MANAGEMENT ACCOUNTING Management Accounting Systems Chapter 7 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
Types of MA Systems Cont …. 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 . Advantages Disadvantages Profitable or non-profitable activities can be disclosed Lack of uniform procedure and necessary actions can be taken to eliminate those This method will measure efficiency and helps to The usefulness of this system is maintain and improve it 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 Description management system 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.
Inventory Management System- Advantages and Disadvantages 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 When essential inventory runs out of stock, that can delay capabilities 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
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 This is very expensive as more clerical work is involved in available and the management can be able to determining cost elements of specific jobs control the efficiency of operations, machines and materials by suitable comparison When the job is completed, the cost under each The costs are ascertained, even compiled promptly, are element can be immediately ascertained and historical as they are compiled after the incidence compared with the selling price of the product in order to identify whether the job is profitable or not This will also help to plan production and estimate The cost complied under this system represents the costs costs of similar jobs that will be taken in future 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 May lead to loss of profit since production cost is retention 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 This report needs to be maintained in Labour reports will aid the Human Resource reports order to monitor departmental costs and department in the organisation to develop to control net profit of the company. their recruitment plan, salary packages, bonus payments, future labour requirements forecasts and so on. Cost This is the process of reporting separate analysis elements in a cost proposal, such as labour, equipment and materials that will Cost analysis will help the departments such produce a product or service and as administration as the company will keep the proposed profit. This will help the records of all the costs incurred in business company for better utilising available operations resources and also aids the organisations to demonstrate evidence of accountability
Status report This report is used to identify the This report will aid the production deviations from goals and strategies of department. Furthermore, the the company. Moreover, this can be production department can use this used for internal management report to prepare documentation of decisions completed projects. Inventory management systems Inventory re- This report is used to identify the level The procurement function can use order level and of inventory at which a re-order for an this report to get facts about the quantity report exact amount of inventory should be right time to reorder inventory, and placed. the right quantity. Material This will provide the items that need The operations function can use requisition to be picked from inventory and used this report to get a knowledge of note in the production process 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 This report will aid the finance and costs of a job. This will be accounting function. Moreover, these completed when the job is departments can use job cost sheet to closed. prepare financial statements and calculate the profit of the company Price optimising system Price This report can be used to fix a forecasting suitable price based on many reports variables. The marketing function can use the facts included in this project to determine marketing strategies
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