Management Accounting Assignment: ABC LTD

Management accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
LO1..................................................................................................................................................1
P1- Explaining management accounting and its essential requirement in the context of
business operations.....................................................................................................................1
P2 Assessing different management accounting reports and its integration with organizational
process.........................................................................................................................................3
LO2..................................................................................................................................................4
P3 Preparing income statement using marginal and absorption costing system.........................4
LO3..................................................................................................................................................6
P4 Advantages and disadvantages of budgetary control techniques...........................................6
LO4................................................................................................................................................10
P5 Presenting how management accounting tools can be used for solving financial problems
...................................................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is accounting process which is used for internal purpose. It helps
to provide information which is used by manager to take effective and prepare appropriate
policies so that company will achieve short term goals and long term goals. Usage of this
accounting to make planning and controlling of the business operation that is essential for
enhance profits and growth of the company. Present report is based on ABC LTD which is
medium size company and is engaged in manufacturing process and provide goods and services
to their customers.
Present report includes concept of management and requirement of different type of
management accounting system. It will also include methods of management accounting report
which is prepared by ABC medium size limited company. Further, report comprise advantage
and disadvantages of planning tool of budgetary control and their application for preparing
forecasting budget of the company which is required for sustainable success by solving financial
problem.
MAIN BODY
LO1
P1 Explaining management accounting and its essential requirement in the context of business
operations
Management accounting is the process of accounting that provide information to manager
in such way that useful for planning, decision making and formulating policies and controlling
operations of the company. This accounting is only used for internal purpose and provide
information regarding monetary and non-monetary. Managerial accounting is not regulated by
any rules and regulation and there is not any requirement to present statement of the company.
This accounting work to manage such area like risk management that help to manage risk from
future circumstance like change interest rates and inflation rate. Manager improve performance
of the company by evaluating employee's performance and prepare strategy that would be
increase in profit margin..
ABC limited is medium size company which adapt different type of job accounting
system that play crucial role within organisation that helps in minimizing cost on per production
and manage the job costing. Medium enterprise follow management accounting system such as
job costing , cost accounting , inventory management and price optimization .
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Job costing- it is the process of job accounting that track the revenue generate and cost
occur job by job then analysis the standard profitability generated by job. Job costing helps to
analysis the direct material, direct labour and direct expenses require in job then allocating the
resources. ABC ltd Company can keep records of performance of individual and team in terms of
cost effectiveness that helps to make money and also ensure about the specific job that continue
in the future.
Pros –
 Company can ascertain cost of each job completion also analysis job cost from the past
data and helps to controlling the cost.
 It helps to compare previous years’ job cost with recent job executed.
Cons-
 Job costing is expensive and have no standardised form because this costing need
supervision. On the time of inflation, comparison of job cost become meaningless for company.
Cost accounting- It helps to measure cost of product by assessing fixed cost and input cost
occur in each production level. Cost accounting includes direct cost such as direct material,
direct labour and direct material and overheads like selling and administration cost. This
accounting system is essential to ABC medium limited company it provides information to
manager that helps to control cost and take planning for future that will helps to increase,
customer retention and generate revenue of the company.
Pons-
 Company can control the cost of product and fix price by cost accounting system.
 It also helps to prepare financial statement that shows position of the company.
Cons- Manager will not able to take future decision because cost recorded on basis of past
years.
Inventory management- it is the process of managing the inventory quantity, carrying cost
and ordering, lead time in such way cost can be minimise and provide quality goods to customer
on the time of demand. It is useful for smooth running of business operation and protect and
prevent from fluctuation in demand. It mainly used to enhance efficiency and decision making
regarding inventory management.
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Pons-
 Manager of the company take effective decision which helps to control cost of inventory.
 Company provide better services to customers which helps to increase sales and profit of
the company.
Cons- Manager can’t estimate future sales of the product because it depends upon needs and
demand of the customers.
Price optimising – It is the process of determining price of the product which customer
willing to pay against the goods and services. For price optimization company can alter in
supply chain so that company will able to make huge sales at economical price and meet out the
demand in market that will helps to take advantages of competition and make decent profit. Price
optimization helps to balance between value and price of the goods and services. Manager will
manage the price by selecting accurate model then accordingly collect historical data and take
decision and monitor for achieving the goals. It is used to determine price of the product that
meet out the customer need as well as maximised the profits.
Pons -
 By price optimising company can compete competition and easily survive in the market.
 Company able to provide better services and goods to customer it helps to increase
customer base and profit can be maximised.
Cons-
 Sometime manager can't make strong strategy for price optimisation on the basis of
historical data because demand and supply frequently change according to customer
needs and preferences.
P2 Assessing different management accounting reports and its integration with organizational
process
ABC LTD. Company follow management accounting which provide information that use
for improving employee’s performance and operation of the business. It will help to accomplish
short term and long term goals of the company at a pre determine time.
Management accounting records such as budget report, account receivable, job costing report
and inventory and manufacturing report which company have to maintain to achieve pre
determine goals.
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 Budget report – ABC LTD. Company prepare budget report which helps to evaluate
actual performance and standard performance if any deviation found then corrective
action can be taken. With the help of budget report manager can analysis business
performance and function department function that helps in control the cost. It will
help to provide incentives and bonus of the company. Budget report is prepared by
analysing inventory management , price optimization and costing of job that helps to
take future decisions and formulate strategy for achieving the goals of the company.
 Account receivable report – it is critical tool of management accounting report that
arrange cash flow of the company. If business sale product on credit then invoice has
separate column which is thirty days, sixty days and ninety days. ABC ltd company's
manager use this report to find the collection and make policies regarding credit sales
so that they get collection within the time so that company can pay their liabilities.
Cost accounting , inventory management directly relate with flow of the cash that
helps to prepare account receivable report. This report helps in decide future prices,
inventory manage and also determine the costing of job so company can improve
performance and arrange cash flows.
 Job cost report – this report represent cost incur in particular project. ABC ltd
Company match expenses and cost so that they can evaluate Job costing profitability.
It concentrates on efforts and progress instead of wastage of fund and time. Job
costing report also integrated with job costing it used to track records of the
employees and company performance so that manager can take corrective action for
improve cost effectiveness and also future performance of the company.
 Inventory and manufacturing report- company can make report to analysis the
manufacturing process and address quantity and cost of the product. This report
usually includes labour cost, material cost and overhead cost that helps to decide cost
of the product and decide profit margin. Company can improve performance,
productivity level and profits. Inventory management report consist all previous year
data regarding inventory management and it gives standard data for future production
quantity and cost of the product. It helps to reducing cost per unit, handing cost and
order per quantity cost.
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LO2
P3 Preparing income statement using marginal and absorption costing system
Marginal costing
Marginal costing is the technique of costing in which variable cost are to be considered in
cost unit and fixed cost are written off against the contribution. Marginal costing calculated by
sale less all variable cost like material cost, labour cost and expenses then get contribution per
unit after that fixed cost to be charged it will never change due to change in output then realised
profit and loss of the company. Marginal costing technique adopt by ABC ltd company which is
used to take decision and determine cost of the product and increase production level that will
help to compete with competitors
Absorption costing –
This costing also known as full costing because all cost to be assign while calculating
manufacturing cost of the product. It includes all cost like direct material and direct labour and
all indirect expenses and also fixed manufacturing overhead. Abc ltd company use absorption
costing because variable cost keep fixed manufacturing cost separate from cost of the product.
This costing compliance generally accepted accounting principle which is essential to accurately
track profitability of the company and help to make strong policies that help to reduce expenses
and cost that will enhance net profit and growth of the company.
Absorption
Particulars units per unit cost amount
sales 16000 50 800000
-COGS 710000
Direct material 18000 10 (180000)
Direct labour 18000 20 (360000)
Variable production
overhead 18000 5 (90000)
fixed production
overhead 18000 5.6 (100000)
closing stock 2000 10.0 (20000)
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profit 90000
production cost per
unit 40.6
Marginal
Particulars units per unit cost amount
sales 16000 50 800000
-COGS 610000
Direct material 18000 10 (180000)
Direct labor 18000 20 (360000)
Variable production
overhead 18000 5 (90000)
closing stock 2000 10 (20000)
profit 190000
production cost per
unit 35
Interpretation- from the above analysis it is interpreted that the production cost per unit as
per the absorption costing is resulted as 40.6 while through marginal costing it is resulted as 35
which means that through absorption costing ABC Ltd incurs high production cost than using
marginal cost approach. The total production cost is evaluated as from absorption costing
equated as 730000 as per the absorption costing approach while from marginal it is resulted as
630000 as fixed production overhead is recorded in marginal method and in absorption both
fixed and variable cost are recorded. The cost of sales areis resulted as 710000 & 610000 as per
the absorption and marginal cost approach which states that absorption is better technique
because it includes both variable and fixed cost while marginal approach does not reflect correct
evaluation of profits as fixed cost is not recorded and it is necessary for the ABC Ltd to bear the
fixed cost in every case. The profits are resulted as pound 50000 & pound 150000 as per the
absorption and the marginal costing. Though profits are resulted lower from absorption costing
as compared to marginal costing but it reflects a true and accurate figure of profits so ABC Ltd
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can assess its performance in the effective way and can keep control over its operations so that
optimum utilisation of resources is made to achieve higher profits.
LO3.
P4 Advantages and disadvantages of budgetary control techniques
Fixed Budget- It is the budget which do not change with the changes in the level of
activity and other resources. It is also known as the static budget. Any change in the sales or
other activity does not affect this budget.
Advantages of fixed budget:
 Easy assessment- As the cost remains fixed for every month so the manager of the
ABC Ltd need not to prepare the budget frequently and the evaluation becomes easy
as it does not vary with the variation in other activity.
 Low cost- it reduces the cost of change that need to be incurred in when there are
changes in the level of sales and profits. The company need not to bear the cost for
preparing the budget every month.
 Less time consuming- as it can be used for the whole period because it does not
record the changes so it turns out to be less time consuming.
Disadvantages of fixed budget:
 Inflexible- ABC Ltd cannot ascertain the changes by using this budget so the comparison
between the actual and the standard budget cannot be made and increase and decrease in
the sales cannot be evaluated.
 Lack of accuracy- results in incorrect ascertainment of cost, if there is a variation in the
circumstances results to the inaccurate budget preparation.
 Difficult forecasting- as this budget does not record the changing conditions so it
becomes difficult for the ABC Ltd to forecast the results as per the changing situations.
Incremental Budget- ABC Ltd. Prepares this budget by using the past year's result as the
base with the increased amounts are added in the new budget. All the allocations are made as
per the previous year budget.
Advantages of Incremental budget-
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 The Quickest method- As the budget is prepared on the basis of the past year's budget
so it becomes simple for the managers to make the assessment and could be made quickly
as not any new changes are need to made.
 Facilitates comparison- the company can make a suitable comparison between the
current and the past year's result so that the relevant changes can be ascertained a. And
leads to better coordination between the budgets.
Disadvantages of Incremental budget-
 Ignore the changes- by this budget the impact of changes are totally ignored as per the
current condition because only those allocations are considered which are mentioned in
the previous budget.
 No incentives- incentives are not paid for any development and innovation made so it
leads to the demotivation among the workers and affects the efficiency of the operations
of ABC Ltd.
 Uneconomic activities- this budget continues to involve the past activities which are
uneconomic like the firm may continue the same method for preparing the product in
house while it will be cheaper when it goes for outsource.
 Inclusion of previous problems- the previous problems in the past years’ budget are
also included in the new budget that to an inefficient budget.
Flexible Budget- under this budget the changes in the level of activity are evaluated and
recorded. It means the budget which changes with change in the level of activity or other
resources. It is also known as the flexible budget.
Advantages of the flexible budget-
 Reveal variances- It records the variances that occur when there are any changes in the
level of activity which enables the ABC Ltd in knowing the performance in accordance
with the current conditions.
 Facilitates forecasting- forecasting becomes easy as it shows the impact of changes in
the several expenses on the operational aspect of the business so that company could take
necessary measures for to overcome with the effects.
 Realistic comparison- the organisation can make realistic comparison as the
bchangedchanged plan figures are placed against the actual ones.
Disadvantages of flexible budget-
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 Time consuming- For evaluating and recording the frequent changes a lot of time is
consumed for preparing the budget with the changing circumstances as budget
preparation is a lengthy process.
 Huge cost- for framing the budget a huge cost is involved as the cost of changes are to be
incurred by the company so it increases the expenditure and reduces the profits of the
business.
Cash budget- It is the financial plan of cash receipts and expenditure at a particular point of
time. It records the inflows and outflow of cash like revenue received, payment of expenditure
and loan payment etc. It is useful in estimating the cash position of the ABC Ltd.
Advantages-
 Optimum utilisation of resources- Through the cash budget company can make
efficient and optimum use of resources so that wastage of resources and money can be
effectively managed.
 Profit maximization- Organisation can increase its profits by maintaining the cash
records efficiently.
Disadvantages-
 Focuses on cash transactions- It only records the cash inflows and outflows and do not
include any credit transactions that affects the performance of the corporation.
 Estimated figures- the estimation regarding the future sales and expenses are made that
results in incorrect evaluation.
 Manipulation- Manager of ABC Ltd manipulated the figures to show the sound position
of the company by underestimating the expenses and overestimating the revenues that
leads to vague results.
Use and application of planning tools for forecasting budgets
Fixed budget- it helps the ABC Ltd in keeping the track record of any unexpected
expenses by keeping aside the cash for such uncertain events. The adjustments regarding the
spending of money within this budget and can recover or meet the uncertain expenses incurred in
the future.
Flexible budget- it changes in every month so it is considered as time consuming at the
starting of each month. It adopts all the relevant changes that happened in the level of activity
and other resources so that ABC Ltd can assess the performance in the changing circumstances.
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It is applicable to those people whose expenses vary on a frequent basis or who work for the
commission.
Incremental concept- it enables the organisation in estimating the effect of cost,
decision and revenues and focuses on the changes incurred in the overall cost and revenue that
results in the price changes, products and investments or any other thing that impacts the
decision making. It is applicable when increased cost and revenue are analysed through the
allocations from the previous years budget.
Cash budget- it helps in ascertaining the cash position so that effective forecasting can be
made regarding the cash receipts and expenditures. It is applied when ABC Ltd wants to know
the cash receipt and expenditure for a specific point of time and is prepared for a monthly,
quarterly and on annual basis.
For example:
Particulars January February March April May June
Cash inflows
Opening cash balance 15000 25250 37862.5 51118.1 65049 79689
Sales 35000 36750 38588 40517 42543 44670
Other income 5000 5000 5000 5000 5000 5000
Total cash inflows 55000 67000 81450 96635 112592 129359
Cash outflows
Material 14000 12863 13506 14181 14890 15634
Labor 5250 5250 5250 5250 5250 5250
other expenses 10500 11025 11576 12155 12763 13401
Sum of cash outflows 29750 29138 30332 31586 32903 34285
Cash surplus / closing cash balance 25250 37863 51118 65049 79689 95073
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LO4
P5 Presenting how management accounting tools can be used for solving financial problems
For making decisions regarding short term and long term aspects management accounting
facilitates the useful information that enables the ABC Ltd to achieve the goals and objectives
effectively and efficiently. This corporation uses different management accounting tools such as
variance analysis, benchmarking, Balance scorecard and key performance index for responding
to the financial problems and making strategies to achieve the sustainable growth in the market.
 Variance analysis- under this analysis the deviation or the gap between the actual and
the standard performance is measured for controlling the operations of the organisation.
This analysis is done by using different methods like material variance and labour
variance. For example, the budgeted sales estimated as pound 15000 and actual sales
resulted as pound 10000, the variance analysis leads to a deviation of pound 5000 which
means low actual sales as compared to budgeted.
 Benchmarking- It is the tool that measures the performance of the ABC Ltd in relation
to its products, processes and services in comparison with its competitors for attaining the
competitive position in the market and to gain the competitive advantage over its
competitors. It is a process that the company follows to ensure superior performance
against its rivalry.
 Key performance index- It helps the ABC Ltd in evaluating the success of the business
in relation to reaching the targets like sales target, production target and budget target etc.
It determines how efficiently a company achieves its objectives. Higher the key
performance indicator demonstrates the overall position of the company. Lower the key
performance indicator reflects the performance of its managers at functional level.
 Balance scorecard- it is the technique that is used to determine and improve several
internal functions of the organisation and the external factors that affects the performance
of the enterprise. It is prepared as the performance metrics and a strategic planning tool
that communicates the vision and the goals of the company. It is used to assign the daily
task with strategy and measures the success and the performance towards the strategic
targets.
ABC Ltd. Uses variance analysis for knowing the gap between the budgeted and the actual
performance that helps the company in ascertaining that the task areis performed as per the set
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strategies and if there is any gap then corrective measures can be taken so that it can achieve the
goal effectively and efficiently. It also uses the benchmarking tool for reaching to the
competitive edge by measuring the performance of its goods and services as compared to the
performance of its competitors so that effective strategies can be built to achieve the growth and
consistency in the market with a healthy competitive environment. For achieving the targets
ABC Ltd make use of the key performance index to know that the set targets are reached on time
or not and how efficiently the targets are met and keep continue review to this index it can
achieve the objectives with time management. Through balance scorecard points are assigned on
the performance metrics so that the working of the internal management can be assessed and
analysis of the macro factors that affects the functioning of the internal staff so that balance can
be maintain between the external and the internal factors and the organisation can achieve
stability and growth in the changing circumstances.
CONCLUSION
This report summarised that management accounting is important management
accounting is important to preparing strong policies for smoothly business operation so that will
improve employees and business performance so that company can maximise the profit and
wealth. By identify and analysing to management accounting report manager can make planning
and take decision. This report explained about management accounting report that ensure
minimise the cost and achieve sales target by providing quality product at a reasonable price. It
also concluded that budgetary control planning tools like fixed budget, flexible budget, and
incremental budgets are essential for take correct decision by comparing actual performance and
standard performance.
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