The purposes of management accounting reports are several, some of the main purposes are evaluated as follows:
Budget report:
The budget reports enable the business owners in evaluating the overall financial position of their organisations and for large-scale organisations, the managers assess the performance of each department along with costs of control. For example, the business owners and managers of the organisations could use the budget reports in order to give staff incentives (Black, 2017).
Accounts receivable aging report:
The accounts receivable aging report is a vital tool in order to handle cash flow for the firms that allow the credit terms of their customers or clients. The managers of the organisations could segregate the balances of the customers based on their owed timeframe. For example, in a situation where a huge number of customers could not settle their balances, the organisation is required to tighten its policies of credit. Moreover, this report is of immense importance for the collection department, as they could have an overview of the previous debts (Christ & Burritt, 2013).
Operational budget report:
This budget report is developed in order to estimate different expenditures that the organisation needs to incur in order to accomplish the overall revenue target. The organisation could accumulate the needed funds for conducting its future operations in advance with the help of this report (Drury, 2013).
As laid out by Fayard et al., (2014), control is the procedure of analysing, measuring, correcting and monitoring the actual outcomes to ensure that the business organisations achieve their overall plans and goals. Feedback is the option available for the organisations in order to achieve these plans and goals. Feedback could be taken into account as the information in assessing or correcting the steps undertaken at the time of time implementation. Management accounting provides immense value to the control function through the production of control reports and performance reports, which signify variances between the expected and actual performances.
The above-stated reports abide by the “principle of management by exception”. This is because they serve as the platform for ensuring necessary corrective measures in order to control operations. If there are significant differences between budgeted and actual results, a manager needs to examine for determining the things in line and likely that the departments or subordinates might need support (Gopalakrishnan et al., 2015).
To Bank Account/ Accrued Payroll Account
The initial entry has been passed to highlight the labour amount used for production of a particular product or service. The next entry has been passed to record the labour pay. If there is any outstanding payment, credit side would have accrued payroll account and if there is no outstanding payment, credit side would have bank account.
The above two entries are interlocked, as the labours could not be kept for future utilisation. If any labour remains unpaid in a particular period, the same could be utilised for production rather than advance payment (Klychova, Faskhutdinova & Sadrieva, 2014). Conversely, if the labours are used for production in case of a particular time, it is required to make the payment within the particular timeline after the completion of the production process. Thus, it could be assessed that both the entries are related to each other and one entry leads to the generation of the other entry.
The method of allocation under which the overhead cost are allocated to each product unit manufactured based on a sole driver of cost, is adjudged as the traditional costing system. In the current global business environment, the accountants face various issues in apportioning the indirect costs with the help of single driver of cost. On certain situations, the sole driver of cost would be related to few overhead costs (Otley, 2016). This has urged the growth of activity-based costing to allocate indirect cost associated with the cost drivers. The present report depicts the arguments for and against the activity-based costing (ABC) system and its benefits over the traditional costing method.
Superiority and drawbacks of ABC system:
The manufacturing firms are able to enjoy various benefits by using the ABC costing system. Initially, the production cost is determined by selecting the cost of such activities with the help of the above-stated method. Moreover, this method makes use of the various cost drivers by allocating each individual responsible for using rightful and relevant process of allocation. The costs associated with production of the finished goods are ascertained through this method and it helps the management to make effective decisions (Songini & Gnan, 2015).
However, several problems are related to the method of utilising the ABC system from the perspective of the modern day business organisations. In this method, the allocation of indirect costs is extremely difficult using the system of single driver to use the advanced cost of production. Moreover, the activity-based costing system fails to consider the single driver process or the other drivers. The basic cause is that it might not take into account each type of cost (Weygandt, Kimmel & Kieso, 2015). Lastly, there is ineffective cost of production in the result of the inaccurate cost allocation and this is the reason, which urges the management in making decisions about the cost of control and the pricing system.
Conclusion:
The firms need to reduce the cost of production with the rise in global business competition. When segregating with the traditional system of costing, pertinent production cost is given with the help of this system. Hence, from the above evaluation, it could be stated that the manufacturers would be able to gather competitive advantage over their competitors using this method. For deployment of this method, extensive resources are required for the organisations with limited funds, since activity-based costing system is costly to implement.
References:
Black, W. H. (2017). Book review: History of Management Accounting in Japan: Institutional & Cultural Significance of Accounting.
Christ, K. L., & Burritt, R. L. (2013). Environmental management accounting: the significance of contingent variables for adoption. Journal of Cleaner Production, 41, 163-173.
Drury, C. M. (2013). Management and cost accounting. Springer.
Fayard, D., Lee, L. S., Leitch, R. A., & Kettinger, W. J. (2014). Interorganizational cost management in supply chains: Practices and payoffs. Management Accounting Quarterly, 15(3), 1.
Gopalakrishnan, M., Libby, T., Samuels, J. A., & Swenson, D. (2015). The effect of cost goal specificity and new product development process on cost reduction performance. Accounting, Organizations and Society, 42, 1-11.
Horovitz, J. H., & Webb, P. (2015). Top management control in Europe. Springer.
Klychova, G. S., Faskhutdinova, ?. S., & Sadrieva, E. R. (2014). Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), 79.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.
Songini, L., & Gnan, L. (2015). Family Involvement and Agency Cost Control Mechanisms in Family Small and Medium?Sized Enterprises. Journal of Small Business Management, 53(3), 748-779.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
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