Management Accounting and Cost Analysis

This document provides an overview of management accounting and its essential requirements. It discusses different methods of management accounting reporting and their application. It also covers cost analysis techniques and the preparation of income statement using marginal and absorption cost. The document is relevant for students studying management accounting and cost analysis.

Management
accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Defining management accounting and its essential requirements..........................................1
P2. Management accounting reporting different methods...........................................................2
M1. Describing benefits and application of management accounting system.............................3
D1. Evaluating the integration of management accounting reporting and management
accounting system........................................................................................................................4
TASK 2............................................................................................................................................4
P3. Preparation of income statement using marginal and absorption cost using cost analysis
technique......................................................................................................................................4
M2. Application of management accounting techniques for financial reporting documents......8
D2. Explanation of financial reports that apply and interpret data for business activities..........9
TASK 3............................................................................................................................................9
P4 Explanation of advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................9
M3. Different planning tools and their application for forecasting and preparing budget........10
TASK 4..........................................................................................................................................11
P5. Comparing how entities adapts management accounting systems for responding financial
problems.....................................................................................................................................11
M4. Explaining that management accounting can lead organisation to sustainable success by
responding financial problems...................................................................................................12
D3. Explanation of planning tools that solves financial problems so that firm could be
successful...................................................................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a process of identifying the aspects that affects the working of
the business directly or indirectly and then making a report with reference to the data that is
collected. Capital Joinery Ltd is a firm that deals in various products an services and is operating
since 2008 in London. This report covers various topics such as different types of management
accounting system and techniques. Apart from this it also covers topics of planning tools, cost
analysis, and different types of costs. Also the way in which an organisation deals with the
problems that are of financial nature.
TASK 1
P1 Defining management accounting and its essential requirements
Management accounting refers to a process of critically identifying and evaluating the
information related to accounts so that it can be precisely used by the managers to take decisions
which is in accordance with the information provided so that it can help a business to grow and
prosper in its industry. It is very important for a business as it helps management to take
decisions which can either be short or long term that helps a firm to improve its financial
stability. Capital joinery Ltd is a carpenter and joinery firm which provides made to measure
doors, double gazed, stairs, sash windows, etc. though the firm has been established in 2008
only, but it has gathered a pool of customer base (Abba, 2018). It is very essential to have a
improved and sophisticated version of management accounting system so that decisions taken
could be well directed and thus helping the firm to grow and capture a larger share of market.
Management accounting originated during 1900's from financial management but it is a lot
different from it in all aspects. Role of management accounting is to collect relevant data and
then analysing it so that it can be beneficial for the company. Principles of it includes that there
should be credibility of the data that is given, as well as it should influence the working of firm
in a positive way. Management and financial accounting differentiation is done below briefly-
Management accounting Financial accounting
 It is optional in nature as it involves
decision making concept and a firm has
to decide about it accordingly. Capital
 It is mandatory for a firm as it involves
communicating the financial position of
the business. Capital joinery Ltd does
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joinery Ltd has a business of public
dealing so the firm uses it to ensure that
decisions are taken effectively and
efficiently which act as a benchmark in
increasing the profitability.
 It is used internally to analyse the
position of the business mainly by
managers and employees. Capital
joinery Ltd has a expertise team of
management that helps in this process
(Alabdullah, 2019).
financial accounting so that the
performance of the firm can be
analysed. This helps in increasing the
scope for the company in the long run.
 It is done for external use so mainly for
outsiders that are directly or indirectly
interested in the working of the firm
like shareholders, lenders, banks, etc.
Capital joinery Ltd does a detailed
analysis in this regard so that it could
not hamper the working of the firm.
Different types of management accounting system are explained in detail below-
Cost-accounting system- It is a system in which cost is analysed of a product so that the
profitability level could be decided on which a firm can operate effectively. Capital joinery Ltd
employs a specialised team of experts that do research and analysis so that a perfect cost of the
product can be decided which can prevail in the market without any problems.
Inventory management system- In this system entire supply chain is tracked and so that
goods are safely procured and then supplied to the desired customer. Capital joinery Ltd has a
intact supply chain that is the backbone of the firm that helps it in working efficiently and
effectively (Askarany, 2016).
Job-costing system- This is a system in which costs regarding jobs are analysed so that
unnecessary expenses can be cut down which is beneficial for the firm. Capital joinery Ltd does
an intensive research in this aspect and reduces the wastage in its process if there is any.
Price-optimising system- In this system different prices are compared that can prevail in
the market at different levels so that a perfect decision can be taken. Capital joinery Ltd is very
precise in analysing different prices and thus helps the working of the firm in long run (Bedford
and Speklé, 2018).
P2. Management accounting reporting different methods
Management accounting reporting can be defined as a report that is given to the internal
team after rigorous evaluation so that it can help in better decision making and thus benefiting
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the overall growth of the firm. Capital joinery Ltd uses different methods of reporting that are
explained in detail below-
Budget report- It is a report in which actual performance is compared with the previous
report or with any set standards of the business. It is very helpful in analysing the variance and
cause for it and after that it can be rectified by taking necessary measures. Capital joinery Ltd
does a variance analysis through this report and the firm is able to identify the loop hole sin the
business and then the information gathered is summarised and then improvements are done
accordingly.
Accounts receivable ageing report- In this report as the name suggests it helps in
identifying the information regarding accounts receivables so that if it is performing badly it can
be improved. Capital joinery Ltd does a detailed study of its receivables and by this it gets to
know about it and then it takes necessary measures that has the potential to improve its
performance (Bisogno and Vaia, 2017).
Performance report- This is a budget which shows the performance of the company so
that the stakeholders and the government can see whether the funds are correctly utilised or not.
Capital joinery Ltd shares the detail of its performance budget with all the bodies that are directly
or indirectly connected with the firm and thus improving the market value. It also encourages the
management and employees to perform to their best because the report is seen by many and any
fall in the performance can be identified quickly.
Inventory and manufacturing report- In this report there is a detailed analysis of
inventory related things which includes all its processes starting from raw material to finished
goods. It helps a firm to reduce any wastage in terms of inventory as well as efficiency level can
also be increased. Capital joinery Ltd employs a team of skilled managers to do research and
analysis of it so that scope for any errors can be reduced. It also helped the firm to increase the
level of profitability because of reduction in wastages.
M1. Describing benefits and application of management accounting system
Benefits of management accounting system with reference to firm is given below in
detail-
Cost-accounting system- This system helps in identifying the activities so that the
profitable one can be chosen and measures can be introduces so that the unprofitable activities
can be reduced as much as possible. Capital joinery Ltd has used many measures to identify and
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prevent wastage and this system is taken the firm to a new heights making it a valuable company
within a short period of time (Gnawali, 2017).
Inventory management system- This system simplifies the inventory management
process which helps a business to grow. This system has helped Capital joinery Ltd to simplify
tits complex process.
Job-costing system- It measures and monitors the cost and employee performance which
is very important for a business. Capital joinery Ltd is performing best in its operations and
profitability just because of this system.
Price-optimising system- It is very helpful in making better and quick decisions and thus
reducing the time and effort in it. Capital joinery Ltd has reduces the time it consumes in
decision making and also improves the accuracy of it.
D1. Evaluating the integration of management accounting reporting and management accounting
system
Management accounting systems and reporting is integrated and helps in company's
processes. It has been discussed below-
Budget report- It helps in company's processes as it identify variances and the reasons
for it and it is very beneficial for a firm in long run. Capital joinery Ltd has been in one of the
most profitable firm in a very short time and budget report helped it a lot (Kashora and 2016).
Cost-accounting system- It contributes a lot in improving company's processes as it
helps in cutting down cost which is of no use. Capital joinery Ltd when started is not doing very
well due to additional costs that it incurs but when it used this system it has changed it a lot and
the firm has become much more profitable than earlier by reducing unnecessary costs.
TASK 2
P3. Preparation of income statement using marginal and absorption cost using cost analysis
technique
Cost can be defined as the price that is paid for using a particular service or for
purchasing a product. There are different types of cost that are explained briefly below-
Fixed cost- These type of costs are those which remain constant during the course of
business. It plays a very important part in the working of a business because this cost will incur
whether business is operational or not so each firm wants to cover its fixed cost first. Capital
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joinery Ltd operates with a little fixed cost so it covers it easily which is helpful in its overall
profitability.
Variable cost- It is a cost which changes with the change in output. If there is a increase
in output variable cost also increases and if there is decrease in output variable cost also
decreases. Capital joinery Ltd decide its level of output very carefully so that variable cost would
not become a burden for the company and this helped the firm in maintaining a good level of
profit (Lay and Jusoh, 2017).
Semi-variable cost- As the name suggests it is a cost which includes both fixed cost and
variable cost. Part of fixed cost will be fixed but variable cost increases and decreases in
reference to output. Capital joinery Ltd has a low semi-variable cost due to its research and
analysis which helped in decreasing these costs which proved beneficial for the firm in long run.
Cost analysis- It may be defined as the analysis of different types of cost so that a
comparison can be done within different types. It is very beneficial for a business as it helps in
reducing the extra costs that are not benefiting the firm in any way. Capital joinery Ltd has a
specialised team of experts in the research and development wing which do a detailed analysis of
all the costs separately so that it can add to the value of the firm.
Cost-volume profit- It is a method which analysis the impact of cost and volume at
different levels of operating profits. It is very important for a firm as both cost and volume are an
integral part of the business and it analysis this aspect of the company (Ng and 2017).
Flexible budget- It is a budget which is flexible in nature which means it changes
according to the activity, volume, or both. It shows the variations that a firm possess in relation
to the different cost it operates in.
Cost variances- It can be defined as the variance between the actual and budgeted. It is
preferable at lower side because lower variance means there is a least deviation which is very
beneficial for the firm in short as well as in long run.
Absorption costing- It can be defined as summation of all the different types of costs
such as land, labour, capital, entrepreneur. The cost are rent for land, wages for labour, etc. all
are included in this type of costing.
Marginal costing- It can be defined as cost of producing a extra unit of output it can
either increased or decreased depending upon the variable. It can be further simplified as change
in total cost of a product due to change in output.
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Marginal costing-
Particulars May June
sales 25000 20000
- marginal cost of sales
variable sales commission 500 400
variable manufacturing cost 2000 1600
direct material 6000 4800
direct labour 4000 3200
total marginal cost of sales 4500 3600
contribution 20500 16400
- fixes cost
fixed selling 1000 1000
fixed production overhead 2000 2000
fixed administration 3000 3000
net profit 14500 10400
Absorption costing-
Particulars May June
sales 25000 20000
-marginal cost of sales
variable sales commission 500 400
variable manufacturing cost 2000 1600
fixed selling 1000 1000
fixed administration 3000 3000
direct material 6000 4800
direct labour 4000 3200
total marginal cost of sales 16500 14000
gross profit 8500 6000
-fixed production overhead 2000 2000
net profit 6500 4000
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Reconciliation statement-
Particulars May June
Profit/ loss under absorption costing 6500 4000
add/less closing stock 8000 6400
profit/loss under marginal costing 14500 10400
profit/loss under marginal costing 14500 10400
Working note-
Particulars Amount
material cost variance
standard cost 24000
actual cost 22400
result 1600
material price variance
standard price 12
actual price 9.3
actual quantity 1000
result 2700
material usage variance
standard quantity 2000
actual quantity 2400
standard price 12
result -4800
Last in first out (LIFO)
DATE RECEIPT issue balance
quantity
unit
cost amount
quantit
y
unit
cost amount
quantit
y
unit
cost amount
01/06/2
0 balance 10 35 350
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01/06/0
9 15 38 570 15 38 570
01/06/1
5 12 38 456 3 38 114
10 35 350
01/06/2
0 10 32 320 3 38 114
10 35 350
10 32 320
01/06/2
3 10 32 320 3 38 114
10 35 350
01/06/2
7 3 35 105 3 38 114
7 35 245
01/06/3
0 2 35 70 3 38 114
5 35 175
27 951 8 289
Average cost (AVCO)
DATE RECEIPT issue balance
quantity
unit
cost amount
quantit
y
unit
cost amount
quantit
y
unit
cost amount
01/06/2
0 balance 10 35 350
01/06/0
9 15 38 570 25 36.5 912.5
01/06/1 12 36.5 438 13 36.5 474.5
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5
01/06/2
0 10 32 320 23 34.25 787.75
01/06/2
3 10 34.25 342.5 13 34.25 445.25
01/06/2
7 3 34.25 102.75 10 34.25 342.5
01/06/3
0 2 34.25 68.5 8 34.25 274
M2. Application of management accounting techniques for financial reporting documents
Normal costing- It is a method that is used in analysing and determining the cost of a
product or services that are rendered by a firm. Capital joinery Ltd has a specialised team that
researches about the current market conditions and then prices are decided accordingly.
Standard costing- It is a process of identifying the cost of expenses. Budgeted costs are
then compared with the actual to see that there are any variances and then the reasons are
analysed for the same. Capital joinery Ltd does a detailed study about it and then the costs are
fixed so that variances can be minimized.
Activity-based costing- In this type each activities are identified and then costs are fixed
in accordance with it. Capital joinery Ltd fix cost of each activity in a specified manner
according the the needs and requirements of that activity (Samuelsson and 2016).
Role of costing in setting price- Costing plays an important part in setting price as the
costs are analysed, researches, and then applied cautiously so that it is done in accordance with
the current market situations and profitability of the firm does not affect by it. Capital joinery Ltd
has a wing of specific persons that deal with it and has taken the firm to a new height by
analysing and implementing all the things correctly and precisely.
D2. Explanation of financial reports that apply and interpret data for business activities
According to marginal costing the net profit for the month of May is 14500 and for the
month of June it will be 10400. While in absorption costing the net profit for the month of May
is 6500 and for the month of June it will be 4000. According to the reconciliation statement
material cost variance result will be 1600 material price variance result will be 2700 material
usage variance result will be -4800. While LIFO balance will be 3 units of 38 each that will be
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114 and 5 units of 35 each that will be 175 whereas AVCO balance will be 8 units of 34.25 each
that will amount to 274.
TASK 3
P4 Explanation of advantages and disadvantages of different types of planning tools used for
budgetary control.
Budget is the estimation of incomes and expenses for a specific future period of time
which is usually compiled and re-evaluated on periodical basis by Capital Joinery Ltd. It is made
by a person, group of people, government or anybody who makes and spends money. Budgetary
control Budgeting methods many depend upon the type of business company is operating. The
following are some types of budgeting techniques used in Capital Joinery Ltd:
Capital Budgeting- This budgeting method revolves around capital expenditures which involves
large inflow and outflow of money in financial investments of Capital Joinery Ltd. With this
process company decides whether it should invest in project or not (okolov and Elsukova 2016).
Advantages
 It helps in understanding the risks and its effects of the business of company.
 The main focus is over decision making for the decisions related to and investment
opportunities.
Disadvantages
 The decisions through such budgeting technique takes long time, which is irreversible in
nature.
 The availability of skilled professionals is not too easy for such long term based
decisions.
Operating Budgeting- It is financial plan which is designed to help Capital Joinery Ltd meet
the debt obligations and sustain growth over time period. By creating operational budgeting plan
company can find out ways to spend its money and areas of business needs money the most
(Tan, 2016).
Advantages
 It keeps the track of entire business activities which indicates both money that would be
spent by company and money well come in.
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 By preparing operation plans company gets the potential investors that operate costs for
the business and make informed decisions to investment in businesses.
Disadvantages
 The operating budget is set of assumptions that are generally not too far distant from
operating conditions under which it is formulated by finance team of Capital Joinery Ltd.
 It has rigid decision making strategies which is why fundamental shift in company is seen
after budgeting is done.
Alternative methods of budgeting- Apart from above discussed budgeting methods the
following are other methods which can be used as alternatives by Capital Joinery Ltd:
Incremental Budgeting- In this method the actual figures of last year are added or
subtracted with percentage to obtain current year's budget. It is one of the most common method
of budgeting as it is simple and easy to understand.
Activity based budgeting- It is a top to down budgeting method that determines
figures of input which are required to support the targets or the outcomes of company. The
enterprise needs to determine activities which needs to be operated to meet sales target and
find costs of carrying such activities.
M3. Different planning tools and their application for forecasting and preparing budget
There are different planning tools that are used by firms to prepare budget and to forecast.
Capital joinery Ltd mainly uses two types of budget that are capital and operating for planning
and forecasting. Both these budgets helps in various aspects like in capital budget, expenditure
that are of capital nature comes in it like fixed assets, plant and machinery, etc. and by analysing
these aspects the firm improves its position in the market. While in operating budget all the
things related to the working and operations of the business comes. This helps a business to
analyse all the factors which directly or indirectly affect a business including external and
internal factors and thus helps in forecasting and preparing budget (Tucker and Lawson 2016).
TASK 4
P5. Comparing how entities adapts management accounting systems for responding financial
problems
Financial problems:
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It can be said to a situation in which a business fails to arrange required monetary
resources for meeting all bills promptly and affording basic necessities. In case with Capital
Joinery Ltd, some of financial problems faced by managers are below:
 Unforeseen expenses: When managers are already busy in succeed multitude of
recurring expenses, it is easy that they forget about cost which they can not easily predict.
In aspect of Capital Joinery Ltd, financial analyst are facing problem of unforeseen
expenses. More outflows than inflows: For promoting the products, marketing and promotions are
key. For this purpose, huge spendings are made by the marketing function of Capital
Joinery Ltd than they make revenues. The expenses of the company have increased then
set budgets that is main cause financial problem.
Management accounting approaches
Benchmarks: In business, benchmarking is seen as an approach to measure performance
of products and process of company against the one which are best in the pertaining industry. It
is used for identification of opportunities for improvements. By using approach of benchmarks,
administrators can solve the financial related issue of more outflows than inflows in company.
The managers of Capital Joinery Ltd can analyse the strategies and tactics which are adopted by
bets businesses and implement the same so to promote or market the brand within respected
budgetary amount (van der Poll and Mthiyane, 2018).
KPI: The approach is all about set of quantifiable criterion adopted for gauging long term
performance of the firm. There are two categories of KPI, one is financial and the next is non
financial. This can be adopted by administrators of Capital Joinery Ltd for predicting upcoming
future expenses. The approach assist managers to optimise targets and analysing situations that
can cause additional expenses.
Financial governance: It could be said to the ways in which firm gather, manage,
admonish and control information about finance. For preventing financial problems, Financial
governance can be adopted by Capital Joinery Ltd in order to track financial transactions,
administer performances, compliance, disclosures and control data.
Comparison between companies:
Comparison basis Capital Joinery Ltd Howden Joinery Ltd
Problem Management accountant of Capital In Howden Joinery Ltd,
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Joinery Ltd have explored that financial
problem of large outflows than inflows
are faced.
financial analysts are facing
financial issue of unforeseen
expenses.
Management
accounting approach
To solve the issue, managers of
Capital Joinery Ltd can adopt
benchmarking so that they can analyse
how other best companies are
managing their finance to promote the
brand in limited budget.
In Howden Joinery Ltd, KPI
approach can be applied to
resolve financial problem of
unforeseen expenses as
managers can focus on
indicators to predict certain
expenses that have high
chances to occur.
Management
accounting system
For this, cost accounting system can be
implied as it will help in allocating
money or budget as per promotional
strategies within the determined
amounts. The system will manage all
related costs and help in solving the
problem.
For this, price optimising
system can be applied so that
all the prices of product can be
changes as per going situations
and expenses that are not
possible to predict can be
assumed. This will help in
analysing what unforeseen
expense can occur in company.
M4. Explaining that management accounting can lead organisation to sustainable success by
responding financial problems
Management accounting can lead an organisation in achieving a sustainable success as it
responds to financial problems as it focus on identifying the deviations and then efforts are made
to rectify that deviation. It compares the set standards of performance with the actual
performance and the variances can be analysed by it. This helps managers to identify the loop
holes in the working of the firm and thus the errors can be detected and further errors could be
prevented.
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D3. Explanation of planning tools that solves financial problems so that firm could be successful
Planning tools help a lot in solving the financial problems of a firm and helps a company
to grow and prosper in the current market situation. The are many planning tools that help
mainly are capital budget and operating budget. Capital budget helps Capital joinery Ltd with its
capital nature assets like plant and machinery, land and building, etc. While operating budget
helps the firm with its operating nature expenses and incomes.
CONCLUSION
From the above project report it can be concluded that the process of preparing reports of
business activities which help managers make short-term and long-term decisions is known as
management of accounting. For such purposes understanding of management accounting
systems and application of range of different management accounting techniques is necessary for
every business company. With the use of panning tools in management accounting the decisions
can be taken effectively.
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REFERENCES
Books and Journals
Abba, M., 2018. Explored and Critique of Contingency Theory for Management Accounting
Research. Journal of Accounting and Financial Management. 4(5). pp. 40-50.
Alabdullah, T. T .Y., 2019. Management Accounting and Service Companies' Performance:
Research in Emerging Economies. Australasian Accounting, Business and Finance
Journal. 13(4). pp. 100-118.
Askarany, D., 2016. Attributes of innovation and management accounting
changes.Contemporary Management Research. pp. 455-466.
Bedford, D. S. and Speklé, R. F., 2018. Constructs in survey-based management accounting and
control research: An inventory from 1996 to 2015. Journal of Management Accounting
Research. 30(2). pp. 269-322.
Bisogno, M. and Vaia, G., 2017. The role of management accounting in family business
succession. African Journal of Business Management. 11(21). pp. 619-629.
Gnawali, A., 2017. Management Accounting Systems and Organizational Performance of
Nepalese Commercial Banks. Journal of Nepalese Business Studies. 10(1). pp. 8-19.
Kashora and et.al., 2016. E-learning and technologies for open distance learning in Management
Accounting. Africa Education Review.13(1). pp. 1-19.
Lay, T. A. and Jusoh, R., 2017. Organizational Capabilities, Strategic Management Accounting
and firm performance. Jurnal Akuntansi dan Keuangan Indonesia. 14(2). pp. 222-246.
Ng and et.al., 2017. Factors influencing accounting students’ career paths. Journal of
Management Development.
Samuelsson and et.al., 2016. Formal accounting planning in SMEs. Journal of Small Business
and Enterprise Development.
Sokolov, A .Y. and Elsukova, T. V., 2016. Using ABC to enhance throughput accounting: an
integrated management approach. Academy of Strategic Management Journal. 15. pp.
8-15.
Tan, B .S., 2016. Accounting research for the management accounting profession. Journal of
Applied Management Accounting Research. 14(1).pp. 69-77.
Tucker, B. P. and Lawson, R., 2016. Moving academic management accounting research closer
to practice: A view from US and Australian professional accounting bodies. In
Advances in Management Accounting. Emerald Group Publishing Limited.
van der Poll, H. and Mthiyane, Z. Z., 2018. The interdependence of risk management, corporate
governance and management accounting. Southern African Business Review. 22(1).
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