Management Accounting: Systems, Reports, and Budgeting

This report provides an overview of management accounting systems, reports, and budgeting. It discusses the role of performance measurement, resource allocation, cost accounting, and inventory management in Eymen Ltd. Company. The report also explores different types of reports, such as budgeting reports, performance reports, accounts payable and receivable reports, and inventory and manufacturing reports. Additionally, it highlights the importance of budgeting and discusses the advantages and disadvantages of master budgets, cash flow budgets, and capital budgeting. Overall, the report aims to enhance understanding of management accounting for effective decision-making.

MANAGEMENT ACCOUNTING 1
Management Accounting
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MANAGEMENT ACCOUNTING 2
Contents
Introduction......................................................................................................................................3
TASK 1............................................................................................................................................4
Part 1.........................................................................................................................................4
Performance measurement.......................................................................................................4
Resource allocation..................................................................................................................5
Cost accounting system............................................................................................................5
Inventory management system.................................................................................................5
Budgeting report.......................................................................................................................6
Performance report...................................................................................................................6
Accounts payable and receivable report...................................................................................6
Inventory and manufacturing report.........................................................................................7
..................................................................................................................................................8
Inventory management system.................................................................................................8
Cost accounting system............................................................................................................8
Price optimizing system...........................................................................................................8
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MANAGEMENT ACCOUNTING 3
Part 2..............................................................................................................................................10
................................................................................................................................................10
Master budget.........................................................................................................................10
Advantage...............................................................................................................................10
Disadvantage..........................................................................................................................11
Cash flow budget....................................................................................................................11
Advantages.............................................................................................................................11
Disadvantages.........................................................................................................................11
Capital budgeting...................................................................................................................11
Advantages.............................................................................................................................12
Disadvantages.........................................................................................................................12
Operating budget....................................................................................................................12
Advantages.............................................................................................................................12
Disadvantages.........................................................................................................................12
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MANAGEMENT ACCOUNTING 4
TASK 2..........................................................................................................................................14
Part 1.......................................................................................................................................14
Measurement:.........................................................................................................................14
Profitability:............................................................................................................................14
Cost application:.....................................................................................................................14
Part 2.......................................................................................................................................16
................................................................................................................................................16
Financial analysis:..................................................................................................................16
................................................................................................................................................18
Analysis and interpretation.....................................................................................................18
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20
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MANAGEMENT ACCOUNTING 5
Introduction
Nowadays, management accounting has become a critical task for the management of any
business. This covers all the financial and non- financial information which would ultimately
assist the business for gaining its pre-set targets. However, there is a strong need to appoint an
accounting officer who is qualified to handle all the managerial accounting things in the
business. This report is based on Eymen Ltd. which is the medium-sized production business
which is operated in the UK. This report covers all the management accounting systems along
with their reports. Various managerial tools are used in order to calculate the profits from the
given scenario. Various planning tools are used for making budgetary control. Financial
problems are resolved by using various management accounting tools in the business.
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MANAGEMENT ACCOUNTING 6
TASK 1
Part 1
Management accounting
Management accounting is concerned with accounting information in such a manner to help the
management in strategy formulation which leads to management accountant in the decision-
making process for the organization. Accounting information is in the form of process data
which has been collected from cost accounting and financial accounting which helps the
management to take the proper decisions in the formulation of day to day business operations for
the company (Ax and Greve, 2017).
Management accounting applications in Eymen Ltd. company operating its business
operations in manufacturing the products or services in the UK, which are discussed
below:
Performance measurement
Performance measurement is the most effective tool by which the top management can easily
figure out the targets achieved by the employees as per the appropriate time assign to their work.
With the help of management accounting, management accountant can easily evaluate the
employees’ performance and overall department performance according to the assigned task
(Kaplan and Atkinson, 2015).
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Presentation of financial report or statement
In every financial year, the company has to record all the financial activities in the financial
statement which tells the financial position of the company. It generally includes the profit and
loss account and balance sheet. This report has been made by the process data and information
about the financial position which has been provided by the management accounting which
ultimately leads to the decision making (Booth, 2018).
Resource allocation
With the help of the Management Accounting, one can know the resources allocated to each
department or sector. Which disinformation company can know the capability of each
department or division and the efficiency of the work as per the assign task particular time.
Efficiently and effectively allocation of resources can help to minimize the waste of the raw
material which helps to achieve long-term sustainability (Armitage, et. al., 2016).
There are different types of Management Accounting system and the role with the
organizational process in Eymen Ltd Company is explained below
Cost accounting system
The cost accounting system helps Eymen Ltd. Company to guesstimate the cost of products or
services in advance which helps the management accountant to find out how much profits and
expenses involved in the manufacturing the products or services for the customers. It also helps
the cited company to reduce unwanted expenses in the manufacturing units and also reduce the
wastages in raw materials and other related expenses. With the help of this system the cited
company can prepare the budget for future production (Maynard, 2017).
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MANAGEMENT ACCOUNTING 8
Inventory management system
This system has been made to look out the number of things in the organization such as the
availability of the stock, to measure the overstock and understock problem and flow of inventory
in an appropriate manner. This system helps the organization by reducing the cost and increasing
the profit over a product by knowing in advance the inventory needs in future manufacturing of
the products (Drury, 2013).
Price optimizing system
This system helps the management of a company to set a price of the product by considering the
cost and profit of the product. Price should be set according to the competitor and customers who
are willing to pay on that product. This can be evaluated by setting a different price level and
different demand in the future of the product (Hill, 2017).
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MANAGEMENT ACCOUNTING 9
Differ
ent Management Accounting reports help inaccurate report preparation which shows each
department performances and provides information which is reliable to the manager in the
organizations. The management prepares different types of reports and their advantages
are explained as under:
Budgeting report
It analyses each department performances and set sound organizations plan. Past reports have
been analyzed and utilized in an appropriate manner by the management of the organization for
the budget preparation which helps the organization to evaluate objectives are achieved on time
and also to make the analysis of the department's performances. Based on these reports future
budget has been forecasted which leads to combining the various departments or divisions efforts
towards the organization’s objectives (Dale & Plunkett, 2017).
Performance report
At the end of the financial year, these reports are to be prepared which record overall
organization performance. In this report, the comparison has been made between the actual
performances and the planned performance which gives assistant it is small or medium
organizations to record performances of each department and evaluate them as well
(Vanderbeck, 2012).
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Accounts payable and receivable report
This report mainly provides information about how much amount of money is going to be
received from the debtor and how much money has to be payable to the creditor. It also gives
assistance to the small and medium-sized organization about the debtor and creditor in the
company and also cited how much debtors going to become bad debts (Kaplan and Atkinson,
2015).
Inventory and manufacturing report
This record the information about every variable cost concerned with the manufacturing and
inventory such as wastage overhead expenses labor cost extra. This report also helps the small
and medium-sized organization to determine how much inventory level is required in the
business at present and in the future. This also gives information about how much inventory is
going to you be used for the manufacturing of the product efficiently and effectively (Maynard,
2017).
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In the context of Eymen Ltd. Company, management accounting system offers various useful
benefits to the management accountant and these benefits are discussed as below:
Inventory management system
This system improves the efficiency of the inventory used for the manufacturing of the product
which ultimately helps in reducing the cost and saving the time. It also helps to maintain the
inventory level match leads to minimize the wastage of the inventory. This system gives
information about the understock and overstock level of inventory in the manufacturing
department (Muller, 2019).
Cost accounting system
This system assists the management accountant in fixing of the price of the product or services
and also minimizes the wastage in the manufacturing process of the product. It also makes the
process effective and efficient which leads to the improvement in the manufacturing process.
This also gives information which is useful for the future planning of the product to the
Management Accountant (de Kok, 2018).
Price optimizing system
This system helps to the management of Eymen Ltd. to determine the price of the product which
is willing to pay a by the customer. This system also helps to determine customers attitude based
on the availability of the same product in the market at different prices. With the help of this
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system the company can prepare pricing policies for their product which will be introduce in
future (Weygandt, et. al., 2015).
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M
anagement accounting systems are interlinked to its report. As this can be strongly said
that on the basis of systems, reports are made which will ultimately assist the business
management for gaining the competitive advantages. With the help of accounting systems,
management makes reports which ultimately assist to boost the performance of the Eymen
Ltd. This likewise integrates all the activities of the entire business division and tries to
attain its objectives. Such integration will help the business manager to plan for improving
future production and likewise optimize the profits. Such integration assists the firm to
attain cited company’s targets. Management accounting reporting renders sound
management of inventory level and cost at the time of forecasting required level of buying
orders to be made. This would assist Eymen Ltd for optimizing their business activities and
profits (Drury, 2013).
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Part 2
Budget is an important planning tool which helps the management in forecasting and managing
the company’s resources in an accurate manner. However, this can be rightly said that the
management of Eymen Ltd. uses the budget for forecasting and predicting the financial
performance of the business. Budgetary control is a kind of procedure via which cost can be
controlled within the firm. By using this tool the management accountant can use optimal
resources in an effective manner. With the help of an optimal budgetary control system,
management can prepare various plans and procedures for their business operations. Henceforth,
this likewise acts as a medium of communication among the employees. This also assists in
reaching co-ordinations among the diverse department. There are diverse planning tools that
could be implemented by Eymen Ltd Company for setting diverse budgets (Kaplan and
Atkinson, 2015). Some of them are discussed as under:
Master budget
This is the combination of all the operational budgets which ultimately assist the business by
way of predicting the operational values for a certain period of time. By using this by Eymen Ltd
Company will get to know the investment amount at which are required for investing in a
particular project. The company needs to relate these spending plans of diverse branches of the
organization for making the master budget. With the help of this budgetary tool, the company
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MANAGEMENT ACCOUNTING 15
would able to make the strategy which will lead the business operations for meeting the business
objectives (Vanderbeck, 2012).
Advantage
One of the advantages of a master budget for Eymen Ltd Company is that it helps to show the
blueprint of how much the company is spending and earning as a whole. Apart from this, it helps
to depict the financial standing of business whether it is negative or good.
Disadvantage
The major disadvantage of the master budget is that it is not easy to modify. It requires a lot of
steps in the entire budget and also includes lengthy charts and descriptions. However, it cannot
be easily understood as a layman.
Cash flow budget
This is the budget which predicts the cash outflows and inflows for a certain period of time.
Apart from this, it can be said that it is simply an estimation which is made by the Eymen Ltd
Company about all cash expenditures and receipts which are expected to take place during any
certain time period (Dale & Plunkett, 2017).
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Advantages
One of the main advantages of a cash flow budget for Eymen Ltd Company is that it helps the
organization to provide the status of company cash position at any point in time. Apart from this,
it is helpful in determining the number of credit sales.
Disadvantages
In the cash flow budget lack of non- financial factors are the main disadvantage for Eymen Ltd.
As a business owner of the firm may choose to borrow funds from two separate banks one may
render lower interest rate which is recorded in cash flow budget, and another bank may render
customer services and offer non-financial perks for borrowing from them which are not recorded
in cash flow budget. Thus, this lack of non-financial factors in cash flow budget is a term to be a
disadvantage for a firm (Hamdan, et. al., 2018).
Capital budgeting
It is a type of technique which is being used by Eymen Ltd Company so as to analyze and
compare among the capital projects in order to acknowledge which project will render the
highest rate of return with the funds invested in the project. Apart from this, it can be said that it
helps to business to analyze different long term strategies which a company can take into
consideration so as to achieve its expansion goals (Hayward, et. al., 2017).
Advantages
Main advantages of capital budgeting techniques for Eymen Ltd Company is that it helps in
understanding the risk and its effects for business as well as helps in making a decision in respect
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MANAGEMENT ACCOUNTING 17
for investment opportunities. Most important of all it helps in presenting whether an investment
will render a valuable outcome or not and along with this it offers adequate control over’s its
expenditure (Maher, et. al., 2018).
Disadvantages
The major disadvantage of capital budgeting for Eymen Ltd Company is that in case if wrong
capital budgeting is done then it will affect the long term durability of an organization. Apart
from this, it is mostly based on assumptions and estimations as the future is a term to be
uncertain, so it can be said that capital budgeting decision is a term to be irreversible in nature.
Operating budget
It is a type of budgeting method that is being prepared by the Eymen Ltd Company in which all
the income and expenses related to the specific project are being accounted over a given period
of time (Weygandt, et. al., 2015).
Advantages
One of the advantages of this tool is that it is helpful for Eymen Ltd Company in making short
term plans as well as it can be changed as per the changing needs of the business.
Disadvantages
The major disadvantage of the operating budget is that it is a term to be inaccurate as it is based
on an assumption. Apart from this, it is a time-consuming process for the management
accountant.
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T
here are various different types of planning tools which are being used for budgetary
control and they are likely to master budget, cash flow budget, and capital budgeting.
Therefore each has its own application for preparing and forecasting budget. The main
application of the master budget is that it helps in analyzing the financial position of
Eymen Ltd. (Kasdan & Markman, 2017). Similarly, the application of the cash flow budget
for preparing and forecasting budgets is that it helps the organization in determining the
company status in respect of the cash position. Whereas the application of Capital
budgeting for preparing and forecasting budget is that it helps business to identify which
project will render the valuable outcome and whether the investment made will term to be
profitable for business or not (Hayward, et. al., 2017).
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TASK 2
Part 1
Absorption costing is also known as full absorption costing specifies that all of the manufacture
costs have been allocated to the manufactured units whereas in marginal costing the variable
costs are considered as the product cost and also allocated to the manufactured units (Aleem, et.
al., 2016). Following points shows some differences between the two methods:
Measurement:
The profits measurement under absorption costing uses the gross profits which include overheads
whereas the profits measurement in marginal costing uses the contribution margin which
eliminates overhead (Frischmann and Hogendorn, 2015).
Profitability:
Profitability will appear to be lower under the absorption costing method whereas the
profitability of a single unit sale will appear to be higher under marginal costing (Christian,
2018).
Cost application:
While using marginal costing, only variable or marginal costs are applied to the inventory
whereas in absorption costing both costs (variable and fixed costs) are applied to the inventory.
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In the absorption costing method, overhead costs are applied to manufactured products whereas
in marginal costing overhead costs are charged to expense in the period.
Another major difference is that, for financial reporting purpose the marginal costing is not
allowed, so its uses are restricted to internal management reports whereas absorption costing is
required by the application frameworks of accounting for purposes of financial reporting
(Weygandt, et. al., 2015).
(a)
Statement of Profit or Loss as per Absorption Costing
Particulars
Amoun
t (£)
Amoun
t (£)
Sales revenue for the period (2,70,000* £13)
35,10,0
00
Less: Cost of Sales
Opening Stock 0
Add: Production Cost
(a) Direct Materials 4,50,000
(b) Direct Labor 6,00,000
(c) Fixed Overhead 4,00,000
14,50,0
00
Less: Closing Stock (30,000/3,00,000*1,450,000)
14,50,0
00
13,05,0
00
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MANAGEMENT ACCOUNTING 21
Net Profit for the period
22,05,0
00
(b)
Statement of Profit or Loss as per Marginal Costing
Particulars
Amoun
t (£)
Amoun
t (£)
Sales revenue for the period (2,70,000* £13)
35,10,0
00
Less: Marginal Costing
Opening Stock 0
Add: Production Cost
(a) Direct Materials 4,50,000
(b) Direct Labor 6,00,000
10,50,0
00
Less: Closing Stock (30,000/3,00,000*10,50,000)
10,50,0
00
9,45,00
0
Contribution
25,65,0
00
Less: Fixed Overhead
4,00,00
0
Net Profit for the period
21,65,0
00
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MANAGEMENT ACCOUNTING 22
Part 2
Reconciliation statement
Particulars Amount
Net Profit as per Absorption Costing
22,05,00
0
Less: Difference in the value of closing stock
(1,45,000 - 1,05,000)
40,000
Net Profit as per Marginal Costing
21,65,00
0
The method of reconciliation provides the difference between both the net profits under
absorption costing and marginal costing method is due to valuation method used in closing stock.
When production is more than sales, net profit will be lower in marginal costing as compared to
absorption costing (Christian, 2018)
Financial analysis:
The method of marginal costing is the method in which all of the variable costs that have been
incurred as considered as the part of the cost of the product and all of the fixed costs are
considered to be the part of the periodic costs. Whereas in absorption costing, all of the fixed as
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MANAGEMENT ACCOUNTING 23
well as the variable costs are considered to be the part of the product costs. This method if used
for the purposes of reporting (Knowledge Kaplan, 2019).
The following are the main differences between the two methods:
 In marginal costing, all of the variable costs forms the part of the product whereas in
absorption costing, the fixed as well as the variable costs forms the part of the product
costs.
 The nature of the overheads in marginal costing includes the fixed and the variable costs
whereas in absorption costing, the same is production, distribution, selling costs etc.
 The amount of the profit is calculated by using the profit volume ratio under marginal
costing whereas under the absorption costing, since the fixed costs are considered in the
product costs and this was the reason as to why profit gets reduced.
 Under the marginal costing, the cost of the next unit is determined, whereas under
absorption costing, the cost of each unit is determined.
 Under marginal costing, since the emphasis is on the next unit, the change in the amount
of the closing stock does not affect the cost of each unit whereas under absorption
costing, the change in the closing stock affects the cost of each unit.
 The most important aspect under marginal costing is the contribution per unit and the
absorption costing, the same is the net profit each unit.
 Under marginal costing, the main aim is the emphasis of contribution in the product cost
whereas under absorption costing, the same is the accuracy and the fair treatment of the
cost of the product (Wall Street mojo, 2019).
In the above as well, the above have points have been taken into consideration.
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MANAGEMENT ACCOUNTING 24
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MANAGEMENT ACCOUNTING 25
Analysis and interpretation
From the above calculation, it can be observed that the management accounting methods use
different tools and techniques of costing for the measurement of the unit cost. While doing
calculation it can be observed that in marginal costing fixed costs has been written off to the
contribution whereas in absorption costing, fixed costs and variable costs utilized in the
calculation of per unit cost of production (Thabet and Alaeddin, 2017). Therefore, while
adopting both methods of costing it can be concluded that both show a different net profit for the
period. In marginal costing the net profit for the period is £21, 65,000 and for absorption costing
the net profit is £22, 05,000. The difference in net profit is due to the valuation of closing stock
which is done differently in both methods.
So, it is beneficial for the company to adopt the absorption costing method to earn a more net
profit as compared to marginal costing.
Benefits of management accounting system:
The management accounting helps in the assessment of the efficiency of the operations in the
company. Each and everything which is done is done with the use of the scientific system that
helps in the valuation and the comparison of the performance of the company. This system also
helps in the maximization of the profits for the company. This method helps in the reduction of
the prices and also ensures success for the company by the way of reducing both the operating
and the capital expenditures.
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MANAGEMENT ACCOUNTING 26
This technique helps in the providing of deep technical reports for the company in which the
facts of the financials are contained.
It helps in controlling the cash flow of the business too which ensures that more cash in hand is
there in the fixed properties in case there is an emergency when it comes to the payment of the
loan or debt. The decisions that are critical for the business are also undertaken (SV Tuition,
2019).
How is management accounting system and management accounting reporting integrated
with organizational process:
This method of management accounting system helps in ensuring continuous improvement for
the company due to the fact that it helps in the identification of the wastages and helps in
eliminating them, thereby reducing the costs of the products or the services. Also, this method
helps in the development and the integration of the cost management systems. It helps the
management in knowing the quality driven costs and also, the way in which the same could be
increased so that the quality products could be manufactured and offered to the customers.
Application of management accounting techniques and production of financial reporting
documents:
In the above given case, the management accounting technique of marginal and absorption
costing has been applied.
Production of financial reports:
a)
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MANAGEMENT ACCOUNTING 27
Statement of Profit or Loss as per Absorption Costing
Particulars
Amoun
t (£)
Amoun
t (£)
Sales revenue for the period (2,70,000* £13)
35,10,0
00
Less: Cost of Sales
Opening Stock 0
Add: Production Cost
(a) Direct Materials 4,50,000
(b) Direct Labor 6,00,000
(c) Fixed Overhead 4,00,000
14,50,0
00
Less: Closing Stock (30,000/3,00,000*1,450,000)
14,50,0
00
13,05,0
00
Net Profit for the period
22,05,0
00
(b)
Statement of Profit or Loss as per Marginal Costing
Particulars
Amoun
t (£)
Amoun
t (£)
Sales revenue for the period (2,70,000* £13) 35,10,0
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MANAGEMENT ACCOUNTING 28
00
Less: Marginal Costing
Opening Stock 0
Add: Production Cost
(a) Direct Materials 4,50,000
(b) Direct Labor 6,00,000
10,50,0
00
Less: Closing Stock (30,000/3,00,000*10,50,000)
10,50,0
00
9,45,00
0
Contribution
25,65,0
00
Less: Fixed Overhead
4,00,00
0
Net Profit for the period
21,65,0
00
Part 2
Reconciliation statement
Particulars Amount
Net Profit as per Absorption Costing 22,05,00
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MANAGEMENT ACCOUNTING 29
0
Less: Difference in the value of closing stock
(1,45,000 - 1,05,000)
40,000
Net Profit as per Marginal Costing
21,65,00
0
The method of reconciliation provides the difference between both the net profits under
absorption costing and marginal costing method is due to valuation method used in closing stock.
When production is more than sales, net profit will be lower in marginal costing as compared to
absorption costing (Christian, 2018)
Financial analysis and Analysis the use of different planning tools and application in
preparation of forecasting budgets:
The method of marginal costing is the method in which all of the variable costs that have been
incurred as considered as the part of the cost of the product and all of the fixed costs are
considered to be the part of the periodic costs. Whereas in absorption costing, all of the fixed as
well as the variable costs are considered to be the part of the product costs. This method if used
for the purposes of reporting (Knowledge Kaplan, 2019).
The following are the main differences between the two methods:
 In marginal costing, all of the variable costs forms the part of the product whereas in
absorption costing, the fixed as well as the variable costs forms the part of the product
costs.
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MANAGEMENT ACCOUNTING 30
 The nature of the overheads in marginal costing includes the fixed and the variable costs
whereas in absorption costing, the same is production, distribution, selling costs etc.
 The amount of the profit is calculated by using the profit volume ratio under marginal
costing whereas under the absorption costing, since the fixed costs are considered in the
product costs and this was the reason as to why profit gets reduced.
 Under the marginal costing, the cost of the next unit is determined, whereas under
absorption costing, the cost of each unit is determined.
 Under marginal costing, since the emphasis is on the next unit, the change in the amount
of the closing stock does not affect the cost of each unit whereas under absorption
costing, the change in the closing stock affects the cost of each unit.
 The most important aspect under marginal costing is the contribution per unit and the
absorption costing, the same is the net profit each unit.
 Under marginal costing, the main aim is the emphasis of contribution in the product cost
whereas under absorption costing, the same is the accuracy and the fair treatment of the
cost of the product (Wall Street mojo, 2019).
In the above as well, the above have points have been taken into consideration.
Comparison of how the organizations are adapting to management accounting problems to
respond to financial problems:
The company has been undertaken various planning tools such as the use of budgeted, standard
costing system for the purposes of solving the problems being faced by the company (Small
business chron, 2019).
How management accounting could lead to sustainable success for the organization:
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MANAGEMENT ACCOUNTING 31
The techniques and the tools of management helps in the elimination of the wastages that further
helps in reducing the costs of the products and the services that are being sold by the company.
The reduction in the prices of the products and the services helps in the satisfaction of the
customers and in turn, more sales mean more profitability which leads to sustainable success for
the company.
Has the work been part of verification process?
Yes, the work performed was the part of the internal process of verification wherein the facts
were verified by the senior management.
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MANAGEMENT ACCOUNTING 32
CONCLUSION
From the above report, it can be summarized that management accounting is an essential
document which is being prepared as it help in rendering timely and accurate information to the
managers for making short term and day to day decisions. There are different tools and
techniques of management accounting which are being discussed above as this tool helps in
achieving organizational goals on a specified time period. Apart from all this, it can also be
concluded that accurate management accounting tools and techniques such as master budget,
capital budgeting, etc. help the manager of an organization to take the right and effective
decision which will result in achieving the greater profitability ratio for business in future.
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MANAGEMENT ACCOUNTING 33
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