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Download PDF FileIntroduction
A study case is being considered of the company named Ice Department. This company sells ice makers to their customers. In the following assignment, a managerial report has been prepared to report the financial performance of the company to the operational manager. The main focus of the task was to prepare the income statement of the company with the help of two methods the job costing system and inventory management of the system. A managerial accounting system has been discussed in the task along with benefits for the Ice Department. Break-even analyses have been performed in this report to find out the breakeven point and as well as units that must be sold out to gain the desired profit.
Management Accounting for Ice Department
Management accounting comprises two terminologies. These are “Management” and “Accounting”. Management accounting deals with different aspects of accounting that are related to the management of the company (Shushila, 2019). However financial accounting, on the other hand, helps to report the results of the financials of the entire business to evaluate the profitability of the company. Moreover, it uses various types of accounting standards as well as to compare the financial performance of the company with its competitors.
In the case of the Ice Department, it can help the management of the Ice Department to take certain decisions for the benefit of the company. It is regarded as a way to represent the information related to accounting to assist the higher authorities of the company to create 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 methods will be suitable 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 so, it is impossible to present it on the graph.
Methods used in Management Accounting Reporting
Implementation of management accounting processes will enable the accountants in representing the managerial accounting information in an operative manner 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
Benefits of the Management Accounting
To survive in the market, management must have to take certain decisions for the profitability of the company. To compete with its competitors, one of the fundamental requirements is to maximize the financial performance of the company using productivity and its services to its customers. Each sector within the organization works efficiently to the best of its abilities to make the performance better 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 management of the Ice department will be benefited from these aspects.
It can help the company to improve its performance and control the specific department within Ice Department.
It can help the management of the Ice Department to allocate the budget to different departments as per their needs.
Profit maximization of each department can be made efficiently with less time as well and in this way planning and forecasting can be made.
It can mainly help the Ice Department to produce good quality products at an affordable cost with less time.
Job Costing System
The job costing system of the Ice Department explains brief information related to the costs that are associated with the production and other different aspects. All materials were purchased by the Ice department 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 are being sold out by the company. Regarding the production of the Ice Department, that is recorded as 50,000 units per year through which 5,000 are left as unsold items and in this way, these are stored in the inventory of the company. One unit is prepared in 2 hours and $10 per hour are being paid by the company to the worker. Therefore, the overall cost of labor is calculated to be $1,000,000. Other expenses are also considered by the company like rent of factory, cost of administration, and cost of distribution of the products to the clients. These costs are also calculated and some of these costs are equal to $350,000. After the deduction of these expenses from the gross profit of the company, profit is calculated that is equal to $6,600,000. These figures of the profit are also noted as the net income of the ice Department.
Critically Evaluation
Management accounting can be considered as critical as one of the main aspects that can shape the entire organization. This system can also help the different departments in the organization to evaluate their performance. Moreover, these sectors help the management of the organization to take different decisions that are based on performance. On the other hand in traditional financial accounting, certain characteristics in it are useful to the shareholders of the company (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.
Income Statement
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 expenses of the company. These heads are further divided into subheads. Expenses of the Ice Department comprise factory rent, distribution cost, admin cost, and labor cost. The income statement of the Ice Department has been prepared according to the standards of IFRS and it explains the overall profit of the company in a year.
Break-Even Analysis
To calculate the safety margin for the Ice Department, a break-even analysis has been performed. From the perspective of managerial accounting, the break-even analysis of the company is slightly different 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 which is comprised of labor cost on the product, and fixed cost which is comprised 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 along with zero profit. However, Ice Department desired to make a profit of $100,000 for a specific period, and for, this purpose it has sold at least 2,500 units in that period.
Conclusion
The above assignment revealed that managerial accounting is one of the tools that is being 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.
Assignment Part 2
Introduction
In the following assignment, different tools are considered for the budgetary control of the Ice Department Company. Among these planning tools, PEST Analysis has been applied to the company along with its advantages and disadvantages. These analyses have been performed to find out the factors that can be good concerning this analysis. Moreover, 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. In the last, these problems are being solved in the light of management accounting.
Planning Tools for Budgetary control
The main role of managers of the company is to take decisions that are 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 being achieved with the help of their decisions (Garrison et al., 2010; McLellan and Moustafa, 2011). These tools help the management of the company to allocate their resources to gain more productivity along with time-saving. On the other hand, there are different types of planning tools that are being used by the companies. In terms of 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 financial performance of the company.
PEST Analysis
PEST stands for political, economic, social, and technology. This is regarded as one of the strategic tools that are used by the organizations to evaluate the different macroeconomic factors and their impact on the business of the company. These factors are based on four forces and that is political, economic, social, and technology (Gupta, 2013; Halik, 2012). This analysis also helps organizations to overview the crucial factors and take initiative to remove their impact on their organizations. However, one of the main significance of this analysis is to vary from industry to industry.
Advantages of PEST Analysis
As PEST analysis of the company is based on different factors that are economic by nature. In terms of the Ice Department, the following are the advantages of the PEST analysis in detail.
One of the main advantages of the PEST Analysis is the understanding of the environment that is suitable for the Ice Department. By which the productivity of the company can be enhanced.
These analyses help to identify the factors. Therefore it can also encourage the management of the company to think strategically for the development of the company.
The factor of technology is one of the most important in the PEST Analysis, therefore it can help to identify several different opportunities for the company.
This analysis can also help the management of the Ice Department to be aware of the threats that are related to their business.
This analysis can help to cover only those analyses that are related to the external environment of the company, not to the internal environment. External environment can include the factors such as Ice Department itself along with its competitors.
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Disadvantages of PEST Analysis
Every matter has disadvantages if there are some advantages associated with it. Following are some disadvantages of the PEST Analysis for the Ice Department.
The main disadvantage of the PEST Analysis for the Ice Department is that it can only identify or simply list down the associated problems with the company whereas it cannot provide their solution.
These Analyses can also help to collect huge information which can be difficult for the Ice Department to identify their main issues like other companies have these sorts of problems.
This analysis can help to cover only those analyses that are related to the external environment of the company, not to the internal environment. External environment can include the factors such as Ice Department itself along with its competitors.
Responding to Financial Problems
Financial and management accounting is regarded as one of the essential for the organization as it has the capacity the change the financial performance of the company as well as its financial position. Following are some financial problems for the Ice department Company.
Brexit
Brexit is regarded as one of the main unusual problems for all the companies based in the United Kingdom. Several factors are associated with Brexit to create problems for the companies. For example, there is uncertainty that if the United Kingdom will leave the European Union or maybe it will not 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.
Efficiency
As the Ice Department Company is based on several departments. Therefore the performance of each department is very essential for the performance of the company. Efficiency is one of the other problems that is associated with the financial performance of the company.
Maximizing the Profitability
The financial position of the Ice Department Company is sometimes measured for a specific period from its profitability and in this way, it is compared with its competitor which is Klarstein Company. Maximizing the profitability of the company is also related to the financial problem of the company in terms of management accounting.
Ice Department as Respondent
As mentioned above problems are being faced by the Ice Department in terms of financials. Therefore, these problems must be sorted out to increase the productivity of the company. In, order to solve these mentioned problems, the operational management of the Ice Department Company reduces the cost that is associated with the operations like the distribution of the products. The company can also reduce the quantity of the product that is placed in inventory. The management of the company can also reduce the other expenditures and price of the product to increase the sales which will ultimately affect the sales of the Ice Department positively.
Klarstein Company as Respondent
Klarstein Company is another company that is also into ice making by its profile and it is also regarded as a competitor of the ice Department. These above-mentioned financial problems are also being faced by this company 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 out 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.
Conclusion
In the above assignment, PEST analysis has been performed in terms of advantages along with disadvantages for the company of Ice Department. It is concluded that this analysis can be beneficial in terms of providing a suitable environment for the company to increase productivity and identifying the number of factors that can be helpful for the company to increase sales. However, this analysis can only provide the bulk amount of problems but no solutions which can be regarded as one of the main disadvantages for the Ide Department. Brexit, the efficiency of the departments within the organization, and maximizing the profitability are regarded as few problems for the Ice Department and its competitor Klarstein Company. These problems can be sorted out with the help of tools of management accounting.
References
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