Management Accounting Analysis: HND Business, Regent College

This management accounting report provides an explanation of management accounting and its essential requirements, including different methods like traditional, lean, throughput, and transfer pricing. It also details various methods for management accounting reporting, such as financial planning, statement analysis, cost accounting, budgetary control, statistical techniques, and ratio analysis. The report includes a computation of production costs and an income statement based on marginal and absorption costing. Additionally, it discusses the pros and cons of cost and budgetary control tools and compares different management accounting tools used in response to financial problems. This student-contributed assignment is available on Desklib, a platform offering AI-powered study tools and a wide range of academic resources.

MANAGEMENT ACCOUNTING
STUDENT NAME
STUDENT ID
PROFESSOR NAME
1

Table of Contents
Introduction......................................................................................................................................2
TASK 1............................................................................................................................................3
LO1..................................................................................................................................................3
P1 Explanation of the management accounting and its essential requirements..............................3
P2 Explanation of different methods for management accounting.................................................5
TASK 2............................................................................................................................................6
LOW................................................................................................................................................6
UP Using appropriate tools and costing methods, provide the computation of cost of production
and thereby prepare and Income Statement on the basis of marginal and absorption costing based
on the given data..............................................................................................................................6
TASK 3............................................................................................................................................8
LO3..................................................................................................................................................8
P4 Discuss the various pros and cons of the various tools of cost and budgetary control. Support
your answer with various illustrations.............................................................................................8
LOW..............................................................................................................................................13
UP Draft a comparison regarding the various types of management accounting tools as used by
the entities in response to the occurrence of financial problems...................................................13
Conclusion.....................................................................................................................................14
Reference List:...............................................................................................................................15
2

Introduction
Management Accounting refers to a branch of accounting that deals with the cost and financial
management of the entity in order to facilitate the decision-making process in the entity.
Management Accounting can be termed as a subset of economics which helps in the process of
decision-making and analysis for each of the individual suppliers and commodities in the
microeconomic business environment (Contrafatto and Burns, 2013, p.349).
The Institute of Management Accounting (IMAM) has defined management accounting as a
process whereby the management of the entity is guided in the context of planning, performance
analysis and the various requisites of appropriate financial reporting.
Chan et al. (2014, p.344) The aspect of management accounting needs to be appropriately
addressed by the top management in order to maintain the appropriate records related to each of
the operations of the entity thereby enhancing the degree of internal control within the entity.
Management Accounting if appropriately adhered to by the management of the entity will
facilitate to enhance the quality of decision-making and thereby to achieve the desired level of
operational efficiency.
Management accounting tools are also an efficient tool for measuring and evaluating the
performance of the entity and thereby assisting in the preparation of the financial budgets.
TASK 1
LO1
P1 Explanation of the management accounting and its essential requirements
According to Wagenhofer (2016, p.50), management accounting is a kind of profession to deal
with the various functions of accounting of the organistions. In management accounting the
managers are involved in the process of decision-making, various types of planning, making
report on the finance, measuring the performance etc. In the case of organizations both in the
matter of internal and external factors management accounting produces report for weekly,
monthly and yearly as well. All the information is about the budget of the organizations, cash,
sales, raw materials, and statistics including the forecast of the organizations. The main principal
of the management accounting is to develop the needs of the various internal management of the
organization (Rend, 2016, p.116).
3

The main purpose of the management accounting is to focus on the cost of the products goods.
The different type of management accounting is as mentioned below-
Traditional management of accounting- In this process of accounting the main purpose is to
track the cost by analyzing the factors of the process of costing methods and order of the job as
well. All the methods of cost basically determine how the business organizations maintain the
cost of the various factors like labor, materials, manufacturing overhead etc. The costing of the
job order can be easily traceable for the case of small business projects. However in the case of
big projects the cost budget can be complicated. The cost of the process based on the different
types of process for producing the product of the business industries. This account system can be
applicable for Vector Holdings Limited. The reason is that this organization is a sole
manufacturer of the products. Therefore, for the process of manufacturing of the products, the
management needs to maintain proper materials, labor etc. Vectair Holding Limited can get
various facilities by using the process of traditional management for implement the management
accounting. In the case of Vectair Holdings Limited a big project of manufacturing of the goods
was failed due to the lack of accounting management. Therefore, as a new accountant manager
of Vectair Holdings Limited, it is necessary to use Traditional management of accounting for the
betterment of the organisations.
Lean accounting- In the case of Lean accounting it can be said that it is one of the most
revolutionary techniques for the accounting management team. Lean accounting mainly focuses
on the new strategies to reduce the cost of the product by avoiding the wastage materials (Loft,
2016, app.). Lean accounting does not focus on the cost control of the organisations. The
accountants of the type of system always provides the immediate information about the factors of
decision making process, measurement of the profitability and the value assessment of the
product of the organisations. All the extra cost for the product and for the budgets may be cut
from the system of Lean accounting. This process of accounting is one of the most essential
components that can be used for Vectair Holding Limited. For reducing the extra cost of the
product Vectair Holdings Limited can get various benefits.
Throughput accounting- This type of accounting system is not considered as costing process
within the traditional management process. In this process the main purpose of the accountants is
that the identification of constraints of the productions system of the business organizations. The
factor of constraints can be included in the insufficient materials of the organisations and the
4

labor and the capacity of the production of the organisations as well. All the facilities of the
production can be examined in this process (Horngren et al. 2013, p.44). After reducing the cost
of the productivities of the business organizations the productions volume can be improved. This
process of accounting of the cost can be used along with the traditional process of cost system.
Transfer pricing- According to Fullerton et al. (2013, p.50), in this process of management
accounting the business industries can analyse the cost of the product. This is one of the most
common factors of the management accounting of the business organizations (Chenhall and
Moers, 2015, p.11). All the items of the companies can be transferred into different department
of the organisations. Each of the products item would add a little portion of cost within the
product item.
P2 Explanation of different methods for management accounting
To manage the accounting as a new account manager in Vectair Holdings Limited, the methods
are such as financial planning, statement of financial, cost accounting, cash flow, fund flow,
budgetary control, decision-making, ratio analysis and so on. To make a report on the decision-
making all the above stated factors must be included.
Financial planning- The main purpose of all the organisations is to maximize the product of the
business industries. This objective can be fulfilled by making proper budget, financial planning
that can be effective for Vectair Holdings Limited.
Statement analysis- In the case of financial statements the option for the profit and loss
statement must be included in the analysis. This kind of statement would help to understand the
growth of the organisation. For making report on decision-making for Vectair Holdings Limited,
this option must be included.
Cost accounting- In this process to know the cost of the process, department and product can be
included for the formulation of the report. After comparing the cost of the products the
management would be able to understand the different of the cost.
Budgetary control- this technique can be used to control the budget of the companies. For
making report about decision-making for Vectair Holdings Limited, the budgetary control must
be included.
5

Statistical technique- The various methods of quality control, regression can be included for
statistical technique. For making the report about the decision-making in Vectair Holdings
Limited, this technique can be included.
Ratio analysis- For forecasting, controlling, and for coordination ratio analysis can be included.
It helps to make the control of the organisation management more effective. In Vectair Holdings
Limited to make the report as an account manager ratio analysis must be included.
Job cost report- The job cost report mainly provides a set of information regarding the status of
a particular job and is able to help in order to estimate the way through which the job can be
finished from a cost and revenue perspective. It is necessary to map out the electronic workflow
process in order to ensure the purchase orders along with the subcontract commitments. Along
with that, it also helps to utilize the job cost tracking. However, it can be time consuming in
order to enter all the cost items.
Accounts receivable- The accounts receivable that is the customer’s unpaid invoices are
considered as the short-term asset on the balance sheet of a particular organization. It can be
converting into cash based on the collection and therefore it has a great importance to the cash
flows.
Inventory management- An inventory database is considered as an important management tool
for the retail business. Controlling an organizations inventory is necessary for the efficiency
along with the profitability of the business. In addition to that, it also helps the organizations to
forecast the demand and the supply of the products. Moreover, it also helps the organization to
improve their productivity. Along with that, it also ensures the ordering and delivery of the
products.
TASK 2
LOW
UP Using appropriate tools and costing methods, provide the computation of
cost of production and thereby prepare and Income Statement on the basis of
marginal and absorption costing based on the given data.
Please refer to the below screenshot and the related excel file for the above solution.
6

Marginal Costing refers to a technique of costing whereby the Profit per product is determined
on the basis of the actual amount of sales and the related costs. The net profit attributable to each
of the product as produced by the entity can be appropriately calculated by the using the
technique of marginal costing. In the technique of marginal costing, we are required to deduct
the variable expenses from the sales figure to arrive at the amount of contribution. Then the from
this contribution we are required to deduct the fixed cost to arrive at the figure of Profit. The
company can utilise the technique of marginal costing to facilitate the break-even analysis of the
various products, can thereby decide the appropriate course of action to reach to the required and
7

the desired level of profit, and can thereby assist the organisation to achieve the motive of profit
maximization (Taipaleenmäki and Ikäheimo, 2013, p.321).
Absorption Costing can be referred to as the method of costing whereby the net profit
attributable to each of the product is computed by using the technique of absorption and the
recovery of the related overheads of producing the commodity. In absorption costing the net
profit or loss arising out of each of the product is calculated by computing the under or over
recovery of the production and the other related overheads of the product. If there is under
recovery the amount of under recovery of the overheads is directly charged to the statement of
profit and Loss. If there is over absorption or under absorption of the overheads of the products
then the amount is credited to the statement of profit and loss (Dung and Aoki, 2014).
The distinction between the marginal costing and the absorption costing can be stated as
hereinafter mentioned:
1. Definition: Marginal costing refers to the type of costing which is prepared by the
management of the entity on the basis of break-even analysis whereby absorption costing
refers to a technique of costing whereby the management discloses the statement of profit
and loss by apportioning the total costs to the relevant cost centres and thereby computing
the aggregate costs of production.
2. Recognition of the cost: In marginal costing the variable costs are termed to be the
product costs and the fixed costs are termed as the period costs whereas in absorption
costing the product cost comprises of both the fixed and the variable costs.
3. Overheads Classification: In marginal costing the overheads are classified as Fixed
overheads and the Variable Overheads whereas in the context of absorption costing the
overheads are classified differently based on the stages of production.
4. Measurement of Profitability: The profitability is measured as Contribution Margin Ratio
in the context of marginal costing whereas in absorption costing the profit is measured on
the basis of the under or over absorption of the overheads of the product.
5. Targets: Here in marginal costing the entity targets to measure the amount of contribution
arising out of the product per unit of production. On the other hand in absorption costing
the entity targets to achieve the amount of net profit per commodity of production.
8

TASK 3
LO3
P4 Discuss the various pros and cons of the various tools of cost and
budgetary control. Support your answer with various illustrations.
There are a various kinds planning tools used for the purpose of enhancing the degree of
efficiency in the context of management accounting. The tools of management accounting are
essential for the management of the entity in facilitating the process of decision making in the
context of modern business in the era of cross-border flow of capital (Garrison et al. 2010,
p.792).
Some of the important tools of planning in the context of management accounting can be
explained as hereinafter mentioned:
1. Financial Planning: Financial Planning refers to the tool for financial decision making by the
management of the operations. Profit Maximisation and the Wealth Maximisation are the main
motives of the top management of any of the going concern entity. The organisation shall be able
to achieve these targets as set by the management only if there exist a sound and appropriate
financial planning.
The merits of financial planning can be stated as follows:
1. Appropriate financial planning helps the entity to safeguard itself in the situation of
contingencies. The business environment is dynamic in nature and thereby the
contingencies can occur at any time in the future depending on the nature of the industry.
2. Effective financial planning by the management of the entity can help the organisation to
undertake huge projects like merger and acquisition and helps in funding the entity in the
event of mergers and amalgamation.
The drawbacks of financial planning can be stated as follows:
1. The analysis based on the financial planning may not come up to the expectations since
the financial planning is made based on assumptions which may fail at any time in the
dynamic business environment.
2. The feature of financial planning is rigid so it may not work out in the dynamic business
environment.
9

2. Financial statement analysis: The financial statement analysis refers to the analysis of the
elements of the financial statements i.e. the Income Statement and the Balance Sheet of the
entity. The financial statements analysis also helps the entity to judge the financial state of the
company (Fullerton, Kennedy and Widener, 2014, p.414).
The advantages of the financial statements can be stated as hereby mentioned:
1. The financial statement analysis also helps the entity to disclose the financial status of the
company to both the current and the potential investors of the company.
2. The financial statement analysis of the company helps the company to raise funds from
the market in the form of loans and capital.
The demerits of the financial statement analysis can be stated as follows:
1. The financial statements are prepared based on historical cost analysis which may not
work out in the dynamic business environment.
2. The financial statements ignore the concept of present values of the amounts so the
company may fail to reach out to the expectations of the stakeholders in near future.
3. Cost Accounting: Cost Accounting refers to the technique of presenting of the financial data
in respect of the cost of production, per product wise as well as process wise. The cost
accounting is done in order to determine the appropriate selling price so as to achieve the
required profit margin and thereby to achieve the objective of profit maximization (Thomas,
2016, app.).
The advantages of the cost accounting can be analyzed as follows:
1. The technique of cost accounting helps the entity to measure the level of efficiency in the
operations of the business and thereby enhance the management of the entity to
determine the appropriate course of action in the entity.
2. The technique of cost accounting helps the entity to determine the appropriate and the
effective selling price in order to earn the required level of profit margin.
The disadvantages of the cost accounting can be stated as follows:
1. The cost accounting system is complex in nature and thereby restrains the entities to
effectively adhere to the principles of cost accounting.
2. The cost accounting techniques may not be appropriately utilized in the small-scale
entities as most of the small scale entities refer to the traditional models of costing as
compared to the large-scale entities.
10

3. Fund flow Statement: Fund Flow Statement refers to the statement that depicts the flow of the
funds of the business from accounting period to another. In the fund flow statement, the
statement of changes in the working capital is also analyzed.
The merits of the fund flow statement can be analyzed as mentioned hereby:
1. The fund flow statement helps the management of the entity to judge the operational
efficiency of the firm by looking into the figure of funds from operations. This will help
the management to evaluate the performance of the entity in regards to the operational
efficiency.
2. The fund flow statement is useful in the sense that it depicts the reasons for the changes
in the flow of funds in the relevant accounting period. merits of the fund flow statement.
The limitations or the drawbacks of the fund flow statement can be depicted as follows:
1. The data as presented in the fund flow statement may not be accurate as the fund flow
statement is prepared on the basis of historical cost.
2. The fund flow statement of the entity may fail to serve as the substitute of the financial
statements of the entity (Klychova et al. 2014, p.79).
4. Analysis of Cash flows: The Cash Flow Statement depicts the flows of cash within a given
accounting period or it can be said that the cash flow statement is a statement which depicts the
sources from where the cash is generated and reveals the sources where the cash is used. The
cash flow statement is essential as it helps the entity to justify the flow of cash and to judge the
effectiveness of the entity in the context of cash management (Borker, 2016, p.258).
The advantages of cash flow statement can be stated as follows:
● The cash flow statement helps the entity to disclose the amount of cash as available with
the business at the end of the accounting period and helps in judging the liquidity of the
business.
● The cash flow statement of the entity is useful in the context of making the future
projections related to the liquidity position of the company.
The demerits of the cash flow statement can be analyzed as follows:
● The cash flow statement fails to reveal the amount of profit and loss of the company.
● The preparation of the cash flow statement is dependent on the data of the Income
Statement and the Balance Sheet.
11

5. Cost plus pricing: It is a cost-based method in order to set the prices of different goods and
services. Through this particular approach, the organization can add the direct material cost
along with the overhead cost and the direct labor cost. In addition to that, this can also be used
within a customer contract.
The advantages of cost plus pricing are as follows:
 It is very much easy in order to derive a product’s price. However, the organization needs
to define the overhead allocation technique to be consistent in the calculation of the
prices of different products.
 It is also justifiable.
 It assures the contract profits.
The disadvantages of cost plus pricing are as follows:
 It ignores the level of competition.
 The cost of the product overruns.
 It also ignores the replacement costs.
6. Standard Costing: According to Malhotra and Van Alstyne (2014, p.24) Standard costing can
also be termed as predetermined cost. Standard costing provides the management with the
yardstick for the purpose of evaluation of the actual performance with the standard or the desired
performance. The tool of standard costing also helps the entity to analyze the level of deviations
in the operations of the business.
The merits of the standards costing can be analyzed as follows:
1. The tool of standard costing facilitates the approach of management by exception. It
helps the entities to judge the performance of the entity in regards to the standard level of
performance.
2. Standard costing also helps the entity in enhancing the quality of bookkeeping within the
entity.
The disadvantages of standard costing can be stated as hereinafter mentioned:
● The tool of standard costing may be rendered useless, as most of these reports of standard
costing are prepared on a monthly or quarterly basis.
● In many of the cases, the variances as computed may be rendered vague if the standards
set become outdated due to the effect of dynamic business environment.
12