ABC Ltd Case Study: Financial Problems & Management Accounting System

This case study delves into the management accounting practices of ABC Ltd, a medium-sized manufacturing company. It examines various management accounting systems such as job costing, inventory management, and cost accounting, highlighting their benefits in decision-making and operatio...Read More

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Management accounting and various kinds of accounting systems............................................3
Various kinds of management accounting reporting..................................................................3
Benefits of management accounting system...............................................................................4
Integration of management accounting system and reporting system........................................5
TASK 2............................................................................................................................................5
Practical.......................................................................................................................................5
TASK 3............................................................................................................................................8
Advantages and disadvantages of planning tools........................................................................8
Use of different planning tools ...................................................................................................9
TASK 4............................................................................................................................................9
Use of management accounting system to respond to the financial problems...........................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Managerial accounting or the management accounting may be defined as the use of the
accounting information and all the financial statements in order to make the decisions for the
company and its growth. This case study is on the company ABC Ltd which is a medium sized
company in the manufacturing sector. The present study will discuss about the different kinds of
the management accounting system along with the different types of management accounting
reporting (Alsharari, Dixon and Youssef, 2015). Further it will outline some advantages and the
disadvantages of the planning tools and their use in the company. At last it will highlight that
how management accounting system helps in solving the financial problems.
TASK 1
Management accounting and various kinds of accounting systems
The management accounting is a concept wherein the management of the company takes
the important decisions regarding the operations and the working of the company with help of
analysis and evaluation of the financial information and the financial statements. There are many
kinds of management accounting system which are discussed in the following points-
Job costing system- the job costing relates to the estimation of cost of every job in the
production process to ascertain the actual cost of producing the product. The job costing system
works in gathering three types of cost that is direct labor, overhead cost and direct materials. This
is required by ABC Ltd in order to maintain all the cost relating to the job.
Inventory management system- this involves the management of the inventory in the
business through the recording of the inflow and outflow of the raw material and finished goods.
This helps in the planning of the production of goods by production department. This is required
by ABC Ltd in order to maintain all the cost relating to the inventory and the finished goods.
Cost accounting system- it refers to the recording of the cost of production of any
product. This system is used by the company in order to estimate all the cost which may be
incurred by the company relating to the products like production cost, management cost,
inventory cost and many other costs. This is required by ABC Ltd in order to maintain all the
cost relating to the whole organization.
Various kinds of management accounting reporting
The management accounting reports are the documents or the reports which are prepared
in order to store and record all the data relating to management and operations of the company

on daily basis and then analyzing that data in order to take the decision (Armstrong, 2014). These
types of reports are then used to interpret and evaluate the data and to take the decision relating
to management. The different types of management accounting reports are as follows-
Job cost reports- these are the types of reports which are prepared in respect of a
particular job or project (Boučková, 2015). This report helps the management of the ABC Ltd in
knowing and evaluating the requirements and the profitability of all the jobs and their operations.
Budget reports- these are the most crucial for the company which is to be prepared. This
is because of the reason that it helps the owners of the company ABC Ltd in beforehand
understand and control all the estimated cost so that losses can be minimized.
Account receivable report- the accounts receivable reports shows the cash flow within
the company ABC Ltd. By the continuous evaluation of the accounts receivable reports the
company can handle its collections effectively and there can be no overlooking of the debtors.
Benefits of management accounting system
The management accounting system refers to a system which is internal to the
organization and is used to manage the company and takes the decisions for the growth and the
betterment of the company. With the application of the management accounting the company can
have many benefits. Some benefits are as follows-
 The management accounting systems like job costing, cost accounting etc. helps the
business in doing proper planning relating to the business because the budget helps the
company in taking more effective and efficient decisions (Quattrone, 2016).
 With the help of the management accounting system much information can be depicted in
the form of charts, bar, diagrams so it helps in proper forecasting, analyzing and
evaluating the managerial policies and strategies used.
 Through the management accounting system there is two way communication in ABC
Ltd. The top management plans and delegates work to lower staff. Also, lower staff
prepares reports and submit it to top management. This two way communication induces
sense of responsibility and also improves work conditions.
 Because of the proper recording and reporting of data on time there is always timely data
available as and when needed which increases the functionality of task there by
improving efficiency of organization.
 (Kaplan and Atkinson, 2015).

 As the management reports are prepared from time- to- time so it helps the company in
keeping eye over all the business and if any non performing activities are identified then
corrective actions are taken in order to improve those activities.
 As the management accounting system involves the division of work between various
authorities it helps the authorities in knowing the responsibility and acting accordingly.
This management accounting system helps the ABC Ltd in managing there all the costs like the
material, variable, fixed or the overhead cost with help of different management accounting
system like inventory management costing, job costing, cost accounting and many more. Also,
the application of management accounting system in ABC Ltd helps in properly plan and execute
activities for maintaining and improving the future of the company.
Integration of management accounting system and reporting system
The managerial accounting refers to as the process through which the managers takes the
decisions by taking in consideration the accounting information and the financial statements. On
the other hand, the management reporting refers to as the preparation of the report in which all
the related data is stored and analyzed (Vasarhelyi, Kogan and Tuttle, 2015). The management
accounting reporting and the management accounting system both are very crucial and important
in the business. With the integration of both these systems there is easy flow of information
through reporting and accounting and because of this the goals and objectives of the company
are accomplished properly and efficiently. The integrated use of both the management
accounting and the reports improves the responsibility, accountability and present-ability in
organization and its employees.
TASK 2
Practical
a) Marginal Costing- The marginal cost is defined as the cost incurred due to the production of
one additional unit or extra unit. The marginal costing refers to the technique of costing whereby
the marginal cost or the variable cost is charged to the units of the production. On the other hand,
the fixed cost for that time frame is fully written off against the contribution. It is calculated as
the addition of direct material, direct expenses, overheads and the direct expenses.
Marginal costing= direct material + direct expenses + overheads + direct expenses
production cost per unit

Cost of Direct material 10
Cost of direct labour 20
variable production overhead 5
Fixed production overhead costs 5
40
Total production cost
Units produced 18000
cost per unit 40
Total production costs 720000
Total cost of sales
Direct material 10
Direct labour 20
variable overhead costs 5
Fixed overhead cots 5
18000*40 720000
less closing stock 2000*40 80000
Cost of sales 640000
profit or loss statement for the month January
Marginal costing (Budgeted)
Details Amount(£)
Sales 800000
Less: Direct material 18000*10 180000

Direct labour 18000*20 360000
variable cost of production 18000*5 90000
630000 -630000
1430000
Less: closing inventory 2000*35 70000 -70000
contribution 1500000
Less fixed costs 18000*5 90000 -90000
1590000
profit or loss statement for the month January
Marginal costing (Actual)
Details Amount(£)
Sales 800000
Less Direct material 19000*10 190000
Direct labour 19000*20 380000
variable cost of production 19000*5 95000
665000 -665000
1465000
Less: closing inventory 3000*35 105000 -105000
contribution 1570000
Less fixed cost of production 19000*5 95000 -95000
Profit . 1665000
b) Absorption Costing- the absorption costing means that all the cost relating to the
manufacturing are been absorbed or being assigned to all the units produced or manufactured
(Padovani, Orelli and Young, 2014). It is a method of valuing the inventory by the process of
assigning all the variable and the fixed cost which are incurred at time of production.

profit or loss statement for the month January
Absorption costing (Budgeted)
Details Amount(£)
Sales 16000*50 800000
Less Direct material 18000*10 180000
Direct labour 18000*20 360000
variable cost of
production 18000*5 90000
Less fixed cost of
production 18000*5 90000
720000 720000
Less: closing inventory 2000*40 80000
640000 640000
560000
profit or loss statement for the month January
Absorption costing (Actual)
Details Amount(£)
Sales 16000*50 800000
Less Direct material 19000*10 190000
Direct labour 19000*20 380000
variable cost of
production 19000*5 95000
Less fixed cost of
production 19000*5 95000
760000 760000
Less: closing inventory 3000*40 120000
80000

Interpretation: Absorption is the technique where all costs have been considered while
analyzing outcomes. However, in relation with the budgeted analysis have represented gains of
160000 while in actual it also has received gains of 80000 GBP. Thus, in relation with this, on
which it can be said that, absorption costing technique is being helpful and adequate for the firm
in retaining appropriate gains in both situations such as budgeted as well as actual outcomes.
TASK 3
Advantages and disadvantages of planning tools
There are a lot many advantages of the planning tools. These tools are more or less
performs same functions (Van Dooren, Bouckaert and Halligan, 2015). The planning tools are
referred to as the different types of tools or techniques which are used in the process of planning
for the future growth of the business.
Advantages of sales budget  The use of these sales budget helps in
the efficient use and allocation of the
available scarce resources and is based
on the needs of the organization and the
benefits which they derive with the help
of such budget (Ramli and Iskandar,
2014).
 With the help of these sales budget
more accurate prediction of sales is
done relateing to all the products and
the services.
Disadvantages of sales budget  All the sales budget preparation
requires highly skilled and
knowledgeable persons and this is not
possible in a manufacturing industry
that there are much skilled employees
(Mirzaey, Jamshidi and Hojatpour,
2017).
 The another disadvantage is that these

use of these making of sales budget is
very expensive and time consuming.
Advantages of production budgets  This type of budget is advantageous
because this budget helps in utilizing all
the plant and machinery upto the
maximum extent.
Disadvantages of production budget  The major problem with this type of
budget is that many costs are variable
and keeps on changing which affects
the prepared budget
Use of different planning tools
The budget is a planning tool which helps the management in planning for the future by
considering the past performance and data (Shi, Zhang and Guo, 2014). This is termed as a
planning tool because the budget helps the company in projecting all the income and the
expenses in advance and plan for the future growth and development. In the budgetary control
the planning tools used are the various types of the budgets like sales budget, cash budget,
financial budget and many more. The different use of the planning tools are as follows-
Sales budget- this is a type of budget in which the company tries to estimate the sales for
the future time period (Osadchy and Akhmetshin, 2015). These budgets are used to plan and
predict the trends of the sales for the future on the basis of the past sales.
Production budget- this is the types of budget which is used in calculating the number of
units of the products which are manufactured. This is the budget which helps the company in
planning for the whole production process that is from where the raw material will be taken at
what rate, which machines will be used, at what cost and all the factors relating to the
production.
These planning tools helps the ABC Ltd in responding to the financial problems because
with the help of the planning tools it is easier for the company to deal with all the financial
problems because these planning tools are very systematic and helpful in proper doing and
execution of the work.

TASK 4
Use of management accounting system to respond to the financial problems
 Bench marking- it is defined as the process of measuring the performance of the
company's products and services as compared to the another business or the competitor
which is best in the industry (McLellan, 2014). The main aim of bench marking is to
identify the company's own internal strengths and convert them into opportunities. Bench
marking helps ABC Ltd in improving the employees understanding about the cost
structure and the internal process because it is compared with the other firm so it can now
differentiate between the cost structure of the ABC Ltd as compared to the other
competitors. Comparatively, Tesco uses this technique in order to minimise the financial
problem of funding.
 Key performance indicators- it refers to a measure or method which demonstrates how
effectively and efficiently the company works in achieving the business objectives and
the goals (Gichaaga, 2014). This method evaluates the rate of success of the organization
or for a particular activity. There are basically two types of the KPI that is financial and
non- financial KPI. Here the Tesco uses KPI to overcome the problem of economic
fluctuation in the industry.
 Balance Score Cards:- This theory recognizes to balance their day to day activities and
communicate with all the department to work according to the strategies that they are
imposed. In these balances score card, organization already estimated their priority task
and their strategies to achieve with the allotted time (Padovani, Orelli and Young, 2014).
Thus, it requires proper planning and management technique to impose various
techniques to minutely examine the working of every field and measure the strategies
which they adopted to achieve goal in the organization. In ABC Ltd. They mainly focus
on innovation which attract the customers through their products and services and also
enhance their brand name but the financial problem arise that it results in wastage of old
products which bring loss to the company. In case of TESCO company, they mainly
focus on employees working so that they can enhance the productivity in better way but
the financial problems arise in case of providing training to the employees and also spend
lot of earning in maintaining their sustainability in the premises.

 Variance analysis:- In this analysis it determines the actual results between the estimated
results. As mainly organization adopted this strategy so that they prepared themselves to
take risk in the market. Through this analysis they maintain a control in the business
regarding the expenses which incurred without any use. In case of ABC Ltd., they can
solve their financial problem through this strategy (Mirzaey, Jamshidi and Hojatpour,
2017).In case of ABC Ltd. they use the estimated strategy to make budget, this is helpful
for them to examine the income and losses occurred during the financial year and also
reflect the strong financial stability similarly in cases of Tesco company they mainly
focus on actual analysis, which mainly results in loss to the company as the market
usually fluctuates due to changes in tax rates.
 Cost-Volume-Profits Analysis:- In this planning tool, companies can examine the cost
incurred and the profits raised from such products and through this process the exact
volume is examined. Thus, it includes the sale prices, the cost which is fixed for the
products and the prices which raises from the sale of such products to recognize the
volume of the products. In this analysis it firstly recognizes the amount of sales which is
left as the fixed cost and then it is deducted in terms of profits (Vasarhelyi, Kogan and
Tuttle, 2015). In case of ABC Ltd. they can analyse the sales costs are fixed and then the
profits which they earned through their activities but in relation to Tesco company they
use the sales cost as variable which affects their financial matters in case of fluctuation in
prices or resources availability.
As from the above planning tool, Balance score card is useful for the ABC Ltd. to solve
their financial matters. As they can refer the strategy for various department and also impose
strategic position to work accordingly. They minutely examined the working of the employees,
so that they can save for future use (Quattrone, 2016).
CONCLUSION
According to the above study it can be concluded that management accounting helps the
organisation to manage their internal activities which helps in taking effective decisions. As if
the accounts are managed in appropriate way it guides the other department to use various
strategies to achieve goal for longer term (Management accounting). It also reflects the stability
of the company if it is made in proper way as many investors and lender watches the stability and
integrity of the company if they mange their internal team effectively. It is the duty of the

management accountant to look after the organisation internally and their activities which is used
by their employees at the time of producing the products.