Management Accounting System Analysis and Recommendation

The assignment requires a detailed analysis of the income statement of a company with periodic cycles and its interpretation. It also explains the concept of budgetary control systems and planning tools used in this context. Additionally, it compares different management accounting systems that can be used by an organization to meet its objectives and avail maximum benefits. The report concludes by recommending the best accounting system for a company to achieve growth and efficient functioning of business activities.

Business Report

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P 1 management accounting system and the essential requirements of the different types of
management accounting system..................................................................................................1
P 2 Different method used for management accounting reporting..............................................3
LO 2.................................................................................................................................................4
Income statement using marginal costing and absorption costing for the month May and June.
......................................................................................................................................................4
Interpretation of the above income statements to the managers of the organization...................6
LO 3.................................................................................................................................................7
P 4 Explaining different planning tools used for budgetary control system................................7
.........................................................................................................................................................9
LO 4.................................................................................................................................................9
P5 Comparing the different management accounting systems and their response to the
financial problems. ......................................................................................................................9
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting system can be defined as process in each financial information
about the company are being provided to the managers so that they could take appropriate
decisions for the company and could develop the most effective strategies for the business and
enhance help the company in enhancing its financial condition of the overall business
organization. Ecotricity is the middle-sized manufacturing company of UK. It was founded in the
year 1996 and currently sales products relating to wind and solar energy. The present study
shows a report of junior management accountant that shows a brief explanation about the overall
management accounting system and requirement of various types of management accounting
system and different methods of management accounting reporting along with a critical
evaluation of management accounting system and its reporting.
Present study also shows difference between absorption and marginal costing techniques
by showing preparation of income statement using these systems. Furthermore, the assignment
provides information about different planning tools of budgetary control system and a
comparison of adoption of management accounting system for the purpose of responding to
numerous financial problems.
LO 1
P 1 management accounting system and the essential requirements of the different types of
management accounting system
Management accounting system is the internal system which an organization used to
measure and evaluate their process for effective management of the organization (Nielsen and
et.al., 2015). Financial information helps to communicate the financial information to its user
who requires the financial information for their use, purpose and decision making. it is basically
the process of preparing the management accounting reports which provide accurate, reliable and
appropriate financial information regarding the disorganization and which can finally
communicate to its users(Stakeholders).An effective management accounting system reaches
into the all departments of the organization and in addition using of financial data managerial
accounting can also include non-financial information such as cash in hand, current sale report,
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number of sales calls per day, current inventory level of raw materials and finished products As
all of these information acts as a basis for identifying the key performance indicator of different
parts of the business.
There are different types of management accounting system which are essential for the
organization to undertake according to the requirements of the organization and to take useful
information for its users which are used by them for their further purpose of decision making.
Ecotricity needs to evaluate their requirements and accordingly they have to adopt the different
management accounting systems. Different types of management accounting system are
classified as :
Cost accounting system
It is also called as product costing system or costing system which is the framework used
by the firms to estimate their costs of their products and services for analyzing the profitability,
inventory valuation and for effectively controlling the costs, the cost accounting is used for
estimating the cost the company needs to consider so that arrangement of the fund can be done
for smooth and effective operation of the business.
Inventory management system
Inventory management system is basically software system which is used for tracking the
inventory levels, orders, sale and deliveries, this is also used in the manufacturing industries for
creating a work order, bills of materials, other produced related activities and documents.
There are basically two types of inventory management system which is used in the Ecotricity
are Bar code systems and radio frequency identification systems which are used to support the
overall inventory control process effectively and effectively (George, 2016).
Job costing system
Job costing system is also called as Job order costing which is used for assigning and
accumulating the manufacturing costs of an individual unit of the output. This system is used
when the various items produced in the organization are sufficiently different from each other
ion some respect and each has as significant costs than this method is used to identify the
individual cost which helps origination to ascertain the cost, sales price and profit margin of the
business organization.
price optimizing system
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This method basically involves the use of the mathematical analysis by an Ecotricity so
that they can able to determine that how customers will respond for the different prices of the
products and services through different channels, it also helps in determining the process which
company used to determine and it will be best to meet their objectives and goals such as
maximizing the operating profit, etc.
P 2 Different method used for management accounting reporting.
There are different methods which is used for managing the accounting reports in the
organization and it helps ten organization in achieving their objective of ascertaining the
financial position and financial health appropriate, accurate and reliable so that they can
effectively Continue with their operations,
The different methods used for managing accounting report are:
Budget reports
Budget reports are very essential in the organization to prepare effective budgets which
helps them to manage the fund's optimally and to face the uncertainties which company might
face. Budgets are prepared on the basis of the past operation and through which estimation can
be done regarding the projected fund requirements in the future. Budgets for all the departments
re made individually so that company can operate effectively and efficiently (Kastberg and
Siverbo, 2016).
Performance reports
These reports are created foe reviewing and measuring the performance of the company
as whole as well for each individual, departmental performance reports are also measured in the
organization to ascertain the actual position so that other related department can wok accordingly
and objectives can be achieved. Performance reports helps the mangers to make the strategic
decisions for future of the company and it also helps in offering the deep insight into the working
of the company, performance reports will help mangers in evaluating the employee performance
so that appraisal and other decisions regarding this can be taken for smooth flowing of the
business (Uyar, and Kuzey, 2016).
Account receivable aging reports
Account receivable aging report is a timely report that differentiates a company’s
accounts receivables according to a length of a particular time period an invoice has been
outstanding. It is used as a measuring device to determine the financial health of a company’s
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customers. The accounts receivable aging indicates whether the company’s receivables are
collected slower or normal. If the collection is slower than the normal then it indicates the
warning sign that the business may be slowing down or that the company is taking greater risk in
credit sales practices. Also, Account receivable reports also let the business identify its
customers to whom it should deal and provide on credit basis or cash basis through showing the
timely payment of customers for their credit.
Cost managerial accounting reports
Cost accounting reports in managerial accounting computes all the cost of items that are
manufactured. It includes all the raw materials cost, overheads, labor cost and all other direct and
indirect costs that are being considered for the product manufacturing. This report helps the
company to have the clear picture and summary of all the costs being undertaken to make the
product and accordingly helps to frame the selling price as well as estimate the profit margin for
the products. These reports provide the exact understanding of all the expenses in order top
ensure the better optimization of resources in all the departments (Carlsson-Wall and et.al.,
2015).
LO 2
Part-1
Income statement using marginal costing and absorption costing for the month May and June.
Income statement under Marginal costing
for the month ended May
Particulars Details Amount (£)
Sales revenue 300000*13 3900000
Direct material 450000
Direct labor 600000
1050000 1050000
Contribution 2850000
Fixed overhead costs 400000 400000
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profit 2450000
Income statement under absorption costing
for the month ended May
Particulars Details Amount (£)
Sales revenue 300000*13 3900000
Direct material 450000
Direct labor 600000
Fixed overhead costs 400000
1450000 1450000
Gross profit 2450000
distribution and administration cost 0 0
Net profit 2450000
Income statement under Marginal costing
for the month ended in June
Particulars Details Amount (£)
Sales revenue 270000*13 3510000
Direct material 450000
Direct labor 600000
Closing Inventory (30000*13) -390000 660000
Contribution 2850000
Fixed overhead costs 400000 400000
profit 2450000
Income statement under absorption costing
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for the month ended June
Particulars Details Amount (£)
Sales revenue 270000*13 3510000
Direct material 450000
Direct labor 600000
Fixed overhead costs 400000
Closing Inventory (30000*13) -390000
1060000 2450000
Gross profit 2450000
distribution and administration cost 0 0
Net profit 2450000
# Working notes: -
Closing stock= Total production of units-Number of units sold
=300000-270000
=30000
Each unit is sold for £13
30000*13=£390000
hence, closing stock = £390000
Interpretation of the above income statements to the managers of the organization.
The above explained income statement is of two months May and June and consists of
two different methods- Marginal costing and Absorption costing which helps to interpret the
important information from the statements and accordingly will help for the decision-making
purpose for the managers.
Marginal costing is the accounting method in which the variable costs are being charged
to the cost units and the fixed costs for that period are written off in full against the aggregate
contribution to the total cost. This method helps the company in decision making according to
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the performance by ascertaining the net profit of the company. Marginal costing method also
explains the analysis of cost into fixed as well as variable costs separately and it also the
segregates the semi- variable costs into fixed and variable elements.
Absorption costing is the method which analyzes all the production related costs of the
company to ascertain the gross profit and deduct all the distribution and administration expenses
comprising fixed and variable costs, to ascertain the net profit of the company. This method does
not consider the raw materials' cost and Labor but includes variable and foxed overheads costs in
it(Van der Stede, 2015). In the income statement of may the company has produced 300000 units
and sold all of them at the price of £13 without comprising any units left in the closing stock.
Under the marginal costing method, the company has the total production cost of
£1450000 and the total contribution of £2850000. In this method the fixed cost of is further
deducted from the contribution which results in ascertaining the net profit of £2450000 in the
month of May. This in turn helps the company in making decisions by identifying the areas of
improvement in various costs control and to use the resources optimally by the firm to avoid the
wastage and reduce the costs.
As in case of absorption method the fixed and variable production costs is directly
deducted from the sales revenue which helps to ascertain the gross profit of £2450000 and
consisting the no fixed and variable overheads the net profit of the company is resulted to
£2450000.
In the income statement of June under the marginal costing method since there is no
opening stock as being all the units sold in the previous month the cost of goods sold is being
determined by deducting the cost of closing stock units that remained unsold, from all the direct
material and labour cost resulting in contribution of £2850000.
Similarly, in the absorption method the amount of closing stock is being deducted from
the sum of Direct material cost , Direct labor cost and Fixed overhead costs and resulting in the
gross profit of £2450000 in the month of May. In may there is no closing stock and fixed cost is
deducted after ascertaining the contribution under marginal costing whereas in June there is
closing stock which is deducted in additional fixed costs to ascertain the net profit under
absorption costing technique.
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LO 3
P 4 Explaining different planning tools used for budgetary control system.
Budgetary control system
Budgetary control system can be defined as a part of management accounting system that
concerns with predicting various business activities as to provide information to the managers
about requirements of various financial resources in the business within a specific time period. In
other words, it can be said that budgetary control system is a process of preparing plan for the
business in numerical terms(Shields, 2015).
Planning tools Budgetary control system
Planning tools of budgetary control system refers to those tools with the help of which
Ecotricity can develop the budgets can be developed in the most effective way. Further, these
tools are termed as a planning tool as with the help of these planning tools, managers can analyse
and measure the actual position of the business accurately through which they can perform their
managerial functions in the most effective ways.
Following are the major planning tools of budgetary control system that helps the
managers in their decision-making process:
Cash budget: Cash budget are those budgetary reports that provides detailed information
about the various sources through which company would gain cash and cash equivalents and
areas where the Ecotricity would be needed to spend cash within a specific time period.
Advantage: -
 Cash budget helps in manage cash and maintain in utilization of cash.
 Organization use cash budget for determine revenue and expenditure.
Disadvantage: -
 Cash budget are susceptible to manipulation.
 Organization make budget according to previous year budget in current year but it
wrongs but it not true.
Operating budgets: - this budget contain all revenue and expenditure that related to
operations of Ecotricity. Operations like labor and raw material. It is made according to function
and department that involve in operation work in organization. Sales budget is included in it and
that purpose is control on expenditure that is related to resources use in sales work. It also has
purpose increase sales and achieve target. Purchase budget include in operations budget and it is
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made by Ecotricity for maintain cost of purchase raw material and machinery and other assets for
organization and it main purpose is purchase quality product with low cost(Ax and Greve, 2017).
Advantage: -
 It helps in track performance of organization and helps in evaluate available cash and
spent cash.
 It beneficial in making budget for next months because through this manager prepare
monthly budget for keep all information.
Disadvantage: -
 It has disadvantage that it requires more and more time because for making budget
organization has to evaluate previous years budgets. So it consumes more time.
Master budget: - master budget is made by ecotricity for future that includes all things like
sales, purchase, production, investments and balance sheet as well. That helps in crate strategic
plan and make special and accurate budget for future. It is make on based on prediction and it
contains all types of budget. For expand of business that organization use these things and
evaluate present cost and rates of all things and make budget for future.
Advantage: -
 It is a bird's eye view of the business because this budget makes accurate strategy and
plan for spent and earn money in the future.
Disadvantage: -
 Master budget do not easily update and modify by anyone because many data are
mention in budget according to previous and then predict data notify.
Zero based budget: - this budget is use by ecotricity and this helps in justify all expenses for
every new period. It is start from zero base so for create this budget managers skills require at
high level. It consumes more time and cost because fort making organization has to evaluate and
analyse all things than make budget(Panchenko, 2018).
Advantage: -
 Managers justify all expenses so for this they also have to evaluate all area for know
about generate revenue.
 It makes strategy for future in effective and efficient manner.
Disadvantage: -
 It consumes more time and cost due to evaluate all things like market.
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 It is very lengthy process and too complex so many difficulties also create during make
budgets.
LO 4
P5 Comparing the different management accounting systems and their response to the financial
problems.
There are different management accounting systems that can be used by Ecotricity Ltd in their
management process. They are as follows
Key Performance Indicators- A Key performance indicator (KPI) is a core quantitative
measures used by the organization to monitor its activities and progress towards achieving the
key goals and financial outcomes. KPI varies as according to the type of departments and
industry the organization functions. Ecotricity Ltd company can use KPIs in relation to its
finance department that will include analysis of its gross margin, net profit, current ratio and debt
to equity ratio. In case of applying KPI in operations department for the Ecotricity Ltd company,
it can ensure and focus on the customer order fulfilment rate as well as the production rate of the
company in a prescribed time limit. The Human resource department can track the gender
diversity as well as measure the employee turnover rates for the company. Further on applying
KPI in marketing department the manager could monitor the acquisition cost of each incremental
customer gained. And in sales department the sales manager could measure and monitor the sales
volume changes and the customer base of the company. Lastly KPI can be useful in customer
service by measuring the number of customer complains being settled and the number of
customers are unsatisfied and hang up. Thus, Key Performance Indicator if being adopted by the
Ecotricity Ltd could help the company in all the areas of functioning by the organization as well
as contribute towards the growth and efficiency of the company(Malmi, 2016).
 Variance analysis- Variance analysis is the quantitative investigation of the difference
between the actual and planned behaviour. This analysis is used to maintain the control
over the business. For instance, the planned budget of sales of the company is £50000
and the actual sales is £45000, here the variance analysis finds out why this difference of
£2000 has been occurred. This could be explained further by following example-
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“Sales of the company were £5000 lower that the planned budget. This variance was
caused by the loss of XYZ customer during the month who amounted to buy £4800 per
month. The reason behind this loss was the repeatedly late deliveries of the products to
that customer.
This level of detailed variance analysis enables the management to understand the root cause of
the fluctuations that occur in business and also provide the remedies for the solution to it.
Ecotricity Ltd can adopt variance analysis and can use its different components such as Purchase
price variance, Labour rate variance, fixed overhead spending variance, selling price variance etc
and many more that could contribute to the growth and optimisation of the
organization(Messner, 2016).
Balance scorecard- Balanced scorecard is a performance metric tool used in the strategic
management to identify and improve all the internal functions of the organizations and their
resulting external outcomes. The balance scorecard reinforces the good behaviour in the
organization by isolating four separate areas that need to be analysed and worked on. These 4
areas involve learning and growth, business processes, customers and finance. The Balance
scorecard maintain the balances between- Internal and external measures, Objective and
subjective measures as well as between the performance results and the drivers of future results.
The Balanced score card helps to achieve the objectives, measurements, initiatives and goals that
result from these four primary functions of business. The company can easily identify the
impacting factors impacting its business performance and accordingly frame the strategic
changes, through the availability of the tracked future scorecard. When Ecotricity Ltd adopts the
system of Balance scorecard in its management, it will enable the company to overview of all the
information about the company relating to its objectives. It will also help the company to
implement various strategies in order to check its value to the organization as well as developing
various strategies in order to counter the problems and changes(Temelli, 2018).
 Benchmarking- Benchmarking is the process for comparing the company’s actual
performance with the performance of other companies in the industry or comparing the
actual performance with the standard performance. This performance involves the
comparison of policies, procedures, products of a business with the other firms or
standard measurements. The Benchmarking process involves following steps-
1. Identification of opportunities that could bring out improvement in organization.
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2. Observation of the targeted areas that are performed by the competitor firms and
peer groups of organization.
3. The development of strategic plan in order to improve the performance of the
company.
4. Systematic review of the results and outcomes as well as further identification of
the other improvement areas.
Benchmarking can help the Ecotricity Ltd to show the that what performance targets needs to be
achieved, accelerate and manage the changes in the organization as well as enable the
improvement process. Lastly it can help the company to maintain the focus on the external
environment of the business and generate the understanding and overview of world-class
performance (Maas and et.al., 2016).
 Financial governance- Financial governance refers to the process or the way that
company collects, manages and monitors and controls the financial information of its
business. The process involves how the company tacks the financial transactions,
management performance as well as control the data compliance along with operations
and disclosures. Financial governance includes internal control, financial policies,
internal and external audits, workflow of the organization, financial controls, data
tracking and validation and data security. When there is a good financial governance and
control, the managers can get the correct version of data to frame the different financial
reports, budgets as well as other financial documents. Controls may include using a
software that maintains the data structure and formatting of the information of the
company. Financial governance enables the company to produce the compliant regulatory
reports and disclosures and also let the company to perform the financial activities
according to the regulatory standards. This will enable the company to prepare sound
financial governance, budgets, plans, models and forecasts more accurately and also help
the company to initiate the process of various financial activities faster. Ecotricity Ltd
company can adopt the Financial governance system in the organization and can obtain a
clear accounting figures related to finance as well as able to identify the financial risk
faster.
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From observing the various benefits and functioning of different management systems that can
be used by Ecotricity Ltd, it has been concluded that the company should adopt Variance
analysis. This is because variance analysis process identifies the root cause for different
problems and the difference between the actual scenario and the planned one. This will enable
Ecotricity Ltd company to face the problematic changes in business with ease and find out
optimal solution to all kinds of problems and enable the company’s growth and development in
the market to face the competition(Otley, 2016).
CONCLUSION
From the above report it is observed that how the management accounting system
establishes its important role in the management of the company. The report also states the
requirements of several components and explain the different types of management accounting
systems. The report also comprises wit the study of different methods being used to manage the
accounting reports of the company. Further the report shows the financial reports consisting of
the income statement of the company of different periodic cycle and its interpretation in a
detailed manner. Further the report explains the concept of budgetary control system as well as
the different planning tools in budgetary control system. Lastly the report compares the different
management accounting system that can be used by the organization to meet out its objectives
and avail the maximums benefits and concludes by recommending the best accounting system to
be adopted by the company to achieve its growth and efficient functioning of the business
activities.
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