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Unit 5- Management Accounting-2018

Assignment 2– Notes

LO 3

Different types of planning tools used for budgetary control

Budget planning tools are used in the business enterprises to manage, plan and forecast the
Company’s budget which shall then be implemented and managed to achieve targeted objectives
and results. Now a day’s companies are becoming more advanced in planning their strategies
which has shifted the trends of traditional budgeting tools towards cloud-based budgeting tools
and software’s. Online budgeting tools also provide a great option to the companies for
managing their budgets in an organized and streamlined way. These planning tools require
minimum supervision and training and are very easy to be executed. Types of planning tools and
their application for preparing and forecasting budgets are explained below:

SCORO– This type of planning tool helps in combining various features of budgeting with other
tools to manage the entire company in one system and provides an integrated plan for the
company as a whole. It provides the facility to manage various expenses and resources available
with the company while managing project budgets. The main features of these tools are as
follows:

• Planning and forecasting budgets are the main features of this tool.
• Financial reports and analysis help in the evaluation of the budgeted targets and actual
performance

• There is no limit on the project budgets.


• Invoicing and professional services automation.
• It provides an automated revenue stream from invoices which help in better forecasts and
planning.
Prophix – Prophix has been created as a software solution for corporate enterprises to manage
corporate performance. It means that the tool involves many smaller tools for the management of
resources available to the company and planning the budgets.

Various features of this tool are:

• Helps in planning, forecasting, and managing.


• Proper financial, statutory and management reporting which aids in better decision
making and evaluation of performance.
• Assists in the accurate planning of cash flows which ensures liquidity aspect of the
enterprise.

• Optimization and profitability modelling which objects for high profitability and
sustainability.

• Personnel planning and management which ensures human resource management.

Planning tools Applications


SCORO SCORO provides management with multiple
budgets and, instead of using different tools
for managing finance, work and clients it
behaves as a single solution for budgetary
control. It also combines budgeting with CRM
and online project management which in turn
helps in the management of the entire
business in one single solution and access to
the entire financial database at one place only.
PROPHIX The tool will offer with a wholesome product
that upgrades and scales constantly with the
growth of the company and forecasting
becomes much easier due to flexibility and
adaptability of the tool. The preparation of
budgets will be better and the resource
allocation can be evaluated and analyzed in a
manner which will ensure that the company
achieves efficiency in operations.

Common costing systems which can be used for budgetary control

Costing system Overview Use of system in Differentiation


budgetary
control
Actual costing This is a costing The cost It does not take into
system system which is estimated on the account any budgeted
concerned with the basis of amounts or standards
recording of cost of the actual rather it makes
product based on actual costing utilization of actual cost
cost of material, labor system data.
and overhead incurred helps the
on the product which is management to
allocated on the basis prepare the
of the actual quantity budgets and set
of the allocation base targeted standards
seen during the in order to
reporting period. This achieve
is the simple costing the
system which does not objectives of
require any enterprise which
preplanning of the are practical to
standard cost. achieve.
Normal costing Normal costing system The estimation of Normal costing uses
system makes use of a production actual cost for the
budgeted amount of overhead helps in material and labor
overhead for the calculation of components but makes
calculation of product cost related to a use of budgeted
cost. It results in very long-term aspect. overhead. If any
fewer fluctuations as it This will help in difference is obtained
is based on overhead preparation of standard overhead cost
costs expected for budgets for the and actual overhead cost
long-term fluctuations. future aspect of the then it can be charged to
It makes the use of enterprise. cost of goods sold.
smooth long-term
estimated overhead rate
which ensures the
calculation of cost
where sudden spikes in
the cost are not
expected.
This refers to the cost Standards costs The cost accounting
Standard costing accounting where allocated to the here is concerned with
expected cost is units of the estimation of
substituted for actual production helps standard or budgeted
cost in the accounting in controlling the cost for the activities
records and then the cost of related involved in the
Variances are Processes and Development of product
identified periodically operations of and then creating a base
that represents the preparation for calculation of
difference between budgets. product cost on the basis
expected and actual of those records.
cost. This involves the
creation of estimated
cost for some or all the
activities of the
enterprise. The system
helps in measurement
and evaluation of the
performance.
Types of budgets that can be used for planning and control

Budgets as a source of planning help the organization to develop a financial plan which involves
the presentation of how the organization will obtain the resources required and use them in
various operations during the specified period of time. These represent the expected amounts as
opposed the historical financial data of the performance. Budgets also create a controlled
environment within the enterprise as they have an efficient and effective set of internal controls
which ensure compliance with management policies and procedures built out for the
achievement of objectives . Variances from the budgets are obtained from the performance
reports which shall then be quickly identified and the managers become aware of the significant
issues relating to the reasons for deviations in the performance.

The Purposes and Nature of the Budgeting Processes

Estimates of cost, income, and resources in a given period of time reflect the interpretation of
future financial situations and goals.

One of the most important administrative tools, the budget can also be used as an action plan to
achieve quantification goals, measures of performance standards, and the equipment to deal with
foreseeable adverse circumstances.

Purposes of the budgeting processes

In the context of business management, the purpose of budgeting includes the following three
aspects: A forecast of income and expenditure and thereby profitability, A tool for decision
making, a means to monitor business performance.

Budget is a very important part of the business planning process. Owners and managers need to
be able to predict whether an enterprise will make a profit. The purpose of the budget is basically
to provide a model of business behavior, financially, if certain strategies, events, and plans are
executed. When building a business plan, the manager tries to make money by predicting
revenue and spending. The purpose of the budget is to provide a financial framework for the
decision-making process, which is that the proposed curriculum action is planned or not
planned.
When managing a responsible business, spending must be strictly controlled. When the
advertising budget is completely exhausted, the decision "whether we can spend money on
advertising" is likely to be "no”. A means to monitor business performance, the purpose of the
budget is to compare actual business performance with expected business performance, that is,
the business meets our expectations. Instead, "variance" is the difference between budget and
actual expenses.

Budgeting processes

Budget is to use Numbers for a certain period of future plan, also is to use the financial figures
cases in the financial budget and the budget of the investment or non-financial number for
example in a production budget to show the expected results. The concept of "budget" used by
the west and our country is different in meaning. In our country "budget" generally refers to the
government departments, institutions and enterprises that are approved by the legal procedure to
make ends meet on a regular basis; The western budget concept refers to the number of plans,
not just the amount.

The main budget is the company's annual budget plan file, which includes all other budgets. It is
in line with the company's accounting year and could be broken down into quarters, even
months. If the company plans to keep the general budget as a document that is ongoing, rolling
over the year, it usually gets added to the end of the budget in a convenient way. This is called
the continuous budget.

The budget committee usually sets the annual general budget under the guidance of the budget
director, who is usually the chief financial officer of the company.

Budgeting Methods

Zero-based budgeting originated in the 1970s. Many businesses will budget and plan out things
to maintain financials. In the past, businesses would only look at specific things and would
assume that everything is already in place and does not need to be double-checked. However, in
the zero-based budget, everything that needs to be budgeted needs to be approved. Since the
budget needs to be approved from scratch, it means that the budget starts with a zero basis, with
a new decision every year.

Capital budget – Capital budget contains capital receipts and payments. It refers to the budget
which allocates money for the question and maintenance of long-term or fixed assets such as
land, building, machinery etc. This helps. to control the expenditure which can affect the long-
term decisions of the enterprise and provides strategic direction to the enterprise. Preparation of
capital budget involves certain steps –

• Preparing a statement of company objectives.


• Analysis of the cash flows for determination of costs and revenue.
• Estimation of the projected cost of expenditure and evaluation of the funds required for
that investment.

• Creation of the spread sheet according to the information collected and making
decisions on behalf of that.

Operating budget – Preparation of operating budget is concerned with the portrayal of company
expenses, expected cost and expected income for the definite period of time. The budget will
take into consideration operational activities of the enterprise which ensures that proper system
has been followed by the performance of day-to-day activities of the enterprise and no deviations
are noticed (Tsofa, et. al., 2016).
The expense which falls under operating budgets includes employee’s wages. Costs related to
running of business, maintenance expenses, marketing, and sales cost. The preparation of valid
operating budget will require learning from past historical performance and then making
considerations to additional costs and market variables.

Incremental budget

One way to set the budget, in which the previous budget was used as the basis for the current
budget, was determined by adjusting the previous budget to consider any expected changes.

Imposed style of budgeting


In this method of budgeting, the budgets prepared by top management have little or no input
from managers and are then imposed on employees who need to work on budget figures.

Participative style of budgeting

In this method of budgeting, the budget is developed by junior managers who then submit the
budget to superiors by junior managers. The budget is based on the perceptions of lower-level
managers about the resources that are achievable and relevant.

Negotiated style of budgeting

At these two extremes, the budget can be determined from above or simply from below, but in
practice, different levels of management often negotiate to reach a budget. In a coercive budget
approach, business managers will try to negotiate with senior management what they consider to
be unreasonable or impractical budget targets. Similarly, senior management reviews and revises
the budget submitted to them, usually through a process of negotiation with junior managers, in a
participatory manner. Therefore, the final budget is most likely to be between what the top
management really likes and what junior managers think is viable. Therefore, the budgeting
process is a bargaining process, and bargaining is crucial to determine whether the budget is an
effective management tool or a clerical tool.

Fixed budgets

The total budget prepared before the start of the budget period is called a fixed budget. Fixed
terms have the following meanings;

(A) The budget is based on the estimated production volume and the estimated sales volume, but
there are no planned actual production and sales events that may differ from the budget.

(B) The fixed budget will not be adjusted (reviewed) to the new activity level until the actual
production and sales for the control period (one month or four weeks or one quarter) are reached.

Flexible budget
At the planning stage there are a number of advantages of planning with flexible budgets. At the
end of each month (control period) or year, flexible budgets can be used to compare actual
results achieved with what results should have been under the circumstances. Flexible budgets
are an essential factor in budgetary control and overcome the practical problems involved in
monitoring the budgetary control system. . For example, suppose that a company expects to sell
10,000 units of output during the next year. A master budget (the fixed budget) would be
prepared on the basis of these expected volumes. However, if the company thinks that output and
sales might be as low as 8,000 units or as high as 12,000 units, it may prepare contingency
flexible budgets at volumes of, say, 8,000, 9,000, 11,000 and 12,000 units.

Budgeting methods

A sales budget estimates the sales in units as well as the estimated earnings from these sales.
Budgeting is important for any business. Without a budget, companies can’t track process or
improve performance. The first step in creating a master company while budget is to create a
sales budget

Management often USES employees from different departments to help with sales and revenue
estimates. For example, management is likely to negotiate with the sales department or sales
staff to set reasonable sales goals for the coming year. Personal sales people are more
experienced than senior managers and more knowledgeable about current trends and customer
areas. A sales budget can be drawn up after management collects information from various
departments. The sales budget not only sets goals for the company, but also provides a
framework for other companies' broad budgets. Other budgets are based on sales budgets. That's
why the sales budget is the starting point for the general budget. A company must know how
many products it will sell and how much revenue it will generate before determining the
procurement budget, manufacturing budget and capital expenditure budget.

The procurement budget contains the amount of inventory the company must purchase during
each budget period. The amount stated in the budget is to ensure sufficient inventory to meet
customer orders for the products. The number of products expected to be purchased should be in
advance on the budget balance sheet to see if the anticipated purchase will have a negative
impact on the amount of cash that the company needs. If that is the case, and there is not enough
funding for it, it may be necessary to cut inventory levels or reduce sales, thereby reducing the
need for additional cash to support the business.

The most commonly used items are retailers or wholesalers who do not produce their own goods.
These entities typically use the purchased product for the product category for budgetary
purposes, rather than trying to budget on a single product level. Doing so reduces the workload
of the budget, which eliminates the inherent difficulty of forecasting at the product level. When
the product is aggregated into a product group, the predicted trend of change tends to be flat.

A personal budget or home budget is a finance plan that allocates future personal income
towards expenses, savings and debt repayment. Past spending and personal debt are considered
when creating a personal budget. There are several ways and tools that can be used to create, use,
and adjust your personal budget. For example, work is a source of income, and bills and rent are
expenses.

Capital expenditure budget refers to the amount of cash invested in projects and long-term
assets. Although spending is set and approved during the budget process, most companies have
separate procedures for approving specific projects in the capital expenditure budget. This
process includes a financial assessment to determine whether the company meets the investment
objectives and will be evaluated qualitatively by the top management team once it has met its
objectives. Many companies, including long-term assets, such as joint venture, to buy other
companies, buy or lease of fixed assets, as well as new products, new markets, research and
development, the major marketing projects, and information technology projects in capital
spending budget.

Management usually develops the cash budget after the sales, purchases, and capital
expenditures budgets are already made. These budgets need to be made before the cash budget in
order to accurately estimate how cash will be affected during the period. For example,
management needs to know the sales forecast before they can predict how much cash will be
collected during this period. Management uses cash budgets to manage the company's cash
flows. In other words, management must ensure that the company has sufficient cash to pay its
bills when due. For example, wages must be paid every two weeks and utilities must be paid
monthly. The cash budget allows management to anticipate a temporary decline in the cash
balance of the company and correct the issue before it expires.

Behavioral implications of budgets:-

• Interdepartmental conflict – The budgeting process sometimes becomes informal


bargaining process for the organization where managers at different departments
compete for the resources in the organization. This leads to dilution of goals and
managers try for more power and recognition blaming each other for no achievement of
objectives as required by them.

• Top management support – Effective budgetary control largely depends on the


participation, support, and cooperation of the top management of the enterprise. The top
management of the enterprise should lead and motivate the lower level managers to
achieve commitment and achievement of desired goals and objectives.

Accountability and clear lines of responsibilities must be established for the efficient
budgetary process.

• Budgetary slack – Budgetary slack occurs when the difference is noticed in the revenue
or cost projections which are provided and the realistic estimate of the same. This
happens when the managers deliberately overestimate or underestimate the cost and try
to obtain more funds needed to support the budgeted level of activity.

• The excessive pressure created by Budgets – Budgets should not create excessive
pressure or stress on the subordinate managers, supervisors and other personnel working
in the organization. The standards set out for the budgets should be real and workable
and they should not be too high or too low.

• Participative budgeting – The participative approach in the budgeting process involves


the participation of the line managers and lower level employees in the preparation of
budget so that peoples who are affected by the budgets can be involved in setting up the
standards for themselves. It provides them the feeling that this is our budget and creates
a sense of responsibility among them.

• Dysfunctional behavior – Due to unrealistic expectations and improper implementation


of budgets, situations arise where the subordinate managers have a negative outlook
about the budget which in turn affects the achievement of organizational goals. This is
generally due to the conflict between individual behavior and organizational objectives.

LO 4

Balanced Scorecard – maintains a track of activities


The balanced scorecard is a strategy performance management tool (System), a semi-standard
structured report that can be used by managers to keep track of the execution of activities by the
staff within their control and to monitor the consequences arising from these actions. It is used to

 Communicate what they are trying to accomplish


 Align the day-to-day work that everyone is doing with strategy
 Prioritize projects, products, and services
 Measure and monitor progress towards strategic targets

BSCs are used extensively in business and industry, government, and nonprofit organizations
worldwide. Gartner Group suggests that over 50% of large US firms have adopted the BSC.
More than half of major companies in the US, Europe, and Asia are using the BSC, with use
growing in those areas as well as in the Middle East and Africa. A recent global study by Bain &
Co listed balanced scorecard fifth on its top ten most widely used management tools around the
world, a list that includes closely-related strategic planning at number one. BSC has also been
selected by the editors of Harvard Business Review as one of the most influential business ideas
of the past 75 years.

The BSC suggests that we view the organization from four perspectives, and to develop
objectives, measures (KPIs), targets, and initiatives (actions) relative to each of these points of
view
 Financial: often renamed Stewardship or other more appropriate name in the public
sector, this perspective views organizational financial performance and the use of
financial resources
 Customer/Stakeholder: this perspective views organizational performance from the
point of view the customer or other key stakeholders that the organization is designed to
serve
 Internal Process: views organizational performance through the lenses of the quality and
efficiency related to our product or services or other key business processes
 Organizational Capacity (originally called Learning and Growth): views
organizational performance through the lenses of human capital, infrastructure,
technology, culture and other capacities that are key to breakthrough performance.

Implementing the balance score card

Traditionally, managers have used a series of indicators to measure how well their
organizations are performing. These measures relate essentially to financial issues such as
business ratios, productivity, unit costs, growth and profitability. While useful in themselves,
they provide only a narrowly focused snapshot of how an organization performed in the past and
give little indication of likely future performance. During the early 1980s, the rapidly changing
business environment prompted managers to take a broader view of performance. Consequently,
a range of other factors started to be taken into account, exemplified by the McKinsey 7S model
(See Related Model below) and popularized by Peters and Waterman’s In Search of Excellence.
These provide a broader assessment of corporate health both in the immediate and the longer
term. This checklist focuses on the Balanced Scorecard, which was developed by Robert Kaplan
and David Norton in the early 1990s with the aim of providing a balanced view of an
organization’s performance.
The Balanced Scorecard has become an increasingly popular performance management and
measurement framework and regularly comes in the top ten in Bain and Company’s most used
annual management tools surveys.

The Balanced Scorecard is defined as a strategic management and measurement system that links
strategic objectives to comprehensive indicators. The key to the success of the system is that it
must be a unified, integrated set of indicators that measure key activities and processes at the
core of an organization’s operating environment. The balanced scorecard takes into account not
only the traditional ‘hard' financial measures but three additional categories of ‘soft' quantifiable
operational measures financial perspective timely and accurate financial data continues to be
essential customer perspective how an organization is perceived by its customers internal
perspective issues in which an organization must excel through business process improvements
innovation, learning and growth perspective supported by knowledge management activities and
Initiatives, areas in which an organization must improve and add value to its products, services,
or operations.
Measurements taken across these four categories are seen to provide a rounded Balanced
Scorecard that reflects organization performance more accurately than one based solely on
financial indicators. This in turn assists managers to focus on their mission, rather than merely on
short term financial gain. It also helps to motivate staff to achieve strategic objectives. Kaplan
and Norton identified a number of stages for implementing the Scorecard. These include a mix of
Planning, interviews, workshops and reviews. The type, size and structure of an organization will
determine the detail of the implementation process and the number of stages adopted.

The main steps,

1. Be clear about organizational strategy and objectives As the Scorecard is inextricably linked to
strategy, the first requirement is to clearly define the strategy and ensure that senior managers, in
particular, are familiar with the key issues. Before any other action can be planned, it is essential
to have an understanding of the strategy the key objectives or goals required to realize the
strategy
the three or four critical success factors (CSFs) that are fundamental to the achievement of each
major objective or goal.

2. starting with strategy and objectives is vital and will help organizations to avoid doing the
wrong things really well. See Related Checklists below for more on developing corporate
mission and strategy. Develop a strategy map Strategy mapping is a tool developed by Kaplan
and Norton for translating strategy into operational terms. A strategy map provides a graphical
representation of cause and effect between strategic objectives and shows how the organization
creates value for its customers and stakeholders. Generally speaking, improving performance in
the objectives under learning and growth enables the organization to improve performance in its
internal processes, which in turn enables the organization to create desirable results in the
customer and financial perspectives.

3 Decide what to measure once the organization’s major strategic objectives have been
determined, a set of measures can be developed. It is vital to ensure that the measures chosen
reflect the strategic objectives and help to align action with strategy. As a guide, there should be
a total limit of 15 to 20 key measures linked to those specific goals (significantly fewer measures
may not achieve a balanced view, and significantly more may become unwieldy and deal with
non critical issues).Based on the four main perspectives suggested by Kaplan and Norton, a list
of goals and measures may include some of the following:
Financial (shareholder) perspective Goals increased profitability, growth, increased return on
their investment Measures cash flows, cost reduction, economic value added, gross margins,
profitability, return on capital/equity/investments/sales, revenue growth, working capital,
turnover. Customer perspective Goals new customer acquisition, retention, extension,
satisfaction Measures market share, customer service, customer satisfaction, number of
new/retained/lost
Customers, customer profitability, number of complaints, delivery times, quality performance,
and response amend the Scorecard if appropriate each organization must determine its own
strategic goals and the activities to be measured. Some Organizations have found that Kaplan
and Norton's template fails to meet their particular needs and have either modified it or devised
their own Scorecard. Public sector organizations, for example, may have different aims and
objectives and may have to tailor the Scorecard to reflect this. One way to do this to reflect the
fact that people are a major cost item and also a major driver of value.

4. Finalize the implementation plan Further discussions, interviews and workshops may be
required to fine tune the detail, and agree the strategy, goals and activities to be measured,
ensuring that the measures selected focus on the critical success factors. At this stage, it is critical
to be clear about ‘what good looks like’. It may be worth identifying the Key Business Processes,
and drawing up a matrix of Key Business Process and Critical Success Factors. Key Business
Processes that have an impact on many Critical Success Factors should attract more attention and
improvement efforts than those which influence no or few Critical Success Factors. Before
implementation, targets, rates and other criteria must be set for each of the measures, and
processes for how, when and why the measures are to be recorded should be put in place.

5. Implement the system an implementation plan should be produced and the whole project
communicated to employees. Everyone should be informed at the beginning of the project and
kept up to date on progress. It is vital to communicate clearly with employees. Explain the
purpose and potential benefits of the system to them and make sure that everyone is aware that
they have a role to play in achieving corporate goals. There should be a ‘golden thread’ linking
personal objectives to organizational goals. Ideally this will be achieved through an
organizational performance management system.

6. Publicize the results the results of all measurements should be collated on a regular basis
daily, weekly, monthly, quarterly or as appropriate. This will potentially comprise a substantial
amount of complex data and it will be necessary to decide who will have access to the full data,
senior management only, divisional or departmental heads, or all employees. Alternatively
partial information may be provided on a need to know basis. Decide how the results will be
publicized, through meetings, newsletters, the organization’s intranet or any other appropriate
Communicate on channels.

7. Utilize the results any form of business appraisal is not an end in itself. It is a guide to
organization performance and may point to areas (management, operational, procedural) that
require strengthening. Taking action based upon the obtained information is as important as the
data itself. Indeed, management follow up action should be seen as an essential part of the
process of appraisal.

8. Review and revise the system. After the first cycle has been completed, a review should be
undertaken to assess the success, or otherwise, of both the information gathered and the action
taken, in order to determine whether any part of the process requires modification. Refrain from
using the same Scorecard measures year upon year. Review the existing metrics and, where
appropriate, remove flawed metrics and replace them with more reliable ones. Be prepared to
introduce additional measures to reflect current circumstances, for example metrics measuring an
organization’s ethical Performance.

Benchmarks, financial and non-financial key performance indicators, & budgetary targets
that identify financial problems and financial variances.

New business conditions have evolved over the past few years where information has been
considered as the most important resource for measuring the performance of the enterprise,
identifying the financial problems related to the variances found in the standardized set of
performance indicators. This has led to the use of various management accounting techniques
that set the benchmarks, utilizes financial and non-financial key performance indicators to
analyses the performance of the enterprise reflecting the way it tends to concentrate on long-term
sustainability aspect. The use of budgetary control in planning and executing various business
activities will help the organization to focus on achievement of standards set for the targeted
results aiming to fulfil the desired objectives of the enterprise.

Key performance indicators are financial and non-financial measures that most of the enterprises
use to reveal their success in accomplishing their long-lasting goals.
Some of them are discussed below: Financial Indicators:-

Basis KPI Responses or use in


identifying financial
problems and variances
solvency, debt  Current ratio Indicates ability to pay short-
Ratio Liquidity, term debts with short - term
assets ( Podgorski, 2015) .
 Quick ratio Sufficiency of liquid assets
with respect to short - term
debt.
 Working The ability of the enterprise
capital to remain solvent used for
the availability of day - to- day
requirements.

The capital structure of the


 Debt to equity company indicating the
proportion of debt and
equity utilized for the
financing of assets.
Percentage of accounts
 Accounts payable outstanding to the
payable to inventory inventory level of the
Profitability ratios enterprise .

 Gross profit That percentage of sales


margin which a company has left
to pay its operating cost
and makes a profit.
Used in benchmarking,
 Selling cost % goalsetting and budgeting.
Used in benchmarking,
 Administrative goalsetting and budgeting.
cost % Used in benchmarking,
Revenue ratios  Total goalsetting and budgeting.
operating cost % Used in benchmarking,
 Finance cost goalsetting and budgeting.
% Indicates the net
profit earned by the
 Net profit company.
margin

 Sales Provides tracking of part


of sales equation through a
CRM system which
provides the knowledge
needed to affect it .
 Sales growth Measurement of trends in
sales and its growth.
Non-financial indicators:

Management of human resources In today’s environment businesses have


started viewing staff as a major asset and
considers it as the important factor for
ensuring the success of the business. This
includes staff turnover, % of job offers
accepted, competence surveys etc.
.
Product and service quality It has been observed that
problems recognized in product or service
quality of the company affects its
long-term sustainability and leads
to customer
Dissatisfaction and loss in future sales.
Therefore it should be compared with
competition and customer’s satisfaction.
Performance on these related dimensions
needs to be combined to reflect an overall
picture.
Brand awareness and company profile The measurement of brand and company profile
can reflect its future growth and development.
This should include dimensions like
high loyalty, name awareness,
perceived quality and other attributes such as
patents or trademark.

Management accounting can lead organizations to sustainable success by responding to


financial problems
The role of management accounting in sustainable success of a business organization can be
summarized in points discussed below:

• The managers will be required to support the strategic and sustainable goals with
the strategies and policies to be developed.

• Management accounting tools and techniques like marginal costing, standard


costing, break even analysis etc. will help in integration of sustainable matters into the
various decision-making processes.

• Management accounting helps in the production of reports that include


information on sustainability impacts which will help in understanding pricing and
budgeting decisions and strategic planning.

• Helps in development of reporting strategy that will integrate sustainability issues


which in turn will allow reporting of financial and non-financial information.

Planning tools for accounting respond appropriately to solving financial problems

The various planning tools help the management in identification of financial problems with the
help of management accounting techniques and tools. The information acquired from these
planning tools helps in making strategic directions and taking financial decisions that can
contribute to the financial success of the organization. The tools will help in controls to be
implemented and investment decisions can be taken accordingly. The analysis and interpretation
of financial data will assist in external reporting which in turn will ensure sustainable growth of
the enterprise. The enterprise will have a significant impact in its issues of sustainability with the
execution of planning tools.

Management accounting contributes at various levels of planning and strategic decisions in the
way explained below:-

Planning and controlling –This is the vital element of management accounting and needs to
put plans in place to set a direction for the organization and control system to ensure that all the
operations are executed according to the plans .
Implementing plans – Managers through the use of management accounting methods collects
various information including budgets, performance reports and product cost on a regular basis
for the implementation of the plans prepared in the process of budgeting. This helps the
management to allocate resources according to the requirements of various departments and
divisions including each particular process.

Competitive edge – It can be seen that well-managed organizations focus their strategies and
objectives on creating the competitive advantage of the enterprise. Therefore the organizations
strategies with the use of management accounting techniques are well focused on getting the
competitive advantage in the market while focusing on low cost and brand image .

Developing effective strategies and systems require effective and timely reporting and requires
disclosure of all financial positions

Strategic planning is concerned with the creation of corporate strategy decisions about the types
of markets and businesses in which the enterprise operates and involves competitive decisions
about the strategies to compete in the market. Strategic planning thus uses management
accounting information from various management systems like costing, budgeting, and
performance measurement systems as well as from the internal and external sources of
organization. Management accountants use of various techniques can help in implementing those
strategies using the planning and controlling systems as described below:-

• Budgeting systems – Long term plans are required to be linked to these systems in order to
produce annual budgets which can support the organizational strategies.

• Performance measurement systems – These can be used for comparison of actual outcomes
to that of related budgets and various other targets that focus on organizational strategies.

Responsibility centers

The cost center is where some costs are collected before further analysis. The cost center may
include the following.
(A) One department

(B) One machine or a group of machines

(C) One project (for example installing a new computer system)

(D) New Products (Determine Development Costs)

To charge the cost center the actual cost, each cost center will have a cost code. Expenditure
items will be recorded with the appropriate cost codes. When the costs are ultimately analyzed,
the cost of one cost center may be spread to other cost centers.

(A) The cost of cost centers sharing cost should be divided into direct attribution costs, cost
center manager is responsible, and common costs, another cost center is directly responsible.

(B) The control system should trace the shared costs back to cost-sharing cost centers so that
their managers are accountable for the costs incurred.

Information about cost centers can be collected based on total actual costs, total budget costs,
and total cost variance (the difference between actual costs and budget costs), perhaps divided
into analysis efficiency, usage and Discrepancy in spending. In addition, the information may be
analyzed on a pro-rata basis as shown below.

(A) Production unit costs (budget and actual)

(B) Number of hours produced per unit (budgetary and actual)

(C) Efficiency ratio

(D) Cost of sales per sale (budget and actual)

(E) Tons / km Transport costs (budget and actual)

A profit center is any unit of an organization (such as a division of a company) that is both
revenue and cost distribution, which can measure the unit's profitability. The difference between
a profit center and a cost center is that they take into account both cost and revenue, so the profit
center's key performance indicator is profit. Profit centers based on responsible accounting have
any validity in the planning and control system. Managers Profit center income and costs have a
certain influence; this is a statement of sales and production policies.

The profit center manager is likely to be a fairly advanced person in an organization, and a profit
center is likely to involve a considerable area of business. A profit center may be the entire
department within an organization, or it may be a separate profit center for each product, family,
brand, or service that the organization sells. The same requirement for information places the
same emphasis on the right place.

In an organization's responsibility center hierarchy, there may be multiple cost centers within a
profit center.

Revenue centers are similar to cost centers and profit centers but are only responsible for
revenue.

For a revenue center to have any validity in the accountability-based planning and control
system, revenue center managers should typically have a handle on how to increase their
revenue.

The Investment Center is a profit center whose performance is measured by the rate of return
on capital used. This means that investment center managers have a say in the investment
policies in their area of operations and are accountable for costs and revenues.

Several profit centers may share the same capital items, such as the same buildings, shops or
fleet, so the investment center may include several profit centers and provide a basis of control
on a very high level of management, like a group within the subsidiary.

Control can be achieved by reporting information such as profit / sales ratio, asset turnover,
cost / sales ratio, and cost variance. In addition, the performance of investment centers can be
measured by comparison.

(A) The report should be clear and comprehensive.


(B) The "principle of exceptions" should be used to highlight significant differences for
investigation.

(C) The report should identify controllable costs and revenues, an item that can be directly
affected by the manager who receives the report. It may be exciting if managers feel they are
responsible for things that are beyond their control and that they cannot influence.

(D) The report should be timely, meaning that reports must be produced in a timely manner so
that individuals can take control before any adverse outcome becomes worse.

(E) The information should be accurate (although accurate enough for the purpose only, since
there is no need to enter unnecessary detail for the sake of meaningless accuracy).

(F) The report shall be communicated to the manager in charge and entitled to take action on the
matter.