Management accounting

Unit code: H/508/0489

Unit 5 – Management Accounting

Assessor: Sujata suresh / kumutha krishnan

Professional Studies Department

Management Accounting

Module level: 4

Credit value: 15

Unit type: core

Professional Studies Department

Management Accounting

Learning outcome: 1

Learning outcome:

Explain the use of planning tools used in Management Accounting

topic: Using budgets for planning & control

Professional Studies Department

Management Accounting

Learning objectives

Upon completion of this Learning Outcome, students should able to explain the use of planning tools used in Management Accounting

To realize the above objective the student should be able to:

Demonstrate an understanding on application of budgets and alternative methods of budgeting

Explain the different types of pricing strategies

Explain the common costing systems and how cost systems differ depending on the cost activity.

Explain the application of PESTEL, SWOT, balance scorecard and Porter’s five force analysis in strategic planning process.

Management Accounting

Professional Studies Department

What is planning?

Planning forces management to think ahead systematically in both the short term and the long term. An organization should never be surprised by developments that occur gradually over an extended period of time because the organization should have implemented a planning process.

When expected changes are gradual, planning occurs in a fairly stable environment, and routine budget planning procedures may be used.

Planning Tools :

Budgets

Pricing and costing

Strategic planning

Management Accounting

Professional Studies Department

Budget – A Planning Tool

Budgeting is an essential tool for management accounting for both planning and controlling future activity.

A budget is a “quantified plan of action for a forthcoming accounting period” that can be set from the top down or from the bottom up.

Its objectives are to:

Ensure that the organization achieves its objectives

Encourage planning for the short and long term

Communicate ideas and plans for the employee and the organisation

Coordinate activities that work towards the common goal

Provide a framework for responsibility accounting

Establish a system of control for measuring performance

Motivate employees to improve their performance

Management Accounting

Professional Studies Department

Annual Budget

Management Accounting

Professional Studies Department

Benefits of Budgets

To assist with the achievement of the organization's objectives :The organization's objectives are quantified and drawn up as targets to be achieved within the timescale of the budget.

To compel planning: Planning forces management to look ahead, to set out detailed plans for achieving targets for each department, operation and (ideally) each manager. It should also help to anticipate problems.

To communicate ideas and plans: A formal system is necessary to ensure that each person involved is aware of what he or she is to do. Communication may be one-way, where managers give instructions to staff, or there might be a two-way dialogue where the staffs feedback their suggestions to management which may be incorporated into the formal plan.

Management Accounting

Professional Studies Department

Benefits of Budgets

To motivate managers to strive to achieve the budget goals:

by focusing on participation

by providing a challenge/target

To control activities:

by comparison of actual with budget (attention directing/management by exception)

management by exception is a process where a manager's attention and effort can be concentrated on investigating significant deviations from the expected results

To evaluate the performance of managers:

by providing a means of informing managers of how well they are performing in meeting targets they have previously set

Management Accounting

Professional Studies Department

Disadvantages of Budgets

It is difficult, if not impossible, to estimate revenues and expenses in a business enterprise realistically.

 It is not realistic to write out and distribute a company's goals, policies and guidelines to all the supervisors.

Budgeting places too great a demand of time on management, especially to revise budgets constantly. Too much paperwork is required for budgeting.

Budgeting takes away management flexibility.

The success of budgetary control depends upon the support of the top management. If there is lack of support from top management, then this will fail.

 A budget cannot be used as a substitute for management. According to Welsch,

“A budget is not designed to reduce the managerial function to a formula. It is a managerial tool”.

Management Accounting

Professional Studies Department

Budgeting Process

The complete budget preparation process is started with preparing sales forecast and then the following budgets:

Sales budget – Production budget (Material Budget – Labour Budget – Purchases budget – Overheads budgets) – Distribution and administration budget (R&D – Marketing & Selling costs …) – Financial budget (Cash budget – Budgeted Income Statement – Budgeted Balance sheet).

Functional budgets – examples include purchasing, marketing, material usage

Master budget – Cash budget, Budgeted Income Statement, Budgeted Balance Sheet

Management Accounting

Professional Studies Department

Activity 01- BUDGETS -EXAMPLES

XYZ company produces three products X, Y and Z. For the coming accounting period budgets are to be prepared based on the following information.

Budgeted sales

Product X 2,000 at RO100 each

Product Y 4,000 at RO130 each

Product Z 3,000 at RO150 each

Budgeted usage of raw material

Management Accounting

Professional Studies Department

Activity 01- BUDGETS -EXAMPLES

Budgeted usage of raw material

Raw materials inventory budget

Labour Hours & Rate

Management Accounting

Professional Studies Department

Solution