Introduction to managerial accounting accounting

10 Part (A) 10 Part (B).12 REFERENCES 15 INTRODUCTION Management accounting may be defined as a kind of accounting that is associated to the preparation of the internal reports on the basis of monetary and non monetary information of businesses (Christ, Burritt and Varsei, 2016). Management accounting: The term management accounting may be defined as a systematic process of gathering and managing the available information about quantitative and qualitative business transactions with an objective to produce internal reports (Jakobsen,

MANAGEMENT
ACCOUNT

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Part (A)...................................................................................................................................3
Part (B)...................................................................................................................................8
CONCLUSION................................................................................................................................9
TASK 2..........................................................................................................................................10
Part (A).................................................................................................................................10
Part (B).................................................................................................................................12
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting may be defined as a kind of accounting that is associated to the
preparation of the internal reports on the basis of monetary and non monetary information of
businesses (Christ, Burritt and Varsei, 2016). Due to help of these reports companies make
maximum use of available resources in an effective manner, this is why because of better internal
management. For better understanding of term management accounting Continental clothing
company Ltd company is selected. This company operates in the manufacture of cloths and
located in London. The project report is categorised into two tasks in which first task includes
different types of management accounting and methods of reporting along with planning tools.
On the other hand, second task contains preparation of income statements by help of marginal
and absorption costing. Apart from it, financial analysis of above respective company is done
whose objective is to provide detailed information to the management.
TASK 1
Part (A)
(A) Management accounting and types.
Management accounting: The term management accounting may be defined as a systematic
process of gathering and managing the available information about quantitative and qualitative
business transactions with an objective to produce internal reports (Jakobsen, 2012). As well as
this accounting is not a mandatory like other accounting. Though its role is wide in the context of
organisations because it acts as a guide for the managers to take futuristic decisions.
Management accounting system- This can be defined as a kind of accounting system which is
related to the preparation of internal reports with the help of available information of financial
and non financial transactions of companies.
Importance to integrate with organisation- It is mandatory for the organisations to align the
management accounting within process. Due to this systems and functions of companies can be
managed and arranged in an effective manner. For example in the above respective, continental
clothing limited company implements this accounting in their operations and activities for
making effective decisions on the basis of internal reports.
Origin, role and principle of management accounting:

 Origin- The origin of management accounting can be tracked from the technique of cost
accounting which evolved in England (Cooper, 2017). It was the time period of industrial
revolution.
 Role of management accounting- The key role of management accounting is to helping
managers of companies to develop a systematic framework to take suitable decisions. As
well as it is beneficial for providing all needed information related to finance and non
finance transactions.
 Principle of management accounting- There are some elementary principles of
management accounting which are essential to apply such as: Influence, relevance, value
and trust.
Difference between financial and management accounting:
Basis Management accounting Financial accounting
Information This kind of accounting includes
both types of information:
qualitative & quantitative.
On the other hand, under this only
financial information is included.
Reports Under this accounting, reports are
produced for internal stakeholders.
While in this financial reports are
prepared for internal and external
stakeholders.
Various types of management accounting systems:
 Cost accounting system- This accounting system is associated to the systematic
management of costs and expenditures of organisational activities with an aim to reduce
the costs. The cost accounting system is essential in the companies for tracking and
estimating total cost of various performed activities. In the above respective company,
continental clothing limited they are using this accounting system and it is helping them
in keeping an extra sight of eye on overall expenditures of manufacturing. Apart from it,
this accounting system estimates the futuristic cost of various operations and tasks of
organisations. On the basis of overheads can be allocated to the activities.
 Inventory management system- Under this accounting system, stored material of
companies are tracked in the term of quantity (Harrison and Lock, 2017). This stored

material can be raw material, work in progress goods or prepared products. It plays an
important role in the aspect of decision making for organisations. This is why because on
the basis of provided information regarding to the quantity of materials companies can
decide whether they should continue their production or not as well as they take buying
decision of raw material. So this accounting system is essential for the purpose of
managing stock specially about finished goods so that demand of customers can be
satisfied. In the above continental clothing limited company, they implement this
accounting system for getting information about quantity of raw material such as
woollen, fabric, lather, denim etc. Along with they aware about prepared cloths in
warehouses and accordingly they conduct their further operation of manufacturing.
 Job costing system- It is an accounting system which is related to evaluating the cost of
job of multi-pal operations that are operated within organisations. With the help of this
accounting system companies can be aware about how much cost is assigned in the
aspect of job allocated to different tasks. Along with it is essential for companies to get
some more information related to costs such as:
Direct material cost- In the job costing system information related to total cost which occurs in
purchasing and bringing material to the stores is included.
Direct labour cost- As well as information related to the total wages paid to the labours is also
provided by this accounting system.
Overheads- Except from above cost related information, some overheads related information is
included by above accounting system.
So this is the reason for which this accounting system is essential for companies. Same as in
above respective company, they use this accounting system with an objective to get full
information related to the cost of various aspects specially about job cost.
 Price optimisation system- Under this accounting system, prices of various produced
items are determined by considering profit of organisation (Soltes, 2014). Eventually, this
accounting system is based on a framework and according to it companies should assign
the price of their products and services by keeping one thing in mind that how customers
will react on different pricing levels. The price optimisation system is essential for
helping to the companies in setting the prices at a suitable level so that customers can be

satisfied as well as sell can be increase. The continental clothing limited company, sets
their prices at a level which is affordable for a particular customer segment.
(B) Methods of management accounting reporting.
It is essential that information which is becoming a basis of management accounting
reports should consists below mentioned features:
 Reliability- As per this feature of accounting information, it is important that all
information should be reliable in accordance to business activities of companies.
 Accuracy- The information must be accurate without including any error. This is why
because any error in information can result in wrong preparation of accounting reports.
As well as it may leads to wrong decisions. Up date- In a running business venture, there are a lot of transactions which occur on a
regular basis. Hence it is important that information must be updated so the internal
reports can become more useful.
Role of presenting the information understandable- It is necessary that financial and non
financial information must be simple and easy to understand so that accounting reports can be
made in less time. On the other hand, if accounting information will not be understandable then it
can be difficult to management accountant to produce the accounting reports.
Methods of management accounting reporting- There are wide range of methods of
management accounting reporting and some of these are mentioned below:
 Cost accounting report- Under this report a detailed information is included about cost of
various kind of activities such as cost of material, labour etc. As well as with the help of
this report companies can determine about total actual cost and can compare to estimated
cost. Thus it is useful in assessing information regarding to overall cost and expenditure
of multi-pal operations of companies. Same as in the above respective company,
continental clothing limited they make this report whose objective is to minimising the
total cost on the basis of provided information.
 Inventory management reports- In this report, information related to the quantity of
available inventories in warehouses as well as cost which is occurring in the process of
storing the stock (Sedevich Fons, 2012). In other words, the inventory management
report contains information about cost of buying the inventories, along with ordering

cost, hiring cost etc. By preparation of this report companies can aware about quantity of
stored material in warehouses and accordingly they take further decisions. For example in
above respective company, they produce this report with an objective to track the record
of all inventories.
 Account receivable ageing report- This is a kind of report which includes information
related to the total debtors which a company has. As well as under it, time period is also
included on which credit transaction is done by companies with buyers. The importance
of this report is that it useful in determining to companies about how much amount they
have in the market which is being paid by debtors. Same as in above continental clothing
limited company, they produce this report which provides them information about how
much debtors crossed the due date to pay the amount. On the basis of it, they charge
interest amount. Their debtors are mostly those customers who acquire their cloths on
credit.
 Budget report- This report is based on information about estimated and actual income &
costs (Rieckhof, Bergmann and Guenther, 2015). Along with it provides comparison
between actual income and budgeted income as well as actual costs and budgeted costs.
Due to this companies can assess their actual financial performance and can take
corrective decisions accordingly. For example the continental cloths limited they produce
this report and it helps them in tracking the actual performance of various kind of
business activities.
(C) Benefits and application of management accounting systems in the context of selected
company.
Management accounting
system
Benefits
Cost accounting system The key benefit of this accounting system is that it helps in
estimating future costs as well as minimise total costs. In the
continental clothing limited company, they apply this accounting
system which helps them in keeping the cost of manufacturing
operations below the estimated costs.

Inventory management
system
This accounting system is useful for tracking the record of
available inventories in stores as well as to minimise the storage
cost. Same as in the above company, this accounting system is
linked with the manufacturing operations and they take further
decisions accordingly about production and purchasing.
Job costing system It is beneficial for managing the cost of job in various activities.
For example in above company, they get the information about
cost of material, labour etc. with the help of this accounting
system.
Price optimisation system It is useful for companies in assigning the prices of manufactured
products. In the continental clothing limited company, they mark
the prices of their manufactured cloths on the basis of this
accounting system by considering customers reaction on different
prices.
(D) Integration of management accounting systems and reporting with organisational process.
The management accounting systems are aligned with the process of companies. This can
be understand by example of above mentioned company (Horton and de Araujo Wanderley,
2018). They are using cost accounting system, job costing system, price optimisation system and
inventory management systems in their operations. Like price optimisation system is linked with
sales department because it helps in setting prices at a level on which sales can be increase. Same
as in the context of accounting reports like cost-accounting reports, inventory management
reports etc. are linked with the process of above mentioned company. This is why because the
cost accounting reports are aligned with the finance department because these reports help in
keeping the cost of operations low. Thus the MA reports and systems are linked to the
organisational process.
Part (B)
Analysis of three planning tools.

In the management accounting various kind of planning tools are included and some of
these are mentioned below:
 Cash flow budgeting- It can be defined as a kind of budget which is related to providing
the information about cash inflow and outflows for a particular time period. This is also
known by the cash budget because it is linked with the cash flow projection. Like in
above respective company, they make this budget which helps them in determining the
need of cash. It has following advantages and disadvantages:
Advantage- It is beneficial in ignoring the debts because this budget limits the unwanted
expenditures.
Disadvantage- This budgeting consumes too much cost and time during preparation of budgets.
 Break even analysis- It can be defined as a kind of analysis which is related to find out
how much units should be sold so that incurred costs can be recovered at a point on
which there is no loss and no profit (Storey, 2014). The continental clothing limited
company, does this analysis to evaluate the point of selling on which their total cost can
be recovered.
Advantage- This analysis is beneficial in taking important decisions by management. As well as
it helps in assessing the units which are needed to be sold to recover the costs.
Disadvantage- Its main disadvantage is that it is based completely on assumptions. Along with it
does not include information about capital employed.
 Benchmarking- This is a kind of planning tool which is related to the comparing an
organisation's processes, performance and policies with other companies of same
industries. For example in above company, they compare their plans and policies with
other companies so that they can find out level of difference.
Advantage- It is beneficial for making competitive strategies so that companies can achieve the
advantage over rivalry firms.
Disadvantage- Its disadvantage is related to complacency and arrogance.
CONCLUSION
On the basis of above mentioned project report it has been concluded that MA has its
important role in the aspect of company's management. In report, MAS are concluded such as
cost accounting, job costing, inventory management system etc. which are important for above

company. Along with MA reports are also concluded like inventory management report, costing
reports which provide detailed information to managers. Apart from it three planning tools:
benchmarking, cash flow budgeting and break even analysis is mentioned. As well as income
statements are prepared with the use of absorption and marginal costing. In the end, business
memo is produced indicating to the managers of selected company about financial position.
TASK 2.
Part (A)
Cost- It may be defined as an addition of all the expenditures that incurs during the procedure of
completing any task. Eventually, every organisation wants that the cost should be low as much as
possible. For example in continental clothing limited company, they produce cloths and in that
process cost occurs. As well as cost can be categorised into various types such as fixed cost,
variable costs etc.
Cost analysis- This is related to a systematic process of computing total cost of various kind of
activities (Schuster, 2015). The purpose of this analysis is to getting detailed information
regarding to all expenses so that cost be controlled.
Cost volume profit- This can be defined as analysis of difference between the cost and profits.
The aim of this type of analysis is to measuring the financial performance as per the variation in
cost and volume. Same as in above company, they do the cost volume profit analysis to find out
difference in cost and revenues.
Flexible budgeting- It is a kind of budgeting technique that is related to preparation of
budgets which can be change if sales and profits vary from the actual level (Bragg, 2012. ). Same
as in above respective company, they use this budgeting technique for short time period.
Cost variance- In this actual cost is compared by estimated costs so that variation can be
find out. With the use of it, organisations can evaluate about whether their cost of operations and
activities is under control or not. For example in the above company, they conduct this analysis
for finding the variation in costs.
Absorption and marginal costing:
Absorption costing- This is a kind of costing technique which is related to the taking fixed cost
as a period cost and variable cost as a unit cost for preparation of income statements.

Marginal costing- Under this costing technique fixed and variable costs are taken as a cost of
product (Guthrie, Parker, 2014).
Inventory cost- It can be defined as a kind of cost which is related to the calculating the total
expenditures which occurs during the process of keeping the stock in warehouses.
Valuation method- There are some types of valuation methods for inventories such as:
 LIFO- Under this method, those raw materials are being used for production which was
brought last.
 FIFO- Under it, raw material which came first in the warehouses is being used first for
production (Mussnig, 2013). Overheads- Under it, various kind of expenses are included that are not associated with
direct material and labour. For example rent, wages etc.
Income statement under absorption costing method for month of May & June:
Particulars May June
(in £) (in £)
Sales (A) 10.5 4200000 3780000
Less: Cost of Goods sold
Opening stock -
Variable production cost 1300000 1300000
Fixed indirect production
expenditure 600000 600000
Closing stock 4.75 - 190000
Total cost of goods sell (B) 1900000 1710000
Gross profit (A-B) 2300000 2070000
Less : Selling & Distribution
expenses - -
Less : Administrative cost - -

N.P. (Net profit) 2300000 2070000
Income statement under Marginal costing method for month of May & June:
Particular May June
(in £) (in £)
Total Sales (A) 10.5 4200000 3780000
Less: Marginal cost of sales
Opening stock - -
Variable production cost 1300000 1300000
Less: Closing stock 3.25 - 130000
Total marginal cost of sales (B) 1300000 1170000
Contribution (A-B) 2900000 2610000
Less : Fixed indirect production cost 600000 600000
N.P. (Net profit) 2300000 2010000
Part (B).
Ratio analysis- The ratio analysis can be defined as a process of making comparison between
two or more organisation's financial condition with the use of ratios. It is beneficial for assessing
the actual financial
For this task Starbucks and Costa company is selected whose ratio analysis is mentioned below
which is as follows:
Profitability ratios- It is a kind of ratio which is being computed by companies to analyse the
profitability of various kind of business activities. This includes different profitability ratios such
as:
 Gross profit ratio- This is a kind of ratio which is related to defining about profit which is
earned by selling of units. This ratio is being calculated by a particular formula such as :

Gross profit/ sales*100. Herein below ratios of above two companies is mentioned
below:
Particulars 2018 2017 2016 2015
Starbucks company:
Gross profit
Sales
Gross profit ratio
7352
24720
29.74
6855
22387
30.62
6741
21316
31.6
5964
19163
31.1
Costa coffee company:
Gross profit
Sales
Gross profit ratio
2910
3295
88.31
2730
3106
87.89
2554
2922
87.40
2275
2608
87.23
07/07/1905 08/07/1905 09/07/1905 10/07/1905
0
10
20
30
40
50
60
70
80
90
100
31.1 31.6 30.62 29.74
87.23 87.4 87.89 88.31
Star bucks
Costa cafe
Interpretation- As per the above gross profit ratio, it can be be analysed that costa company's
financial position is good. This is why because their gross profit is more. In year, 2018 Starbucks

GP ratio is of 29.74 same as in costa coffee their ratio is of 88.31. So it can be interpreted that
costa company's gross profit is more then Starbucks.
 Net profit ratio- It is a kind of ratio which calculate the net profit of company in response
of operating cost expenses. This is calculated by formula which is Net profit/ sales*100.
Below this ratio of two companies is mentioned:
Particulars 2018 2017 2016 2015
Starbucks company:
Net profit
Sales
Net profit ratio
4518
24720
18.27
2884
22387
12.88
2817
21316
13.21
2757
19163
14.38
Costa Coffee:
Net profit
Sales
Net profit ratio
438
3295
13.29
422
3106
13.58
391
2922
13.38
370
2608
14.11
07/07/1905 08/07/1905 09/07/1905 10/07/1905
0
2
4
6
8
10
12
14
16
18
20
14.38 13.21 12.88
18.27
14.11 13.38 13.58 13.29
Net profitability
Star bucks
Costa cafe

Interpretation- The net profit ratio of both the companies is different from each other. In the
previous year during 2015-17 both company's net ratios are similar. In year 2018, Starbucks net
profit ratio is of 18.27 which is more then to the costa coffee. Hence, it can be interpreted that
Starbucks company's net income is better then Costa coffee.
Liquidity ratio- This can be defined as a kind of ratio that is related to defining about how much
cash is available in the organisation to operate day to day activities. It includes two types of ratio
such as:
 Current ratio- It defines relation between current assets and liabilities. As well as ideal
current ratio is 2:1 which means company has enough assets to pay the liabilities.
Particulars 2018 2017 2016 2015
Starbucks company:
Current assets
Current liability
Current ratio
12494
5684
2.19
5283
4221
1.27
4761
4547
1.04
4353
3654
1.19
Costa Coffee:
Current assets
Current liability
Current ratio
350
851
0.41
338
839
0.40
247
693
0.35
166
584
0.28

07/07/1905 08/07/1905 09/07/1905 10/07/1905
0
0.5
1
1.5
2
2.5
1.19
1.04
1.27
2.19
0.28 0.35 0.4 0.41
Star bucks
Costa cafe
Interpretation- On the basis above it can be analysed that Starbucks company has enough assets
to pay their liabilities. This is so because in year 2018, their current ratio is of 2.19 while the
costa coffee company's current ratio is just 0.41. So it can be interpreted that costa company's
liquidity position is weak.
 Quick ratio- This ratio defines relation between liquidity assets and current liabilities. As
well as it is calculated by applying formula such as: liquidity assets/ current liabilities.
Particulars 2018 2017 2016 2015
Starbucks company:
Liquidity assets
Current liabilities
Quick ratio
10586
5684
1.86
3561
4221
0.84
3032
4547
0.66
2713
3654
0.74
Costa coffee:
Liquidity assets
Current liabilities
Quick ratio
301
851
0.35
290
839
0.34
107
693
0.15
42
584
0.07

07/07/1905 08/07/1905 09/07/1905 10/07/1905
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
0.74 0.66
0.84
1.86
0.07 0.15
0.34 0.35
Star bucks
Costa cafe
Interpretation- Same as the current ratio, costa coffee company's quick ratio is also weak in
compare to Starbucks company. Like in year 2018, their quick ratio is of 1.86 while the costa
coffee's quick ratio is of 0.35.
Turn over ratio : In this mainly three types of ratios are included which are as follows -
 Fixed assets turn over ratio = This is calculated by a particular formula that is as follows :
FAT = Net sales / Average fixed assets
Particulars 2018 2017 2016 2015
Starbucks company:
Net sales
Average fixed assets
Fixed assets turn over ratio
24270
11662
2.08
22387
9082
2.46
21316
9569
2.22
19163
8093
2.36
Costa coffee:
Net sales
Average fixed assets
Fixed assets turn over ratio
3295
4542
0.72
3106
4351
0.71
2922
4158
0.70
2608
3568
0.73

1 2 3 4
0
0.5
1
1.5
2
2.5
3
0.72 0.71 0.7 0.73
2.08
2.46
2.22
2.36
Costa coffee
Starbucks
Interpretation – As per the above diagram this can be interpreted that Starbucks company's fixed
assets turn over ratio is higher as compare to Costa coffee. This is indicating that cost coffee is
not making buying and selling of their fixed assets as compare to Starbucks.
 Inventory turn over ratio = Cost of good sold / average inventory
Particulars 2018 2017 2016 2015
Starbucks company:
Cost of good sold
Average inventory
Inventory turn over ratio
17368
1401
12.39
15532
1364
11.38
14575
1379
10.57
13199
1306
10.10
Costa coffee:
Cost of good sold 385 376 368 333

Average inventory
Inventory turn over ratio
49
7.85
48
7.83
45
8.17
37
9
1 2 3 4
0
2
4
6
8
10
12
14
7.85 7.83 8.17
9
12.39
11.38
10.57 10.1
Costa coffee
Starbucks
Interpretation – On the basis of above graph, this can be interpreted that in costa coffee company,
there are less transaction of goods as compare to Starbucks. The reason of this difference can be
small area of operations and activities of costa coffee company.

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