Questions:
1. Importance of management accounting and difference with financial accounting?
2. Different classification of costs [types, behaviour, function and relevance?
3. Variance analysis and examples – limitations?
4. Identification of different types of operational budgets and advantages of preparing those budgets?
Answers:
Introduction
The report will present the importance of management accounting of a manufacturing company – Imperial Tobacco, UK. The difference between management accounting and financial accounting will be discussed in this report so that the management of the company may understand the importance of management accounting in the real world. The different cost classifications will be discussed here from the point of view of behaviour, function and relevance. The report will consist of discussing the significance of variance analysis as well as its limitations. Some of the variances will be explained here as per the major requirement in a manufacturing company. The last stage of the report will express the concern over different operational budget as well as their efficiency to prepare in organisational context.
1. Importance of management accounting and difference with financial accounting
The importance of management accounting is to prepare the decision module for the managers in operation. The complex operations of the business could be derived by using the techniques of management accounting. The application of these techniques in business provides the managers to determine the efficiency of the operations in different segments (Bai 2015). Further, it also provides the managers important and relevant information regarding the control of the business activities. According to Zhang (2015), management accounting is a great tool to control the internal financial situation of the firms. It provides internal information such as costs of every step or action in a firm’s activities. Management accounting helps the managers to control the costs as well as to make important operational decisions to meet the objectives. Imperial Tobacco is a manufacturing company where the differentiation of the products are from tobacco based materials. However, the management control over the operation is possible by introducing the management accounting for the different divisions of the company.
The main difference between management and financial accounting is the users of the information in industry. The first one is relevant to the internal users like employees while the latter is used by the external stakeholders (Arroyo 2012). Financial accounting deals with the end results while management accounting helps to control the internal cost of the operation. The presence of financial reporting covers the entire financial performance of the firm while the other one consists of departmental costs only. The management accounting helps to get the prediction of future as the techniques takes the current information for preparing the accounts. However, financial accounting information is based on the past performance of the companies (TerBogt and Scapens 2014). The major contribution of management accounting is to drive the goals of the business while financial accounting verifies the monetary information of the business.
2. Different classification of costs [types, behaviour, function and relevance]
The costs classification is mainly distributed by its application in the operation. As opined by Kaplan and Atkinson (2015), the different ways of cost classification allows the managers to use the information in operation in different ways. Some of the costs are useful in making decision while some of them help in controlling the expenses. Additionally, the functions of different departments can be understood by the costs incurred for the respective departments.
The cost-classification is made by the types of costs in the manufacturing. There are many examples in management accounting that classify the costs by types. Types of costs provide the traceability of the expenses of the operations. Labour, material, cost of running machinery are the examples of types of costs. The expenses related to the costs of goods sold in the business are a rich example of types of cost in manufacturing industry (Otley and Emmanuel 2013). For manufacturing operation of Imperial Tobacco, the materials are tobacco and papers mainly. Therefore, the costs associated with materials like tobacco and papers are measured as the material cost. Direct labour and overhead cost in manufacturing area are associated with the time provided by the staff function in the factories. This is indirect labour cost of manufacturing the tobacco based products. The indirect cost like machineries operating expense is a typical classification in manufacturing that evolves as the expense related to operation directly (Malmi 2016).
Ward (2012) said that the behaviour of the costs on the basis of different level of activities in the operation was observed in any firm. The behavioural classification of the costs is based on the activity level of the operation of different departments. Fixed cost, variable, semi-variable and stepped fixed costs are the main examples in this regard where the costs are classified with different level of activities. Fixed cost is fixed for any level of activities unless it changes after a certain level of activity. It becomes stepped fixed cost. Variable cost varies with the change in the level of activity in operation. The semi-variable cost behaves like fixed for certain level of activity and starts changing after that level of activity (Parker 2012).
The functional costs like cost associated with R&D, marketing, training, manufacturing cost are the examples in practical field. The cost associated with the overall activities of the business is known as the cost to the function. The particular function of the business can be evaluated by this costing method. In this way, the particular section of the operation can be found in financial measurement to control the functional cost of the operation. Additionally, the expenses related to R&D is also a functional cost as R&D is a different function in the firms (Chak and Fung 2015).
Relevance of the cost in different operation provides the managers to make important decision related to the business. The decision-making process is crucial in business as it can change the horizon of the business as well as the operational strategy of the firms (Bennett, Schaltegger and Zvezdov 2013). The cost associated with shutting down of any division may change the expenses related to wages of the labours. Therefore, the planned shutting of the division may be relevant to the labour cost of the operation. However, the prepaid rent for the land of that division may not be relevant in this case to make any effective business decision. Relevant cost helps in making decision for future. The managers normally try to make decisions in operation by measuring the relevance of the cost in decision-making and the activities of business (Hiebl, Feldbauer-Durstmüllerand and Duller 2013).
3. Variance analysis and examples – limitations
Variance analysis is the technique to control the cost of operations in a business. According to Arroyo (2012), variance of different costs or the price may generate important information for the managers to take appropriate action in controlling the operating cost or other activities. However, Bogt and Scapens (2014) said that variance was a finding of deviations in financial matters with its standard mentioned at the initiation of the activities. The variance analysis may provide the managers to rectify the deviations in time to generate the fruitful results in the business operation. It helps them to grow the opportunity in the business as well as usage of the resources effectively (Tucker and Lowe 2014). There are many types of variances present in the business. Some of them are based on the cost or units as targeted in the budget. Additionally, the efficiency is also measured using both the unit and cost/price variances of any type of cost. It provides the managers to find the inefficient activities in the operation. The managers may take appropriate actions to improve the efficient segment for obtaining the desirable benefit from the business. In this regard, the main change is observed in analysing the variance of sales (Anderson, Asdemirand and Tripathy 2013). The sales variance can be of many types such as volume, mix, quantity and price variance. The resource usage is measured by analysing the material variance in the operation (Henri, Boiraland and Roy 2015). The material variances are mainly based on the usage and the price to buy the materials of the production. These two variances are important in understanding the deviation between actual cost and standard cost of the production and the efficient behaviour of the manufacturing (Ratnatunga, Michaeland and Balachandran 2012).
The labour variance of the manufacturing is based on the direct and indirect labour. This is based on analysing the efficiency measurement of the labours to produce the end products in the manufacturing. In addition to this, the variance measures the idle time of the labours when a manager may use them in other activities. Therefore, labour variance provides the manager a chance to improve their scheduling of manufacturing as well as resource usage in the business (Bai 2015). The last cost variance in manufacturing is the overhead variance, which is used to determine the efficient application of indirect cost in manufacturing. As opined by Michalski (2013), overhead cost of production may not yield the relevant profit margin due to high expenses in this matter. The indirect costs are associated with the staff function of the manufacturing. Thereby, it is normal to lower down the unproductive cost in manufacturing (Potts and Ankrah 2014). Thereby, the efficiency of overhead variance may generate the measurement of effective decision-making by the management of the firms.
Variance analysis has many drawbacks. Therefore, many analysts do not find the variances in different manufacturing costs. The main reason is the measurement technique of variance analysis in financial aspects of the manufacturing. According to Liuet al. (2012) that variance analysis is based on the standard costing of the different aspects of the resources and the activities of the business. Thereby, the measurement of variance may not be truthful for the future of the business. It also reduces the quality of the products as labours reduce their attention on individual product.
4. Identification of different types of operational budgets and advantages of preparing those budgets
Operating budgets help the managers to introduce the standard target of operating costs as well as the income from the business. Yuen (2014) found that operating budgets may help the business to set the target for a predefining period. However, it also helps in controlling the different activities of the operations (Sawyer 2015). The operating budgets must be of different types – sales budget, cash budget, cost of production and material budget are the standard operating budget. The operating budget is mainly prepared for a month and the adjustment among the operations of the different months can be obtained by controlling the deviations in the actual figures. The relevant operating budget is prepared with the activities associated with the manufacturing of a firm. It helps the managers to control the inventory, payable and receivables of the business and sustain a healthy balance sheet at the end of the period (Zhang 2015). The operating budget provides the key information on forecasting of output from the different activities as well as the controlling opportunity to the manager due to periodic reviewing system of the budget with the actual performance of the operation. The operating budget helps to take the appropriate action in the relevant section of the operation to improve the operational situation (Glackin 2013).
The sales budget starts with the sales target of the business. However, the sources of the goods is not budgeted in this budget. The forecasting of the sales in future is based on the past data of revenue. Additionally, the cost of sales as well as the material sourcing would have different budget (Klychova, Faskhutdinova and Sadrieva 2014). In this budget, the material cost is forecasted so that the actual cost of materials can be controlled by the managers. The revenue generated from the above stages, the overhead budget comes into the action. It provides the cash generated from the budget and the input of cash budget can be obtained from this budget. The budgetary control can maintain the operation in line with the objectives set by the management at the start of the period. However, the reverse order of operating budget is not possible as the output of cash budget may not be an input of sales budget (Jeston and Nelis 2014). Therefore, using different operating budgets provides the managers to control the different activities in business minutely. It helps them to increase the operating efficiency of the activities.
Conclusion
The above report has explained the importance of management accounting in a manufacturing company like Imperial Tobacco. In addition to this, the major difference between financial and management accounting has been deduced here too. The report has explained the classification of cost and its applications. The different variances of costing of the operations have also been discussed in this report. The importance and the limitations of the variance analysis was described too. Additionally, the limited usage of variance in the business was explained in the report. The last segment of the report also prepared the advantages of applying different operating budget to make the business profitable and efficient.
References
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