Management Accounting Present Business Environment

Question: Discuss about the Management Accounting for present business environment? Answer: Introduction The importance of management accounting has grown in the present business environment throughout the world. Management accounting can be said to the art of interpreting the financial results of a company. This interpretation has become very important as valuable conclusions are derived from a practice that caters to the decision maki8ng needs of a company. Management accountants help the management of the company to make important decisions related to investment, finances, operational efficiency etc. Financial results are prepared by accountants while management accountants analyse and interpret information available from such financial statements (Kaplan and Atkinson 2015). For the purpose of this report, one of the biggest manufacturing companies of the UK has been chosen, i.e. Unilever (core.sitename 2016). The objective of this report is to advise the company about increasing their operational efficiency by controlling their costs. The ultimate aim of this cost control is to incr ease the profits of the company. In essence, there are two important factors that are to be dealt with, first, cutting costs of the company and second, increase operational efficiency and increase the profits. This report is directed towards achieving these two goals by emphasizing on the importance of management accounting and its practices with respect to the chosen company. Importance of Management Accounting in Unilever As mentioned earlier, the main responsibility of a management accountant is to interpret the financial statements of the company and enumerate his/her findings in a report that will assist the management of the company to take important decisions related to their business activities (Accountingformanagement.org 2016). The financial results stipulate the changes in financial figures of the present year and that of the previous year. For example, the operating profit of the company is 7515 million Euros as compared to 7980 million Euros in 2014 (core.sitename 2016). It is the function of a management accountant to analyse and bring out the reasons for such a change. Based on the analysis, a management accountant makes forecasts about the future course of the business. These interpretations help the management of the company to take important decisions (Otley and Emmanuel 2013). This is true because the Board of the company has many more crucial responsibilities to perform and therefore , these interpretations form an important source of information to them and help them in imparting their responsibilities. Difference between Financial Accounting and Management Accounting Though the two disciplines are very closely related, both do have a few differences. Financial accounting is concerned with drawing up of financial statements based on the activities of the company while management accounting interprets the financial statements (Ward 2012). Apart from this, there are several other differences as stipulated in the table below: Financial Accounting Management Accounting Information used by external stakeholders of the company. Information is used within the organization by the management, employees and senior personnel. Displays financial results at the end of a particular financial year and states the financial position of the company. It caters to the needs of the management by helping them to make important decisions. It also helps to strategies and fixing of objectives for the organization. There is a legal obligation under the Companies Act 2006 to prepare financial accounting reports. There is no legal obligation for a company to chalk out managerial accounting reports. It is related to the overall performance of the organization. It is related to the results of individual departments of the organization. It focuses on the results of the present situation and that of the previous year/quarter results. It focuses on the results of the present year/quarter and makes forecasts for the future. The format to be followed in filing financial results is fixed under the specific legislative framework. There is no fixed format of a management accounting report as it is used internally and is more informal in nature. International accounting standards such as the IFRS and GAAP apply to financial accounting and financial reports. As these reports are used internally to help make managerial decisions, international standards do not apply to them, as there is no legal requirement of such sort. Preparations of financial statements are required to be done at a stipulated time, i.e. quarterly, half-yearly and/or annually. Management accounting reports are prepared according to the requirements of the organization. Classification of Costs Cost is said to be a sacrifice of important resources to obtain a benefit or any other resource. Generally, in the business world and especially in the manufacturing industry, cost is related to the monetary value of an element. In the course of business, there are a lot of expenses that a concern has incur while procuring materials and manufacturing products and services (Van der Stede 2016). To get a clear idea about the total costs involved in manufacturing a product, it becomes imperative to classify costs under different heads. This helps in taking important decisions related to the manufacturing process. In essence, costs may be classified in many ways depending upon the nature of the cost. Classification based on Types of Cost Product costs are costs that can be assigned to the manufacturing process and can be identified in the financial reports. There are generally the following types of costs: Material Costs: These are costs that a manufacturing organization has to incur in order to procure raw materials for the manufacturing process. Material costs can be further classified into the following: Direct Material: These costs can be directly attributable to cost of the product. Indirect Material: These costs cannot be directly attributable to the final product. Labour Costs: This represents the cost of labour time spent for manufacturing the products. This can also be sub-divided into direct and indirect labour costs. Direct labour costs are the cost that can be directly attributed to the final product and indirect labour is the opposite of that (www.tutorialspoint.com 2016). Overhead Costs: These are costs that a manufacturing concern has to incur other than material and labour costs. For example, an accountants salary, electricity expenses, cost of stationery, depreciation of fixed assets, etc. Classification based on Behaviour of Costs Classification of costs based in their behaviour means the manner in which costs behave with a change in the level of production done by the manufacturing concern. There are mainly three types of costs under this category as follows: Fixed Costs: These costs remain fixed or constant with the change in the level of output. Therefore, these costs are independent of the output level. For example, rent paid for factory premises remains constant whether the output level of the company is zero or thousand units per hour. On the other hand, fixed costs per unit decreases when there is an increase in the level of output as the overall fixed cost amount remains the same (Markowitz 2014). Variable Costs: These costs have a direct relation to the level of output. Variable costs increase with the level of output and vice versa. This means there is an increase in the overall variable cost amount when there is an increase in the total production level. For example, the cost of raw materials increase when there is an increase in the number of units produced by the manufacturing company (Accountingexplained.com 2016). Mixed Costs: Mixed costs are also known as semi-variable costs having both the characteristics of fixed and variable costs. For example, telephone expenses consist of a fixed rental as well as call charges per minute (Diffen.com 2016). Since mixed costs are not much useful in their original form, they are split according to their fixed and variable components by using behavioural analysis and attributed accordingly. Classification based on Functions Costs can also be classified according to their activities in an organization. Classification based on function takes the following forms: Production Costs: These costs relate to the production or goods and services of an organization. Both direct and indirect costs are included within the overall production costs of the organization. Administrative Costs: These costs are incurred in the general administration of the whole business concern and the general management of the business. These are mostly indirect in nature and are also known as administrative overheads (In and gassim 2015). Selling Costs: These costs are incurred in order to sell goods and services manufactured by the organization. These are also known as selling overheads and are indirect in nature. Distribution Costs: These are expenses that are incurred by an organization in the course of distributing the manufactured product to their selling points. These are also indirect in nature. Research and Development Costs: These are costs that an organization has to incur for developing a new product or service. The amount spent on researching new products and developing them come under this head. Variance Analysis Every organization draws up a budget with respect to their operating activities. At the end of the financial year, the actual figures are compared with the budgeted figures in order to find out any deviations in the figures. In managerial accounting, variance analysis is actively used to find out the differences in the budgeted figures. It is also used to analyse the differences in the financial figures (Ziaja et al. 2016). By the help of variance analysis, the performance of the organisation is measured and further policies and strategies are formulated accordingly. Variance analysis is an important tool that is used by the management in order to forecast and make important managerial decisions. The budgeted figures serve as a standard with which the actual figures are compared and analysed (Kfknowledgebank.kaplan.co.uk 2016). Types of Variance Analysis In the course of business operations, the management accountant does different types of variance analysis. These types of analysis are dependent on the various business activities of the organization. The most common types of variance analysis are as follows: Sales Variance The difference in the budgeted sales figures and the actual sales figures are analysed with the help of sales variance. It takes into account the selling activities undertaken by the organisation (Accounting-simplified.com 2016). Material Variance This relates to the amount expended on materials to be used for production. It analyses whether the actual cost of materials were more or less than the budgeted figures and the manner in which it influences sales and revenue generation. Labour Variance This relates to the expenditure incurred on labour. It takes into account the total amount of budgeted labour hours and the rate of each hour and compares it with the actual amount of expenditure incurred in this regard. Overhead Variance Overhead variance takes into account the budgeted overhead amount and the actual overhead expenditure done by the company in the current year. The reasons for the difference are critically analysed and the standards are reviewed and re-visited. Problems and Limitations of Variance Analysis Following are the problems faced by management accountants while undertaking variance analysis: Performance Measurement The performance of key personnel and managers often pose a threat to variance analysis. Proper care should be taken by the managers while working out variances by taking into account authentic data so that the analysis works out to be exact. Improper Accounting of Costs In order for the variance analysis to be successful, accounting records have to be arrived at in a proper manner. The financial data provided for the analysis forms the base of the entire process (Hemmer and Labro 2016). If accounting of costs are not done in a proper manner, the analysis will become inaccurate. Poor Setting of Standards The standards and the budgeted figures have to be logical and practicably implementable. If the contrary happens, the essence of variance analysis is lost. Therefore, it is utmost necessary, that the standards are established in a proper manner for the management to have a full and accurate evaluation of the business process (CIMA 2016). Operational Budgets Operational budgets are budgets that are related to the operational activities of a manufacturing concern. It is prepared annually and functions as a standard with which the actual operational results of the company can be measured and evaluated (CIMA 2016). An operational budget is very important as it influences the operational efficiency of the organization. It includes the total estimates of the resources that are required to carry out the manufacturing activities of the company. It helps in the overall business planning and forecasting of future performance of the concern (eFinanceManagement 2012). Types of Operating Budgets There are generally three different types of operational budgets as follows: Expense Budget: It stipulates the expected budgets during the budgeted year. It gives an idea about the total expenditure that is to be incurred by the organisation during the year. According to the expense needs, finances are arranged to finance the operating activities of the organisation. Revenue Budget: This budget identifies the expected revenue that the company will be earning during the budgeting year from its selling activities. This provides an idea about the income that the company is going to derive in the future and helps in tax planning (eFinanceManagement 2012). Profit Budget: A profit budget combines both the expense and revenue budget in a single statement to give the overall expected financial position of the company. This helps in formulating policies for growth of the organisation along with the maximisation of wealth of the shareholders (Accounting-simplified.com 2016). Conclusion It can be seen from the above discussions that management accounting plays an important role in achieving the objectives of a business organisation. It helps in policy formulation as it gives an actual interpretation of the financial statements of the company. A proper explanation of the financial statements is very important for the management to take proper decisions that will ensure profitability and longterm sustainability of the organisation. An important tool of management accounting is variance analysis. This helps in analysing the difference between the budgeted figures and actual figure during a budget period or financial year. This analysis helps an organisation to rectify its drawbacks and develop core competencies so that the solvency and profitability of the organisation is maintained. Recommendations Following are the recommendations with respect to Unilever and its management accounting practices: More emphasis has to be given to get departmental results related to their operations. Further breakdown of the budgeting period for individual departments Implementing an internal check system so that operational figures are arrived at in a proper manner References Accountingexplained.com. (2016).Cost and Cost Classifications | Types | Managerial Accounting. [online] Available at: https://accountingexplained.com/managerial/costs/ [Accessed 23 Mar. 2016]. Accountingexplained.com. (2016).Costs by Behavior: Fixed, Variable and Mixed | Managerial Accounting. [online] Available at: https://accountingexplained.com/managerial/cost-behavior/ [Accessed 23 Mar. 2016]. Accountingformanagement.org. (2016).Classifications of cost | Accounting For Management. [online] Available at: https://www.accountingformanagement.org/classification-of-cost/ [Accessed 23 Mar. 2016]. Accounting-simplified.com. (2016).Limitations of Variance Analysis Standard Costing. [online] Available at: https://accounting-simplified.com/management/variance-analysis/disadvantages-of-standard-costing-and-variance-analysis.html [Accessed 23 Mar. 2016]. Accounting-simplified.com. (2016).Variance Analysis | Formulas | Examples | Calculation | Importance. [online] Available at: https://accounting-simplified.com/management/variance-analysis/#definition [Accessed 23 Mar. 2016]. CIMA. (2016).Standard Costing and Variance Analysis. [online] Available at: https://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_standard_costing_and_variance_analysis_mar08.pdf.pdf [Accessed 23 Mar. 2016]. Cimaglobal.com. (2016).What is management accounting?. [online] Available at: https://www.cimaglobal.com/CIMA-in-business/What-is-management-accounting/ [Accessed 23 Mar. 2016]. core.sitename. (2016).About Unilever. [online] Available at: https://www.unilever.com/about/who-we-are/about-Unilever/ [Accessed 23 Mar. 2016]. core.sitename. (2016).Annual Report and Accounts 2015 Downloads. [online] Available at: https://www.unilever.com/investor-relations/annual-report-and-accounts/annual-report-and-accounts-2015-downloads.html [Accessed 23 Mar. 2016]. core.sitename. (2016).Annual Report and Accounts Overview. [online] Available at: https://www.unilever.com/investor-relations/annual-report-and-accounts/ [Accessed 23 Mar. 2016]. Diffen.com. (2016).Financial Accounting vs Management Accounting - Difference and Comparison | Diffen. [online] Available at: https://www.diffen.com/difference/Financial_Accounting_vs_Management_Accounting [Accessed 23 Mar. 2016]. eFinanceManagement. (2012).Classification of Costs based on Functions / Activities. [online] Available at: https://www.efinancemanagement.com/costing-terms/classification-of-costs-based-on-functions-activities [Accessed 23 Mar. 2016]. eFinanceManagement. (2012).Types of Costs and their Basis of Classification. [online] Available at: https://www.efinancemanagement.com/costing-terms/types-of-costs-and-their-basis-of-classification [Accessed 23 Mar. 2016]. Hemmer, T. and Labro, E., 2016. Productions and Operations Management Management Accounting. In, L. and gassim, m. (2015).Cost Classification, Variable, fixed, semi-variable costs. [online] Opentuition.com. Available at: https://opentuition.com/fia/ma1/cost-classification/ [Accessed 23 Mar. 2016]. Investment Small Business Accountants. (2010).VARIANCE ANALYSIS: MEANING, ADVANTAGES AND DISADVANTAGES - Investment Small Business Accountants. [online] Available at: https://www.accountantnextdoor.com/variance-analysis-meaning-advantages-and-disadvantages/ [Accessed 23 Mar. 2016]. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Kfknowledgebank.kaplan.co.uk. (2016).Kaplan. [online] Available at: https://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Variance%20Analysis.aspx#_x003C_h4_x0020_align_x003D__x0022_left_x0022__x003E_Materials_x0020_variances_0_1_0_2_0_0_0_0_0_0_0_0_0_0_0_0 [Accessed 23 Mar. 2016]. Markowitz, H., 2014. Meanvariance approximations to expected utility.European Journal of Operational Research,234(2), pp.346-355. Otley, D. and Emmanuel, K.M.C., 2013.Readings in accounting for management control. Springer. Van der Stede, W.A., 2016. Management accounting in context: Industry, regulation and informatics.Management Accounting Research. Ward, K., 2012.Strategic management accounting. Routledge. www.tutorialspoint.com. (2016).Cost Accounting Classification of Cost. [online] Available at: https://www.tutorialspoint.com/accounting_basics/cost_accounting_classification_of_cost.htm [Accessed 23 Mar. 2016]. Ziaja, A., Antoniadou, I., Barszcz, T., Staszewski, W.J. and Worden, K., 2016. Fault detection in rolling element bearings using wavelet-based variance analysis and novelty detection.Journal of Vibration and Control,22(2), pp.396-411.