Management Accounting and Reporting Methods

This document provides an overview of management accounting systems, essential requirements, different methods used for reporting, and cost calculation using absorption and marginal cost methods. It also discusses the integration of management accounting systems and information, as well as various management accounting reports. The document is based on Excite Entertainment Ltd, a company that provides weather and news content, web-based email, and a metasearch engine.

MANAGEMENT
ACCOUNTING
1

Table of Contents
INTRODUCTION...........................................................................................................................3
P1 Management accounting and essential requirements of different management accounting
systems.........................................................................................................................................3
P2 Different methods used for management accounting reporting.............................................5
P3 Calculation cost using absorption and marginal cost method................................................7
LO 3.................................................................................................................................................8
P4 Diverse types of planning tools used for monetary control..........................................8
LO 4...............................................................................................................................................10
Management accounting systems adapt by Excite entertainment Ltd...........................10
CONCLUSION.............................................................................................................................12
REFERENCES............................................................................................................................13
2

INTRODUCTION
Management accounting defined as procedure of providing financial resources
and information to company manager in decision taking. It is only used by internal team
of company, and this is the best thing that makes it unique from financial accounting. In
this procedure, info about financial budget and reports such as invoice, monetary
balance statement is transferred by finance administration with organization
management team. Management accounting objective is to use statistical data and take
the accurate and better decision, business activities, controlling enterprise and business
development. In other words, this is the profession that add incorporation of non-
financial and financial statements to cater effective info to management so that
department take appropriate decision for company well fare. The present report is
based on Excite Entertainment Ltd; they provide variety of content including weather
and news, a web-based email and a metasearch engine. It explains management
accounting, requirement of various types of MA systems and various methods used for
MA reporting. It justifies correct techniques of cost analysis to made an income
statement using absorption and marginal costs. Furthermore, this study clarifies benefits
and disadvantages of several types of planning tools used for monetary control. It
explains ways used by companies for adapting management accounting systems to
reply to financial issues.
P1 Management accounting and essential requirements of different management accounting
systems
In current time period business firms are facing competition on number of fronts
and it become difficult for them to compete with them. Firms do lot of research and
identify areas where they need to work in order to solve their business problem. Cost is
one of the main focus area where most of the business firms pay due attention in order
to control cost of production and operations. There are number of approaches that are
used by the firms to control. Important point to note is that in order to control cost it is
very important to identify areas from where higher amount of cost is generated. In this
regard, big data system is developed by the firms specially those working in
manufacturing industry. These firms adopt management accounting system under which
in specific manner cost of production is computed and then analyzed. Number of
techniques like variance analysis and budgeting are used to find out whether firm
successfully control its production cost or there is need to take specific action to handle
situation (Lopez-Valeiras, Gomez-Conde and Naranjo-Gil, 2015). Most commonly in
case of few expenses actual value surpassed projected value and in that case negative
variance comes in existence. Varied sort of management accounting systems are
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explained below.
 Cost accounting system: Cost accounting system is one of the common
management accounting system that is used by the business firms. Under this
system entire product costing is done altogether. Specifically this accounting
system is not used by the firms that are producing multiple products. Opposite to
this it can be said that cost accounting system is used by the firms that have
single product. This system cannot be used for the multiple products because in
this there is not a provision to do accounting for each product individually. If firm
produce multiple products and cost accounting system is used then in that case it
cannot obtain information about overall cost of each product line individually. This
is one of the major limitations of the cost accounting system. Main importance of
cost accounting system is that by using cost accounting system for single product
manager can identify expenses whose value is high and over expenses made. In
cost accounting system entire database is maintained and due to this reason by
comparing current value with past one business firm easily identify area where
extravagance is made. By taking corrective actions situation is handle and it is
ensured that in future time period expenses will remain in control at facility.
 Inventory management system: Inventory management system is the one of
the main system under which entire data related to the inventory is saved by the
business firms. Firms operating in manufacturing sector usually place an order
to purchase a raw material. They need data to make decisions about quantity of
raw material that must be purchased and time on which order must be placed to
purchase an order (Wouters and Kirchberger, 2015). Thus, it can be said that
inventory management system has huge benefit for the business firms because
by using it firm managers can determine time by which order must be placed so
that unused inventory does not remain in the warehouse. Important point to note
is that in inventory every year higher amount of money get stuck because
sometimes due to interruption in production process inventory remain unused at
workforce. In such situation heavy loss is faced by the firms. Use of inventory
management system ensured that everything will be fine and according to
requirement order will be placed. All these things lead to cost saving in the
business. Best techniques of inventory management that are used by the firm are
given below.
 LIFO: Under LIFO units that are produced recently are sold first and those who
were produced earlier are sold later. Now some days many firms are using this
approach because USA income tax rules permit firms to do so. This approach is
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used to move cost from inventory to COGS. It can be said that LIFO help a lot to
firms to manage inventory at workplace.
 FIFO: In FIFO items that are produced first are sold in the market as soon as
possible. This approach is just inverse of LIFO. This method is used by those
firms that prepare and sale perishable goods.
 Job costing system: It is another accounting system that is widely used by the
business firms. This accounting system is used when firm have multiple product
lines. Most of business firms are always interested in knowing which product line
is profitable for them. Hence, business firms use job costing system, as under
this system for each product line cost is computed individually. Thus, a business
firm comes to know that which product is generating better and worst results.
Time to time analysis of data is done and on that basis area where action need to
be taken are identified. In this way in better way cost is controlled at the
workplace (Pavlatos, 2015). Job cost system is adopted now some days by most
of large size business firms because it assists them to analyze cost at granular
level which ultimately lead to making better decisions at the workplace. This is
one of the major benefit of job costing system. Business firms maintain entire
database where record of long time period is maintained. Analysis of data reflect
history of performance which ultimately help managers in identifying trends that
persist in past time period. Consistent origination of same trend reflect a lot about
a problem and indicate manager that there is need to take immediate action to
handle situation.
 Price optimization system: In today era cost is one of the major focal point
of the business firms. Now days most of companies are focusing on
optimizing their product price. In this regard number of approaches is used
by the business firms like linear programming etc. By using these
approaches best allocation of resources is done among products and cost
is controlled in proper manner. Thus, it can be said that there is huge
significance of the price optimization system for the business firms. It not
only helps them to control cost of production but also assist them to make
best use of available resources (Bobryshev and et.al., 2015). Firms
according to their requirement use varied price optimization system. Every
business firm has experts that have knowledge of the specific tools.
Because of this reason in few firms linear programming is used and in
other firms other methods are used. It can be said that scope of price
optimization system is wide.
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Basis Management accounting Financial accounting
Meaning Management accounting
reflect the cost that is
incurred to produce
goods at the workplace.
Financial accounting
indicates cash flows that
happened in varied
business areas.
Purpose It is used to control cost
at workplace and making
cost related decisions.
It is used to check
company financial health
and making decisions to
improve it.
Techniques In management
accounting techniques
used are variance
analysis and budgeting
etc.
In financial accounting
techniques used are ratio
analysis and horizontal
and vertical analysis.
D1
Management accounting system and information can be integrated to each other.
As in the production varied quantity of raw material is used which is employed in
machines according to pre plan. Hence, in earlier stage already relevant data is saved
in the computer system and in this way management accounting system and
information can be integrated to each other. Apart from this, IOT is also used to track
other data and that directly goes to server from where facts can be obtained about
production process.
P2 Different methods used for management accounting reporting
Business managers have to make day to day business decisions and in this
regard, they make use of varied reports. In the report multiple information are available
that are used by the managers to solve any business problem and to find out points
where there is need to do hard work in order to solve the business problem. Information
provided by the report must be accurate, relevant to the user and must be reliable and
up to date because manager on basis of information make decision about optimization
of business operations. If information will be wrong then in that case decisions made will
also be wrong. Hence, information available to the manager must be highly reliable.
Varied sort of management accounting reports are discussed below in detail.
 Budget report: Budget report indicates current performance of the business firm
in respect to determined standards. In budget value of each element is
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determined and within that performance need to be made in order to control cost
of the production in the business. Budgets are prepared in respect to production,
sales and marketing etc. Time to time actual performance is compared with the
budget performance and variance is identified. If variance is negative then in that
case steps are taken to handle situation.
 Cost report: In this report expenses are recorded in respect to varied business
operations and points where cost suddenly rise and decline are identified. If
trends are normal then management does not make change in its strategy.
Opposite to this, If it is identified that results will be opposite to the expectation
then in that case changes are made to course of action to handle current
situation.
 Execution report: It is prepared when firm operate specific project. Under the
project multiple activities are performed together and their completion time period
is also determined. In case firm failed to complete activities on time cost increase
sharply. Thus, execution report is prepared time to time because it reflects
percentage of task that completed and percentage that remain to be performed.
If it is identified that more time will be required to perform task then in that case
additional resources are used to finish that task on time (Collis and Hussey,
2017). In this cost elevation is controlled to some extent which ultimately lead to
increase in business profit.
 Inventory report: It is the report where information about inventory use and
quantity stored in the warehouse is available. In the inventory report data related
to previous months is also available. Manager by comparing current performance
with previous one identified whether performance is good or bad and accordingly
take step to handle situation.
 Manufacturing report: It is the report in which record related to number of units
produced within specific time period is available. Like inventory report in
manufacturing report also record is available about number of units produced in
earlier months. Thus, manager easily obtains information about progress made
towards target.
 Job costing report: In the job cost report cost of each of product line is given
and along with this cost classification in varied expenses is also given. By
analyzing elements of overall cost managers come to know about item where
heavy expenses are made. Manager evaluate that item previous month expense
to identify whether extravagance made or value of expense is in control
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 Performance report: Performance report reflects overall performance of the
business firm. In the report varied issues related to business firm are explained in
detail. These issues are taken in to account in order to determine future course
of action (Armitage, Webb and Glynn, 2016).
 Account receivable report: Account receivable report reflects status of varied
account receivables. In the report information about amount need to be received
is given and along with this, duration for which account receivable is allowed is
also given. Those receivables which must be received till the date but not
received are also given in the account receivable report. Thus, this report assist
managers in maintain current asset to some extent.
P3 Calculation cost using absorption and marginal cost method
Absorption and marginal cost method both are different from each other. In case
of marginal costing approach variable expenses are taken in to account in order to
calculate profit on product. On other hand, in case of absorption costing method both
fixed and variable expenses are taken into account. There are both advantages and
disadvantage of both absorption and marginal costing method. Important point to note is
that both variable and fixed expenses have different impact on the firm profitability.
Decision makers always like to know these impacts and that work is done by the
marginal and absorption costing method. If small amount of profit remains after
subtracting entire variable expense from the revenue then in that case it can be said
that it has huge impact on the firm profitability (Ahmad and Mohamed Zabri, 2015).
Opposite to this, if sufficient amount of profit remains in the business then in that case it
can be said that firm have strong control on variable expenses or proportion of that
expense is low in the business.
Table 1Absorption costing method
January
Sales Revenue 120000
Marginal cost of sales
Variable production
overhead 60000
Fixed production
overhead 40000
100000
Add: Opening Stock 5000
Less: Closing inventory 12000 88000
Profit 1712000
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Table 2Marginal costing method
January
Sales Revenue 120000 120000
Prime cost 40000
Variable production
overhead 20000
60000
Add: Opening Stock 5000
Less: Closing inventory 12000 53000
Profit 1747000
It can be seen from the table given above that profit in case of marginal cost is
£1747000 and same in case of absorption costing is £1712000. This clearly reflect that
higher profit is earned on marginal then absorption because in it fixed expenses are not
taken in to account.
LO 3
P4 Diverse types of planning tools used for monetary control
Incremental budgeting-
It is one of the suitable and appropriate planning tools used by excite
entertainment Ltd for budgeting control purpose. In this technique of accounting recent
year revenue as well as sales figures is taken into understood by company (Maskell,
Baggaley and Grasso, 2017). It means that organization gather data about their current
year sales, after which it forecast trends that bring in existence in business environment
in further time. Based on these trends rate change in deals, cost and benefits is
recognized by company (Guthrie, 2005). That rate change is considered by utilizing
current figures and included to them so as to draft spending plan for following financial
year. Under this kind of accounting an increment is made to previous budget. Company
cannot run at the percentage greater the nation GDP, by using growth rate gross
development profit projections is made. Along with this, it is common approach in
businesses where management cannot intend to invest the great deal of time framing
budget controlling.
Advantage-
The main benefits are simplicity of this tool, being based on either current
financial outcomes that eagerly verified. When programs needed funding for many
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years in order to gain certain outcome, this tool is best structured help to assure that
funds can hold flowing to program. It helps to assure that accounting department are
effectively operated in stable and consistent manner for long period of time.
Disadvantage-
Incremental budgeting undertakes only minor changes from earlier period, when
in fact there are major structural changes in firm. Its outcomes in conservative mindset
in firm that actually noticeable force in destroying overall business over long term.
Top down budgeting-
This is the second planning tool or type of budgeting in which two level of
management perform together and work on budget, these stages are middles & top
level of accounting department. According to this tool, top management make a budget
and interact same to all level of financing management. After that manager at middle
level allocate budget cost among all management levels and these distributions is
communicated to middles one of top stage of administration for approval. After final
approval from supervision budget amount is assigned all sections in organization
effectively. In simple words, in top down budgeting method first of all higher cost
elements is being determined in budget at primary stage.
Advantage-
The benefits of using top down budgeting tool is that is allow company to do not
depend on lower level managers in firm to come up with budgeting data. Organization
with this method permit manager to only centring on its department and focus on what
they do best. When Excite entertainment Ltd, use this method, they have to wait for
each department to bring with budgets and after that compile them into firm broad
budget.
Disadvantage-
On the other hand, top down budgeting also has some drawbacks that impact on
accounting management. By using this technique is not always good choice as it does
have some disadvantages. For example, high level executives of organization not have
much knowledge about each department to come up with effective budget.
Zero based budgeting-
In this planning tool budgeting old value has not been used, in this method
budget is prepared by determined all activities of company (Walsh, 2016). Then assets
are assigned to these activities in order to make budget. Inputs is taken from all
department, until they cannot direct projected expense statement to top level of
management no amount is allocated to particular department. Resources values in this
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method is estimated as well as by using these value company budgets is finally
prepared.
Advantage-
The advantage of this method is that it assures manager to think about how
every dollar or pound is spent and how every budgeting period. This procedure forces
manger to justify all functioning expenses and focusing which areas of firm is generating
revenue. With using traditional budgeting, organization cannot be examined legacy
costs for years until there is some sort of economic shock that pressure business to
take extreme actions. This approach leads to important misallocation of all resource,
when done effectively zero-based budgeting prevent misallocation from happening.
Disadvantage-
With this method high chances of presence of impractical values in budget
impact on business performance, it not used by company sometimes. One of the major
disadvantages of this method is that it can return short term thinking by moving
resources towards filed of organizations that generate revenue over further time period.
As outcomes, some areas of firms that is usually viewed as long term investments that
is not directly tied to revenue such as development and research or employees training,
left with smaller budgets which they actually need. It would possibly harm firm because
although these areas cannot be generating revenue, it is also considered as key to
remaining competitive for longer period of time.
LO 4
Management accounting systems adapt by Excite entertainment Ltd
Identifying financial issue with benchmarking-
Organizations can use benchmark, budgetary targets and key performance
indicators that helps to identify financial issue. Benchmark is the best procedure of
measuring performance of organization services, products or processes as opposite
those of other companies considered to be best in sector, in short, this method helps to
identify internal opportunities of business for financial improvement (Kruger and
Hancke, 2014). Business conditions has included over past few years where financial
information is considered as one of the most essential resource for measuring business
performance identifying financial issues related to alterations found in standardised set
of recital indicators. It led to use of different management accounting systems that set
benchmarks to analyse performance of business reflecting way it tends to focus on long
term sustainability features. Benchmarking is appropriate practice of comparing existing
business performance and procedures metrics to industry best and bests practice from
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other organizations. Dimensions usually measured cost, quality and time. With the help
of comparing business performance against other companies’ performance, excite
entertainment Ltd can improve their financial problems.
Management accounting skill sets-
Company know features of effective and efficient managerial accountant, that
helps to improve financial issues and reduce it effectively. Firm understand how skills is
applied to prevent issues and to deal with misappropriation of assets meant to grow
business. Planning and reporting, decision making, technology, operations and
leadership is included in set of management accounting skills that provide many
benefits to company when they used it efficiently. Competencies needed to envision
future, evaluate report financial outcomes and measure performance. Manager is able
with management accounting skill is to guide decisions, established the ethical
environment and mange risk that is beneficial for overall business. Company manage
information systems and technology to enable effective operations that also support to
solve financial issues. By contributing as cross functional partner of business it helps to
transform organization wide operations that increase financial budgets. Furthermore,
firm also respond to financial problems when they collaborate with its team member in
good manner which inspire group of people to achieve their common goals and
objectives.
Financial governance-
It is another way can used by company in which they collect data, monitor and
control in business. Along with this, day to day data is measured and decision made by
manager in respect to manufacturing of products in workplace and buying of raw
materials. These kinds of practices are assured that condition further remain in control
which is typically lead to earning or gaining of appropriate amount of profit in company.
Through this procedure organization track financial transactions effectively, control data
and manage performance of business which is one of the best respond to financial
issue. With the help of these activities they can consider the major things which affects
productivity and profitability of firm. Financial governance allows businesses to monitor
their current monetary controlling strategy that identifies any barriers in effective
financial management process. It is the best action of company in which they made
different policies as well as processes that is used by firm to manage business data and
assure that data is suitable for them.
Key performance indictor-
This is the anther method or way that is highly used by companies to make
appropriate decisions. In this procedure for several items standards is identified, this is
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complete to determine whether situation is out of control or under control (Zamfir, 2015).
Taking steps towards betterment company can maintain resources control on their
expenditures. Most of the firms can use advance data visualization technology or
software that is Tableau where actual is compared with current target and it indicated
whether recent scenarios are under control. By using this software for key performance
indicators company gain benefit that is real time basis shows growth that is drive
towards achieving objectives and goals. Moreover, on actual time basis directly
manager take decisions rely of inputs taken from Tableau system.
CONCLUSION
On the basis of above discussion, it has been summarized that Excite
entertainment Ltd make many efforts to control budget. By using management
accounting systems company assure effectual management of pricing, inventory and
cost aspects. Firm undertaking all the systems which help to set appropriate prices of
goods and services, is also help to increase profitability. Managerial reports cater
essential information to administration about internal performance of business, it also
supports in achieving objective as well as developing competent strategies for further
period. Furthermore, it has been summarized that company select absorption pricing
system over marginal because it helps in describing optimal view of profit and cost by
focusing variable as well as fixed cost. Organization is centring on employing activity-
based accounting system. Some tradition from costing highly suitable to production
companies in term of price assessment. Moreover, this study concludes different
planning tools that used by firm for further business growth and success. In order to
solve financial issues firm, take the best actions.
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Top-Down Method. 2018. [Online]. Available through:<
https://smallbusiness.chron.com/topdown-method-23876.html>
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