Management accounting : Oshodi PLC

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Management accounting and essential requirements of different types of management
accounting...............................................................................................................................1
P2 Different methods for management accounting reporting................................................3
LO2..................................................................................................................................................4
P3 Calculate costs using appropriate techniques of cost analysis to prepare
an income statement using marginal and absorption costs...........................4
LO3..................................................................................................................................................8
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control....................................................................................................................8
LO4................................................................................................................................................11
P5 Compare how organisations are adapting management accounting systems to respond to
financial issues......................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15
Books and journals...............................................................................................................15
Appendix........................................................................................................................................15

INTRODUCTION
Management accounting is a process of preparing financial report to assist the management team
to make policies to control business operations. Financial information helps in making strategic
decisions. It helps in evaluating the performance of the company by analysing previous year data
with the actual data. Present report is based on Oshodi PLC which is a juice manufacturing
company. Report contains the concept of management accounting, different types of
management accounting, methods of reporting. Report will include the techniques of cost
analysis i.e. absorption and marginal costing, calculation of income statement is presented by
both the methods. Further report also contains the how organisations adopt accounting systems to
respond to financial issues(Kaplan and Atkinson, 2015).
LO1
P1 Management accounting and essential requirements of different types of management
accounting.
It lays down the procedure for applying knowledge and professional expertise for
preparing the accounting plus financial information in a way assisting the management team to
formulate policies and to control the industrial operations of the firm. Process that helps the
mangers in making managerial decisions with the help of financial information and the
resources, management accounting is also referred as managerial accounting. Management
accounting is for the internal management team of the company and this difference makes it
stand apart from the financial accounting process. Finance administration discuss reports such as
financial statements, reports of the revenues and the other transactional reports with the
management accounting team of the organisation. Motive of management accounting is to take
exact and effective decision with help of statistical data to control the business enterprise.
Management accounting lays down the procedure for presenting financial data and the business
operations to help the management team to make decisions.
Types of management accounting system
 Cost-accounting systems
 Inventory management systems
 Job-costing systems
 price-optimising system
1

Cost Accounting System
Cost accounting is a branch of management accounting which is concerned with
classifying, allocating and recording the present and the future prospective costs. At the present
times it is considered to be the essential part of business management as the organisations are
highly benefited by applying cost accounting(Merchant and White, 2017). It helps the
organisation to classify its costs along with its recording. Management are able to classify its
costs into direct, prime, factory etc. Such allocation helps the organisation in controlling its costs
and to determine the profitability from the operations . Cost accounting also helps the
organisation to have a control over its various cost s such as material labour and other factory
overheads. It helps the organisation to set standards to increase its efficiency and to manage its
operations to achieve the set standards.
Inventory Management System
Inventory management helps the organisation to mange stocks of the business and
keeping the track records of the inventory of the business. Inventory management also helps the
company to be aware of its stock requirement and to order stocks on time without impacting the
production process. They have a major importance in the industries such as food and beverages,
health care etc. An active stock management system keeps the track records of the inventory fro
its entrance in the factory to the warehouse and from warehouse to the customers. Proper
inventory management system helps the company in keeping its business well maintained.
Updated records help the company to know its inventory requirements and to fulfil the
requirement on time without breaking the production process. Companies can maintain reorder
level, safety stock and to know the break even points.
Job Costing System
Job Costing helps the organisations to use cost records to know the profit margins of each
job and to compare it with budgeted profit margins. It is defined as the process of gathering
information about production and service activities and the costs connected with each activity. It
helps the organisation to know the reliability of the estimate made by it. The prices quoted
should be bale to acquire a reasonable profit for the company. It mainly helps the organisation in
maintaining three types of records such as direct materials to have the records of the
consumption of the materials, direct labour for getting the exact labour costings to the company
and the other overhead costs applied in manufacturing process(Schaltegger and Burritt, 2017).
2

(Maas, Schaltegger and Crutzen, 2016)Price-optimising System
Price optimisation helps the organisation to analyse the variation in demands with the
change in prices of the products of the company. Then on the basis of the costs information
gathered and the available inventory level organisations make decisions on the prices that can
prevail in the market. It helps the company to determine its initial, promotional and the
discounted pricing policies. Price optimisation helps the company to know its standing in the
markets as well as the prices with which it can survive in the market. It tells the company about
the cost reduction or to improve the production process to match the pricing levels without
sacrificing profits of the company.
P2 Different methods for management accounting reporting.
Management accounting helps the Oshodi PLC in trimming its costs whit the help of
information provided by the managerial reports. Accounting reports also enable the organisation
to shred down its non rewarding product lines and to focus more on the goods which will offer
high financial returns to the Oshodi. Company may also generate reports considering its timely
requirements such as on quarterly, half yearly or on the annual basis(Maas, Schaltegger and
Crutzen, 2016).
Budget Reports
Budget reports helps the organisation to assess its efficiency and the performance of its
operations whether they are able to meet its set standards or the production is not declining.
Budgetary standards are set on the basis of the actual expenses occurred by the department and
the production level they were achieving at that costs levels in the prior years. It will also help
the company to change its budget reports if the expenses are going beyond the budgeted levels
even after making all the possible changes in the same budget. Budget reports also help the
organisation to trim its costs if the expenses are going beyond the attainable standards. Budgeted
reports help the managerial officials to analyse the performance of the workforce and to reward
them with incentives for meeting the targeted standards(Boučková, 2015).
Job Cost Reports
Job cost report helps the organisation to display its costs records over a specific process.
Reports are generally compared with the estimated revenue levels for evaluating the profitability
of the specific jobs. Job cost reports help the PLC to find out areas that give high returns and to
put extra efforts in enhancing those areas and ensure that the company does not waste its time on
3

low returning jobs. It helps the organisation to control the costs of the ongoing project and to
make necessary changes by applying other cost-efficient methods to enable the organisation save
itself from the losses that could offer.
Performance Report
Oshodi generates its performance reports for reviewing the overall performance of the
PLC and the each employee working in the organisation. Performance reports enable the
managers to take decisions and to frame strategies to improve the future performance of the
company. Efficient employees are rewarded to perform even better and the inefficient employees
are trained and motivated to improve the performance. Performance report also helps the
organisation to know its efficiency in meeting the production levels to achieve its targets so that
the company can make necessary changes to improve the performance of the company as a
whole. Performance reports plays a vital role to detect the flaws and to implement new strategies
to achieve the target level(Chenhall and Moers, 2015).
Other Managerial Accounting Reports
There are other reports also that can be generated by the company as per requirement of
its business activities have a better monitoring and controlling the business operation. The
reports which also helps the PLC in analysing the existing business and its operational activities.
These reports can be prepared by the company itself or by the professionals working outside the
company and preparing reports as per the specific business requirement. Professionals possess
the knowledge and expertise to make reports and also also help the company to analyse its
impact. It also provides the company with the suggestive measures that can be used by the
company to improve its cost control measures along with the operations.
LO2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
INCOME STATEMENTS USING MARGINAL COSTING
Marginal Costing
Profit or Loss statement of Oshodi PLC for November
and December
4

Novemb
er
Decemb
er
Particul
ars
Price
per unit Units GBP GBP
Price
per unit Units GBP GBP
Selling
price 50 10000 500000 50 12000 600000
Less: Cost of
goods sold
Op. Stock @ 25 25 2000 50000
Cost of Prodn
variable 12000 300000 10000 250000
2000
Less: Cl. Stock @
25 2000 50000 300000
(Weetm
an,
2019) 250000
Varianc
e
Analysis
Cost of Prodn
variable 5 10000 50000 5 12000 60000
300000 300000 240000 2400000
Contribu
tion 200000 360000
Less: Cost of
Prodn Fixed 200000 240000
Production Cost 99000 99000
Selling
Cost 14000 14000
5

Administration
Cost 26000 139000 26000 139000
Net
Profit 61000 101000
Profit as per Marginal Costing of
Nov. and Dec.
(Weetm(
Weetma
n,
2019)an,
2019)
Novemb
er 61000
Decemb
er 101000
162000
Marginal Costing
Particulars GBP GBP
per unit
Selling Price 50
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
Total 25 25
Contribution 25
6

Working Note 1
Calculations of Variable Costing
Particulars GBP
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
Total Variavle cost 25
Working Note 2
Particulars GBP GBP
Selling Price 50
Production cost cariable 25
Selling overhead variable 5
30 30
Contribution p.u. 20
Working Note 3
Selling overhead variable 10% of sales value
50*10%
5
Absorption Costing
Profit or Loss statement of Oshodi For November and December
November December
Particulars Unit GBP GBP Units GBP GBP
Selling Price 10000 500000 12000 600000
Less: Cost of goods sold
Op. Stock @ 34 2000 68000
Absorbed Prodn Cost 12000 408000 10000 340000
2000 68000
340000 340000 408000 408000
Gross Profit 160000 192000
Adj. for Under/Over Absorption 9000 -9000
16900 183000
Less: Overhead Cost
Selling Overhead variable 50000 60000
Selling Overhead fixed 14000 14000
7

Admin overhead Fixed 26000 90000 26000 100000
79000 83000
Calculation for Under/ Over Absorption for Oshodi PLC for November and December
Month Units of Prodn. O/H absorbed p.u. Total Absorption Actual O/H Under/ Over Absorption
November 12000 9 108000 99000 9000
December 10000 9 90000 99000 -9000
Working Note 1
Normal Production Level 11000 units
Overhead cost Fixed 99000
Fixed O/H absorbed 99000/11000
GBP 9
Total Prodn Cost Variable Cost + Fixed O/H absorbed
Variable Cost 25
Fixed O/H absorbed 9
Total Prodn Cost 34 per unit
LO3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
Financial Budget:
Financial budget explains the details about the incoming and outgoing of the amount from the
business and also explain the future plans of spending money to gain large profits for the oshodi
plc company.
Financial budget includes:
 Cash budget: This portrays inflows and outflows of the cash in the business daily, weekly
or monthly or in a particular period of time.and also predicts amount available in the
manufacturing company.
8

 Capital expenditure budget: This concentrates on the large investment on the fixed assets
of Such as, land buildings, vehicles or the new setups of the oshodi manufacturing
company of the jojo fruit juice.
 The balance sheet budget: This includes liabilities, shares and the assets available in the
firm during the present period of accounting.
Advantages:
 Financial budget carries all the details about incoming and outgoing money and the profit
margins of the company.
 Financial budget provides ideas about further investment of the money and about
increasing the earnings from the jojo fruit juice.
 Financial budget allows inflow and outflow of the cash that means it carries all the details
about available cash amount in the company which makes higher possibility to plan for
more profits and easy to recognise financial position of the company.
Disadvantages :
 Business with Cash is quiet risky as it can be loose somewhere or there is a probability of
its stealing.
 Financial capital expenses is the permanent investment and is an irreversible process, so
after investing money in permanent assets it cannot be used for further profits or sales.
 Financial budget plan is time consuming process, as it needs an upgrade every now and
then as it is very short term process used on the regular days(Weetman, 2019).
Operating Budget:
Operation budget describes planning over a particular period of time such as annual or quarterly
etc. to portray sales and income of the business, actual and expected profit of the business.
Operating budget includes:
9

The sales and revenue budget: This allocates the amount of money received by the normal
running of the business and determines the future economic positions of the oshodi PLC
manufacturing company.
The expense budget: This traces the expected expenses of the firm in a specific period of time
and also relates to approaching expenses of the business.
The project budget : This includes estimation of the amount authorised in a projects handled by
the oshodi plc company of jojo fruit juice.
Advantages:
 Operating budget shape all the budget required for operating entire business which helps
in prediction of financial position of the company in the future.
 It calculates the amount used for the production of jojo fruit juice and also calculate the
amount of the goods and services used for the production.
 It also analyse profit margins of the business by calculating profit per each packet of juice
and also calculate no. of packets sold which helps in examining its demand and trends.
Disadvantages:
 It is time consuming process, creating budget and detailing money inflows and outflows
of the company.
 Operating budget varies directly with change in the sale volumes , income and even with
the change of goods and services.
 It is short term process, needs updation after every short period of time(Suomala, Lyly-
Yrjänäinen, J., Laine and Mitchell, 2017).
static Budgets:
Static budget describes inflexible constant non changing budget with increase or decrease in
sales, income or other activities of the sale in the business.
Advantages:
10

 Static budgets is time saving tool as it does not has to update regularly during whole
accounting process, hence it is very easy to execute and follow static budgets .
 It permits company to estimate its sales and profits and helps in changing old strategies
and in making new strategies to increase no. Of sales of fruit juice and to increase its
earnings.
 static budget allows company to understand the difference between actual and planned
profits and performance of the business.
Disadvantages:
 static budget is inflexible and it cannot be change, hence it cannot add more volume to
increase sales.
 They are dependent on the old data so it can create difficulties establishing new
businesses and implementing them in the new business.
 Companies having higher differences in the sales and profits every year cannot use static
budget for the prediction of no. of sales and the earnings of the company.
Oshodi PLC manufacturing company of JOJO fruit juice is applying all the above budgetary
planning tools on their own with accepting its advantages and overcoming its disadvantages,
meanwhile, increasing no. Of sales of jojo fruit juice day by day with increment in their own
profits margins and running the company very smoothly(Rikhardsson and Yigitbasioglu, 2018).
LO4
P5 Compare how organisations are adapting management accounting systems to respond to
financial issues
Today the management accounting had became very essential for the companies to monitor and
control its operations and to improve the performance of the company. There are various
financial issues which are to be resolved by the company with the help of the management
accounting.
Variance Analysis
The Oshodi is is not able to match its productions level as per the budgeted requirement
of the company. The failure of the company to meet its budgeted level is affecting the company
11

as its costing is not decreasing but the output is declining. The company has to overcome the
issue using the variance analysis. Variance analysis is mainly used for investing the causes of
variations between the actual and budgeted figures. The analysis helps the organisation in
controlling its business operation. The PLC will have to identify the exact variance level so that
the company can adopt specific procedures for wiping out the differences in the production
process. Variance analysis also help the organisation to investigate the variation and to know the
reason behind the variations. It helps the com(Boučková, 2015)pany to detect the possible causes
of fluctuations and the ways to resolve the issues(Hald and Thrane, 2016). There are different
variance to detect the difference in the specific activity like purchase variance to know the prices
paid to the the customer compared to the budgeted ones, labour rate variance for knowing if
there is a difference because of the labour costs , Variable overhead variance to ensure that the
expenses are within the budgeted figures selling price variance to know the selling price
variation in the process which is affecting the business operations there are many other variances
to identify the exact loopholes in the process.
The variance analysis helps the organisation to make adjustments related to its financial
issues like if the company is not getting raw materials at the prescribed prices than the company
will have to raise its budgeted figures and also the raised price will require the company to have
more funds to purchase the raw material. Similarly variations at any level will influence the
financial decisions of the company as it will have to reschedule its financial plan and the
budgeted standards of the company. The PLC may also require to manage for further funds to
ensure that the process continues without any interruptions(Kenno and Free, 2018).
Ratio Analysis
The Oshodi PLC was facing liquidity issues and was not able to manage its funding
requirements. And the cash outflow were increasing and the company with the help of the ratio
analysis managed its operations and made necessary adjustments to fulfil its cash requirements.
After the preparation of the financial reports of the company it is important for the
company to carry out its analysis as it will help the officials to know the financial position of the
company. Ratio analysis is the tool that helps the organisation in assessing its present position.
Ratio analysis helped the PLC to identify the flaws because of which the company was not able
to meet its cost operations. Ratio analysis helps the company to frame interpretation from the
financial statements and other financial records and to know the position of the company. The
12

company can know its liquidity position in case of urgent requirements of the cash, failing
which the company suffered the financial losses. There are two ratios that help the company to
know its liquidity position which are current ratio and the quick ratio(Hieb and Richter, 2018). It
helps the company in maintaining its short term liquidity requirements so that the company can
manage to run its operations without any interruptions. Along with liquidity ratios that help to
manage its liquidity there are various other ratios that help the company in analysing its various
operations and to take necessary steps for managing the differences. Ratio helps the
organisations in managing the assets and available resources for the maximum benefits of the
company it also helps in properly allocating the resources of the company. Ratio analysis makes
it possible for the company to measure its profitability levels and the performance level so that
the company can take decision to improve its performance in case of underperformance or to
enhance further if its able to meet its targeted objectives. With the help of ratio analysis the
companies are able to make financial arrangements if it is planning to expand or if the operations
are required to be modified seeing the demand levels in the market(Watson, 2015). Financial
allow the company to compare its position with the other firms in the market with which the are
competing.
CONCLUSION
From the above analysis and studies it is concluded that the management accounting is a
becoming a very important for the companies to manage their operations. From the above
analysis it is found there are various types of management accounting that help the organisation
to manage it cost operations properly. Among the various methods cost accounting method helps
the organisation to control and monitor cost operations of the company. Inventory management
system helps the organisation to keep proper track record of its inventory so that the company
can meet its requirement on time. Price optimisation helps the organisation helps the organisation
to make make optimum usage of the resources at the minimal cost.
13

14

REFERENCES
Books and journals
Kaplan, R.S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Merchant, K. A. and White, L. F., 2017. Linking the Ethics and Management Control
Literatures☆', Advances in Management Accounting (Advances in Management
Accounting, Volume 28).
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Weetman, P., 2019. Financial and management accounting. Pearson UK.
Suomala, P., Lyly-Yrjänäinen, J., Laine, T. and Mitchell, F., 2017. Interventionist management
accounting research: Theory contributions with societal impact. Routledge.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Hald, K. S. and Thrane, S., 2016. Management Accounting and Supply Chain Strategy. In 1st
InternationalCompetitiveness Management Conference.
Kenno, S. A. and Free, C., 2018. Fostering and forcing uses of accounting: Labour-management
negotiations in the automotive crisis in Canada 2008–2009. Management Accounting
Research. 39. pp.17-34.
Hiebl, M. R. and Richter, J. F., 2018. Response rates in management accounting survey
research. Journal of Management Accounting Research. 30(2). pp.59-79.
Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting
Literature. 34. pp.1-16.
Boučková, M., 2015. Management accounting and agency theory. Procedia Economics and
Finance. 25. pp.5-13.
Appendix
Marginal Costing
Profit or Loss statement of Oshodi PLC for November
and December
Novemb
er
Decemb
er
Particul
ars
Price
per unit Units GBP GBP
Price
per unit Units GBP GBP
Selling 50 10000 500000 50 12000 600000
15

price
Less: Cost of
goods sold
Op. Stock @ 25 25 2000 50000
Cost of Prodn
variable 12000 300000 10000 250000
2000
Less: Cl. Stock @
25 2000 50000 300000
(Weetm
an,
2019) 250000
Varianc
e
Analysis
Cost of Prodn
variable 5 10000 50000 5 12000 60000
300000 300000 240000 2400000
Contribu
tion 200000 360000
Less: Cost of
Prodn Fixed 200000 240000
Production Cost 99000 99000
Selling
Cost 14000 14000
Administration
Cost 26000 139000 26000 139000
Net
Profit 61000 101000
16

Profit as per Marginal Costing of
Nov. and Dec.
(Weetm(
Weetma
n,
2019)an,
2019)
Novemb
er 61000
Decemb
er 101000
162000
Marginal Costing
Particulars GBP GBP
per unit
Selling Price 50
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
Total 25 25
Contribution 25
Working Note 1
Calculations of Variable Costing
Particulars GBP
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
17

Total Variavle cost 25
Working Note 2
Particulars GBP GBP
Selling Price 50
Production cost cariable 25
Selling overhead variable 5
30 30
Contribution p.u. 20
Working Note 3
Selling overhead variable 10% of sales value
50*10%
5
Absorption Costing
Profit or Loss statement of Oshodi For November and December
November December
Particulars Unit GBP GBP Units GBP GBP
Selling Price 10000 500000 12000 600000
Less: Cost of goods sold
Op. Stock @ 34 2000 68000
Absorbed Prodn Cost 12000 408000 10000 340000
2000 68000
340000 340000 408000 408000
Gross Profit 160000 192000
Adj. for Under/Over Absorption 9000 -9000
16900 183000
Less: Overhead Cost
Selling Overhead variable 50000 60000
Selling Overhead fixed 14000 14000
Admin overhead Fixed 26000 90000 26000 100000
79000 83000
Calculation for Under/ Over Absorption for Oshodi PLC for November and December
Month Units of Prodn. O/H absorbed p.u. Total Absorption Actual O/H Under/ Over Absorption
18