Management Accounting Report for ABC LTD

The assignment provides a detailed report on the management accounting practices of ABC LTD. It discusses the use of budgeting control tools, such as standard costing and variance analysis, to compare actual performance with standard performance and identify variances for corrective action. The report also compares net operating profit using marginal costing versus absorption costing, finding that total net profit is higher using marginal costing. This analysis provides insights into the company's financial management practices.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
P3 Calculation of marginal and absorption costing................................................................1
P4-Advantages and disadvantage of budgeting control planning tools.................................7
CONCLUSION ...............................................................................................................................8
REFERENCES .............................................................................................................................10

INTRODUCTION
Management accounting is a process of preparing financial report and accounting of the
company. It is usually used for internal management and it is not regulated by any law. It is
significant tool that supports managers of company to make correct decision. Present report is
based on ABC ltd company which is engaged in chair manufacturing and the business is running
for 3 years. Report will explain budgeting control tools which are very useful for evaluate actual
performance of firm. This report also includes marginal costing and absorption costing
calculations and interpretation of net operating income is added in study (Chi and Ho, 2017).
TASK
P3 Calculation of marginal and absorption costing
INCOME STATEMENT FOR YEAR 1
(using marginal costing approach)
ITEMS Units P.U Amount Amount
Sales 36000 70 2520000
Marginal cost of sales
Opening stock
Add: variable production cost
direct material 40000 12 480000
direct labour 40000 16 640000
variable expenses 40000 20 800000
total variable cost A 40000 48 1920000
Less: closing stock end of the year B
(opening stock units + units produce -unit sold) 4000 48 192000
Marginal cost of sales(A-B) 1728000
fixed indirect production cost (B) 64000
Gross profit sales: (MCOS-fixed production cost) 728000
Selling and distribution overhead 10000
Admin overhead 15000 25000

Profit before interest & Tax (PBIT) 703000
Interest expenses 1000 1000
profit before tax (PBIT- interest) 702000
Tax @19% 133380
net profit 568620
Interpretation for first year:
From the above solution it is found that the number of unit sold is 36000 thus, sales
amount is 2520000 pound. Closing stock amount 4000 pound deducted from all variable cost in
order to get marginal cost amount. Gross profit sales are 1728000. After getting gross profit
company has to calculate profit before interest and tax by deducting selling and admin
overheads. Thereafter interest amount and tax @19% then finally net profit of the first year was
598620 pound. From the above table it can be interpreted that expenses are very high thus net
profit is low.
INCOME STATEMENT FOR YEAR2
(using marginal costing approach)
Items Units P.U Amount Amount
Sales 40000 70 2800000
Marginal cost of sales
Opening stock 4000
Add: variable production cost
direct material 48000 12 576000
direct labour 48000 16 768000
variable expenses 48000 20 960000
total variable cost A 48000 48 2304000
Less: closing stock end of the year(B)
(opening stock units + units produce -unit
sold) 12000 48 576000
Marginal cost (A-B) 1728000

fixed indirect production cost 64000
Gross profit: (MCOS-fixed production
cost) 1008000
Selling and distribution overhead 10500
Admin overhead 15000 25500
Profit before interest & Tax(PBIT) 982500
Interest expenses 1250 1250
profit before tax(PBIT- interest) 981250
Tax @19% 186437.5
Net profit 794812.5
Interpretation for second year -
From the above solution it is found that sales are 40000 units @ 70 pound. As first year
closing stock was 4000 so it had become second year opening stock. After that, all variable cost
was added and then deduction of opening stock was done, then closing stock amount realised
that was 12000. Gross profit amount was 1008000 then deducting all selling and admin overhead
and received PBIT amount that was 982500. Finally, net profit amount was calculated for second
year that is 794812.5 pound which was higher than the previous year due to low expenditure.
INCOME STATEMENT FOR YEAR 3
(using marginal costing approach)
Items Units P.U Amount Amount
Sales 60000 70 4200000
Marginal cost of sales
Opening stock 12000
Add: variable production cost
direct material 51000 12 612000
direct labour 51000 16 816000
variable expenses 51000 20 1020000
total variable cost A 51000 48 2448000

Less: closing stock end of the year B
(opening stock units + units produce -unit
sold) 3000 48 144000
Marginal cost (A-B) 2304000
fixed indirect production cost (B) 64000
Gross profit: (MCOS-fixed production
cost) 1832000
Selling and distribution overhead 11000
Admin overhead 15000 26000
Profit before interest & Tax(PBIT) 1806000
Interest expenses 1500 1500
profit before tax(PBIT- interest) 1804500
Tax @19% 342855
Net profit 1461645
Interpretation-
From the above table it can be interpreted that, firstly sales were given at the 70 pound
per unit. Last year closing stock become next year opening stock then closing stock deduct from
the all variable cost so realised marginal cost of the sales. Fixed indirect production cost
deducted from the marginal cost and gross profit is calculated. Thereafter selling overhead and
admin overhead deducted then PBIT is received then interest and tax rate @19% deducted from
the profit before interest and tax. After all these calculations it has been observed that net profit
which is realised is 1461645 which is maximum due to higher sales in this year.
INCOME STATEMENT (ABSORPTION ) FOR THE YEAR ENDED 1
Amount Amount
Sales 70 36000 2520000
less: COGS 49.6 40000 1984000

gross profit 536000
operating expenses:
selling expenses 10000
admin expenses 15000
interest expenses 1000 26000
Net operating income 510000
working notes:-
direct material 12 40000 480000
direct labour 16 40000 640000
variable overhead 20 40000 800000
fixed overhead 64000 64000
total production cost 1984000
unit produce 40000 40000
production cost per
unit 49.6
Interpretation-
From the above solution it is identified that sales of the year are 2520000 pounds. Gross
profit is calculated by deducting COGS amount from the sales. Gross profit for the year is found
to be 536000 which further deducts S&D expenses and the net profit which is realised is 510000.
INCOME STATEMENT (ABSORPTION) FOR THE YEAR
ENDED 2
Amount Amount
Sales 70 40000 2800000
less: COGS 49.33 48000 2367840
gross profit 432160
operating expenses:
selling expenses 10500
admin expenses 15000
interest expenses 1250 26750
Net operating
income 405410

working notes:-
direct material 12 48000 576000
direct labour 16 48000 768000
variable overhead 20 48000 960000
fixed overhead 64000 64000
total production cost 2368000
unit produce 48000 48000
production cost per
unit 49.333333
Interpretation-
From the above solution, it is found that sale of the third year is 40000 @ 70£ total
amount of the sale is 2800000. Cost of good sole deducted from the sale for calculating
gross profit it is 432160. Thereafter all selling expense, admin expenses and interest
expenses less from the gross profit so net operating income is found to be 405410 which is
lower than the previous year even after low production cost.
INCOME STATEMENT (ABSORPTION) FOR THE YEAR ENDED 3
AMOUNT AMOUNT
Sales 70 60000 4200000
less: COGS 49.25 51000 2511750
gross profit 1688250
operating expenses:
selling expenses 11000
admin expenses 15000
interest expenses 1500 27500
Net operating 1660750

income
working notes:-
direct material 12 51000 612000
direct labour 16 51000 816000
variable overhead 20 51000 1020000
fixed overhead 64000 64000
total production cost 2512000
unit produce 51000 51000
production cost per
unit 49.25490
Interpretation -
From the above table sales was made in the third year of 4200000 pound. For calculating
gross profit cost of goods sold deducted from the sale. After getting gross profit, deduct selling
expenses 11000, admin expenses 15000 and interest expenses 1500 then net operating income
was realised as £1660750 which is highest among all the years due to high sales and low
production cost.
Use of marginal cost
Marginal cost is used to ascertain net profit which an organisation earns without
including any fixed cost so that a reliable contribution or gross profit can be ascertained.
Comparison between absorption costing and marginal costing
In marginal costing only variable cost is to be considered for calculating product cost but
in absorption costing method fixed cost and variable both cost is considered while calculating
product cost (Pratiwi, Malisan and Lahaya, 2018). Thus, there is difference in net profit in both
these methods.
Reason of difference in profit using marginal and absorption costing methods
From the above report net operating income due to changing approaches that was in the
first year- marginal costing profit was 568620 pound while through absorption costing profit was
51000. on the second year net operating profit marginal costing was 794812.5 while absorption

costing profit was 405410 and in the end third year net profit was 1461645 by using marginal
costing and 1660750 pounds’ net profit by using absorption costing due to variation in
production cost in both the methods which occurred as fixed cost is not included in marginal
costing method. So ABC LTD company should use marginal costing because of higher net profit.
P4-Advantages and disadvantage of budgeting control planning tools
Budgeting control is a process in which actual performance is compared with predefine
budget (standard budget), it helps to find out variance so that corrective actions can be taken
without any delay (Saha, 2017).
BUDGETING CONTROL TOOLS OF ABC LTD COMPANY-
ZERO BASE BUDGET
Zero base budget is budgeting controlling tool in which all expenses are approved for
new year. Zero base budging starts from new base at the beginning of every financial year.
Company analysis cost of every function and accordingly funds are allocated within departments
(Wilhelm and Sydow, 2018). This budget is also known as DE NOVA budgeting.
ADVANTAGES
 ABC LTD company able to efficiently allocate resources because zero base budget
prepare on the basis of needs and cost of every function department.
 This budget helps in enhance coordination and effective communication within the
company because all member wants to involve to take decision (Pratiwi, Malisan and
Lahaya, 2018).
 It can be prepared with accuracy because budget is prepared by current scenario instead
of past figures or past scenario.
DISADVANTAGE
 In large scale organization it will become threat for manager because it is required large
number of decision and data are also large so calculation become also complex (Saha,
2017).
 It is time consuming process because company have to analysis expenditure for the new
year so sometimes managers are not able to define necessary expenditure for particular
function then it will create complexity.
Fixed budget

Fixed budget doesn't change or vary due to changes in sales volume and other activity.
This budget also called static budget because company prepare set static data which helps for
comparing actual performance (Pratiwi, Malisan and Lahaya, 2018).
ADVANTAGES
 Through static budget ABC LTD company easy to track budget in every month and time
saving budget because it doesn't change due to changes in sales volume (The fixed
budget, 2018).
 Fixed budget helps in reduce cost because manger needs not to make budget all over the
business period (Dereje,2015).
DISADVANTAGE
 Fixed budget has no significantly use because every moment company's activities and
sales volume are unpredictable so there is no use of static budget because it will not able
to give accurate profit of the company.
 Unfavourable variances may impact on overall predicted budget thus; entity may fail to
run operations successfully.
Flexible budget
Flexible budget is a budget which changes with the change in the level of activity. It is
also called as variance budget (Chi and Ho, 2017).
ADVANTAGES
 Through Flexible budget ABC ltd company can be done effectively forecasting that will
help in maximization of the profit.
DISADVANTAGES
 Flexible budget is more confusing budget because ABC LTD company need more
planning to track expenses and more adjustment to be required within a business period
(Abdallah, 2017).
Variance analysis- it is quantitative investigation of the difference between actual and planned
behaviour. The variance analysis is used by the organization to maintain and control the
operation of business. Variance analysis uses numerical in the evaluation of the progress of
company.
Advantages
 It is useful for identifying the deviation in the performance.

Disadvantages
 It takes long time to examine the effect of variance.
Cash budgeting-
Cash budget is a budget or plan which refers to the estimation of future cash receipts and
disbursements during the period. The cash budget depicts the company's cash position in the
future. The cash inflow and outflow includes revenues collected, expenses paid, and loans
receipts and payments.
Advantages :
 It assists in identifying the future needs of the cash for [performing the different
operations of organisation.
Disadvantages
 It is very expensive to operate a budget
CONCLUSION
Management accounting report summarised that ABC LTD company adapt budgeting
control tools because it helps to compare actual performance with standard performance and
company able to found variance and corrective action can be taken. These report also concluded
that net operating profit of the company vary by using different costing approaches. Total net
profit of the 3 years using marginal costing is higher than absorption costing. So, it can be
concluded that ABC LTD company should follow marginal costing as company can report high
net operating income as compare to absorption costing.