Management Accounting Management

Questions: 1. Discuss the purpose of management accounting and the relative Importance of using management accounting tools over financial accounting, for furthering companys growth and profit. 2. Explain different classification of costs namely on the basis of type, function, behaviour and relevance and the implications of the cost classification for pricing. 3. Analyse the importance of cost volume profit, in decision making. 4. Discuss the benefits of preparing budgets for the company and suggest the types of budgets to be prepared, to forecast future performance of the company. Answers: Introduction The success of every business organization depends upon its management of its operational costs (Drury, 2012). The concept of management accounting plays a major role for the success of the modern business organization. The given report will reflect the importance of management accounting on the business organization AVN Plc. 1. Discussion on the purpose of management accounting and importance of management accounting tools over financial accounting for further growth of company Management accounting plays an important part for managing the cost and future strategic purposes of the modern business organizations. It mainly deals with the internal decisions of the firm. The management of the organization AVN Plc can take several strategic decisions based on the different internal problems of the firm. The tools and techniques of management accounting are cost sheets, cash budgets, forecasted cash flows, discounted cash flows, etc. Financial accounting is a wider concept and it deals with the internal and external business decisions. The main merit of management accounting is that it helps in analyzing the internal business decisions concerning cash flows, reduction of operational expenses, improvement of cash flows and operating budget planning. The focus and function of management accounting is on the pricing policies concerning the operational decisions of the organization. Therefore, the organization AVN Plc needs to focus on the techniques of management ac counting to make their pricing strategy effective in terms of competitive advantage. The firm can also increase their financial returns with effective implication of management accounting tools. The main possible advantage of management accounting is that expenses can be reduced. The profitability and sustainability of the business firm AVN Plc will depend upon its capability of reducing the expenses and upon their respective pricing strategy (Epstein and Lee, 2011). Therefore, growth of the firm depends upon its management accounting systems. 2. Explanation on different classification of costs based on type, function and behavior and implications of cost classification pricing There are various types of costs present within the internal business environment of a firm. Because of behavioral nature, the different types of costs can be in the form of fixed, variable and semi-variable costs. Fixed costs are those, which remain fixed throughout the financial year. Example- Wages, factory rent, etc. Variable costs are those, which fluctuate on the due course of time. Some examples of variable costs are office and administration expenses, marketing expenses, etc. On the contrary, semi-variable costs are those,w hich have the behavioral nature of both fixed and variable costs. One example of semi-variable costs is salaries of managers. Costs can also be classified based on function. These are in the form of production costs, financial costs, marketing and selling costs, research and development costs, office and administrative costs, etc. Some examples of production costs are direct labor, direct wages, etc. Financial costs include different forms of operational expenses, etc. In case of different types of costs are direct and indirect expenses (Horngren and Horngren, 2012) The below table reflects on the classification of costs based on their respective function and different types of costs:- Functional costs Different Types of costs Costs on the basis of Behavior 1.Financial costs 1. Direct costs Fixed Cost 2. Production Costs 2. Indirect Costs Variable Cost 3. Office and administration costs Semi-variable cost 4. Marketing and selling costs 5.Costs related to research and development costs Table 1: Different types of costs based on function, type and behavior (Source: Horngren, 2011) The given table reflects about the different types of costs that the business organization can incur. Based on the given costs, the firm AVN Plc can determine their respective pricing strategies (Bebbington and Thomson, 2013) 3. Analysis of importance of cost volume profit in decision making The three most crucial elements of business decision making is cost, volume and profit. With the help of CVP analysis, a business organization can determine the rate of operating leverage and allocation of fixed and variable costs. The percentage of sales levels and sales volumes required for the sustainability of the business can also be done through the analysis of cost volume and profit analysis. With the analysis of cost and volume of the selling units of the business will help to determine the profitability portion of the firm. The business organization AVN Plc can also determine the total percentage of break-even point in sales through effective utilization of cost volume profit analysis. The total amount of range of activity can also be determined with the assist of given analysis. The business firm AVN Plc can also implement their respective pricing strategy through the analysis of CVP. Per unit costs of product will be assessed by the firm with the help of the technique of c ost-volume and profit. Contribution per unit and marginal analysis are another two advantages of this technique that will assist the firm in case of business decision making. Therefore, it is concluded that the given tool of CVP technique is essential for a business firm like AVN Plc in case of decision-making (John, 2012) 4. Benefits of budget and suggestion of different types of budget to forecast performance of the firm There are various benefits of the process of budgeting. These are in terms of forecast of operational costs and implementing various decisions based on the given tool of budgeting process. The process of planning and managing operations starts with the preparation of budgeting process. Different types of allocation of operating cash and reviewing and monitoring the performance of the organizations can also are done through the process of financial budgeting process. Apart from this, controlling and measurement of cost variances is also evaluated through effective utilization of cost variances and expenditure of budgeting process. The management of the organization can also coordinate with all the respective departments through implementation of budgetary process. In the present business scenario, there are several of types of financial budget. These are cash budget, production budget, operational budget, cash flow budget, etc. All the given budgets have different forms of utilities i n accordance to the decision making purpose of the organizations to forecast the future activities (Horngren, 2011) Conclusion The report concludes that management accounting is a crucial aspect for an organization AVN Plc in making different pricing strategies and minimizes the cost of operations. The success of the organization will depend in what manner the organization can implement the tools of management accounting within their system. References Chenhall, R. (2012). Developing an Organizational Perspective to Management Accounting.Journal of Management Accounting Research, 24(1), pp.65-76. .Bebbington, J. and Thomson, I. (2013). Sustainable development, management and accounting: Boundary crossing.Management Accounting Research, 24(4), pp.277-283 Nixon, B. and Burns, J. (2012). The paradox of strategic management accounting.Management Accounting Research, 23(4), pp.229-244 Bhattacharyya, D. (2011). Management accounting. Noida, India: Pearson. Drury, C. (2013). Management accounting for business. Andover: Cengage Learning.. Epstein, M. and Lee, J. (2014). Advances in Management Accounting. Bradford: Emerald Group Publishing Limited. Groot, T. and Selto, F. (2013). Advanced management accounting. Harlow, England: Pearson. Horngren, C. (2011). Introduction to management accounting. Upper Saddle River, N.J.: Prentice Hall. John Y. Lee., (2012). Advances in Management Accounting. Emerald Group Pub.