Management Accounting Report

This report examines management accounting concepts and their application in Ovation System, a business entity. It covers topics like types of management accounting, reports, benefits of systems, and integration. The report also analyzes absorption and marginal costing, break-even analysis, and planning tools for budgetary control. It compares Ovation System with its competitor and evaluates planning tools for solving financial problems to achieve sustainable success.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Explaining types of management accounting with its essential requirements.......................1
B. Explaining different types of management accounting reports with their significance to
management................................................................................................................................3
C. Benefits of management accounting systems and their application.......................................4
D. Critical evaluation of the integration of management accounting systems and reporting ....5
TASK 2............................................................................................................................................5
A. (1) Explaining Absorption and Marginal Costing..................................................................5
A. (2) & C. Preparing income statement using both absorption and marginal costing
techniques with a financial reporting document on it.................................................................6
B. & D. Calculations on Cost Profit Analysis (break-even analysis) with an interpretation of
business activity data..................................................................................................................8
TASK 3..........................................................................................................................................10
A. Explaining demerits and merits of different planning tools for budgetary control..............10
B. Application of planning tools for analysing, preparing and forecasting budget .................11
C. Comparing adapting management accounting systems for responding to financial problems
...................................................................................................................................................12
D. Analysing management accounting techniques that could lead organisation to sustainable
success.......................................................................................................................................14
E. Evaluating planning tools for solving financial problems to attain sustainable success......14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is employed through senior management of organization for
extracting critical data of business on the basis of financial position through which daily
decisions related to operations are made. Present report will discuss all concepts related to
management accounting with reference to Ovation System. There will be appropriate
understanding on management accounting system with its various types. It will be applying
different range of management accounting techniques such as absorption and marginal costing
with its profit and loss statement. It will reflect calculation of break-even point and margin of
safety on its similar context. This report will also represent planning tools which are applicable
in management accounting with their merits and limitations. Further, it will articulate proper
comparison in between Ovation System and Compound Security System (major competitor) with
application of management accounting to respond on its financial problems. In the same series, it
will evaluate planning tools for solving financial problems and lead to attain organizational
success.
TASK 1
A. Explaining types of management accounting with its essential requirements
Accounting is of two types which are management and financial. Management
accounting is referred as the process of preparation of accounts and reports which give
appropriate and timely information related to finance and statistics to its managers for taking
decision from short and long term perspective. There is a huge requirement of managers of
department for forming various reports and to communicate information to team of senior
management. This data is not shared with lenders, other external parties and shareholders.
Financial accounting is replicated as a process of summarising, reporting and recording each
transaction of organization for giving accurate picture of its fiscal performance (Nitzl, 2018).
There are various types of management accounting systems such as:
Cost accounting system: It is a system of accounting which is used through
manufacturers for tracing activities of production with application of perpetual inventory system.
In simple words, accounting system is framed for manufacturers who track inventory flow on
continuous basis at different stages of production. It tracks raw materials on this stage and
converts the same into finished goods. These materials are used in production and on immediate
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aspect, these are recorded and credited through its accounts and debited from goods in process
account. It comprises of actual, normal and standard costing. Actual costing: It uses rate of actual and direct cost with its application for identifying the
cost of specific items. The hours of manufacturing time are analysed by managers along
with requirement of calculating actual cost of producing a particular product. Normal costing: It uses annual overhead rate which is predetermined for allocating
manufacturing overhead to its particular products. In simple form, its rate is directly
based on the expected overhead costs for whole accounting year and its volume of
production. Example could be rent or mortgage and depreciation on machine used for
producing products.
 Standard costing: This is estimated and predetermined cost for performing operation to
manufacture any good on the basis of normal condition. It is applicable as the target cost
and developed through analysis of historical data from motion or time study. Its example
could be cost of direct material, labour or manufacturing overhead (Saeidi and Othman,
2017).
Job Costing system: It engages the process of accumulating information related to cost
associated along with proper production or service job. There is a huge requirement of
information for submitting information of reimbursed cost to specific customer. The application
of information is used for identifying the accuracy for estimating system of organization. It has
gained capability for quoting price which allows for obtaining reasonable margin. This particular
information is used for allocating the cost of inventory to its goods which were manufactured. In
this system, it has to accumulate information related to direct material, labour and overhead. For
instance, it is appropriate for determining constructing cost of custom machine, building
construction and to design software program.
Inventory management system: It tracks goods via whole supply chain or business
proportion which is operated in it. This system covers each item of production to warehouse to
shipping, retail and each movement of stock and parts in it. There are various systems of
managing inventory such as periodic inventory, JIT, LIFO and FIFO. Periodic inventory: It is the system which updates on periodic aspect. It does not make
any effort for proper record of either cost of sales or of inventory.
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 JIT (Just in Time): It is a common technique for leaning methodology for designing to
raise efficiency and to cut cost. In the similar series, waste has been decreased through
receiving goods with its requirement.
B. Explaining different types of management accounting reports with their significance to
management
Managerial accounting reports gives information for trimming cost and rewarding
employees on the basis of high performance . It signifies the best financial outcomes of business
which are undertaken and time sensitivity of information related to finance. There are various
types of management accounting reports which are used by Ovation System such as:
Budget report: It is an internal report which is applicable through management for
comparing the budgeted projections which are estimated along with obtained number of actual
performance in specific duration. These are inaccurate and differ in huge aspect from
organization's actual performance. Ovation System could prepare this report on quarterly,
monthly and annual basis. It will give detailed overview about performance from its previous
years and fluctuations on this aspect. These are invaluable method for Ovation System for
monitoring business's financial health. It helps in making or buying decisions and with providing
a better understanding on performance variances (Budget Report, 2018.).
Accounts Receivable report: It is a critical tool for proper management of cash flow
with extension of credit to its customers. The problems related to collection process of Ovation
System could be extracted by its managers. If these accounts receivable reports are analysed on
periodic aspect then it would keep collection department from overviewing old debts (Bui and
De Villiers, 2017).
Inventory reports: This report gives information for helping the business to improve
decision making skills. Information related to current inventory and owners of direct businesses
on the basis of sensible purchase are outlined. It consists of items such as hourly labour costs,
inventory waste and cost of per unit overhead. The different assembly lines are compared within
business for highlighting improvement areas for giving bonus to departments that are performing
well. In nutshell, it optimises the level of inventory and ensures about appropriate tracking.
There are different methods for extracting inventory control report in Ovation System (Reports
of Inventory Management, 2018).
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C. Benefits of management accounting systems and their application
Cost accounting system: This system helps in clustering expenses and revenues through
cost object by distribution channel, product line and product for identifying profitable or need of
support. It extracts exact cause of issue and suggests appropriate solution to management. In the
similar aspect, it examines cost structure of possible acquisition with its appropriate justification.
The occurrence of actual cost could be compared with standard or budgeted cost for observing
business contribution to spend as compared to expected. The capability of business for
supporting increased level of sales by exploring amount which is exceeding capacity. It also
includes charges of direct labour to inventory along with allocation of factory overhead to stock.
It gives help for process of decision making and accuracy of financial accounts had been checked
in Ovation System.
Job costing system: The cost might be ascertained with completion of job at any stage
which provides scope for controlling costs by performing appropriate steps in Ovation System.
Each job helps in earning profit and individually it is known as Job costing. The management
could properly estimate each cost of job by considering previous records in it. Its actual cost of
present job could be compared with previous job execution. It might predetermine overhead
recovery rate on basis of budget. There is absence of under and over recovery of its overheads. It
helps in implementing budgetary control system with appropriate estimation with context of job
costing. The suitability of job costing is along with cost and contracts and it facilitates pricing of
each particular job (Hope, Thomas and Vyas, 2017).
Inventory management system: This system helps in achieving productivity and
efficiency in operations. With this context, adequate supply of specific product to accomplish its
demand which is very important to increase sales and customer services. If inventory
management system is computerized or manual then it would determine trend and to prepared for
requirements of customer. It streamlines operations as in facilities of manufacturing must
maintain appropriate inventory of supply which is mandatory for manufacturing products of
Ovation System. It is major advantage of an effective system of inventory management. It helps
for identifying adjustments of lead time and ensures about stock belongs to sale. In the similar
aspect, it decreases liabilities and loss created through overstock. It keeps proper track on supply
and demand and decline in sales to determine one time occurrence for preventing over orders of
particular products.
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D. Critical evaluation of the integration of management accounting systems and reporting
It is a system of software application which helps in standardizing procedures for tracing
each transaction and appropriate dissemination of information related to its financials. The
reporting activities are interlinked to various functional areas of business like point of sales, back
office, stores and front office. The whole information is streamlined with its output and input of
functions of financial reporting and management accounting. However, integration management
accounting system is adopted then it would directly enhances financial system along with
accuracy, speed, efficiency through proper process of financial information. It helps in enabling
and relay on real time information with context of business transactions.
Integrated management accounting serves as shop of one stop on basis of its information
which consists of managerial, cash flow and financial accounting. It has huge requirement of
maintaining separate procedure of accounting for preparing reports of financial, cash flow and
management. It has been critiqued that, data which is processed on automated aspect and
bookkeeping and accounts are simplified with application of this system. It substitutes
complicated and tedious activities of reconciliation and performs with non-integrated
management accounting system. This adaption is mandatory not a choice due to increment in
complexities of world of modern business with application of efficient system to maximise its
performance. However, Ovation System must ensure to choose affordable, user friendly and to
update flexible system to ignore complications in this implementation (Diouf and Boiral, 2017).
TASK 2
A. (1) Explaining Absorption and Marginal Costing
Absorption costing:
It is managerial costing method of allocating cost by including both fixed cost and
variable expenses in production of inventory. In absorption costing method all the expenses
incurred that is material cost, and indirect cost like overhead cost are considered while evaluating
the final price of a product (Noreen, Brewer and Garrison, 2014). It helps to recover all expenses
of production from the selling cost of that product. It is widely used technique of ascertaining
cost of a product. Absorption method of costing is also referred as full costing as it present more
comprehensive and accurate expenses incurred on the production of inventory.
Marginal Costing:
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It is the method of costing technique where the variable expense is considered to
determine the price of the inventory and fixed cost will consider as completely written off
against profit in that period (Quinn, Elafi and Mulgrew, 2017). Only variable cost are charged to
operations processes. It is not considered as a system of costing but taken as a technique which
concerned as change in the cost and profit from production with the change in variable expenses
in production of that product. It is not considered as a suitable technique to ascertain cost of
inventory as it does not determine the fixed cost in production whether it increases with
production or not.
A. (2) & C. Preparing income statement using both absorption and marginal costing techniques
with a financial reporting document on it
Income statement using Marginal Costing:
Income statement using Absorption Costing:
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To,
The General manager,
Ovation Systems
London, United Kingdom
Date: 4/10/2018
Sir,
This is to inform the higher authority of Ovation System about the costing techniques
which should be implemented in company to ascertaining the cost of inventory. By analysing
the calculation done above, it can be demonstrated that absorption costing method is accurate to
use in costing a price of inventory as it involves both variable and fixed expenses of production.
Where, marginal costing only considered variable expenses that is the price of output will
change with change in variable expenses (Hiebl, 2018). Marginal costing doesn't considered the
fixed expenses in product pricing and written off fixed expenses for the specific time period.
The Ovation System should opt for absorption costing technique, as it can be analysed from the
calculation of income statement with both method of costing.
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Implementing absorption costing will give higher net income that is 17700 pounds,
where marginal costing will give only 17500 pounds of net profit. Hence, using absorption
costing techniques will help the company to show accurate profit calculation to set final cost of
goods and services. This method is very important as it includes fixed manufacturing cost which
is also important in manufacturing process which required to be recovered from selling price of
products. Adopting absorption costing will provide complete picture of cost per unit of a
product line that will be helpful for a company management in evaluating profitability by
determining prices for the product and services offered by the company.
Thanks & Regards,
Management Accounting Officer
B. & D. Calculations on Cost Profit Analysis (break-even analysis) with an interpretation of
business activity data
Calculation on Break-Even analysis:
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Interpretation:
Break even analysis is a technique which is used by production management and
accountant of a company to ascertain the level of selling where, the cost of production can be
recovered. Hence, BEA is a financial tool that will help to evaluate management that at which
stage the product will start giving profit to company (Soldavini and Tyner, 2018). The
calculation of break-even will determine the number of sales volume which is required to cover
its fixed and variable cost of production.
The above calculation will help in determining various business data activity with the
help of break-even analysis.
a) Break-even point (in units): A point at which the sales revenue will be equal to the cost
incurred in production of that products will be same. That is the company will be at no profit no
loss situation, that point is known break-even point. From the above calculation, it can be
interpreted that BEP of the company is 222.
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b) Break-even point (in monetary term): The BEP value of company where the cost of
production is equal to the sales revenue is pound 8888.889.
c) Desired profit: The number of product that is required to sell in order to earn the desired
profit of pound 10,000 is 592.59259 units of product.
d) Margin of safety: The safety margin required if 800 products are sold is 722.
TASK 3
A. Explaining demerits and merits of different planning tools for budgetary control
According to CIMA, Budgeting is referred as formal quantitative expression of plan of
management. As it is quantified in monetary aspect which is prepared and approved prior at
given duration reflecting planned income which is generated and capital attained for specifying
objective.
Cash Budget: It refers to appropriate estimation of inflow and outflow of cash for
particular business at specific duration of time. Generally, it is used for assessing whether
liquidity for operation is sufficient or not. Its main objective is to give current status of
organization about its position of cash at single point of time. This tool helps in prioritizing the
period of payment related to budget (Ax and Greve, 2017).
Advantages
 It helps management for concentrating on its attention on important concerns which are
not proceeding as per plan.
 The communication is improved and gives appropriate understanding along with
consonant relationship within its employees.
 Coordination is improved in context of each activity within all departments of Ovation
System.
 It helps in reducing cost and to maximise profit in efficient aspect.
 It improves thinking of management and devise efficient as well as effective method of
handling its resources.
Disadvantages
 It is fully built on the basis of subjective estimate.
 The cooperation and operation of staff is associated with success.
 It takes huge time for accomplishing its objective.
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 For operating budget, it is considered to be very expensive. The productivity and morals
is lowered along with non-realistic target.
Master Budget: It is an aggregation of budget at lower level which is produced through
functional areas of Ovation System along with budgeted financial statements, financing plan and
cash forecast. In simple words, it gathers smaller budgets within organization for attaining brief
overview of finance related to business. It consists of marketing, customer service and all
different departments creates a single overall budget.
Advantages
 It is considered as vital motivational tool through which actual performance is compared
to budget. It helps staff for creating job satisfaction along with proper growth
contribution in Ovation System.
 It would be performing its operation as summary of budget and its overview of
management and owners. This budget would indicate amount of earnings and expenses
incurred through Ovation System.
 There is identification of unusual issues in advance which are fixed at initial stage.
 Each business entity has long, medium and short term goals as master budget helps in
attaining objectives of organizations. All resources are controlled and channelized for
optimising margin.
 It is replicated as continuous process as it prepares and performs as analytic tool. In the
similar aspect, variances are determined and worked for better outcome on continuous
aspect.
Disadvantages
 The divisional staff has to accomplish target along with different difficulties due to
pressure via top management. It might lead to estimate of low revenue along with huge
expenses. There is absence of consideration through manager with innovative
opportunities for Ovation System's growth.
 It is very difficult for modification and any other alteration has requirement of numerous
step in whole budget. It consists of lengthy charts and descriptions as well.
B. Application of planning tools for analysing, preparing and forecasting budget
Sept Oct Nov Dec Jan Feb
Receipts £ £ £ £ £ £
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Cash sales 55000 59400 87360 159416 303223 590524
Credit sale receipts
from debtors 42000 45360 49442 50431 51440 52469
Other income
received 8000 8640 9418 9606 9798 9994
Total receipts (a) 105000 113400 146220 219454 364461 652987
Payments
Purchases 30000 32400 35316 36022 36743 37478
Wages- Labour and
overheads 7000 7560 8240 8405 8573 8745
Fixed costs 9000 9720 10595 10807 11023 11243
Capital expenditure
- Plant 8000 8640 9418 9606 9798 9994
Advertising 9000 9720 10595 10807 11023 11243
Total Payments (b) 63000 68040 74164 75647 77160 78703
Surplus/Deficit (a) –
(b) 42000 45360 72056 143807 287301 574284
Balance b/f 0 42000 87360 159416 303223 590524
Balance c/f 42000 87360 159416 303223 590524 1164808
C. Comparing adapting management accounting systems for responding to financial problems
Approaches Ovation System (OS) Compound security system
(CSS)
Bench-marking It is the method of discovering
about accomplishment of
performance in Ovation
System through unique
industry. They had laid special
This organization has
developed wireless security
system which is directly ideal
for protection of rural sites like
farms and all. It lays special
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emphasis on best practices in
its industry and continuous
improvement had been strived.
In the similar aspect, Partnered
to share and communicate all
related information. It has
huge requirement for
maintaining competitive edge
and adaption on basis of needs
of customer after best of its
examination (Overview of
Ovation System, 2018).
focus on measures of
performances. It strives for
bandage or quick fix. CSS has
considered corporate spying
through some and simply nice
to have existing operations.
Lastly, it had attempted on
mirror on another process or
company.
Balance score card It has integrated with
objectives of strategic
management and helps in
monitoring and executing the
plan. It has aligned
organizational structure with
Ovations objectives. The
vision has been translated to
accomplish objectives and
strategies of business entity to
its employee which gives
better understanding of actions
which impact overall success
(Cooper, Ezzamel and Qu,
2017).
With context of CSS, it has
need of communication and
this process had helped
managers for binding strategic
goals with departmental and
individual objectives. It had
also ensured all employees of
organization for appropriate
understanding of strategic
goals for meeting objectives
which are lined up.
Key performance indicators Ovation System had
considered various steps for
considering its major key
CSS had initiated different
factors with application of
management team in managing
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indicator with appropriate
establishment of process of
business. This organization
had set different requirements
with quantitative and
qualitative measurements of its
outcomes (Importance of KPI,
2018).
its resources. It has
significance of industry
standards and norms and has
selected KPI to its business
division. In the similar aspect,
it had identified variances and
adjusting process to
accomplish goals on short term
perspective.
◦ D. Analysing management accounting techniques that could lead organisation to
sustainable success
 The management accounting techniques are important for tools for management
accountants of Ovation System to measures and increase profit margins while lowering
operating expenses. Following management accounting techniques in right directions will
help the managers to lead the company in enhancing overall profitability that could deals
with the financial problems and in long-term sustainable success.
 Following are some techniques which Ovation System is adapting which can help
in their sustainable success:
 Balanced Scorecards: BSC is a model which helps in evaluating business performance
evaluation that balances measures of financial performance, learning, innovations and
internals operations (Bergeron, 2017). The balance score card has comprises of four
perspective which is financial, internal operations, customer and learning and growth.
These perspectives plays a significant role in increasing the performance of company that
would lead the company to attain its long term sustainable success.
 Bench-marking: It is a process through which a company measures its products, services
against its toughest competitors in market and making internal goals which needs to be
achieved (Law, 2014). It is one of the best tools for managers to determine the
performance of company's particular functions and activities efficiently, whether its costs
are up to that of competitors. Bench marking helps the management to find gaps in
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performance and provides opportunities to improve so as to deals with the financial
problems of company
Key performance indicators: it is a measurable value that helps in evaluating effectiveness of
company in achieving key business objectives and long term success. Company uses KPIs at
multiple levels to evaluate their success at reaching targets sets by that departments. High level
KPIs may focus on the overall performance of the enterprise, while low level focuses on
processes or employees in departments..
E. Evaluating planning tools for solving financial problems to attain sustainable success
The planning tools could be evaluated for attaining sustainable success as master budget
described about asset and liability position and overall margin of Ovation System. It helps in
measuring the performance and departmental control has been provided. The efficiency is
improved and gives departmental accountability. The main financial problem is disconnection
among inter divisional departments which lead to create severe problems so that it will help and
ensure about coordination with another division. In the similar aspect, financial position of
Ovation System has been illustrated to its external and internal stakeholders. It also consists of
suppliers, investors and company’s leadership. If cash flow is increasing along with huge
demand for different opportunities and products for extension of company.
It is a positive signal to its potential and current investors. However, its expenses are
more significant as compared to its cash inflow. It creates high investment risk and disapproves
additional investment on the basis of Ovation System. Further, declining cash flow might creak
difficulty to accomplish credit or to pay existing debt as well as it might lead to bankruptcy.
CONCLUSION
From the above study, it can be concluded that management accounting is important for
each business and in every industry. It has shown necessity of accounting in which financial and
management accounting are interlinked to each other. In the same series, it has represented
different types of reports which are mandatory for Ovation System in process of decision
making, forecasting future cash flows, controlling cost and appropriate understanding on
performance variances. It had extracted net income on basis of absorption and marginal costing
where absorption method could be acceptable due to high net income. It has also represented
various planning tools which are directly leading to attain sustainable success such as cash and
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master budget. It can be summarised that benchmark, key performance indicators and balances
score card should be adopted to respond towards financial problems.
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REFERENCES
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Noreen, E. W., Brewer, P. C. and Garrison, R. H., 2014. Managerial accounting for managers.
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Quinn, M., Elafi, O. and Mulgrew, M., 2017. Reasons for not changing to activity-based costing:
a survey of Irish firms. PSU Research Review. 1(1). pp.63-70.
Saeidi, S. P. and Othman, M. S. H., 2017. The mediating role of process and product innovation
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