The following case study targets a random company named "Ice Department" to evaluate the functioning of management accounting in its system. This company sells ice makers to their customers. In the following assignment, a managerial report has been prepared to report the company's financial performance to the operational manager. The main focus of the task was to prepare the company's income statement with the help of two methods: the job costing system and inventory management. A managerial accounting system and benefits for the Ice Department have been discussed. Break-even analyses have been performed in this report to determine the breakeven point and units that must be sold to gain the desired profit.
Management accounting comprises two terminologies. These are “Management” and “Accounting”. Management accounting deals with different accounting aspects related to the company's management (Shushila, 2019). However, financial accounting, on the other hand, helps to report the results of the entire business's financials to evaluate the company's profitability. Moreover, it uses various types of accounting standards to compare the company's financial performance with its competitors.
In the case of the Ice Department, it can help the management to take certain decisions for the company's benefit. It is regarded as a way to represent the information related to accounting to assist the higher authorities of the company in creating policies for day-to-day operations that are being carried out within the organization. Three main methods can be used to report management accounting. In terms of the Ice Department, written and graphical techniques will be used to report financial statements to the managers of the Ice Department. These two methods are suitable due to many reasons. As the income statement is calculated for one year, it is impossible to present it on the graph.
Implementation of management accounting processes will enable the accountants to represent the managerial accounting information operatively so that the organization can take strategic decisions for the smooth transition of the business. With the application of the management accounting processes, the profitable operations of the management are easily visible to the stakeholders. There are different types of management accounting reports financial statements, accounts receivable reports, job cost reports, and stock & manufacturing reports.
To survive in the market, the management department of this company "Ice department" must take certain decisions for the company's profitability. To compete with its competitors, one of the fundamental requirements is to maximize the company's financial performance using productivity and its services to its customers. Each sector within the organization works efficiently to the best of its abilities to improve performance compared to the previous year (Mehrdad, 2015; Saeed, 2015). Management accounting, by its definition, helps to increase the efficacy of different departments in the organization. Therefore, the Ice department's management will benefit from these aspects.
The job costing system of the Ice Department explains brief information related to the costs that are associated with production and other different aspects. The Ice department purchased all materials in the first month year January 2020. Overall revenue of the year is recorded from the sales of Ice makers $9,000,000. These sales are 45,000 units that the company is selling out. The production of the Ice Department company is recorded as 50,000 units per year, out of which 5,000 are left as unsold items stored in the company's inventory.
One unit is prepared in 2 hours, and $10 per hour is paid by the company to the workers. Therefore, the overall cost of labor is calculated to be $1,000,000. Other expenses are also considered by the company, like the factory's rent, administration costs, and distribution of the products to the clients. These costs are also calculated, and some of these costs are equal to $350,000. After deducting these expenses from the company's gross profit, the profit is calculated at $6,600,000. These profit figures are also noted as the net income of the ice Department.
Management accounting can be considered critical as one of the main aspects shaping the entire organization. This system can also help the different departments in the organization to evaluate their performance. Moreover, these sectors allow the organisation's management to take further decisions based on performance. On the other hand, in traditional financial accounting, certain characteristics are helpful to the company's shareholders (Smith, 2017). It provides attempts to the management of the company to provide feedback to the company within the marketplace. The financial performance of the company helps the organization to compare it with the competitors of the company along with the industry.
The income statement of the Ice Departments mainly comprises different heads. These heads are revenue or sales of the company, cost incurred on the sales, and company expenses. These heads are further divided into subheads. Expenses of the Ice Department comprise factory rent, distribution, admin, and labour costs. The income statement of the Ice Department has been prepared according to the standards of IFRS, and it explains the company's overall profit in a year.
A break-even analysis has been performed to calculate the Ice Department's safety margin. From the managerial accounting perspective, the company's break-even analysis differs slightly from financial accounting. Factors of revenue and profits are different in both aspects of accounting. Products can be made more costly to generate more revenue. The main variables for the calculation of the break-even analysis of the Ice Department are total variable cost comprised of labor cost on the product and fixed cost consisting of expenses.
From the above analysis of the Ice Department, 1944 units are calculated break-even point, which means at this point, Ice Department has zero loss and zero profit. However, Ice Department desired to make a profit of $100,000 for a specific period, and for this purpose, it sold at least 2,500 units.
The above assignment revealed that managerial accounting is one of the tools used in organizations to evaluate the performance of different departments within the organization. On the other hand, financial accounting is based on the opposite perspective to it. However, the job cost system of the Ice Department explains the cost of the company that is being incurred by the management of the company from different perspectives.
In the following assignment, different tools are considered for the budgetary control of the Ice Department Company. A few financial problems have been highlighted for the Ice Department, and it's one of the Competitors in the United Kingdom (i.e. Klarstein Company). These problems are Brexit, efficiency, and maximizing profitability. Lastly, these problems are being solved in the light of management accounting.
The main role of managers of the company is to make decisions based on the information provided by the manager accountants. These decisions are mostly related to planning and forecasting the sales and profit of the company in many aspects. In this way, different goals of the company are achieved with the help of their decisions (Garrison et al., 2010; McLellan and Moustafa, 2011). These tools help the company's management to allocate their resources to gain more productivity and time-saving.
On the other hand, companies use different types of planning tools. Regarding the Ice Department, budgetary control is based on future information. Moreover, the company estimates future needs (i.e. financial) in an order based on budgetary control. Another purpose of this control system is to control the company's financial performance.
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Financial and management accounting is regarded as essential for the organization as it has the capacity to change the financial performance of the company and its financial position. Following are some financial problems for the Ice department Company.
Brexit is regarded as one of the main unusual problems for all companies in the United Kingdom. Several factors associated with Brexit create problems for companies. For example, there is uncertainty that if the United Kingdom leaves the European Union, it may not be able to do so. In both aspects, it will have some positive impacts on the financial performance of the companies as well as negative impacts. In terms of the Ice Department, it can be a problem related to the labor and production of the company.
As the Ice Department Company is based on several departments. Therefore the performance of each department is essential for the company's performance. Efficiency is one of the other problems associated with the company's financial performance.
The financial position of the Ice Department Company is sometimes measured for a specific period from its profitability. In this way, it is compared with its competitor, Klarstein Company. Maximizing the company's profitability is also related to the company's financial problems in management accounting.
As mentioned above, the Ice Department faces problems in terms of financials. Therefore, these problems must be sorted out to increase the company's productivity. To solve these problems, the Ice Department Company's operational management reduces the cost associated with the operations, like the distribution of the products. The company can also reduce the quantity of the product in inventory. The management of the company can also reduce the other expenditures and price of the product to increase sales, ultimately affecting the Ice Department's sales positively.
Klarstein Company is another company that is also into ice making by its profile and is also regarded as a competitor of the ice Department. This company is also facing these above-mentioned financial problems, and the management of the Klarstein Company has taken certain steps to mitigate these problems. The company has evaluated the performance of each department with the help of management accounting to find a specific department that needs to be focused more. Moreover, most of the costs associated with different operations have been reduced with the help of management accounting.....
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