Cost accounting systems (actual, normal and standard costing)

With the ramified economic changes and complex business structure, financial management plays an important role for the business success. There are several financial tools which could be used by the investors to analysis whether the particular company has potential to create value on the investment or not.  It is observed that the evaluation of the financial statements is required to identify whether the company is performing well in the market or not. In this report, critical understanding has been made on the working of the Tech (UK) which has been working as manufacturing company since very long time. There are several financial tools have been used that are given in this report in the different report tasks. This report emphasises upon the insight of the managerial accounting system, budgeting and other managerial tools that could be adopted by the Tech (UK) for the effective functioning of the organization.

Management accounting is the process to evaluate the available financial information before making investment decision. This management accounting helps managers to take the imperative decisions and assists employees to take tactical decision in organization

  Management accounting is used by the managers of the Tech (UK) to understand the concept of the managerial accounting and helps in taking the effective financial decision making in long run.

 (i)  Definition of Management Accounting and Differences between the managerial accounting and Financial Accounting

1. It could be inferred that the Management accounting is the tool or measure which analysis all the financial and costing data of the company to make the more informed decision on the basis of available information.
2. It assists managers to make the effective financial decision making and implement the progressive strategies to win over the market competitive market (Weygandt, Kimmel, and Kieso, 2015).

Differences between the managerial accounting and Financial Accounting

Details	Managerial Accounting	Financial accounting
Definition	Management accounting is the tool or measure which analysis all the financial and costing data of the company to make the more informed decision on the basis of available information.  It assists in making more imperative decisions for the long term benefits.	It assists in making the financial decisions such as accepting the project and investing in particular stocks.
Object	It improves the existing working by implementing the effective strategic decision making.	It provides the financial information to the managers to make long term financial decision.
Form of function	It sumarised the details of the company and implement the effective strateic progrma to win over the market.	It provide the proper understanding for the requird capital in the particualr business projects.
Users	It is useful for the employees to make the tactical decisions.	It is used by the internal and external stakeholders.
Time Frame	The time frame of the required information is based on the uses and deployment of the information in the particular decision making.	The financial report is prepared in the year end.

With the ramified changes in time, managerial accountants uses the imperative accounting information to make the effective decision making to mitigate the long term business issues.  It develops the business of Tech UK limited in the long run. It is considered that Tech UK limited could use this accounting information to make the long term decisions such as strategic alliance, accepting the projects and expanding the business in long run.

There are several uses of the accounting information which could be used by the Tech UK for the effective business functioning (Jordan, 2014).

1. Estimation of the future results- The management accounting information helps in identifying the future problems and issues which managers will face.  It helps managers to prepare the effective decision making to mitigate eh future problems at spot.
2. The Management accounting information also assists in identifying the variances which arise due to the differences in the expected and actual result.  
3. It helps in determining the inflow and outflow of the cash in the business.
4. It also identify the rate of return and capital employed in the business. It helps in dettermining the futrue cash flow and required cost of captial in business.

It is evaluated that the accounting system of the Tech UK limited estimates the cost of the products and return on capital employed.  The cost of the capital and return on capital employed could be used by the organization to control the cost of the business. It becomes complex to determine the overall cost of the business if company does not use the proper management accounting.  The main use of the cost accounting system is to lower down the overall cost of the production which eventually helps company to increase the overall return on capital employed (Jordan, 2014).

Use of budgets for planning and control purposes

This actual cost is the cost incurred for the effective business functioning and injecting the capital in the operating works of the Tech UK. It includes payment for the raw material and labour cost.

Normal Costing

The Normal costing of the products is determined by using the payment to labour and material added by the overhead expenses made over the cost of the production. The accounting system assists in implementing the effective decision making (Flannery, 2016).

Standards work cost

The computation of the standard cost is done by using the proper accounting method and deducting the estimated cost form the actual cost incurred. The recorded of the variance between the actual and estimated cost is done by using the standard work cost.

Inventory is required to be managed for the effective level of working in organization. Effective inventory management work system assists in reducing the overall cost of the business and increasing the overall business outputs.  The inventory management work system assists in implementing the proper inventory management in business. It determines the inventory turnover, minimum and maximum stock and the cost of capital increased due to the blockage of inventory. 

The job costing system is used to identify the specific products and groups of the products. It is used to determine the job costing to the mangers and evaluating the business functions program. This type of the job costing system is suitable when there is lot of products cost is there to determine.  This job costing is the most suitable for the organization which have high complex business recording system. It assists in bifurcating the costs in the different work process.

It is evaluated that managerial accounting is the process of using the financial and cost accounting information for the effective decision making.  There are several types of the report is prepared for the analysis.

1. Balance sheet and income statement- The financial reports helps in identifying the capital available and resourced used in the business functioning of organization. The financial information helps managers to determine whether the accepted projects will give good amount of return on investment or not.
2. Job Costing sheet and Cost Report- This sheet reflects the costing of the particular jobs and implemented work. It assists in implementing the effective decision making and identifying the areas of the expenses made in the particular project.  
3. Inventory record system report- It helps in setting the proper track record of the inventory of the company. It assists in management of the company and implemented the strategic work for the better handling of the inventory of the organization (Ehiedu,2014

1. Accounts Receivable Aging Report- It is the list which is accompanied with the unpaid customers details, customer invoices and memos ranges which helps in recording of the credit sales.
2. Accounts Payable aging Report–  It is the report which covers all the detail and list of the accounts payable of company. It shows the time period, amount of credit purchase and payment amount to be paid to account paybles.

(ii) Why it is important for the information to be presented in a manner that must be understood

It is evlauted that each and every person should present their infommraton in such a way which must be understood by others. It is the core objective of shared information. . If the shared information becomes difficult to understand by others then it will negatively impact the shared information. Therefore, if company wants to share its imperative information with its stakeholders then the shared information must be given in such a manner which is easy to understand by the others.  If they fail to understand the information then it will negatively impact the investor’s decisions and will render company less transparent in terms of sharing required information (Siguenza-Guzman et al., 2016).

Application of the Balanced Scorecard approach for responding to financial problems

Hence, Proper use of methods and tools plays imperative role in sharing information with the stakeholders.

There are several benefits that could be used by Tech (UK) Limited by using the management accounting information in its business.

• It will help managers of the Tech UK to take all the imperative decision and develop an effective decision making system.
• It will assist company to reduce the overall cost of productions and eventually increase the overall profitability in determined approach.
• It also assists in maintain the effective inventory management program and implement the inventory management program.
• It helps in prepraito of the job sheet for the employee and unit per cost of the operating work department of the Tech (UK)
• It increases the profitability of the business by reducing the overall cost of capital of business.

1- Statement reflecting cost of per units of the Tech (UK) Limited:

Particulars	Amount per unit
Direct-labour cost per unit	£ 5
Direct-material cost per unit	£ 8
Variable-production o/h per unit	£ 2
Fixed-production o/h incurred in the month	£ 15,000
Total-units manufactured in a month	2000 units
Fixed-production o/h per unit [£ 15000 / 2000 units]	£ 7.50 per unit
Standard production cost [£ 5 per unit + £ 8 per unit + £ 2 per unit + £ 7.50 per unit]	£ 22.50 per unit and per month

2- Calculation of Total Cost of Production of Tech (UK) Limited:

Particulars	Amount
Cost of production (Standard)	£ 22.50 per unit
Total units produced in a month	2,000 units in a month
Cost of production [2000 units X 22.50 per unit]	£ 45,000

3 – Calculation of Total Closing Stock of Tech (UK) Limited:

Particulars	Units
Total production in a month	2000 units
Total units sold in a month	1500 units
Closing stock [2000 units – 1500 unit]	500 units

Income Statement of Tech (UK) Limited using Absorption Costing

Particulars	Amount
Sales [15,000 units x £ 35 per unit]	£ 52,500
Cost of goods	£ 45, 000
Add: Opening stock	Nil
Less: Closing stock [500 units X £ 20 per unit]	(10,000)
Gross Profit	£ 17,5000
Selling, Distribution, and Administration Expenses Fixed expenses = £ 10,000 Variable expenses = £ 7, 875 (15 % of £ 52,500)	£ 17,875
Net Loss	(£ 375)

1- Statement showing the calculation of Production cost per unit of Tech (UK) Limited:

Particulars	Amount
Direct-labour cost	£ 5 per unit
Direct-material cost	£ 8 per unit
Variable-production o/h	£ 2 per unit
Total marginal Cost of Production [5 per unit + 8 per unit + 2 per unit]	£ 15 per unit
Total units produced in a month	2000 units
Total marginal Cost or variable cost of production [2000 units x £ 15]	£ 30,000

Income Statement of Tech (UK) Limited using marginal Costing

Particulars	Amount
Sales [15,000 units x £ 35 per unit]	£ 52,500
Cost of goods	£ 30, 000
Add: Opening stock	Nil
Less: Closing stock [500 units X £ 20 per unit]	(7,500)
Gross Profit	£ 30,0000
Selling, Distribution, and Administration Expenses Variable expenses = £ 7, 875 (15 % of £ 52,500)	£ 7,875
Period Cost Production overhead = £ 15,000 Selling, distribution, and administration = £ 10,000	(£ 25,000)
Net Operating Loss	(£ 2875)

Budgeting is the tool which is used to estimate the future expense and income of the business. It is prepared to estimate the amount of capital required to implement the strategies.

In the meeting of the Tech (UK) the senior manager prepared budget and asked employees to work as per the prepare budget to control the future expense and costing o the business. There are following details are given as below (Keel et al., 2017).

(a)Different types of budgets and their advantages and disadvantages

The Budget is used to estimate the future expense and income in the present.

.There is several budgets are prepared:

• Master Budget-It is the complete combined budget which is made at all levels of company. It gives details about the operating expenses, future sales, income and flow of cash in business. 
• Advantages:
• Gives overview of the financial results.
• Becomes easy for the future financial planning.
• It assists in decision making in long run.
• It is used for the Gap analysis.

Disadvantages:

• The amounts provided in this budget lacks specificity as these amounts are collectively represented.
• It becomes difficult to read a master budget. Updating of any information is not possible one it is prepared as the data is interlinked.

• Operating budget: It provides the future debt plans and operating expenses which company might have in the long run. IT shows the spending of money in the particular department (Allen, 2011).
• .

Advantages:

• Manage the requirement of the business.
• Project the future flow of cash in business.
• Reduce the financial leverage and increases the profitability of the business (Wyatt, 2012).

Disadvantages:

• It is time consuming process and increases the overall cost of the business.
• It considers only financial factors and avoids the possible non-financial information (Needles, Powers, and Crosson, 2013).
• Cash Flow Budget: This budget is prepared to determine the future cash inflow and outflow from the business. It assists in maintaining the flow of cash in near future.

Advantages: 

• It estimates the cash available in the business.
• It reduces the associated of the business.
• It reduces the overall cost of the capita of the business (Baños-Caballero, García-Teruel, and Martínez-Solano, 2014).

Disadvantages:

• It might distract the financial information negatively as it becomes hard to determent the cash and non-cash transaction in the prepared budget.  
• Cash budget may result to fraudulent activities if the prepared budget reflects the higher cash outflow and inflow. As mangers tends to take that excess in their pocket.
• Financial Budget: This budget is ideally used when company uses the capital budgeting tools to make the effective financial decisions.

Advantages:

• It provides the future outcomes at spot which eventually increase the effectiveness of the financial decision making (Ehiedu, 2014).
• Well planned business will identify the core issues which manager might face in its business.
• A Monthly audit plan and prepared budget helps in identifying whether the particular project would be viable for the company or not.  

Disadvantages:

• It considers only financial data and avoids the non-financial information.
• Time consuming process and increases the overall cost of the business.
• All the data and financial planning is interlinked. One mistake may destruct the complete budget (Flannery, 2016).

Budget is prepared to identity the future cost and expenses of the business. It includes the pricing and costing which might incurred in the production. It covers the costing, pricing sand inventory management policies of the Tech (UK) Limited (Grant, 2016).

1. Committed for the budget- It includes the financial experts who would be indulged in the preparation for the budget (Jordan, 2014).
2. Evaluating the previous performance- it evaluates the last production data and sold items.  
3. Cost Analysis- It includes the use of the job sheet, implementation of the proper strategic program and implements the proper strategic program which helps in identifying the cost of the process.
4. Pricing- It includes the pricing strategies such as price skimming strategy, production unit strategy and implemented work program which will be used to sell the products in market.
5. Coordination- It sets up the direct and indirect relation between the work program of the Tech (UK)
6. Communication-It sets up the proper communication methods between its employees and managers while preparing the work sheet (Mwangi, and Murigu, 2015).

Determination of the price of the products and services offered in market

1. Cost Plus pricing- It is the pricing method which is determined on the basis of the cost of the services offered in market.
2. Price skimming- The price skimming strategy is followed when company has strong brand image in market. It is used when to sell the products at premium rate.
3. Price penetration- The price penetration strategy is used to sell its goods and services at very low cost to increase the overall outcomes of the business and increase the business efficiency.

The proper planning is most required element to implement the strategies. Planning is required to prepare the budget. Budget is used to control and evaluate the costing of the business (Mwangi, and Murigu, 2015.).

Budget in planning- The budget provides the estimated cost and finance capital which might requires in the implementation of the decision. It gives the clear details about the finance and costing required to impellent the strategies.

The budget for controlling- The budget program is used by the mangers to control the cost of the business.  In the end, the final outcomes are compared with the prepared budget to identify the gap between both which eventually increases the overall outcomes of the business (Tseng, and Chiang, 2016).

Performance Measurement and evaluation

Explain ways by which the Balanced Scorecard approach suggested by the auditors can be used to respond its financial problem and compare this approach to another management accounting approach used in another organisation of your choice. You must provide relevant financial information about the other organisation you have selected for comparison. 

It is evaluated that improving the internal work functions could be improved by business by using the balance score card approach. This technique is used to set up the performance indicator and set four quadrants such as customer perspective and implement the strategic work program. It improves the existing work program in determined approach.

Comparison with another management accounting approach used in a different organization

It is the feedback management system. The main crunch of this measurement tools are that is requires clarification of the objectives in each working department. It also set the day to day tactical targets for the employees of the Tech (UK). It monitors the implemented strategic targets and goals (Weygandt, Kimmel, and Kieso, 2015). 

This tool helps in making the effective decision making and mitigates the future problems and financial crunch of the business.

Details	Target set	Measurements	Indicators	Steps to mitigate the issues
Financial Perspective	Increasing the revenue by 20%	Increase the production and sales	Use of financial statement and cost sheet	Adopting new machines and system devices in UK tech
Customers perspective	Satisfy clients’ needs in offered products	Increasing the quality of the work process system.	Focus on customization of the	Improve product mix and generate cost leadership strategy.
Internal process system	Re-Engineering of existing value chain activities	Increase the production	Set targets and goals	Install new system devices in the value chain activities.
Learning and growth	Hiring of experts employees. Use of different systems.	Use of training and development program	Strategic alliance with other organization	By using the strategic alliance with other organizations to reduce the cost of capital.

Activity-Based Costing v/s Balance Score Card

It is evaluated that the management accounting approach helps in addressing the problems of the traditional accounting system. It gives the ranking to the costs of the production of the goods on the basis of partition of the costing.  On the other hand, balance score card approach helps in identifying the financial and non-financial indicators which assists in implementing the strategic program in long run. Therefore, as referred by the auditors of the Tech (UK), balance score card approach is more suitable for the company to analysis the loss of the £ 1.5 Million in the last year (White, Sondh, and Fried, 2015).

The JB HI-FI Company has used Activity based approach and shown the good amount of increment in its financials.

Conclusion

With the increasing complexity, it could be inferred that each and every company needs to implement the proper strategic program and effective work functions to win over the market. These financial strategic tools help company to win over the market and implement the strategies to reduce the overall costing of the business. Tech (UK) Limited has to initiate its working towards the managerial accounting system in the manner discussed in the report for a better working. The use of the management accounting and financial information assists management to implement the strategies to cut down the business cost and increase the overall return on capital employed.

References

Allen, C., 2011. Benefits of Effective Quality Control Systems in Accounting Firms. The CPA Journal, 81(1), pp.52–57.

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Flannery, M.J., 2016. Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

JB HI-FI, 2017., Annual report., [Online]., Available from https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_JBH_2016.pdf  [Accessed 14th May, 2018].

Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.

Keel et al., 2017. Time-driven activity-based costing in health care: A systematic review of the literature. Health policy, 121(7), pp.755–763.

McKercher, B., Mak, B. and Wong, S., 2014. Does climate change matter to the travel trade?. Journal of Sustainable Tourism, 22(5), pp.685-704.

Mwangi, M. and Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Needles, B., Powers, M. and Crosson, S., 2013. Financial and managerial accounting. Nelson Education.

Siguenza-Guzman et al., 2016. Using Time-Driven Activity-Based Costing to Identify Best Practices in Academic Libraries. The Journal of Academic Librarianship, 42(3), pp.232–246.

Tseng, F.M. and Chiang, L.L.L., 2016. Why does customer co-creation improve new travel product performance?. Journal of Business Research, 69(6), pp.2309-2317.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis.

Wyatt, N., 2012. Budgeting and forecasting. Harlow: Pearson.