Scenario 1 (LO1&LO2)
Scenario 2 (LO3 & LO4)
LO3 Explain the use of planning tools used in management accounting.
P4 Explain the advantages and disadvantages of different types of planning tool used for budgetary control.
The advantages and disadvantages of planning techniques used for budgetary control is as follows:
- Budgeting: The actual quantity cash to pay premiums in the same months to manage their income they are present to confirm and to pay their bills regularly i.e, monthly they are ready for these payments.
- Price Setting: Market situations like your enemies prices aren’t the alone limits they desire to set their fees, prices and costs. They wants to remind their production and overhead costs before you set your rates. A budget permits them to undertaking their service, health care, marketing, rent, wages, debt charges and alternative prices thus they will be able to learn actuality price per unit of constructing their product or delivering their service. (Massingham,2014) Once you recognize this, they will be able to set their costs to form the profit they would like.
- Capital and Credit procural: Few deals capitalists, banks, dealers or alternative owners can provide them with cash or trust unless they have got cash inquiry to evaluate they are a going interest..
- The character of the account is numeric, thus it tends to focus executive attention on the quantitative methods of a employment. In reality, customers don’t care exercising the profits of a business. (Mutikanga, 2012).
- Blame for results: If a agency doesn’t bring home the bacon its accounted results, the agency controller might action on the other agency that give services thereto for not having completely supported his agency.
- Expense allotment: The budget might impose that sure amounts of overhead prices be allotted to varied departments, and therefore the controllers of these agencies might disagree with the allotment ways used.
- Time needed: The time exercised is lesser if there’s a well-constructed accounting process in situ, staff equal part aware of the method, and therefore the organization uses accounting package(Wilker & Rusche, 2014).
M4. Analyze how, in responding to financial problems, management accounting can lead organizations to sustainable success.
- Management accounting have basic objective to provide the management for deciding purpose. As simply just in case of financial problems, management needs the information regarding increasing. There are a unit variety of companies have the abilities to satisfy these challenges and to compete in a very property economy according to the Environmental Management and Assessment Institute. The Management Report stands to point what range business entities have disappeared into valuable intelligence and analysis by failing to realize trustworthiness capabilities (Hopkins, 2013). This involves the employment environment for impact and analysis and news on the impact of environmental and economical factors on employment progress. throughout this case, the senior respondent may need data on this sort of data. However, there unit of measurement indications that it begins to change, and predicts common fraction of the numerable expected growth at intervals subsequent two years for environmental and social data. income forecasts can facilitate predicts forthcoming cash shortages to help them produce the correct choices. It will facilitate in tax preparation, developing with new instrumentation purchases or distinctive if they might wish to secure a touch business loans(Crum & Derkinderen, 2012).
LO4. Compare ways in which organisations could use management accounting to respond to financial problems.
P5 Compare how organisations are adapting management accounting systems to respond to financial problems.
KPI stands for the set of some standardized parameters that ought to be adopted by a corporation compare the inner performance against applied individual standards. As an example, most accepted level of short liquidity is 2:1 and, a enterprise will compare liquidity of business against this applied commonplace to research the areas of issues.
Through the applying of KPI’s, structure performance is measured against applicable standards. It will facilitate to spot the problem-containing areas which require improvement. When the identification of such areas, an efficient strategy is created and enforced by management to get rid of money problems and insure sustainable growth.
This term stands for the method that is expounded to comparison among industry-based-standardized-values and after-effect of business operations, as an example, eighteen web profit is assumed higher in Retail market trade of United Kingdom, thus a corporation is that is gaining profits eighteen or a lot of are assumed sensible whereas a corporation that’s not generating profits as per trade commonplace are assumed, low performing artist. Through the applying of benchmarking, a business will improve internal performance level up to trade parameters to insure good profits and enlargement (Crum & Derkinderen, 2012).
Financial governance is associate in nursing indicator of these moral rules that area unit required to be applied in a very business corporation to insure security from dirt that will occur because of non-presence of moral arrangements. Actually, losses from larceny or fraud area unit one the key issue for the money issues in business and therefore the adoption of economic governance creates Associate in Nursing surroundings of moral operating (Hopkins, 2013). Also, it ends up in the institution of sound internal controls in organizational procedures that prevents the entity from capital losses.
D3 Evaluate how planning tools for accounting respond appropriately to solving financial problems to lead organisations to sustainable success.
Findings of the report
Financial analysis is important step while considering a organizations investment perspective. It is a process of ratios between various products in monetary statements. Ratios are classified as advantage ratios, liquidity ratios, asset utilization ratios, leverage ratios and valuation ratios based on the indications they provide. Balance sheets, Earning Statement are the most essential monetary statements and if properly examined and interpreted can gives valuable visions into a organizations employment (Mutikanga, 2012).
Financial Proportions is commonly used by at present and capable investors, creditors and monetary institutions to evaluate a organizations past progress to spot fashions in a employment and to compare its progress with the average company progress. Internally, controller use these ratios to monitor progress and to set particular aims, objectives, and policy actions(Wilker & Rusche, 2014).
The employees of departments of Tesco square measure much co-operative and dependent to every different. Tesco provides an entire set of economic statements includes an income statement, an announcement display either all adjustment in equity aside from those rising from asset by & circulation to house holders, a outline of bookkeeping schemes, and informative notes. The operative expenses of Tesco have dramatically accumulated that encompasses a vital influence to lower cyberspace financial gain. The complete department ought to be sophisticated concerning their goal and objectives. There square measure positive connection exists between capital, sales and profit. Monetary and Accounting agency is one in every of the foremost vital departments of Tesco, they’re accountable to form benefit for the company. It’s necessary to execute organization objective into particular bull’s eye. There should be easier allotment of capabilities, power & answerability. The corporate must announce a lot of promotional programs. The corporate must take action to develop a good analysis and growth centre to urge inventive concepts to capture the competing market.
Massingham, P., 2014. An evaluation of knowledge management tools: Part 1–managing knowledge resources. Journal of Knowledge Management, 18(6), pp.1075-1100.
Mutikanga, H.E., Sharma, S.K. and Vairavamoorthy, K., 2012. Methods and tools for managing losses in water distribution systems. Journal of Water Resources Planning and Management, 139(2), pp.166-174.
Wilker, J. and Rusche, K., 2014. Economic valuation as a tool to support decision-making in strategic green infrastructure planning. Local Environment, 19(6), pp.702-713.
Hopkins, J.P., 2013. Afterlife in the cloud: Managing a digital estate. Hastings Sci. & Tech. LJ, 5, p.209.
Alviniussen, A. and Jankensgard, H., 2015. Enterprise risk budgeting: bringing risk management into the financial planning process.
Crum, R.L. and Derkinderen, F.G., 2012. Capital budgeting under conditions of uncertainty (Vol. 5). Springer Science & Business Media.
This report will be prepared to discuss the planning tools that are available under management accounting to support business activities. The report will be created in two parts and each part will deliver elucidated image of management accounting concepts. In the first part of the report, planning tools of management accounting will be discussed whereas the second part will elucidate the application of management accounting practices for the removal of financial problems.
Planning tools of management accounting
The management system includes several planning tools that can be applied by a business organization for the overall betterment in business events. These planning tools help the owners in effective forecasting, systematic planning and elimination of threats to assure that aims will be accomplished and financial problems will be removed at the initial stage.
It is set of some analytical procedures that are useable for the analysis of income, expenditure and non-monetary operational data so that internal managerial reports can be prepared and delivered to top management to support the quality of decision-making activities.
In a more explanatory view, it is the process which includes different assumptions, analytical practices and management tools and, utilised in the creation of internal financial reports to enable high-quality decision-making in business.
Above two explanations are presenting that management accounting is:
- A system which is useable for efficient planning of future activities and establishment of effective control on all operational events.
- It supports performance evaluation activities that can be made through the comparison of actual and budgeted financial data.
Some planning tools and their use for the removal of financial problems is provided below:
Cash is one of the most crucial issues of business because it is related to working capital requirements and a shortage of cash may affect the sustainability of the entity. Cash flow budget is part of budgeting activities which are performed to evaluate the future figures of financial factors by analyzing recent trends (Pinheiro, 2014).
- Through the cash budget, the advanced and diversified strategy can be made for future cash shortages.
- It enables better resource distribution among different departments.
- It is based on the estimates so suffers from accuracy problems.
- Sometimes adoption of cash budget becomes problematic due to lack of corporation among staff.
Use of Cash flow budget in the removal of financial issues:
A cash flow budget is highly supportive in cash management activities because it provides tactful information about the allocation and availability of funds. For example, managers can transfer additional working capital of one department to another department by evaluating the need for cash funds (Pinheiro, 2014). Similarly, a cash flow budget informs about the need and availability of cash resources in the future so that managing-authorities can arrange additional funds when required.
It is explainable as the set of some analytical arrangements that are available for a business to compare the pre-budgeted standards against real outcomes. This tool is useable for both financial and non-financial aspects and, highly popular to determinate the efficiency of business operations and the accuracy of budgeting practices (Cleartax, 2018).
- It is highly effective in performance evaluation for the elimination of problems.
- Through this tool, a business can enable effective control of unnecessary expenses.
- Detailed market research and financial data are required to apply this tool.
- Knowledge of financial items is required to use this tool.
Use of Variance analysis in the removal of financial issues:
Lack of efficiency and inappropriate planning are major factors which create financial problems for a business and, both factors can be eliminated from the organizational process through the utilization of variance analysis (Cleartax, 2018). For example, low employee performance increases the cost of operations which ultimately affects the profitability. Through applying Variance analysis, individual employee performance can be compared with applicable standards to insure the deportation of precarious ingredients.
- Investment appraisal techniques:
There are several appraisal techniques which can be adopted by a commercial organization to correctly evaluate the suitability of capital projects. For instance, NPV (Net Present Value) informs about the current value of profits that are expected to be generated by investment options (Lindvall and Larsson, 2017). Similarly, the payback period informs about the period that is required for a project to generate an amount of investment back.
- Through appraisal techniques, suitability and profitability of capital projects can be evaluated correctly.
- Time value of money is a very crucial factor in investment decisions and appraisal techniques show filtered results by eliminating the impact of the time factor.
- Use of appraisal techniques demands heavy knowledge of data analysis skills.
- Results of appraisal techniques are subjected to other economic factors.
Use of appraisal techniques in the removal of financial issues:
Inefficient investment decisions can be presented as the major factor which is liable for the financial problems in many business entities. Through the application of suitable appraisal techniques, the acceptability of a project can be evaluated correctly and decisions can be made in the light of such evaluation so that the threat of financial problems can be excluded.
Following are some major factors which are liable for the financial problems in business organisations:
|Performance issues||Lack of cash resources||Unbeneficial investments|
|Employee performance is a primary concern for each organisation because each improvement in employee performance comes with an improvement in overall profitability. It can arise due to a lack of monitoring and training arrangements. ||Due to the unavailability of cash resources, a business may face problems in continuity of operations. For example, cash unavailability may affect the appropriate continuity of most beneficial segment of the business and lead for the heavy operational losses. ||Investment decisions are required to be made with enough analysis and caution to ensure that desired profitability. Due to an inappropriate investment decision, a business may loss whole capital and gone into liquidation. |
Above problems can be resolved through the use of selected planning tools in the following manner;
|Variance analysis||Cash budget||Appraisal Techniques|
|Variance analysis is one of the most popular tools for the analysis of monetary and non-monetary data. Through this tool, budgeted data can be compared with real outcomes to outline and remove the factors of low performance. It is also useful in comparison to departmental performance to remove managerial issues. ||Cash budget presents the structure of cash-ins and cash outflows so that application of cash funds can be monitored correctly. Through a cash budget, sufficient resources can be allocated to each department and cash-unavailability can be resolved timely. ||Through the use of appraisal techniques, all investment offers can be evaluated correctly. For example, NPV can be utilised to identify the net profitability of a project considering the time factor. By adopting appraisal techniques, a business entity can select the most suitable project which will maximise the business growth and profitability. |
This term stands for the cost-volume-profit analysis which can be presented as the group of some cost analysis techniques to interrogate the impact of alteration in volume and costs on incomes. It works on the assumption that selling price and fixed expenses are fixed (Akmese, 2016). Through the use of CVP analysis, the impact of each alteration in cost can be identified against alteration in profits to assure the escalation of incomes.
CVP analysis as a problem-solving tool:
It is a popular tool to identify the impact of volume and cost alterations on newt incomes. For example, each reduction in production volume will reduce the consumption of variable cost but improve per unit absorption of fixed cost. Similarly, the increment in variable cost will reflect in the reduction of net profits. Through CVP analysis, management can identify a most appropriate combination of costs and volume so that the objective of profit escalation can be accomplished.
To handle the financial issues and evacuate the threat to the sustainability of entity, management accounting is a highly suitable and popular tool for business owners. Through the application of management accounting tools, financial problems can be handled in the following manner:
- Key-performance indicators:
KPI stands for the set of some standardized parameters that should be adopted by an organization compare the internal performance against applied individual standards (Bakertilly, 2015). For example, most accepted level of short-term liquidity is 2:1 and, a business organization can compare liquidity of business against this applied standard to investigate the areas of problems.
Through the Application of KPI’s, organizational performance can be measured against applicable standards. It will help to identify the problem-containing areas which need improvement. After the identification of such areas, an effective strategy can be made and implemented by management to remove financial issues and insure sustainable growth.
This term stands for the process which is related to comparison among industry-based-standardized-values and after-effect of business operations (Bakertilly, 2015). For instance, 18% net profitability is assumed better in Retail supermarket industry of UK, so a company is which is gaining profits 18% or more will be assumed good whereas a company that is not generating profits as per industry standard will be assumed, low performer.
Benchmarking is a very essential tool in systematic management of business operations to insure the availability of sustainable success. Through the application of benchmarking, a business can improve internal performance level up to industry parameters to insure good profits and expansion (Markgraf, 2019).
Financial governance is an indicator of those ethical regulations that are needed to be applied in a business corporation to insure security from loess that may occur due to non-presence of ethical arrangements. Actually, losses from theft or fraud are one the major factor for the financial problems in business and the adoption of financial governance creates an environment of ethical working (Bwise, 2019). Also, it leads to the establishment of sound internal controls in organisational procedures which prevents the entity from capital losses.
From the above discussion, it is identified that unethical working of employees, low performance of staff and inefficient investment planning are major factors for the financial issues in business entities and, it can be removed through the application of management accounting tools. Findings of discussion are enough to wrap up that the use of management accounting system is very beneficial for business corporations in the consummation of targets.
- Akmese, H., 2016. The use of cost-volume-profit analysis in turkish hotel industry.
- Ayres, C., 2017. 12 Advantages and Disadvantages of Performance Appraisals. [online] ConnectUS. Available at: https://connectusfund.org/12-advantages-and-disadvantages-of-performance-appraisals [Accessed 18 Mar. 2019].
- Bakertilly, 2015. Benchmarks and key performance indicators (KPIs) – the hidden gems of financial management tools | Insights. [online] Bakertilly.com. Available at: https://bakertilly.com/insights/benchmarks-and-key-performance-indicators-kpis-the-hidden-gems-of-financial/ [Accessed 9 Mar. 2019].
- Bwise, 2019. Financial Governance. [online] Bwise.com. Available at: https://www.bwise.com/solutions/governance/financial-governance [Accessed 9 Mar. 2019].
- Cleartax, 2019. Variance Analysis – Overview, Budgeting, Benefits. [online] Cleartax.in. Available at: https://cleartax.in/s/variance-analysis [Accessed 9 Mar. 2019].
- Lindvall, N. and Larsson, A., 2017. Investment Appraisal in the Public Sector–Incorporating Flexibility and Environmental Impact. Journal of Advanced Management Science Vol, 5(3).
- Markgraf, B., 2019. Difference among KPI and benchmarking [online] Yourbusiness.azcentral.com. Available at: https://yourbusiness.azcentral.com/difference-between-benchmark-indicators-key-performance-indicators-23945.html [Accessed 9 Mar. 2019].
- Pinheiro, J.D.O.G., 2014. Cash budget versus financial budget: advantages and disadvantages: a case study (Doctoral dissertation).