Management Accounting: A Comprehensive Analysis of Tech (UK) Limited

This report delves into the intricacies of management accounting, exploring its fundamental principles, reporting techniques, and budgeting practices. Using the case study of Tech (UK) Limited, a company specializing in mobile chargers and carryout gadgets, the report analyzes the application of various management accounting tools, including absorption costing, marginal costing, and balance scorecard. It also examines the importance of budget preparation, pricing strategies, and the role of management accounting in decision-making and performance evaluation.

Management Accounting: Tech (UK)
Limited
1

Introduction
In this rapid changeable business environment organisations face intense competition within the
diverse market structure due to growth and advancement in different context. Therefore, account
management is very significant part to stable overall market position by means of budgeting control,
profit as well as production measurement. The internal aspect of management is very complex, where
managers can recognize the financial situation to get a vivid report presentation of direction,
motivation, performance evaluation as well as control. This identical information is supportive for the
organisation to implement different policies as per situational demand. This report deals with the brief
discussion on management accounting and its different approaches based on the case scenario of Tech
(UK) Ltd. They produce special mobile chargers and manufacture different carryout gadgets in
various retail outlets. This report enlightens the in-depth analysis of account management and its link
with the decision-making, report presentation and budgetary control. This analysis will also display
the angle of pricing control to maintain organizational stability during emergency such as lack of
financial back up.
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Task 1
Tech (UK) Limited
To: Director of Finance / Line Manager
From: Management Accountant Apprentice
Subject Line: Reporting different fundamental types of management accounting
systems
a) Explanation of management accounting and the essential requirements of
management accounting system
Managerial accounting is a specialised branch, where managers can present the report in a
timely and accurate in nature. This report primarily includes both financial and non-financial
information. Through management accounting, managers can take short term and long term
decision to resolve operational consequences in a disciplinary manner. According to Boscia
and McAfee (2014), management accounting is also referred to the procedure of
measurement, recognition communication and elucidation for improving the internal
efficiency at all levels. Cost accounting, variance analysis, budget reporting and job costing
are different types of managerial accounting. From this standpoint, there are different aspect
to regulate financial accounting and management accounting.
I. Comparison of Management Accounting with Financial Accounting
In the diverse field of business operation, financial accounting and management, accounting
is operated in different contextual scenario. The major differences are as follows:-
Comparison Context Financial
accounting
Management
Accounting
Purpose It can display the Departmental
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exact financial
position of the
company. This
report is
presented for the
support of
financial
regulators,
investors and
banks.
managers can take
effective decision on
performance
improvement through
the support of
managerial
accounting.
Outputs Output of
financial
statement is
income
statement of the
company in
annual or
monthly term.
Output of managerial
accounting is demand
report, variance report
and scheduled report.
Time horizon This report is
related financial
accounting,
which usually
prepared for one
accounting year.
This report generally
presented from an
interval of 15 to 20
years.
Behavioural
beneficiary
In this branch,
behavioural
beneficiaries are
external users
such as
investors, banks
and financial
regulators.
In this branch, internal
body such as
managers, directors
and owners are
considered as
behavioural
beneficiary.
Governing principles GAAP In this case, no such
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framework is
followed here
under the
context of
governing
procedure.
GAAP means
Generally
Accepted
Accounting
Principles
(Loughran and
McDonald,
2016).
policies are involved.
Emphasis It is oriented
with past or
existing business
concern such as
historical
performance of
2016-2017.
It is oriented with the
future context.
(Source: Budding et al., 2015)
II. The importance of management accounting information as a decision making tool
for department managers.
For every company management account is important for the departmental managers, who
are incorporating different decision-making tools to maintain performance efficiency. These
factors are demonstrated as follows:-
o Investment decisions: Investment decisions are taken through the support of
management accounting information. For instance, marketing managers and
departmental sales manager use identical information of management accounting to
decide the investment purpose in regards to marketing as well as business promotion
(Campbell et al., 2014).
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o Problem solving: Through assessing the managerial accounting details, organizational
managers can understand their gap in existing policies, which will be supportive for
introducing new policies for resolving sudden consequences.
o Operational planning: Through managerial accounting, management bodies can plan
their required daily business tactics.
o Decision-making: Decision-making has primitive role in business process, where
managerial accounting supports the managers to take priority on niche markets,
competitive markets as well as service innovation.
o Operational control
It helps the organization to take control over inventory tracking, where spending cost-
control is required to maintain profitable performance (Chouhan et al., 2017). In
addition, departmental managers can supervise their control on supply process and
purchasing with more clarified determination.
III. Cost accounting systems (actual, normal and standard costing)
Cost accounting system is associated with the cost measurement within the organisation.
According to Kandampully et al., (2015), there are three different cost accounting systems,
which are described are as follows:-
Standard costing: Departmental managers measure this cost through comparing the actual
costs of the organization as well as standard spending costs.
Actual costing: Actual measurable cost is related to cost of the service or product, which
primarily spent for procuring productivity as well as profit.
Normal costing: It measures the enterprise costs through application of both standardised
overhead cost and actual direct costs.
IV. Inventory management systems
Currently Inventory managers follow several stocking and cash controlling methods for
fostering operational performance. As per the opinion of (), there are three effective inventory
management principles for optimising inventory management within the organisation.
 AVCO method (Average cost method): In the periodic inventory system, Average
cost calculates the sold goods-cost as well as cost of ending inventory. Under this
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method, average price is stocked for selling the entire inventory. It is a distinct but
appropriate stock management method rather than that of LIFO and FIFO
(McKercher and Tung, 2015).
 LIFO method (The last in and first out): this method is incorporated while a
particular stock positioned at the last level in the storage (Kireeva, 2016). Through
this method, last level stocks are sold first as primary priority rather than selling the
first level stocks in the storage.
 FIFO method (The first in & first out): this method is opposite to the LIFO method
under the term of valuation. This method is effective to maintain a structured process.
Through this method, first purchased stocks in the storage are sold out as first priority.
V. Job costing systems
These systems are used for evaluating the cost involved in different jobs in an organization. Different
types of job costing systems available are:
Contract costing: Different types of costs involved while undertaking a contract by an organization is
referred as contract costing (Kerzner and Kerzner, 2017). Few examples of contract costing are cost
involved in case of contracts related to construction of buildings, offices, hotels and so on.
Process costing: When an organization is involved in manufacturing different types of units that can
be distinguished from everyone else, then this type of job costing is adopted. In such organizations,
the job costing is calculated by determining average cost from the cost that is spend in producing each
unit.
Batch costing: In an organization, where similar kind of products is produced on a large scale, there
this type of job costing is used or adopted.
Job costing: Job costing are costs involved in accomplishing any type of action or activity in order to
fulfill customer needs. These are used in many large factories and manufacturing workshops
(Edmonds et al., 2016).
b) Presenting financial information
I. Different types of managerial accounting reports
There are many different types of management accounting reports that are often used for various
tasks. Different management accounting reports are mentioned below:
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Exception reports- This type of report provides information about unreturned or the obsolete stocks
of a firm. Another important information that can be gathered from this report is about expenses that a
company spends on maintenance.
Scheduled reports- Scheduled report includes information about the various debts that need to be
paid, thus considerably important for understanding the amount that is overdue of debtors. The report
includes information about account, balance sheet and so on (Weygandt et al., 2015).
Planning reports- The report includes information about finances and economies of the company,
usually of previous years. This report is crucial as it provides information about the financial strength
of the company, essential for determining strategies for future (Bromwich and Scapens, 2016).
Demand reports- This report provides information about several things that can be generated by a
computer. Few examples of information derived from this report is sales report, customer feedback
report and so on.
II. Why it is important for the information to be presented in manner that must be
understandable
Proper understanding of financial standing of an organization is essential for bringing any change in
the course of an organization (Fullerton et al., 2014.). Financial statement of an organization serves
many different purposes, therefore presenting them in a proper manner should be the top priority. The
following are the importance of financial information:
 The future prospects of an organization are decided based on the current financial
standing of the organization
 The information derived from the repot can provide insight about the performance of
the organization
 It is used for finding improved plans for an organization
 It is used for taking strategic and tactical decisions for an organization
 Financial information is often shared with shareholders and other financial institution
to attract more funds and resources
Task 2
I. Absorption costing method
Income generated from sales = 35 pound x 1500 units = 52500
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Cost of sales = Fixed cost + Opening inventory - Closing inventory = 10000 + 30000 - 10000 = 30000
Sales & admin cost = 15% of Income generated from sales = 52500 x 15% = 17875
Units absorbed = Actual amount of overhead - Overheads actually absorbed = 15000 - 10000 = 5000
According to absorption costing, the income statement of Tech (UK) limited is as follows:
Particulars Income
generate
d from
sales
Less –
Cost of
sales
Less –
Units
absorbe
d
Gross
profit
margin
Less - Selling &
distribution
overhead
Net
profit
Amount £52500 -
£30000
£22500 -£5000 £17500 -£17875 (£375)
II. Marginal costing method
Income generated from sales = 35 pound x 1500 units = 52500
Cost of sales = Opening inventory - Closing inventory = 30000 - 7500 = 22500
Sales & admin cost = 15% of Income generated from sales = 52500 x 15% = 17875
According to marginal costing, the income statement of Tech (UK) limited is as follows:
Particula
rs
Income
generat
ed from
sales
Less
–
Cost
of
sales
Less –
Variab
le
Sales
&
Admin
costs
Margin of
contributi
on
Less
:
Fixe
d
cost
Selling &
distributi
on
overhead
s
Producti
on
overhead
s
Net
profit
Amount £52500 -
£2250
0
£3000
0
-£7875 £22125 £10000 £15000 (£287
5)
Reconciliation statement -
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Particular
s
Profit
figure
(marginal
costing)
Add –
Fixed
expenses
Profit
figure
(absorption
costing)
Amount
(in £)
-2875 2500 -375
The above mentioned table shows why it is important to consider marginal costing and absorption
costing. According to both the costing techniques, profit and loss of Tech (UK) LIMITED can be
observed. The two statements show that the company is facing little loss, as fixed costs are used for
calculating net profit. Fixed costs are considered as period costs in the case of marginal costing, while
in absorption costing, such costs are included for calculation. The above two reports show different
net loss for Tech (UK) LIMITED, due to this reason. It is advisable for the company to use absorption
costing for future consideration as it shows less loss as compared to marginal costing technique.
Task 3
a) Different kinds of budgets and their advantages and disadvantages
Preparing budgets are important for every organization as it is the key for improving the financial
position of an organization. All organizations prepare or design a plan that the company is going to
follow for a course of period, this is referred as budget. A budget of an organization usually includes
information like allocation of resources, future plans for cash flow, strategies for sales and revenue of
organization and so on. Thus, it is very important to prepare budgets. There are various types of
budget report that are often prepared by organization, some are mentioned below with their several
advantages and disadvantages:
Incremental budgets: This type of budgets are prepared by taking previous year’s budget into
consideration and along with that little percentage of increment is also added for the fresh period.
These types of budgets find immense use and application in public sector.
The various advantages of incremental budget are:
 Changes occur slowly and in a course of time
 Thus very stable as the changes happen slowly in the budget
 Quite easy to prepare and follow
 Efficient in practice and helps in cooperation and coordination
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The various disadvantages of incremental budget are:
 The budget has been observed to create obstacles and several problems for new and
unique ideas of organization
 This type of budgets usually leads to far more expenditure because increments are
added while determining overall cost of the organization
Zero based budgets: This type of budgets is often made in an organization that is completely new and
fresh. In zero based budget, no reference is made to last financial year budget whatsoever and a
completely new budget from scratch is made. Thus a fresh budget gets created from base zero and all
costs and expense are included in this for the upcoming financial year.
The various advantages of zero based budgets are:
 This budget helps in bringing several changes and modifications in the organization
 The budget creates opportunities for improved line of communication, coordination
and cooperation
 Very helpful in minimizing and removing unproductive actions and functions
The various disadvantages of zero based budgets are:
 Lot skilled employees is required for executing the plan according to this budget
 The budget requires lot of time and complexity
 Thus very difficult to implement and creates several problems
Fixed budgets: As the name suggests, this type of budget remains fixed for the whole financial period
for which it has been designed. The budget does not involve any sort of changes or modifications in it
for its entire period of execution (Mauskopf et al., 2017). This is why it is often referred as static
budget. This type of budget often finds application in public limited companies.
The various advantages of fixed budgets are:
 The method of preparing and implementing this type of budget is very easy
 The costs involved in controlling the company reduce drastically
The various disadvantages of fixed budgets are:
 As no changes are allowed in this type of budget, thus it loses flexibility and the
power to adjust to changes
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 The budget is often observed to have a negative impact on the earnings of the
organization
Variable budgets: The variable budget offers lot flexibility and addictiveness in preparing and
executing this budget, because variable budgets can be changed and altered any time required (Philips
et al., 2016). A certain example of this budget would be that, if any change occurs in the production
function of the organization, the changes can be made in the budget as well. This type of budget is
often referred as variable budget.
The various advantages of variable budgets are:
 Any sort of change and modification is welcomed in this type of budget
 An organization facing any downturn or economic slowdown, the changes occurring
surrounding environment can be easily incorporated in the budget
The various disadvantages of variable budgets are:
 The budget is difficult to understand and thus involves problems in execution
 Business involves several changes and modification in its environment, thus those
updates and alterations need to be updated in the budget as well
b) The budget preparation process including determination of pricing and different
costing systems that can be used
Several steps are involved in the preparation of budget for an organization. In other words, the method
of preparing the budget often includes five different types of steps or levels. These five levels are
mentioned below:
 Study of the earlier performances and the current circumstances in conjunction with
market exploration
 Study and recognition of the present ability
 Determination of the future prospects and necessities
 Making of the budget
 Accomplishment of budget and assessment of performance
The pricing strategy of an organization gives an idea about the method or way the organization
decided to price its products and services. These strategies depend on several factors like political
stability, customer preferences and needs, supply and demand issues, laws and regulations, expense of
12

inventory and so on. Pricing strategy is highly influencing in the success or failure of a product or
service. The different pricing strategy applied is given below:
ROI pricing – This pricing strategy is effective as the price of products and services are decided on
the basis of addition or inclusion of a mark-up percentage. The mark-up percentage is actually the
quantity of profit that an organization desires to achieve and in addition the costs involved in deciding
the selling price of products and services are included. This entire pricing strategy is often called the
ROI pricing strategy (Nagle et al., 2016).
Cost plus pricing – According to this pricing strategy, an organization sets the prices of its products
and services by multiplying the cost that is spent in the production of particular product and also a
particular mark-up percentage is included to finally arrive at the selling of product or service. The
addition of the result so obtained with the expense of production gives the final selling price.
Selling price = Cost of product + (Cost of product x Markup percentage)
Variable cost pricing – This is another pricing strategy often implemented by companies in order to
set appropriate prices for their products. The prices of goods and services are set by adding the mark-
up percentage with the total variable cost that the organization has spent. However, fixed costs are not
considered while using this type of pricing strategy for setting product prices (Hull and Basu, 2016).
Absorption cost pricing – Absorption cost pricing involves deciding of product prices by considering
both indirect and direct expenses of an organization, that are spent for manufacturing the product and
service and also for comparing it with competitors.
c) The importance of budget as a tool for planning and control purposes
Budgets are nothing but future plans and designs that a company decides to follow in order to achieve
it set goals and objectives (Johnson, 2016). Thus, the importance of budget is important and essential
for deciding the course or path that needs to be followed. The importance of budget as a tool for
designing and planning is mentioned below:
 Preparing a budget gives the company an idea about how to proceed and carry out
various functions
 Achieving short and long term goals possible only through budget
 They help in proper allocation of resources which in turn helps in proper utilization of
it
 Budget allows better control over the various functions of an organization like
inventories, costs and expenses and so on
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 Budget helps in planning and organizing work and also help in meeting customer
needs and requirements
Task 4
(I)Balance scorecard and its perspectives
Balance scorecard is often viewed as technique that in management accounting that helps in
examining and determining the entire performance of an organization. They help in getting a complete
overview of financial strength of an organization (Fooladvand et al., 2015). This tool allows adding
different perspective in an organization while providing opportunities to check the finances and
economies of the organization. The four different types of perspectives that are included in balance
scorecard are given below:
Financial perspective – Balance scorecard provides a holistic view of financial strength of an
organization along with that measurement of the financial aspects of a business like determination of
total profitability, analysis of sales, checking return on investments, revenues and so on.
Customer perspective – Balance scorecard also provides customer perspective and guides in
evaluating the performance of an organization. It allows measuring the level of satisfaction of
consumers, analyzing its market share and determining brand value along with that investigating the
organizational ability of customer retention (Grijalva et al., 2016).
Internal business process perspective – This perspective is important as it support and guides in
evaluation of the internal business process of an organization or business. Inventories of an
organization, their orders, proper resource allocation in the organization and the quality control are
few processes that become easy through this perspective. Following this, allows to measure overall
efficiency of an organization.
Learning and growth perspective – This perspective, learning and growth, allows an organization to
carry out evaluation of the performance based on the learning outcome of the organization. The
various areas that are analyzed before reaching the desired outcome are evaluation of employee skills,
employee turnover, employee satisfaction, and employee education, this helps to examine the overall
performance of the organization.
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(II) Uses of balance scorecard for identification and response to the financial problems
of Tech (UK) Limited
The Company Tech (UK) Limited has suffered a loss of 1.5 million pounds during the previous year,
according to recent findings and analysis. However, the loss suffered by the company can easily be
recovered by implementation of balance scorecard within the organization. It helps an organization to
appropriately respond to its financial problem. The financial problems of the Company Tech (UK)
Limited can be solved in following ways -
 The performance of the company Tech (UK) Limited can be calculated through four
areas only because of balance scorecard approach
 Balance scorecard allows the company Tech (UK) Limited to align its daily activities
to achieve maximum growth
 The above mentioned approach allows to achieve long-term goals as well as short
term goals for Tech (UK) Limited
(III) Comparison of balance scorecard with another management accounting approach
and its use in another organization
The Samworth Brothers Holdings Ltd. is a manufacturing company that operates within the
boundaries of UK. The company is known as the leading manufacturers of food and pork pies in the
region. However, a complete investigation of organization shows that the company suffered a loss of
44764 million in the previous financial year 2016. This concludes that Samworth Brothers Holdings
Ltd. suffered more loss than Tech (UK) Limited. The possible reason for loss might be improper
management carried out by senior managers in the company. Further evaluation of the company,
Samworth Brothers Holdings Ltd., shows that it uses a management accounting tool known as RCA
(Resource Consumption Accounting). This technique of management accounting is an included,
active and complete approach which allows company’s managers to support and take decisions that
will help in growth and profitability optimization (Okutmus, 2015).
However, the company is facing large losses every year, only due to different loopholes in the system.
Comparison of RCA with balance scorecard provides complete evidence to understand RCA as well
as identify drawbacks of RCA.
 The RCA, management accounting tool, provides lot of information in order to
optimize an enterprise. A balance scorecard provides information related to different
perspectives of an organization, which RCA cannot do or provide.
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 RCA is a quantity-based approach that helps to review and check the behavior of
expenses and resources of an organization. However, RCA fails to align the various
strategies of an organization according to day-to-day activities that is through balance
scorecard.
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Conclusion
The assessment helped in understanding the management accounting and its role and importance
within an organization. Management accounting has great role and part to play in the entire
functioning and activities of an organization. There are several reporting techniques that are often
used by organizations to present their financial information. The study also helped to understand
various budgets that are developed and what are their respective advantages and disadvantages. The
report also includes information about balance scorecard and their use in context to Tech (UK) limited
and how they help in increasing management accounting. Various pricing strategies that an
organization implements in order to set prices of product or service are also briefly discussed.
17

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