Management Accounting Systems and Reporting Methods

This document provides an overview of management accounting systems and reporting methods. It discusses the importance of costing techniques and explores different types of management reports. It also includes a calculation of costs using marginal and absorption costing.

Management
Accounting

Table of Contents

INTRODUCTION
Management accounting is a technique which is used by managers in most of the
business entities for the purpose of determining the ability of company to reach all its
predetermined goals. In order to perform all the operational activities appropriately, it is very
important for all the enterprises to conduct it every year so that internal information could be
gathered to form decision for future (Abernethy and Wallis, 2018). The organisation which is
selected for this project is KPMG which is one of the leading accountancy firm in the world and
delivering services to different clients such as Excite Entertainment Ltd. It is running its
operations in leisure and entertainment industry. This report contains the subject the management
accounting systems, reporting methods, formulation of income statement by applying marginal
and absorption technique of costing it is tried to execute the importance of costing techniques.
Role of financial governance and benchmarking in management accounting is correlated to
respond financial problems effectively.
TASK 1
P1 MA systems and the requirements of various type of MA systems
Management accounting: In most of the business entities a technique is used for the
purpose of analysing, controlling and monitoring effectiveness of operations which is known as
management accounting. In Excite Entertainment Ltd., managers are focusing on it as it helps
them to determine that the efforts which are made by them are benefiting the business or not. It is
considered by them in decision making as with the help of it, actual information about
performance of company could be gathered.
Financial accounting: It is one of the recording structure that is used by large as well as
small companies to form final accounts so that actual financial status of business could be
determined. In Excite Entertainment Ltd., accounting professionals are focusing on the
formulation of financial statements so that they can analyse that whether operations are resulting
in profit or losses (Alawattage, Wickramasinghe and Uddin, 2017).
(a) Difference between management and financial accounting:
Basis Management accounting Financial accounting
Format There is no specific format to prepare In order to formulate all the final
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all the reports which are generated
under management accounting.
accounts which are formed in financial
accounting have a specific format in
which all the accounts are required to be
generated.
Compulsio
n and
auditing
For all the organisations it is not
necessary to conduct it every year as
there is no requirement of auditing for
management reports.
For all the companies, it is compulsory to
conduct financial accounting every year
as auditing is very important for final
accounts.
(b) Cost accounting systems: It can be defined as a system which is mainly used by
companies for the purpose of determining actual cost which is faced by them while executing
operational activities. In Excite Entertainment Ltd., managers are using it for the purpose of
finding causes of all the expenses which are taking place due to operations. It is essentially
required for the enterprise as it can guide the managers to determine the factors which are
resulting in higher cost. There are two types of it which are as follows:
 Direct costs: All the expenses which are directly related to business activities are known
as the part of such costs. In Excite Entertainment Ltd., managers face such costs while
promoting the concerts and festivals all around UK.
 Standard costing: It is a costing technique which is used in most of the business entities
such as Excite Entertainment Ltd in order to gather information regarding the factors
which are resulting in variation between standard and actual cost.
(c) Inventory management systems: this system is recognised by entities to manage all the
goods which are used subject to conduct operations effectively. In Excite Entertainment Ltd it is
used by managers to maintain record of all the inventories in which is being used by employees
to provide leisure to the clients (Anderson and Dekker, 2014). There are three different types of
it which are as follows:
 Last in First Out (LIFO): This can be defined as a kind of inventory valuation method
in which companies focus on those inventories which are bought in last and used first in
the production process. Such as in the Excite entertainment limited company, they are
using this technique in order to better management of their stored inventories.
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 AVCO: It is a method that is utilised by organisation to set the price of products and
services on the basis of average cost. Such as in the aspect of above Excite entertainment
limited company, they use this method for setting the price of their products on the basis
of average cost of manufacture.
 FIFO: In first in first out inventory management system earlier bought goods are used by
managers to deliver all the leisure and entertainment services to clients. In other words,
under this inventory valuation method goods which are bough first are used first in order
to production.
From all the above described systems managers in Excite Entertainment Ltd are using
FIFO method as it helps to utilise all the resources properly. It is essentially required for the
company as with the help of it inventory could be managed properly.
(d) Job costing systems: This system is mainly used in large organisations in order to segregate
all the expenses which are resulting from different jobs. In Excite Entertainment Ltd, managers
are using this system for the purpose of keeping track record of all the jobs which are performed
according to specification of clients. It is very important for the organisation as it can help to
segregate different expenses according to the customers. Under this costing vital range of costs
are measured that are as followings:
 Contract costing- It is a type of cost that is linked with a particular contract with
customers.
 Service costing- This is a type of cost that is used in business entities in order to provide
services instead of products. Such as the above Excite entertainment limited company
provides services of organising events except from providing products.
 Batch costing- It is a kind of cost which is assigned to each batch of units. This costing is
much similar as job costing.
(e) Benefits of MAS:
Importance of cost accounting system – It is useful for assessing cost of each individual unit of
output. This system helps to above Excite entertainment limited company in analysis of each
units' cost.
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Importance of inventory management system- This is useful for effective management of stored
materials in the warehouse which leads to effective control over storage cost. Same as in the
above company, it is benefiting them in controlling total cost of storage.
Importance of job costing system – It helps in the calculating and providing information about
each produced unit's cost. In above company, their managers get aware about cost of each
products which they operates in their activities.
P2 Diverse methods of management reporting methods
(a) Management accounting reporting: It is the process of forming management reports
which is followed by all the companies in order to analyse actual performance of business. In
Excite Entertainment Ltd., managers are formulating four different kinds of reports in order to
keep detailed information of business. All of them are described below in detail:
Account receivable report: It is the document that includes covers in-depth material
subject to the unpaid amount which was not paid by clients at the time of purchase. Managers in
Excite Entertainment Ltd., are creating this report in order to analyse the amount which is owed
by customers. It is very beneficial for the organisation as it helps to analyse total outstanding
which will be received by the company in upcoming period (Fallan and Opstad, 2014).
Inventory management report: It is the paper that contain significant data of
inventories that are used by companies to perform all the executional and operational activities.
In Excite Entertainment Ltd managers are formulating the objectives of business. the company is
having sufficient inventory to deliver leisure and entertainment services to customers. It is
advantageous for the enterprise as with the help of it stock could be ordered by the managers on
time before the crisis related to shortage of them take place.
Performance report: In all the organisations, such reports are generated to analyse that
all the staff members and business is performing well of not. Managers of Excite Entertainment
Ltd. are also formulating it to track that employees are making their best efforts to contribute in
the attainment of organisational goals. It provides various benefits to business which includes
facilitation in providing bonuses to employees, formulating decisions for future etc.
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(b) Explanation of why information presented should be accurate, relevant to the user, reliable up
to date and timely.
The information should be accurate, relevant and reliable and up to date because of
following reasons:
Accurate – The information should be accurate because as per it managers take crucial decisions
about business.
Relevant- The accounting information should be relevant to companies financial transactions
because if information will not relevant then it can be difficult to relay on these informations.
Reliable- As well as the accounting information should be reliable to use for all managers
because in the absence of this feature, companies can not take corrective actions.
Timely – In addition, the accounting information should be presented on right time so that
companies can make plans and policies on time to beat competitors.
D1 Critical evaluation of the way in which management accounting systems and reporting is
integrated within organisational process
In Excite Entertainment Ltd., managers are concerned with enhanced performance of the
organisation for this purpose, different systems and reports are used by them which are related to
management accounting. Main purpose of all of them is to provide detailed information
regarding performance and operational efficiency of business. For example, cost accounting
system is used by managers to segregate different expenses which are resulting from operations.
On the other hand, managers are formulating management reports such as performance report.
With the help of it, actual status of the company and efforts which are made by employees are
assessed.
TASK 2
P3 Calculation of cost using marginal and absorption costing
Absorption costing: The technique is used in cost accounting for the purpose of
determining the cost of absorption is known as this method. In Excite Entertainment Ltd.,
managers use it for the purpose of finding the best method to form the income statement so that
actual information regarding business could be gathered.
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 Limitations: One of the biggest limitation of this technique is the difficulty which is
faced by analysers while comparing the results as all the expenses are taken in to
consideration while using it to calculate profit (Feng and Ho, 2016).
 Benefits: It guides managers through out the way in which they can formulate strategies
to increase operating income for the company for a specific period of time.
Marginal costing: This technique is used in management accounting to find the cost
which gets changes when the units in total production is modified by top managers. While using
this method, managers in Excite Entertainment Ltd write off all the fixed costs.
 Limitation: There is high level of difficulty which is faced by analysers while classifying
costs in this costing as all the costs are variable in long run.
 Benefits: As this method is very easy to understand so it can help the managers to
formulate the strategies as soon as possible so that business can attain growth.
Income statement as per absorption costing:
Particulars Amount
Sales (8000*5) 120000
Less : Cost of good sold:
Opening stock (500*10)
Production (10000*10)
5000
100000
Less- Closing stock (2500*10) 25000
Absorption cost 80000
Profit 40000
Income statement as per marginal costing:
Particulars Amount
Sales (8000*15) 120000
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Less: Variable cost
Opening stock (500*6)
Marginal cost of production (10000*6)
3000
60000
Less: Closing stock 15000
Marginal cost of sales 48000
Contribution 72000
Fixed cost 40000
Profit 32000
M2 Accurate application of range of management accounting techniques
There are various types of management accounting techniques which could be used by
Excite Entertainment Ltd. All of them are described below:
Standard costing: In this, costing technique difference between actual and budgeted
figures are analysed. It helps managers to find the causes of which are affecting the current
situation of business and the forecasted position of the company.
Historical costing: According to this costing technique, all the figures in balance sheet
and other financial statements should be recorded on actual amount rather than the book value.
With the help of it, actual position of business could be determined.
D2 Accurate application and interpretation of data for a range of business activities
Financial report showing results of profits for September 2019
Particulars Amount
Marginal costing method 32000
Absorption costing method 40000
From the incomes statements which are formed for Excite Entertainment Ltd. it has been
determined that marginal costing is resulting in profits of 69000 and absorption method is
reflecting the net income of 35000. The main cause of the difference is ignorance of fixed cost in
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marginal costing. By analysing the current situation, it has been recommended to the
organisation to use the first method which is showing net profit of 69000.
TASK 3
P4 Different planning tools used in budgetary control
Budgetary Control: Budgets are statements that involves estimations about the
expenditures or gains which are framed after analysing objectives of company. Methods that are
opted by an entity for controlling financial performance through preparing addition to
implementing distinct budgets is said to budgetary control. Finance department of Excite
Entertainment Ltd prepares various budgets and determine results through budgetary control
mechanisms in which they compares actual performances with the estimates. With this, they are
able to find discrepancies together with takes remedial actions at specified time (Giacomini,
Sicilia and Steccolini, 2016).
Different planning tools:
Zero based budget: One of the budgeting tool wherein all transactions are justified for
beginning of new accounting period. Budget manager of Excite Entertainment Ltd. uses the
budget through scratching all expenses to zero every time in order to justify money spent as per
business goals.
Advantages: Zero based budget creates opportunities for managers of respective firm as it
helps in capitalising resources on inefficiencies addition to finding innovations for reducing costs
(Hertati and Sumantri, 2016).
Disadvantages: Preparation of the budget at enterprise consumes more time as the
procedure of preparation involves new aspects in each cycle that takes more duration in
evaluating activities for making estimations.
Cash budget: Another planning tool where in expected cash receipts together with cash
disbursements are recorded for accounting period. With this budget, Excite Entertainment Ltd
managers gets complete information about cash status so that further critical decisions in context
to creating reserves and usages in prudent manner are framed. In addition, cash budget is also
used while prioritizing payments and analysing variances in outflow or inflows of cash (Jinga
and DUMITRU, 2015).
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Advantages: Cash budget benefits the entity in avoiding any debt circumstances that
further results in getting true results about current cash at workplace (Benefits of Cash budget.
2019). With cash budget, managers devises realistic predictions and analyses financial
statements so to look into expenditures that are made in the period.
Disadvantages: No credit transaction are transcribed in cash budget that fails in providing
accurate position of company. It also specify the limits the areas of spendings that resulting in
preventing opportunities to make future investments by company.
Master budget: One of the central planning tool that comprises interrelated financial
programmes addition to budgets so to attain strategic business goals. It primarily documents
production levels, future expenses incurred, expected future sales, capital investments, purchases
as well as other loads that are to be repaid addition to acquired. At Excite Entertainment Ltd,
managers with the help of master budget frames rough guidelines about near term expectations.
Advantages: Master budget benefits the business owners in identifying problems by
reviewing other departmental budgets in order to plan ahead. It provides summary of other
budgets due to which businessman analyses total earnings and nature of occurred expenses as
whole.
Disadvantages: Master budget usually takes more time in updation and not easy to alter
easily due to involvement of lengthy descriptions together with charts. With master budget,
managers fails to consider new growth opportunities for company (Kihn and Näsi, 2017).
From the all, cash budget and master budget are only opted by Excite Entertainment Ltd
managers that helps them to accurate estimations about cash position and evaluating
departmental performances promptly.
Comparison between master, zero and cash budget
Basis of comparison Cash budget Zero budget Master budget
Meaning Cash budget is defined
as plan including
expected cash
amounts regarding
receipts and expenses.
Zero budget is said to
plan in which all the
expenses are justified
and begins as zero base.
Master budget is
termed to plan
involving other
budgets that are
prepared at different
departments within
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organization.
Main objective The objective behind
using cash budget at
Excite Entertainment
Ltd is to get fair idea
about idle cash
position and available
cash to meet
obligations
(Nimtrakoon and
Tayles, 2015).
Zero based budget
caters objective of
reducing unnecessary
and required expenses.
Master budget is
prepared with the
objective to set rough
guidelines to attain
future expectations.
Master budget, zero based budget and cash budget have similarity that these all are used
as effective planning tools and aids in future financial planning of Excite Entertainment Ltd.
With these budgets, managers set short term addition to long term objectives, analyses deviations
in set and actual outcomes and devise strategies for improvements (Papazov and Mihaylova,
2015).
M3. use of different planning tools and their application for preparing and forecasting budgets
Planning tools are generally used to frame strategies for upcoming durations. All entities
uses planning tools including cash budget, master budget addition to zero based budget so to
estimate revenues with expenses. In context to Excite Entertainment Ltd, managers follows cash
budget in order to ascertain cash position to meet cash requirements. In order to prepare as well
as forecast budgets, master budget is applied via budgetary control mechanisms so to achieve set
targets in limited duration.
TASK 4
P5. Compare how organisations are adapting management accounting systems to respond to
financial problems.
Financial issue – This can be defined as those problems which are associated with lack of
financial sources to complete various activities and operations. It is one of the crucial issue for
companies because in the absence of proper financial resources companies can not exist in the
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competitive environment (Revellino and Mouritsen, 2015). There are vital range of financial
issues and some of them are mentioned below that are as follows :
 Lower profit or revenues - It is a kind of financial issue that occurs to companies due to
frequent decreasing in activities which are revenue generating. In this kind of financial
issue, organisations face the problem of lack of liquidity because if profits will be lower
then companies will not be able to get enough amount of cash. The main reason of
occurring this financial issue is increased in amount of expenses. Such as the above
respective company, Excite limited is facing this financial issue which is becoming a
main cause of their lower performance (Richardson, 2015).
 Decreasing in sales – Another financial issue that is majorly faced by companies is
decreasing in sales and output. There can be many cause of decreasing in sales of
businesses. Due to this financial issue, businesses can not exist in competitive
environment because they do not have enough amount of fund in order to prepare plans
and strategies (Schaltegger, Burritt and Petersen, 2017).
Financial governance- This technique act as monitoring strategy for companies in the
aspect of solving financial issues. It has been defined as a kind of method which collects and
manage all financial transaction of companies in a systematic manner. In the case, if
organisations face any kind of financial issue then in the process of resolving this plays a
significant role.
Methods for deducting financial issues:
 Ratio analysis – It can be defined as a kind of method which is linked with calculation of
different types of ratios in order to define exact financial issue. Such as the above Excite
limited company is using this technique to find the cause of exact financial issue. They
computes ratios like profitability ratio and by help of it exact issue is find out (Seal and
Mattimoe, 2014).
 KPI – This is named as key performance indicator in which activities are identified on the
basis of their profitability and cost level. Due to this activities which are resulting in
higher cost as compare to standard cost are highlighted and termed as cause of financial
issue. On the basis of it companies make futuristic plans and strategies.
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Comparison of organisations :
Basis of
comparison
Excite limited company PC clothing limited company
Financial
issue
The financial issue of above excite
limited company is decreasing in level
of profit. Due to this their fund
reserves are decreasing in order to pay
debts and performing activities.
This company's financial issue is of
decreasing in sales. Due to this their
competitive existence is getting weak
as well as funds are decreasing.
Technique They are using ratio analysis technique
for finding exact financial issue. By
help of it they calculated net profit
margin ratio that guided them to know
exact financial problem.
This company is using KPI technique
for finding and making plan to solve
the issue. By using this they are
focusing on those activities which are
resulting in higher cost.
MAS This company is using cost accounting
technique to sort out the financial
issue. The reason for applying this
system is that because by use of it
companies can aware about actual
expenditures and can minimise those
which are above set target. The above
company is getting benefit from this
system to focus on minimisation of
expenditures and increasing in profits.
They are applying price optimisation
system in order to solve financial
problem. By help of this system they
revised their pricing structure and set
the prices at a level which can be
acceptable by customers. Thus their
sales increased and problem of lack of
sales sorted with ease (Vasarhelyi,
Kogan and Tuttle, 2015).
Calculations:
BEP to attain desired profit = Fixed cost + desired profit / contribution per unit
= 120000+90000
= 210000/30
= 7000 units
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Profit of sale of 7000 units
Sales (7000*40) = 280000
- Variable cost = 70000
Contribution = 210000
- Fixed cost = 120000
Profit = 90000
Role of management accounting in responding to financial problems
Business entities faces uncountable financial problems while executing successful
operations. Such as Excite Entertainment Ltd., goes through financials issues including lower
revenues as well as decrease in sales. For resolving such problems, adoption of distinct
accounting systems are proved beneficial as these systems have capability to understand the
issues and solve them promptly. Use of benchmarking, KPI addition to financial governance
results in framing effective solutions and implementing them at correct duration will help the
institution in achieving sustainable success.
D3 Use of planning tools to respond financial problems
When planning tools are adequately implemented then proper budget are prepared that
further results in resolving any sort of financial issue. Planning tools involves budget and
controlling methods such as cash budget, master budget and zero based budget that predicts
future uncertain situations and at same time provide effective solution to overcome from the
problems that benefits the entity in leading towards sustainable success.
CONCLUSION
From the presented report, it can be summarised that management accounting plays
significant function to provide financial information to top managing authorities such that critical
decisions are framed for business growth. Management accounting system is combination of
distinct systems such as inventory management system, cost accounting system as well as job
costing system that helps in preparing accounting reports like performance reports, inventory
management report and account receivable reports in systematic together with understandable
format. Further, cost analysis techniques such as marginal and absorption were used in preparing
financial statements. Planning tools that organisations uses in budgetary control are cash, master
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and zero based budget which plays role in adequately estimating future revenues with expenses.
Financial problems that business concerns faces are decreasing in sales addition to lower profit
margins and to resolve them effective approaches of KPI and benchmarking are preferred that
further helps in sustainable success in competitive world.
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Benefits of Cash budget. 2019. [Online]. Available through:
<https://www.sapling.com/7757509/benefits-cash-budget>
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