Analysis of Income Statement and Management Accounting Tools

The assignment is about analyzing the income statement of a company using various management accounting tools and techniques. It also discusses different methods such as balance scorecard, key performance indicators, variance analysis, and benchmarking. The report concludes by reflecting on the implications of manager effects research for management accounting research and provides an overview of management accounting research in the past 25 years.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Scenario 1-(LO 1)............................................................................................................................3
Management accounting system.................................................................................................3
Methods which are use by the company for management accounting reports............................6
Scenario-2 (LO 2)............................................................................................................................7
Scenario-3(LO3)
.......................................................................................................................................................10
Scenario-4 (LO 4)..........................................................................................................................13
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting system is the profession which includes the partnering in
decision making, planning and performance management systems and also provide expertise in
the financial reporting.
The present study is based on Excite entertainment Ltd. which is the UK based company
and operates in the leisure and entertainment industry and a non government company.
Furthermore, the report Wil explain abut the different management accounting system
and planning tools of the company . In addition to this, analysis of income statement through
different methods will also be explain in the report. The report than further explains the different
tools which helps to solve financial problems
Scenario 1-(LO 1)
Management accounting system
Managerial accounting is the internal system of the business which focuses on measuring
and evaluating the processes for the management of the organisation. management accounting
plays essential role in managerial function of the organisation(Quattrone, 2016).
This process includes basic function which consist of planning, organising, controlling
and decision making which help the to make important and effective decision which ultimately
leads the organisation on right path of growth and developing. effective performing the
management accounting will help the business in measuring their actual performance by
comparing with the budgets so that corrective measures can be taken in order to eliminate the
disruptions(Otley, 2016).
By applying budget and planning organ' is ale to manage the business activities
effectively and efficiently. accounting is responsible for leading the business to make quality
decisions to control and monitor the business activities in addition with the financial security of
the company and handling all the financial matters which leads to drive the business in overall
and efficient management.
Management accounting is done by the management accountants who are the risk
mangers, planners, budgeters, decision makers and strategists(Malmi, 2016). They preform the
task activities which help the business staff including board of directors, owners and managers in
making decisions for the effective growth of the organisation.

This accounting helps the business in preparing the internal reports by effectively
analysing and evaluating costs and operations so to aid the managers dan other members of the
organisation in making the effective decisions which ultimately helps in achievement of the
organisational goal.
Financial accounting is the accounting which perform the activity of tracking the
business's financial transactions by using standard guidelines(Malmi, 2016). In this ca counting
all the fanciable transactions are recorded, analyse, summarized and present in the form of the
financial report and financial statements which includes income stalemates, balance sheet and
cash flow. These statements will help to determine the financial position and financial
performance of the business. the main function of this accounting is to preparing of the final
reports which provide information about the performance of firm to the external parties such as
creditors, government, customers, creditors, tax authorities.
 Management accounting helps in
providing the information to the people
within the
organisation(Maas,Schaltegger and
Crutzen, 2016)
 management accounting is not
mandatory or required by the law.
Accounting is completely depends on
the choice of organisation in order to
manage the business transaction' and
activities.
 This accounting consist of particular
product or cost centres
 reports can be generate by the business
at any pint of time such as on daily
basis, weekly or monthly.
 Reports are considered to be the
forward looking and containing the
forecasting value for those who are
 Financial accounting is the accounting
which helps to provide the information
to the external parties such as creditors,
investors , etc.
 this accounting is mandatory or
required by law to perform so that they
can generate the information of the
companies through their final reports.
 This consist with overall organisation
 financial reports are created for period
generally financial year(Kaplan and
Atkinson, 2015).
 these reports are based on the historic
data and have predictive value to those
who are planning to invest in the
business by taking effective financial
decisions to attract higher profit.
 This involve the preparation of the
financial reports which includes the

within the organisation(Gunarathne.
and Lee, 2015).
 It involve preparing of the reports
which are primarily confidential and
used by the top management of the
company and these reports and
prepared by using the statistical method
and scientific methods so that they can
arrive ta certain monetary value which
is further use for making decision.
These reports generally includes:
 Sales forecasting reports, merger
reports, feasibility studies, budget
analysis , comparative analysis.
basic requirements of profitability,
stability, solvency and liquidity. These
reports are generally help the internal
and external users to generate the
information regarding the company;s
financial position which help the in
their further decision making(Hopper
and Bui 2016).
Cost accounting system is framework which is used by Excite entertainment Ltd. to
estimate and analyse the cost of their products for ascertaining the profitability analysis ,
inventory valuation and controlling and monitoring the costs. For profitable operation by the
company, ascertaining the accurate statistical function of the organisation. Cost accounting is
also called as product costing system and costing system(Gunarathne. and Lee, 2015). There are
basally many types of cost which is required to estimate by the company and some of them are :
Direct costs is the cost which is directly associated with the particular goods and
services .these cost are directly countable for the cost object . Some direct costs are direct
material, direct labour, wages, manufacturing supplies, commission, etc.
standard costing is the estimated cost or performing the operational activities or
producing the goods and services under the normal conditions (Englund and Gerdin,
2018) .These costs are generally used as target costs or treated as base for comparison of the
actual cost and also developed from the historical data. The main advantages of this type of
costing are it can be effectively used for product costing, for controlling the costs of operations
and for decision making.

Inventory management system is the software system which helps in tracking the
inventory levels, sales, deliveries, orders. These are also used in the manufacturing industries to
create the woe order, bills of the materials and also the other production related documents. This
costing helps the companies across the supply chain in making better decisions and ore money.
The main benefits of employing inventory management system in a business are cost savings,
enhancement in the efficiency in the operations of company, better management of warehouse,
updated data, privacy and security of data and useful insights into trends related to the
consumption of inventory by an organisation. There are different methods of inventory
management and they are:
FIFO- it means the management system which stands for the first in first out that means the
goods which are first purchased and products are also to sold first. This method helps the
company to assume the inventory which is purchased first is need to sold first and the new
inventory kept as unsold.
LIFO – it means last in first out that is meant that valuing the cost of the goods sold at the
ending inventory. It is the method where the product which is the most recent is recorded as sold
first.
Just in time-is the method is considered to be the company’s strategy which help the company in
increasing their efficiency and decreasing the waste by receiving the goods as and when needed
only in te entire production process which helps to reduce the inventory costs..
Job costing system is system of assigning manufacturing costs of an individual unit of
output that is it is the system which is used in the company when various item which are
produces are different from each other and required to accumulate the significant cost
individually( Coad, Jack and Kholeif, 2015). The main aim of job costing is to ascertain the
costs and profit and loss on each of the job performed its is also done to ascertain the most
profitable jobs .
The benefit of job costing is that, it provides a basis for forecasting the costs of similar
jobs which are to be done in the future. It facilitates the identification of spoilage and defective
work related to a specific job and responsibility can be fixed on a particular department or an
individual for the same. These are most suitable for cost price contracts in which the price of the
contract is strictly determined on the basis of costs (Job Costing: Meaning, Advantages and
Limitations, 2019).

Methods which are use by the company for management accounting reports
Management accounting reports are the reports which produces for the internal use to
obtain the information which can be used for further decision making. This is the report which
helps in analysing the performance of the Excite entertainment Ltd.. There a different types of
managerial accounting reports which are required to develop by the business's for effective
management and which includes:
Budget reports- these are the reports which is prepared for controlling the costs of
enterprise activities . By evaluating expenses it becomes possible to estimate the budgets for the
following year in order to compare the actual with estimate so to eliminate the deviation if any
by taking the corrective measures for controlling the costs.
Job cost reports- this report provides the information of the total cost which is accrued in
single project or job and compared to expected revenue which can be yield by the particular
project(Bromwich and Scapens, 2016). In simpler words, job cost report means a kind of report
that keeps the track of ongoing job order or project of the company.
This helps the business in evaluating the profitability of the specific jobs and also
optimizing their operations by focusing on the jobs which are the mere profitable.
Account retrievable ageing reports- this is required by the business s who are offering
credit to their customers. These reports help the business in providing the credit balances
according to the age which include different categories that is 30, 60, 90 days late. this will
ultimately help the company in adjusting and setting the credit policies so to align with the
customers capabilities of repayment,
The information disclosed in the report should be accurate, reliable and relevant to the
user as all the financial decision, investment decisions taken by the users are directly relies on
these reports and accuracy of the information will help the user in making the accurate and sound
decisions which ultimately leads the business towards the path of success(Abernethy and Wallis,
2018).
More reliable reports help the user to decide Whether they need to invest in the
particular company or not and this decision is completely depends on the financial position mad
performance of the Excite entertainment Ltd., hence, it is required to the company to make and
prepare the reports more reliable, relevant and containing the data with more accuracy.

Scenario-2 (LO 2)
Income statement using absorption costing method
Calculation of per unit cost
calculation of cost of goods sold

From the above income statement it is cleared that by adopting absorption costing
method the company has to include all the cost that is fixed and variable and is deducted all
together to ascertained profit margin and the company had earned profit of £40000 and total
production cots of £10.
Income statement using Marginal costing method
calculation of cost of goods sold
Calculation of per unit costs

From the above income statement where the Excite entertainment Ltd. uses marginal
costing method the net profit generated is £32000 where only variable costs is associate and
deduct from the goods to ascertain the net contribution and fixed cost is deducted further to
arrive at net profit of £32000.
Scenario-3(LO3)
Planning tools are the instrument which help to guide the organisational steps for taking
actions related to the implementation of the initiative, intervention program. They provide
detailed description about the implementation of the plan and ho it is being developed. There are
different types of planning tools which helps the business to take decision which are required to
implement and they are :
Activity based budgeting- it is the budgeting method which helps to prepare the budgets
using the Activity based costing after taking overheads costs into the consideration is the
management planning tool which do not consider the past years; or historical budget to arrive at
the current year's budget(Abernethy and Wallis, 2018). In this method of budgeting the activities
which incurred cost are directly recorded,and analysed. It is the planning system in which costs
which are associated with the activates and the budgeted expenditure are compiled basis on the
expected activity level.
Advantages
 It allow for high refinement of cots planning.
 It helps in reducing the activity level which leads to improving the profits
 management can ascertain the cost associate wit each unit of output.
 Better understanding for the overheads costs(Abernethyand Wallis, 2018)
 more reliable and accurate costing of the goods and services
 It helps in facilitating the benchmarking
 It helps the Excite entertainment Ltd. by supporting performance management and the
scorecards it helps in optimally utilising unit costs rather than just the total cost.
Disadvantage
 Increases the workload as it require to track activities regularly

 .Reports which are generated using this method are no generally not follow the
accounting policies(Quattrone, 2016).
 It is the complex procedure and time consuming
 it consumes the organisation resources which leads in wastage as spending too many
resources on n analytical function is complete wastage of the resources
 it focus on the short term needs and requirements and ignore the long term.
zero based budgeting-It is the budget which involve preparation of the budget from the
scratch that is with the zero or no base and the fresh evaluation of each line item .Zero base
budgeting helping the Excite entertainment Ltd. in integrating the managerial functions that is of
planning and controlling(Otley, 2016) . The budget is prepared on the basis of no historical data
and complete fresh evaluation is made while preparation of this budget. In this method of
budgeting mangers are responsible to identify all the expected expenses and require to rank all
the activities according to their importance and costs. This type of budgeting is generally used by
the governmental or non profit sectors,
advantages
 It helps the business in efficient allocation of resources as it is based on the benefits and
needs
 it helps the mangers in finding the cost effective ways to manage the activities.
 It detects the inflating budget(Malmi, 2016)
 it is appropriate fort the service department as critical is not easy to understand.
 It helps in increasing the staff motivation s it gives the more emphasis to make decisions
 it increases the communication ad coordination between the organisational members
 it helps to eliminate the wastage. It also crates and opportunity for the outsourcing(Maas,Schaltegger and Crutzen, 2016).
Disadvantages
 It is the time consuming process
 In the preparation of ZBB more paper work is involved
 In ranking of the decision packages there is higher chance of personal bas

 Managers can threaten by the Zero base budgeting-
 Administering and communicating the ZBB may create critical problems.
Incremental budgeting is the method of preparing the budget which uses the previous
years budget or actual performance as the base for the incremental amounts which are to be
added for the new budget period. The allocation of resources in different segment and activities
which are biased on according to the allocation in the previous year(Kaplan and Atkinson, 2015).
these are the budgets which are slight change from the preceding year's budgeted results. this is
the common approach of the Excite entertainment Ltd. where management dose not intend to
spend much time on formulating the entire budget. This is generally done where there is no
tough competition in the industry.
Advantages
 This ensures that department of the organisation should operate in the consistent and
stable manner for longer period
 If any project is required of funding for long term than the incremental budget helps to
ensure that regular funds should keep flowing to the project. This contains the element of simplicity that is budget is based on the recent financial
results or recent budget which can easily verified( Coad, Jack and Kholeif, 2015).
Disadvantages
 It considers only minor changes from previous year where there are structural changes in
reality that is this method is incremental in nature
 Mangers are able to build very less growth and more expenses into the incremental
budgets
 It fosters the overspending
 In case of budget Is carried forward to with minor changes there is requirement of
comprehensive review(Bromwich and Scapens, 2016) .

Scenario-4 (LO 4)
There are different ways of management accounting which can be applied in dealing to
financial problems and hep the organisation on preventing from financial problems in the Excite
entertainment Ltd. are :
 Key
performance
indicators
Benchmarking Balance score card Variance analysis
 It is the
measurable
value which
helps to
determine that
how
organisation is
effectively
achieving its
objectives(Gun
arathne. and
Lee, 2015).
 Organisation
uses the KPI's
at different
multiple levels
in order to
evaluate their
success
towards
reaching the
targets.
 This enable the
 It is the process
or way of
analysing that
what would be
the best
performance
which can be
achieved by the
organisation.
 Benchmarking
helps the
company's in
comparing the
performance in
order to direct
the activities
towards the
direction of
achieving goal.
 Benchmarking
is used to
identify the gap
in the entire
 It s the tool
which is used
to measure
cost-
effectiveness
of any activity
by controlling
and monitoring
the strategic
decisions and
plans(Aberneth
yand Wallis,
2018) .
 It includes the
financial
measures
which helps the
company's to
disclose about
the result of
actions.
 Balance score
card is the
 Variance
analysis is used
to analyse the
difference
between the
budgeted
amount and the
actual amount.
This is
associated with
the
manufactures
product costs.
 This basically a
quantitative
investigation of
the difference
between the
actual and the
planned
behaviours(Ho
pper and Bui
2016) .

organisation
for tracking
and monitoring
the business
success of their
operational
activities they
perform(Otley,
2016).
 this is used by
companies in
order to gauge
their
performance
over period.
 The company
has set the
objective of
earning the
profit of £
60000 in one
year and they
are earning
profit of less
than £60000
than through
using KPI's
they can
analyse the
reason of
deviation and
process of
performing
activities so to
eliminate the
deviation at
right time and
also to win
over the
competitive
advantage,
 Excite
entertainment
Ltd. will draw
metric for them
and compare
directly with
the competitor
as competitive
benchmarking
so to attain the
level which is
set by the to
win over the
competitors.
performance
measurement
tool which
aims to
translate the
organisational
mission into
the actions
including
strategic
planning.
 In process of
operational
activities
company is
accumulating
the cost of
products the
ABC analysis
and if they not
achieving that
target than they
will use the
balance score
card in order to
attain the
objective and
solve their
financial
problems.
 This will lead
the
organisation to
adapt the
corrective
measures to
eliminate the
deviation if
occurs any in
between the
actual and
planned
performance.
 This helps in
solving the
financial
problems of the
business(Abern
ethyand Wallis,
2018) .
 For example- If
the budgeter
sales was
£15000 and
actual sales is
£10000 than
variance
analysis will
yield the
difference of
£5000 and will

can make
improvement
in their
performance(M
almi, 2016).
help to
calculate and
allocate the
loss which
company faces
by expending
more according
to the set plan.
Break-even Analysis : This analysis tells the organisation regarding what it needs to sell
for covering its costs and expenses of conducting business. The break even point is a point
where revenue matches the expenses or in other words, it such a point where a firm earns neither
earns profit nor suffers any loss.
It is calculated by the following formula :
Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

From the above table it can be interpreted that selling price of company is £40 and variable cost
is £10 with £120000 fixed cost which leads the company to generate the contribution of £ 30
per unit.
The cost , volume and profit analysis is the method of cost accounting which focuses on
the changes in the costs and volume affects the operating income of the Excite entertainment Ltd.
and net income(Maas,Schaltegger and Crutzen, 2016). In-order to perform this analysis there are
several assumptions which are required to made that includes :
 selling price per unit remain constant
 variable per unit cost will remain same
 Total fixed cost also remain constant.
 No volume discounts will offer .

 Cost will be classified as either fixed or variable only.
Therefore, from above interpretation it is concluded that the break even point in terms of
unit sis 4000 that is by producing 4000 units company is in situation of no profit an no loss.
Whereas at the £160000 company will be at break even point. If they want to attain their profit of
£60000 than they need to produce 6000 units which will help them in increasing their profit to
£60000.
CONCLUSION
From the above report it can be concluded that managerial accounting is of ultimate
significance for a business organisation because it collects cost related data and interprets it to
form meaning information for the purpose of facilitating the managers in their decision making.
There are different methods of management accounting such as cost accounting system which is
used for estimating and analysing the data that helps the business to improve their efficiency to
achieve the organizational objective.
It can also conclude from the above report that the company has different planning tools
which can also be adapted by them to effectively implement their plans into actions, by using
different costing method and analysis of income statement is also done in the report.
This report also conclude about the different tools and techniques such as balance
scorecard, key performance indicators, variance analysis, benchmarking etc., which are used to
solve the financial problem of the company.

REFERENCES
Books and Journals
Abernethy, M. A. and Wallis, M. S., 2018. Critique on the'manager effects' research and
implications for management accounting research. Journal of Management Accounting
Research.
Abernethy, M. A. and Wallis, M .S., 2018. Critique on the'manager effects' research and
implications for management accounting research. Journal of Management Accounting
Research.
Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years
on. Management Accounting Research. 31.pp.1-9.
Coad, A., Jack, L. and Kholeif, A. O. R., 2015. Structuration theory: reflections on its further
potential for management accounting research. Qualitative Research in Accounting &
Management. 12(2). pp.153-171.
Englund, H. and Gerdin, J., 2018. Management accounting and the paradox of embedded
agency: A framework for analyzing sources of structural change.
Gunarathne, N. and Lee, K. H., 2015. Environmental Management Accounting (EMA) for
environmental management and organizational change: An eco-control approach. Journal
of Accounting & Organizational Change. 11(3). pp.362-383.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research.31. pp.10-30.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
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.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research.31. pp.31-44.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research.31. pp.118-122.
Online

Difference Between Financial Accounting and Management Accounting. 2019[Online]Available
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