.50 |
|
Pack Cake/Pastries |
$80,000 |
No. of Cakes/Patries |
800000 |
$0.10 |
|
Inspect Patries |
$2,500 |
No. of Pastries |
50000 |
$0.05 |
Cost Accounting
Bill of Activities:
|
Activity Consumed |
Annual Quantity of Activity Driver |
Cost per Unit of Activity |
Total Cost |
|
Process Receivables |
500 |
$3.00 |
$1,500.00 |
|
Process Payables |
200 |
$10.00 |
$2,000.00 |
|
Program Production |
100 |
$28.00 |
$2,800.00 |
|
Process Sales Order |
400 |
$10.00 |
$4,000.00 |
|
Load Mixers |
100 |
$14.05 |
$1,405.00 |
|
Operate Mixers |
30000 |
$0.23 |
$6,885.00 |
|
Clean Mixers |
100 |
$6.90 |
$690.00 |
|
Move mixture to filling |
30000 |
$0.02 |
$517.50 |
|
Clean Trays |
2000 |
$1.25 |
$2,500.00 |
|
Fill Trays |
100000 |
$0.02 |
$2,000.00 |
|
Move to baking |
2000 |
$0.50 |
$1,000.00 |
|
Set up Oven |
100 |
$50.00 |
$5,000.00 |
|
Bake Cake/Pastries |
100 |
$130.00 |
$13,000.00 |
|
Move to Packing |
2000 |
$2.50 |
$5,000.00 |
|
Pack Cake/Pastries |
100000 |
$0.10 |
$10,000.00 |
|
Dispatch Sales Order |
500 |
$12.00 |
$6,000.00 |
|
Develop & Test Product |
$600.00 |
||
|
Total Overhead Cost |
|
|
$64,897.50 |
|
Annual Volume |
100000 |
||
|
Cost per unit for Lamington |
|
|
$0.65 |
All the costs discussed above are referred to as overhead costs, such costs are costs that are incurred indirectly by business, and this helps in supporting the distribution and production process. Nevertheless, an organization can have many associated direct costs that has not been explained and mentioned in the case study provided. Costs are directly attributable manufacturing and production of any goods in the business or for any services rendered are regarded as direct cost. Cost of production incorporates one of the important elements that are overhead cost as business without incurring such costs will not be able to manufacture the goods (Thomas 2016). Therefore, it is essential to take into account costs that are incurred directly for computing the cost of products of Lamington. Some of the direct costs that are incurred by Lamington for the computation of product cost are listed below and they are as follows:
- Freight Inward Charges
- Direct Material Costs
- Direct Labour Costs
Requirement a:
According to the case study, two sources are used by HLW to earn money and this comprise of court fees and fees generated by annual membership. Within the initial two months of accounting period, annual membership generates almost 40% of total revenue. However, cash generated from court fees in every month was uneven. Fees generated from court fees is higher during the peak season that is from October to April and total fees generated stood at 45% of total revenue amount. However, lower amount of fees generated from the month of May to September and this amount comprise of 15% of total revenue amount.
Implementation of new membership plan during the new accounting period by HLW will help in generation of revenue of almost 80% of total revenue at the initial stage itself. Some of the advantages from the implementation of this plan are as follows:
- Organization will have a built in platform with the implementation of the new plan that would provide assistance in generating even and steady cash flow throughout the year in every month.
- There can be unrestricted flow of cash from operating sources with the implementation of plan in the form of annual membership (Taylor and Scapens 2016) In the current scenario, club is relying on individual programs that help in earning almost half of total revenue.
- Furthermore, under the new plan within the first month, there can be accumulation of 80% of total revenue by the club management. Hence, club need not wait for six months. Therefore, it will help them in taking wise financial decisions and appropriate utilization of funds that have been accumulated.
The given case study does not provide with the clarification of some of the issues. Therefore, for the determination and evaluation of impact of new plan on the revenue generated from sales comes with the below listed assumptions and they are as follows:
- It has been assumed that 60% of capacities are utilized during the non-prime task in peak season.
- Usage of court is assumed to be 100% in the peak season prime time.
- Earnings of club from the court fees are assumed to be 40% of court usage during off season.
Annual Membership Revenue:
|
Particulars |
Weightage |
No. of Members |
Annual Membership Fees |
Total Fees |
|
Total Members |
100% |
2000 |
|
|
|
Individual Members |
25% |
500 |
$45 |
$22,500 |
|
Student Members |
25% |
500 |
$30 |
$15,000 |
|
Family Members |
50% |
1000 |
$100 |
$1,00,000 |
|
Total Membership Fees |
|
|
|
$1,37,500 |
Total Court Fees:
|
Particulars |
Hourly Court fees |
No of Courts |
No. of Days |
Usage % |
Hours |
Total Fees |
|
Peak Season- Prime Time |
8 |
10 |
181 |
100% |
4 |
$57,920 |
|
Peak Season- Non Prime Time |
12 |
10 |
181 |
60% |
8 |
$1,04,256 |
|
Off Season |
6 |
10 |
184 |
40% |
12 |
$52,992 |
|
Total Court Fees |
|
|
|
|
|
$2,15,168 |
Total Sales Revenue Earned:
|
Particulars |
Amount |
Weight age |
|
Membership Fees |
$1,37,500 |
38.99% |
|
Court Fees – Peak Season |
$1,62,176 |
45.99% |
|
Court Fees – Off Season |
$52,992 |
15.03% |
|
Total Fees Collected |
$3,52,668 |
100% |
The expectation of club under new membership plan is to earn sales revenue as depicted in the table below:
Revenue generated from prior Membership:
|
Particulars |
Current Member |
% of Continuation |
% of Active Members |
Annual Fees |
Total Fees |
|
Individual |
500 |
70% |
45% |
250 |
$39,375 |
|
Student |
500 |
70% |
45% |
250 |
$39,375 |
|
Family |
1000 |
70% |
45% |
450 |
$1,41,750 |
|
Total Fees from Early Membership |
|
|
|
|
$2,20,500 |
Revenue generated from General Membership:
|
Particulars |
Current Member |
% of Continuation |
% of General Members |
Annual Fees |
Total Fees |
|
Individual |
500 |
70% |
55% |
250 |
$48,125 |
|
Student |
500 |
70% |
55% |
250 |
$48,125 |
|
Family |
1000 |
70% |
55% |
450 |
$1,73,250 |
|
Total Fees from Normal Membership |
|
|
|
|
$2,69,500 |
Total Sales Revenue Collected:
|
Particulars |
Amount |
Weightage |
|
Membership Collected: |
||
|
August-September |
$2,20,500 |
34.45% |
|
October |
$2,69,500 |
42.11% |
|
March |
$1,50,000 |
23.44% |
|
Total Membership |
$6,40,000 |
100.00% |
Table below provides with the impact of new membership plan on sales revenue that are periodic:
|
Particulars |
Current Plan |
New Plan |
Increase/ (Decrease) |
|
Revenue: |
|||
|
Pre-Received (Aug-Sep) |
$0 |
$2,20,500 |
$2,20,500 |
|
October-April |
$2,99,676 |
$4,19,500 |
$1,19,824 |
|
May-September |
$52,992 |
0 |
-$52,992 |
|
Total Membership |
$3,52,668 |
$6,40,000 |
$2,87,332 |
Cash Flow Analysis
As depicted from the table above that implementation of new plan will help in increasing sales revenue by amount $287,332. It can also be stated from the computation of above figures that lion shares of expected sales can be generated by club within the month of October.
New membership plan of chub generated higher sales revenue compared to existing plan. Some of the factors assisting in plan evaluation are listed below:
- Under the new plan, there will not be any generation of court fees; however, it will be possible to collect the fees within first or second month. Therefore, it can be helpful on part of management in preparing periodic recording of revenue and reducing the cost of collecting court fees. Evaluation process can incorporate such reduction in costs (Lavia and Hiebl 2014).
- The existing membership fees are lower than the fee under the new plan and there is a possibility that it will lead to loss of members. Such higher fees might not be affordable mainly by students who are not financially independent and it will be difficult for them to have the renewal of their membership plan. Therefore, it would be better to seek feedbacks about the new plan regarding its fees and at the same time, benefits should also be explained to them. Feedback would help in getting proper feedback for evaluating the outcome of the plan.
- Promotion of plan should be accompanies by conducting campaign by club and while evaluating the plan outcome, this cost of promotion should be incorporated along within the cash flows and net revenue generated.
- It is perceived by management of club that new member will be able to replace the members who have been lost. As per the expectation, it is also ensured that losses are fulfilled because otherwise, their expected revenue generation will not be achieved.
Conclusion
From the above discussion, it can be inferred that activity based costing provide with benefits in terms of activities and operations of business of Lamington. Cause and effect of business can be easily established with the implementation of this particular costing method. Users will be able to analyze and understand the costing techniques in better way as it reveals the accuracy of costs. It can be concluded that business owner are able to derive benefits in terms of better and informed decision making. Furthermore, organization has been able to arrive at better decisions with the analysis of cash flow statements. Implementation of new membership plan would provide business with several benefits and is capable of generating more business.
References and Bibliography list:
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.
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), pp.414-428.
Gholami, S., Hariri, M. and Akbari, P., 2014. Innervation and moan review process, from the perspective of law, and knowledge of management accounting.
Granlund, M. and Lukka, K., 2016. Investigating highly established research paradigms: Reviving contextuality in contingency theory based management accounting research. Critical Perspectives on Accounting.
Horton, K.E. and de Araujo Wanderley, C., 2016. Identity conflict and the paradox of embedded agency in the management accounting profession: Adding a new piece to the theoretical jigsaw. Management Accounting Research.
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized enterprises: current knowledge and avenues for further research. Journal of Management Accounting Research, 27(1), pp.81-119.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-248.
McLean, T., McGovern, T. and Davie, S., 2015. Management accounting, engineering and the management of company growth: Clarke Chapman, 1864–1914. The British Accounting Review, 47(2), pp.177-190.
Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.
Nuhu, N.A., Baird, K. and Bala Appuhamilage, A., 2017. The adoption and success of contemporary management accounting practices in the public sector. Asian Review of Accounting, 25(1), pp.106-126.
Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), pp.304-314.
Taylor, L.C. and Scapens, R.W., 2016. The role of identity and image in shaping management accounting change. Accounting, Auditing & Accountability Journal, 29(6), pp.1075-1099.
Thomas, T.F., 2016. Motivating revisions of management accounting systems: An examination of organizational goals and accounting feedback. Accounting, Organizations and Society, 53, pp.1-16.
Van der Stede, W.A., 2015. Management accounting: Where from, where now, where to?. Journal of Management Accounting Research, 27(1), pp.171-176.
Van der Stede, W.A., 2016. Management accounting in context: Industry, regulation and informatics. Management Accounting Research, 31, pp.100-102.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
