MANAGEMENT ACCOUNTING SYSTEMS

REPORT

MANAGEMENT ACCOUNTING SYSTEMS

Management accounting is a branch of accounting that provides useful information for decision-making purposes to the management or internal users of the information to help them make better decisions and improve the efficiency and effectiveness of existing operations (Drury, 2018). According to Drury (2018), management accounting systems accumulate, classify, summarize and report information that aids internal users such as management and employees of a firm in their decision-making, planning, control, and performance evaluation activities. There various types of management accounting that serve different specific purposes but in general assist management in the decision-making process, planning, control, financial reporting, and even control, monitoring, and evaluation. Each system is designed to provide management with different types of information that assist management in decision making, planning, control, and evaluation. The following are some of the major types of varying management accounting systems;

1. Cost-accounting systems- this management accounting system used to estimate or calculate the cost of producing a product. It is useful as it enables the organization to estimate the cost of its goods and thus calculate the profitability of the different products it manufactures. For example, the Qatar national cement can use cost accounting systems to estimate the cost of producing various products such as washed sand, Sulphate Resisting Cement, Ordinary Portland Cement, and calcium carbonate. The cost accounting systems are important as they also help management evaluate their plans of inventory and cost controls and also undertake more cost control measures so as to improve the profitability of the firm. The cost accounting systems can be broadly categorised into; job-order costing and process costing. Allocation of cost in cost accounting systems can be based on either the traditional costing system or the modern activity-based costing system. The management of National cement may use traditional costing system for financial reporting purposes and the activity-based costing for their internal use to assist them in planning and decision making.
2. Inventory management systems-These are computerized information systems that process, store, and retrieves information about inventory such as quantity, prices, deliveries, orders, and other information regarding the inventory of the firm. In addition to the software, other hardware equipments such as barcode scanners, barcode printers, and

mobile devices are part of the inventory management system (Smith-Barrett, n.d.). Inventory Management systems allow management to plan, manage, and control raw materials, stocks, finished goods, warehousing, storage, costs, and prices of various items such as material and finished products. The computerised inventory management systems are essential as they help the management of the organisation to have an easy access of information on inventory, track inventory levels, and manage production processes and the cost of holding stock. The Qatar National Cement has an inventory management system that allows the company to obtain timely information on the levels of its inventories, thus avoiding running out of stock, which can cause it to stop production due to lack of material or fail to deliver an order due to stock-out. Each purchase of raw material transaction detail is recorded on the inventory management system and updated when any raw-material is used, similarly the finished goods stock level is updated every time there is a sale transaction or production of new finished goods. Therefore, the management of National cement can order raw material on time and also maintain optimum inventory levels that minimise the cost holding the inventory and at the same time, minimize the probability or running out of stock. Thus the National cement company can benefit from an inventory management system, increasing the company profitability, enhancing inventory accuracy, and improving the company workflow.

1. Job-costing systems -This is a costing system cost of each job is determined differently from the other because each task or product is distinct from the other and thus consumes different quantity and value of resources. According (Horngren et al., 2012), job costing is used to cost specific jobs in which production/or completion uses different quantities of production resources, so it would be incorrect to cost each task at the same average production cost. Job costing is best suitable for those circumstances where goods and services are produced upon receipt of a customer order, according to customer specifications, or in separate batches(Walther, 2017). The Qatar National cement can use job costing when determining the cost of a particular order, for example, is a customer orders a product with specifications that are different from the standard products.
2. Process costing; This is a costing system in which the cost object is masses of identical or similar units of a product or service(Horngren et al., 2012). This system is best suited for products that are similar and produced using the same processes. Thus, process costing uses the average production cost for all units produced to estimate per unit cost of each product.  Qatar National Cement uses this method to calculate the cost of its products, such as cement.
3. Price-optimizing systems- price optimising systems or models are mathematical programs that calculate how demand varies at different price levels, then combine that data with information on costs and inventory levels to recommend prices that will improve profits(Rigby, 2017). Price optimising models or systems use historical data, market data such as competitors’ prices, market share and market structure, and the macro-economic data to estimate the price elasticity of demand for various products. The mathematical models simulate the impact of different pricing strategies on the bottom line of the firm under various economic conditions and reactions by rival firms, thus helping the management select a pricing strategy that maximizes the firm profit. Price optimising systems are beneficial to management for pricing decisions, including determining the rate of markdowns or mark-ups, discounts, and promotional budgets. Pricing many products and services in highly dynamic market conditions is a very intricate task; thus price-optimising modelling results and insights aids to estimate demand, design pricing, and promotion strategies, manage stock levels and subsequently enhance customer satisfaction (Rigby, 2017). These models usually consider three elements which are; pricing policy, the value of the product to both buyer and seller, and strategies that manage all aspects affecting profitability (Rigby, 2017). The price-optimising systems can be used by Qatar National cement in initial price optimisation to help the company set prices for its existing products that maximise the company profits. Moreover, the National cement management can use these models in promotional price optimisation that would help the firm set temporary promotional prices and thus spur demand for its new products.

Evaluation of Qatar National Cement Management accounting system and management accounting reporting

            Management of National Cement has not provided a report of their management accounting. Thus, the company has not provided a summary of their forecast, estimated demand, and pricing of their product in the coming financial but just reported the statutory financial reports. The company should provide a management non-statutory report to inform the shareholders of the strategic management plans and their forecast of the company performance in the next financial years.

The company should digitize most of its records and upgrade its information systems to the latest technology utilizing machine learning, artificial intelligence, and big data analytics. With the use of these technologies, the company can develop price-optimising systems that can help the company forecast demand of its products under various range of prices and market conditions and thus optimize its pricing and promotional strategies under each economic state.

Additionally, the company can design and use a costing system which is most suitable to its products and thus enable the company to improve the accuracy of cost allocation across various range of its product line. The use of the traditional costing method may be ineffective in the allocation of manufacturing overheads, and thus, the company should use the modern activity-based costing model.

Conclusion

Management accounting is a beneficial branch of accounting as equips management with helpful information for decision making, control, evaluation, and planning. Management accounting systems are many, and each is suitable for providing specific and mostly different information to the management or the internal users for the purposes of effective management, including planning and decision making. The management of firms such as Qatar National cement should, therefore, utilize management accounting systems in their firm to improve management effectiveness by using information from these systems to make management decisions and effective planning. These systems are beneficial to the firms as they improve firm profitability and efficiency.

PORTFOLIO

Qatar cement cost sheet information (assumptions)

For the purpose of this assignment, the assumption is made that the company produces only cement and the variable cost per unit and the total fixed cost are presented in the table below;

Income Statements Using Marginal Costing

Marginal costing considers the cost of producing the next unit rather than the average cost incurred in manufacturing the total units and thus treats variable cost as the product costs while fixed costs are treated as period costs. It mostly used for management or internal users purposes, and it aid decision making and planning functions of management.

Other income such as investment income and other expenses such as interest or finance charges are ignored.

Income Statements Using Absorption Costing

Absorption costing considers the average total cost incurred in producing a product as the product, including both the variable and fixed costs. It is easier to use and usually used for financial reporting and tax purposes.

Cost Analysis

The Total can be broadly categorised as production/manufacturing costs and selling and administration costs. The manufacturing or production costs are those costs incurred during the manufacturing process and be tracked to the production processes such as direct material, manufacturing overheads, and direct labour. The selling and administration costs are other costs incurred during the selling and distribution of the products or the costs that not related to the manufacturing of the products such as advertising costs, office rents, and administrative staff salaries. These costs can be further categorised as variable or fixed costs.  Variable costs are those cost that varies with activity level while fixed cost does not vary with activity level and are constant (Gitman & Zutter, 2012).

COST-PROFIT VOLUME ANALYSIS

The cost volume analysis examines changes in profits due to changes in volume or units sold. The break-even analysis evaluates the activity level, in which the sales will produce zero profits also referred to as accounting break-even point (Brealey, et al., 2001).

Cost summary

Breakeven point in Units

Break even sales in units = Total Fixed Cost / Contribution margin per unit (DeMarzo & Berk, 2014)

Total fixed costs =275,000,000.00

Contribution margin = (selling price – total variable cost per unit)

Selling price = 270

Total variable cost per Unit = 98

Break-even sales in units = 275,000,000.00/172 = 1,598,837.21

So it is approx.  1,598,837.21 tonnes of cement (assuming quantities less than a ton can be sold)

Breakeven point in Qatar Riyal QR

Break even sales in revenues (QR) = Total Fixed Cost / Contribution margin percent

Contribution margin ratio = 172/270 = .63703

Breakeven sales in Qatar Riyal QR=275,000,000.00/(172/270) =    431,686,046.51 QR

Margin of Safety

This management accounting tool that evaluates how safe a company sale in unit or revenues are from making a loss.

The margin of safety (in units) = Budgeted (or actual) sales quantity – Breakeven quantity (Ross et al., 2016)

Actual sales units = 2,600,000

Margin of safety in units =2,600,000-1,598,837.21 = 1,001,162.79 units (tonnes)

Thus, if the company sales in units dropped by more than 1,001,162.79 units, then the company would not break-even and would a loss.

The margin of safety = Budgeted (or actual) revenues – Breakeven revenues

Margin of safety = 702,000,000.00-431,686,046.51= 270,313,953.49

Thus, if the company sales in Riyal dropped by more than 270,313,953.49 QR, then the company would not break-even and would a loss.

Bibliography

Brealey, R. A., Myers, S. C. & Marcus, A. J., 2001. Fundamentals of Corporate Finance. New York: The McGraw-Hill Companies, Inc.

DeMarzo, P. & Berk, J., 2014. Corporate Finance. 3rd ed. Boston: Pearson.

Drury, C., 2018. Management and Cost Accounting. 10th ed. Andover, Hampshire SP10 5BE: Cengage Learning EMEA.

Gitman, L. J. & Zutter, C. J., 2012. Principles of Managerial Finance. Sydney: Prentice-Hall .

Horngren, C. T., Datar, S. M. & Rajan, M. V., 2012. Cost Accounting:A Managerial Emphasis. 14th ed. New York: Pearson.

Rigby, D. K., 2017. MANAGEMENT TOOLS 2017:An executive’s guide. Boston, MA: Bain & Company, Inc.

Ross, S. A., Westerfield, R. W. & Jordan, B. D., 2016. Fundamentals of corporate finance. 11 ed. New York(NY): McGraw Hill Education.

Smith-Barrett, M., n.d. Management Accounting: Level 4 Unit 5. s.l.:s.n.

Walther, L., 2017. Principles Of Accounting. s.l.:CreateSpace Independent Publishing Platform.