Management Accounting Assignment - ABC Limited

Management Accounting

INTRODUCTION...........................................................................................................................3
LO 1.................................................................................................................................................3
P1 Explaining the meaning of management accounting and different kinds of management
accounting systems...................................................................................................................3
P2 various method used by the organization for preparation of management accounting
report.........................................................................................................................................6
Integration of management accounting system and management accounting report...............7
LO 2 ................................................................................................................................................8
P 3 Calculation of Net Profit or Loss under Marginal Costing and Absorption Costing for
ABC Ltd. ..................................................................................................................................8
LO 3 ..............................................................................................................................................12
P 4 Advantages and Disadvantages of different types of planning tools used for budgetary
control.....................................................................................................................................12
P5 Explaining range of management accounting systems for developing efficiency of
company in responding to various financial problems...........................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting is the process recording, analysing, measuring and evaluating
the financial data by using the various tools to get the information for making decision for the
organization. The aim of management accounting is to support the manager in decision-making
process and analyse the financial data. The report is about ABC Limited, which is a medium size
manufacturing company operating in United Kingdom. The aim of report is to explain the role of
management accounting and requirement of various accounting system to the organization to
evaluate the performance and control the cost of the company. It also explains the different
method used by the company to reporting the management accounting like the balance sheet,
profit and loss account and income statements. It highlights the use of marginal and absorption
cost to prepare the income statement and various advantages and disadvantages of the planning
tool like zero base budgeting, increment budget etc. The report also help to focus on the MA
system to resolve the financial problem like variances in budget, change in sales and profit etc.
LO 1
P1 Explaining the meaning of management accounting and different kinds of management
accounting systems
Managerial accounting is defined as a procedure of systematically recording, evaluating and
analyzing the cost and financial information of an entity for the purpose of preparing accurate
internal financial reports, statistical information which is needed by the business managers for
exercising their day to day functions. Tools and techniques of management accounting also
facilitates the managers with the required information regarding log term decisions such as
acquisition of capital assets, undertaking of a particular project etc. This is done by assessing
their feasibility and profitability. Such decisions are taken with the help of financial
modeling,capital budgeting etc. (Mouritsen and Kreiner, 2016).
Difference between financial and managerial accounting :
Basis Management accounting Financial accounting
focus managerial accounting’s aim to
provide the managers with needed
financial and cost related
financial accounting focuses on
preparing the financial reports for
all the interested parties or
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information that assists the in their
decision making process, strategy
and policy formulation, etc.
stakeholders of the business
Statutory requirement managerial accounting is practised
for the sake of assisting the
managers with meaningful
information to make qualify
decisions for the organization.
financial accounting is required by
the law and is mandatory
Different types of management accounting systems are as follows:
Cost accounting system:
It is referred to as a procedure of systematically recording, classifying, evaluating and
analyzing the costs. This system is applied by the business organization for anticipating the costs
of their products or services for the purpose of identifying the profitability, cost control, cost
reduction and inventory valuation. ABC Ltd applies this system of management accounting
within its operations for a motive of determining the costs and profitability of the products
manufactured by the company. This also helps them in exercising controlling function through
which cost-effectiveness is achieved.
Requirement and Benefits :
It is required in the business because it allows the managers in measuring and assessing the
cost efficiency within the operations. It further allows the management of ABC Ltd in
identifying the profitable and non profitable operations (Machado, 2016).
Price Optimization system :
Price optimization refers to a system employed by business organization for identifying the
retail value of the company’s products or services. In other words, it is a procedure of
determining the balance between profit and product’s value. The manager of business
organization evaluate and analyse different possible prices of the goods which consumer is
happy to pay. It also analyse and assess the lowest price which the business entity requires to fix
for preventing any possibility of losses(Borker, 2016).
Requirement and Benefits :
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Price optimization leads to better quality decisions that helps in improving the efficiency of
overall company. It allows management to set an optimum price which helps it in attracting the
attention of consumers. Further, it significantly helps the business in standing peacefully and
Strong the ultra competitive market.
Inventory management system:
It is a system of managing the non capital asset of the business organization which are stock
or inventory. It is basically a procedure of keeping and maintaining the sufficient levels of
inventory within the business so that flow in the production process does not get disturbed
(inventory management, 2019). There are different ways through which a company manages its
inventory such as:
 LIFO: It is last in first out method in which recently purchased goods are removed first
from the inventory and is matched with income generated through sales which is reported on
the income statement.
 Just in time purchase: This is one of the method of managing the inventory in which
organization purchase goods only when they are to be delivered to the customers for meeting
their demands. Economic reorder quantity: It is defined as such quantity that minimizes the carrying and
holding costs of materials in total. It is recognized as one of the best classical model of
scheduling production.
Requirement and Benefits :
This system is required within the business because it helps in optimally managing the
inventory which in turn reduces the unnecessary costs of handling and carrying excessive
inventory which is not required by the company. Further, it also keeps a balance between
production demand and stock of raw material that helps the business in avoiding excess
requirement of working capital. This significantly reduces the operation costs of the business
which eventually lead to higher profitability for the organization.
Job costing system:
It is such system in which costs of each product is assigned and allocated individually. Job
costing system acts as a supervising technique that assists the managers in keeping the track of
company’s expenses. ABC Ltd apply this job costing in its business through which it determines
the profitability and viability of a particular product of the company.
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Requirement and Benefits :
The major benefit of this accounting system is that it enables the management in
ascertaining the profitability of each order, job or product of the manufacturing unit. This in turn
facilitates the management with the crucial information that whether a particular product should
continue or it should be closed down.
P2 various method used by the organization for preparation of management accounting report
Managemnt accounting report prepare record the data for the internal user like managers,
employees and owner to produce the information for the external users such as creditors,
customer etc. Management accounting use the data from the financial accounting to measure and
control the performance of the company and provide the effective result through the efficient
decision-making process. The various method are used by the organization for reporting such as :
Budget : It is prepared to estimate the cost of the product and determine the various
activities in the production and manufacturing process. It controls the activity and cost of the
company by estimating the cost of various resource used by the organization during the
manufacturing and distributing process. Budget help the ABC company to prepare the
management accounting report. By comparing the standard budget to the actual cost ABC
company can easily manage the performance by finding the variances and manage them by
controlling the cost (Le Quéré, and et.al., 2015).
Performance report : It is prepared by the company to measure the performance of the
organization and its employees. To manage the performance of the company they also prepare
the report as department wise. It helps them to get the performance of individual department and
their impact on the whole organization. ABC company prepare the management accounting
report to evaluate the performance of each employee and department by comparing it to previous
year performance which increases the efficiency of the company (Management accounting
report, 2017). They also use the various tools in evaluating the performance such as key
performance indicators, budgetary control etc.
Inventory and manufacturing report : It is used to manage the inventory level in the
organization and make the efficient manufacturing report. It includes the various items such as
inventory wastes, overhead cost per hour or labour cost on hourly basis. ABC company use the
inventory and manufacturing report by comparing it with different assembly lines and found the
area of improvement to gain the higher profit. By managing the inventory level in the
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organization ABC manufacturing company can easily fulfil the demand of the customer and
order the quantity when they required.
Job cost report : It helps the company to focus on the specific project rather than to
invest time and money on different job which are less important for the company. It helps ABC
company to identify the area which provide higher earning and manage the tome and cost of the
firm. It also helps ABC company to analyse the expenses of the activities when project is
running, so they can manage the time and cost to address this problem and expenses after the
wastage become out of control.
Integration of management accounting system and management accounting report
Management accounting report and MA system is used by the ABC limited company to
formulate the policy, plan and strategy to evaluate the performance of the company via using
different reports such as budget report, inventory and manufacturing report etc. MA system help
the organization to manage the inventory level by providing different software to record the
inventory level and order quantity in the organization. It also helps them to reduce the inventory
maintenance cosy and improve the efficiency of the product and organization.
LO 2
P 3 Calculation of Net Profit or Loss under Marginal Costing and Absorption Costing for ABC
Ltd.
1. Production cost is the cost which is occurred at the time of converting raw material into
finished goods. These costs are generally direct costs for the company. Various types of
Production cost are real cost, opportunity cost, money costs etc.
The Production Cost per unit occurred in the company at the time of production
goods by ABC Ltd is -£ 46.67 per unit
The total production cost incurred by ABC Ltd at the time of production of goods is
£886730
The total cost of sales occurred in the month of January by ABC Ltd is £1026740.
2. Application of appropriate Budgeted Profit or Loss statement for January
Particulars
Budgeted Cost at 19000
unit
Budgeted Profit or Loss
for 19000 units
Material 19000 19000
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cost per unit 46.67 60
Total cost 886730 1140000
Particulars actual Cost at 19000 unit
Actual Profit or Loss for
19000 units
Material 19000 19000
cost per unit 46.67 60
Total cost 886730 1140000
3. Marginal Costing and Absorption Costing
Marginal Costing is the method of costing where for the calculation of closing inventory is
valued on marginal cost per unit (Collis, 2017). Marginal Cost per unit is calculated by charging
all the variable cost which occurred in the production of the goods. This costing cost accounts all
the variable cost for taking out contribution for ABC Ltd. All the fixed costs of the company are
deducted from contribution of the company to calculate the Net Profit of the company.
Absorption costing can be defined as the costing technique which calculates the total
absorption cost per unit by including all the fixed and variable costs for ABC Ltd. Calculation of
closing inventory is done on the basis of absorption cost per unit (Schmidt, 2015). It takes into
account all the production costs absorbed at the time of production of goods. All the fixed and
variable production costs are deducted to calculate the Gross Profit of ABC Ltd. Net Profit is
calculated by deducting all the fixed and variable selling costs from Gross Profit.
Calculation of Net Profit or (loss) under Marginal costing and Absorption costing
Assessment of cost per unit: Marginal costing
Particulars Figures (in £)
D. M. 10
D. L. 20
Variable costs 5
Total cost per unit (£) 35
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Cost per unit: Absorption costing
Particulars Figures (in £)
D. M. 10
D. L. 20
Variable costs 5
Fixed manufacturing costs (100000 / 20000)
= 5
Total Cost per unit (£) 40
Profitability statement as per marginal costing system
Particulars Figures (in £)
Net Figures
(in £)
Sales 800000
D. M. 180000
D. L. 360000
Variable overheads 90000
Total costs 630000
Less: Closing inventory 70000
Marginal cost of sales 560000
Add: Fixed production costs 100000
Total production cost 660000
Net profit (NP) (£) 140000
Income Statement under Absorption costing:
Particulars Figures (in £)
Net Figures (in
£)
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Sales 800000
D. M. 180000
D. L. 360000
Variable Costs 90000
Fixed costs 100000
Total costs 730000
Less: closing inventory 80000
Cost of sales (COS) 650000
NP (£) 150000
Income statements when production units are 19000 and closing stock is 3000 units
Under marginal costing
Particulars Figures (in £)
Net Figures
(in £)
D. M. 190000
D. L. 380000
Variable costs 95000
Total expenses 665000
Less: closing stock 105000
Marginal cost of sales 560000
Fixed production costs 100000
Total production cost 660000
NP (£) 140000
Absorption costing
Particulars Figures (in £)
Net Figures
(in £)
Sales 800000
D. M. 190000
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D. L. 380000
Variable costs 95000
Fixed costs 100000
Total costs 765000
Less: closing inventory 80000
Cost of Sales 685000
NP (£) 800000
ABC Ltd should select the absorption costing method because absorption costing is
giving better presentation of the net profits. Under absorption costing method there is more net
profit than the net profit under marginal costing. It is because under absorption costing fixed cost
per unit is calculated for closing inventory whereas under marginal costing calculation of closing
inventory is done on the basis of total fixed costs. It leads to the decrease in the profits under
marginal costing. Thus, ABC Ltd should go for presenting its net profit under absorption costing.
M 2 Applying the accounting techniques and appropriate financial reporting documents for
ABC Ltd.
ABC Ltd shareholders should use the absorption method for the presentation of net profit
or net loss because absorption costing is showing more profits than under marginal costing
method for the month of January (Lips, 2017). This will help better in presenting the financial
reports of the company.
D 2 Application of various financial reports for making interpretation and analysis for
complex business activities
Various financial reports are used by the managers of the company in order to certain
decisions for the company. They take the decisions on the basis of the reports prepared by the
Professional of the company and makes analysis of the reports for better presentation of financial
statements. ABC Ltd should present its net profit or loss of the company under absorption
costing method because it is giving better presentation of Profits than the profits under marginal
costing. Under absorption costing method only presents £200000 whereas under absorption
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costing it is showing £218000. So, company should go present its income statement under
absorption costing method.
LO 3
P 4 Advantages and Disadvantages of different types of planning tools used for budgetary
control
Budgetary Control is the process where the company will be comparing the actual
performance of the company by the budgeted prepared by the company (Mohamed, 2016). These
budgets are prepared in order to control the extra cost allocated by the company which does not
gives the benefits to the company. The company prepares the budgets for taking decisions for the
company and than they are compared with actual performance of the company. Company
compares both actual and budgeted reports and if any deviations are found than company takes
certain corrective actions in order to improve the performance of the ABC Ltd. These budgets
also help in increasing the profits of the company and also control the cost with proper planning.
Various types of tools used in budgetary control are as follows-
Zero Based Budgeting-
Zero based Budgeting is the method in which all the expenses are needed to be justified
by the manager of ABC Ltd that what is their need in the department. It generally starts with the
“Zero Base” to know the worth of each and every expense allocated in the department. Expenses
under Zero Based Budgeting are allocated on the basis of their needs in each department and
what will be the benefits if these are allocated in the particular department (O'Shea, 2018). Under
this method, all the budgets are prepared specific for that particular year.
Advantages of Zero Based Budgeting are-
 This method helps in better allocation of each and every expense in all departments of the
ABC Ltd.
 This method helps in the better communication within the departments through effective
decision making and budget prioritization.
Disadvantages of Zero Based Budgeting of ABC Ltd are-
 It takes lot of time in the justification of each and every expense for the allocation in
every department. It also needs professionals to justify each and every expense of ABC Ltd which may not
be economical for the company.
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Incremental Budgeting
Incremental Budgeting can be defined as the budgeting where a percentage is been added
to the previous year of budget to prepare the current year’s budget of ABC Ltd. It is based on the
previous year’s budget and does not have any fixed formula to prepare budget under Incremental
Budgeting (de Campos, 2016). This budget is very useful to those companies where only small
changes occur in the whole year. This budget may lead to the conservative mindset of preparing
budget which may not be possible to apply in every company.
Advantages of Incremental Budgeting are-
 The calculation used under Incremental budgeting is easy and also they are easy to
implement in ABC Ltd.
 This budget is suitable for all the companies whose size are small and leads to fixed
changes in ABC Ltd.
Disadvantages of Incremental Budgeting are-
 Incremental Budgeting leads to the lack of innovation and there is no reduction of cost
for the managers in ABC Ltd. All the budgets prepared under Incremental Budgeting are on the basis of previous year’s
budget so it disconnects from real budgets benchmarks.
Activity Based Budgeting Control
Activity Based budgeting control is the method under which ABC Ltd requires the inputs
in order to achieve the set targets for the outputs which are to be achieved by the company. The
method is top- down approach. This method does not consider any past year’s budget to prepare
the current year’s budget (Mahal, 2015). Every activity in ABC ltd checks the every expense in
order to know the efficiency of the company. This method is more rigorous as compared to the
other methods. Under this method ABC ltd identifies all the activities in the organization and
realizes all the expenses and revenues of the company.
Advantages of Activity Based Budgetary control are-
 The main aim of this budgetary control is improve the customer’s relationship by
reducing the price of the products in ABC Ltd.
 This activity helps in the cost cutting of the company and reduces the cost of production
for the company.
Disadvantages of Activity Based Budgeting Control are-
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 This method requires the deep understanding of each activity in the company for budget
preparation. It takes a lot of time because ABC Ltd requires the depth research and analysis for every
activity held in the company.
M 3 Use of different planning tools and application for preparing and forecasting budgets
Zero Based Budgeting can be applied where company needs justification of each and
every activity to allocate them in every department. Incremental Budgeting should be applied in
the company where the size of the company is small or medium and only small changes occurs
in the company.
ABC Ltd can apply Activity Based Budgeting in their organization because ABC Ltd is a
manufacturing company. Manufacturing company is involved in large number of activities and
this budget will help the company in justifying every activity in the company (Mahal, 2015).
Company can better present its budget under Activity Based Budgeting for each and every
activity held in the company. Thus, ABC Ltd should apply Activity Based Budgeting for the
company to prepare the annual budgets for the company.
P5 Explaining range of management accounting systems for developing efficiency of company
in responding to various financial problems
Management accounting system
The major focus of each concepts and principles MA system is to detect various problems
within the business and improve the quality of managers regarding development of several
business activities and improving financial position of the company.
Financial problems
Financial problems are set of all those problems that affects overall financial position of
the company. Financial problems of the business can be related to either liquidity of the firm or
with its financial position in the competitive market (Machado, 2016). These problems have
direct relationship with sustainability of the organisation. In this order, it is essential for
managers to develop effective plans and strategies for the company in order to improve the
efficiency of company in facing various financial problems that may arise in future and improve
its sustainability as well.
For this purpose, the managers can adopt any of the following management accounting
system:
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Key performance indicators
(ABC Ltd)
Variance analysis
(XYZ Ltd.)
This system provides guidelines to managers
regarding analysing and summarising various
business activities. It develops efficiency of the
managers in evaluation of improvement or
decline in the efficiency of the performance of
each department of the firm. In addition,
adoption of key performance indicator also
establishes the ability of managers in analysing
improvement or decline in the efficiency of their
own performance. ABC Ltd. Adopts this MA
system within its business organisation in order
to improve the efficiency of its managers in
analysis of overall efficiency of the company.
Managers of the company establish their
monitoring over performance of each
department of the company by adopting key
performance indicator (Le Quéré, and et.al.,
2015). While performing managerial functions
in this regard, the managers sets a minimum
performance level of each department. If any
department performs below the level of
performance set by them, it is indicated as an
inefficient department of the business. In this
regard, managers easily detects the inefficiency
within the organisation and identifies each
financial problem that may arise due to those
inefficiencies.
For example, in case, production department of
the firm becomes inefficient, managers can
Variance analysis can be defined as one of the
best technique of MA system. This technique
provides tools to the managers through which
they can easily analyse the efficiency of
business regarding various activities such as
use of material, labour, other costs, etc. XYZ
Ltd. Adopts this technique for performing
their managerial functions. With the help of
tools provided by variance analysis, the
manager’s analyses performance of the
company with their budgets developed earlier.
Managers compare actual performance
of the organisation with the budgeted
performance and derive the results regarding
efficiency of the company in terms of
favourable or adverse results. Favourable
results show efficiency of the business. On the
other hand adverse result derived by
manager’s shows inefficiency of the company
in performing any specific activity. In
addition, this tool of management accounting
system also enable managers in determining
the actual reason behind the inefficiency of
the firm as well. In this regard, they becomes
more able to develop their plans and
procedures for the entity in order to eliminate
that specific inefficiency from roots.
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easily detects the inefficiencies in the working
of department. Through developing effective
strategies in that context, they can enable
business in facing all issues that can be arive in
the future due to the specific inefficiency.
M 4
Financial governance
Financial governance is the technique through which managers can maintain their eyes on each
financial activity of the company. In this regard, it can be analysed as the best technique to be
used for managing financial performance of the company. In addition, by adopting financial
governance, the managers of a company can easily identify each financial problems that may
arise in near future of the company. Furthermore, the technique also helps in establishing more
effective ideas, strategies and plans for the firm through which they can develop efficiency in the
business for the purpose of responding to various financial problems in future in more effective
way.
For example, In case, managers detects inefficiency of employees in recording financial
transaction of the company due to which financial reports are showing inappropriate results,
managers can develop their strategies regarding improving efficiency of the employees and
prevent the company from such financial problems easily.
CONCLUSION
By analysing the above study on MA it can be stated that adoption of MA system and
MA reporting is an essential element of a management of company. Adoption of appropriate
techniques and methods in this context cam help in improving the financial capabilities and
financial problems of the company. In addition, it can be seen that with the help of effective MA
system, managers of the company can easily detect the problems that may arise in the future.
Furthermore, these systems also provide help to the firm in developing more effective strategies
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and plans for the company so as to improve its efficiency in responding to all the financial
problems.
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Le Quéré, and et.al., 2015. Global carbon budget 2015. Earth System Science Data. 7. pp.349-
396.
Lips, M. 2017. Disproportionate allocation of indirect costs at individual-farm level using
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Management accounting report. 2017. [Online]. Available through :
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>
inventory management. 2019.[Online]. Available through
<https://searcherp.techtarget.com/definition/inventory-management>
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