Management Accounting Systems and Reports

This assignment provides an in-depth look at management accounting systems, including inventory management, price optimization, cost accounting, and process costing systems. It also discusses various management accounting reports and approaches such as benchmarking and KPI. The document includes numerical problems related to absorption costing method, marginal costing method, and net present value methods. This resource is ideal for students looking to understand the concepts of management accounting and improve their skills in solving financial problems.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
PART (A).....................................................................................................................................1
PART(B)......................................................................................................................................5
ACTIVITY 2....................................................................................................................................8
PART (A).....................................................................................................................................8
PART(B)....................................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is a type of accounting system that is related to the monitoring,
analysing and interpreting the financial data for taking internal decisions(Kaplan and Atkinson,
2015). Eventually, this accounting system is very important for the organisations because it
contains all needed financial data and information that can become basis for future planning and
policies. As well as it consists both type of information, including monetary and non monetary.
This accounting system is a wide term that includes various kind of other accounting systems.
Herein, the project report various types of management accounting and their advantages are
discussed. Apart from it, project report highlights on the different method of budgetary control
and role of management accounting techniques in solving the financial issues. To understand in
detail about the management accounting, an engineering company is selected that is O'Keefe
construction limited. This company is located in the London UK and deals in providing
construction services, ground work services etc.
ACTIVITY 1.
PART (A)
Management accounting and essential requirement of different accounting method.
Management accounting system may be defined as a kind of accounting system that is
related to the providing the needed information to the managers for decision making. Though ,
management accounting system is very important but it is not a compulsory part and it is not
prepared as per the accounting rules, concepts. As the time passing, the organisations are using
this accounting approach widely because it consists various kind of approach and techniques that
have own importance. In broad sense, the management accounting includes different types of
accounting systems which are being used by the companies. Herein, the context of O'Keefe
construction limited company, they applies a wide range of accounting systems which are
required for their various civil engineering projects. Some of them are mentioned as below:
Inventory management system- Inventory management system is a type of accounting
system which is involved in the accurate management of raw material and finished
products(Ward, 2012). Basically, inventory management system keeps an extra sight of eye on
the movement of raw material and finished goods in entire supply chain system. Apart from it,
1

this accounting system has its own importance in the evaluating the quantity of available stock
and material in the warehouses. Due to this, companies can manage the purchase and sell of
products and services. Majorly, this accounting system is required for management of raw
material and prepared goods so that companies can make purchase of new material as per the
requirement. Like in the aspect of O'Keefe construction limited company, they apply this
accounting system for proper management of available raw material for civil engineering
projects. As well as due to this, they can aware about how much of quantity of raw material
(cement,concrete,steel) is available in their stock.
Price optimisation system- Price optimisation system may be defined as the type of
management accounting system that is involved in the assigning a right level of price of products
and services(DRURY, 2013). Additionally, this system offers a framework for reviewing the
customers reaction on different level of pricing. The price optimisation system is not only
beneficial for the companies but also for the customers too. This is why because if companies
use this method then they will be able to decide an accurate price that can suit both to the
customers and companies. In the absence of this system, organisations can not determine the
right price and because of this their can be conflict in the relation between price and cost. The
price optimisation system is required to fix the price at the level which is beneficial for both to
the customer and company. For example the O'Keefe construction limited company implements
this method of analysing and determining the price of various civil projects. Due to this system
company is able to satisfy their clients in the terms of price.
Cost accounting system- Cost accounting system is an accounting system that is used
for evaluating the total cost of products and services(Wickramasinghe and Alawattage, 2012).
This accounting system, computes total cost in entire process of service providing or product
manufacturing. Basically, this accounting system is important to apply in the companies because
due to this they can check which products are beneficial and which ones are not. This can be
possible by evaluating the total cost of different products and services. In the O'Keefe
construction limited company, their engineers apply this system for checking the cost of various
projects and with the help of this they can evaluate efficiency of civil projects. So majorly this
system is required for computing overall cost that occurs at different steps. In broad sense, cost
accounting system is divided into two types which are as follows:
2

Job order costing- This system calculates the cost by computing each job cost that is
assigned in different activities. Like in O'Keefe construction limited company, they analyse the
cost by calculating each job's cost that is involved in various activities of civil projects.
Process costing system- The process costing system calculates the cost of each step of
any process of manufacturing. Herein, the aspect of above mentioned company they calculate the
cost of engineering projects by computing cost of entire process of construction.
Different methods of management accounting reporting:
Management accounting reporting is a process of preparing the reports on the basis of
information provided by the management accounting systems(Otley and Emmanuel, 2013).
There are many kind of reports which are being prepared by the with the help of management
accounting. The O'Keefe construction limited company makes different kind of reports some of
them as follows:
Budgetary reports- Budgetary reports are those reports which are prepared for
measuring the actual performance by comparing actual result with the estimated targets. It is an
internal report that is useful for performance management and analysing the issues. As well as on
the basis of these reports manager take important decisions. The O'Keefe construction limited
company prepares these type of reports to evaluate the actual level of performance. It can be
understand by an example like company estimates the income of £150000 from a civil
engineering project and if they earns more in compare to £150000. Then it would be symbol of
good performance and budgetary report will include this in the report.
Cost managerial accounting reports- Cost managerial accounting report is a kind of
accounting report that contains all the information regarding to the cost that occurs in the
process of service or product offering(Renz, 2016). This accounting report includes different
information like material cost, labour overhead, direct cost etc. Due to these reports companies
can check the entire information regarding to the cost and can evaluate the those activities which
are high cost consuming. Eventually, these reports are being prepared with the help of cost
accounting system. Herein, the aspect of O'Keefe construction limited company, they prepares
theses cost reports for evaluating the cost different projects activities. Like due to these reports,
they can aware about the each activity cost in the construction.
3

Inventory cost report- Inventory cost reports have the information regarding to the
availability of raw material and other stocks in the warehouses. Due to these reports, organisation
can check about how much quantity is available in the stock and how much they need to
purchase. As well as with the help of these reports companies can match the balance between
supply and demand of products and services. Apart from it, the inventory cost report consists the
information regarding to the storage, ordering and carrying cost. In the O'Keefe construction
limited company, they make this report for proper management of raw material of construction
as well as for analysing the different cost of inventory management.
Benefits of management accounting systems and their application in organisational context.
Management accounting systems include various kind of systems like price optimisation
system, inventory management system and cost accounting systems(Kotas, 2014). All these
systems are beneficial for the companies. In the context of above mentioned company these
accounting systems have following benefits:
Benefits of inventory management system- This accounting system is useful in tracking
the movement of raw materials and finished goods in entire supply chain. In the O'Keefe
construction limited company, it is beneficial for them in checking the availability of raw
material like cement concrete, iron etc. in the stores.
Benefits of price optimisation system- In general, the price optimisation system is
important for determination of right price of products and services. Herein, the context of above
mentioned company this system is important in assigning the best price of construction projects.
Benefits of cost accounting system- The cost accounting system is helpful in the
providing information regarding to the various cost that occurs in different processes. In the
above mentioned engineering company, this system is beneficial for checking the overall cost of
different engineering projects.
Management accounting system and reporting are integrated within the organisational process.
Management accounting system is helpful in preparation of management accounting
reporting. This is why because management accounting reports like inventory cost report,
budgetary etc. are prepared with the help of information which is provided by the different
accounting systems(Schaltegger, Gibassier and Zvezdov, 2013). The link between both is
4

interrelated with the organisational process. Like in the O'Keefe construction limited company,
they make various reports with the help of accounting system like inventory management
system, cost accounting system etc. In the absence of this combination of accounting system with
the management accounting reporting it would be difficult to prepare the reports. So both are
interrelated within the organisational process.
PART(B)
ANNEX(A)
Marginal costing- It is a kind of method which is being used for preparation of the income
statements(Herzig, Viere, Schaltegger and Burritt, 2012). Eventually, in this method variable
costs are considered as the unit cost and fixed costs are considered as the period cost.
Absorption costing- This is a method that is totally different from the marginal costing method.
In variable costing method both costs (fixed and variable costs) are considered as the product
cost.
Income statement by marginal costing method:
PARTICULARS AMOUNT
SALES 427500 427500
LESS VARIABLE COST
DIRECT LABOUR (15*5000) 75000
DIRECT MATERIAL (18*5000) 90000
VARIABLE PROD ( 9*5000) 45000
VARIABLE 10% OF SALES VALUE 42750 252750
LESS DIRECT LABOUR (15*500) 7500
DIRECT MATRIAL ( 18*500) 9000
VARIABLE PROD (9*500) 4500 -21000
CONTRIBUTION 195750 195750
LESS FIXED EXP (180000/4) -45000
PROFIT FOR THE YEAR 150750 150750
5

Income statement by absorption costing method(1st quarter)
PARTICULARS AMOUNT
SALES (4500*95) 427500 427500
COGS -231750
GROSS PROFIT AT NORMAL 195750
UNDER/OVR ABSORPTION 6800
GROSS PROFIT AT ACTUAL 202550
-FIXED EXP -45000
NET PROFIT 157550
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method(2nd quarter)
SALES (3000*95) 285000
COGS -180250
GROSS PROFIT AT 104750
6

NORMAL
Under ABSORPTION -5476
GROSS PROFIT AT
ACTUAL 99274
-FIXED EXP -45000
NET PROFIT 54274
Working notes:
1.
Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
2.
Per quarter standard
production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
ANNEX (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
7

Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Interpretation
As per the above solved numerical it has been analysed that there are two products: X and
Y whose labour hour rate is of £12. Herein, the conventional absorption method, the total
overhead in product X is of £72,000 and in product Y, it is of £192,000. Apart from it, in the
ABC(activity based costing) approach machine hour rates of both products are variant. In
8

product X it is of £24,000 and in product Y it is £16,000. As well as overheads are also
different. Product Y is consuming more expenditure in compare to product X which are as
follows: product X( £ 82749) and product Y(£181,255).
ACTIVITY 2.
PART (A)
Advantages and disadvantages of different planning tools of budgetary control:
Budgetary control is a kind of process that is related to the establishing the financial and
non goals with the help of budget. After that comparing the actual result with the standard goals.
This can help in evaluating the actual performance of different activities. Herein, it is important
that standards should be achievable and as per the need. There are different kind of planning
tools of budgetary control which help in analysing the actual result. The O'Keefe construction
limited company, applies a wide range of tools of budgetary control. Some of them as mentioned
as below:
Fixed budget- Fixed budgets are those budgets which are not flexible in the nature. It is
also known by the static budget(Sánchez-Rodríguez and Spraakman, 2012). These types of
budgets do not change as per change in the sales or volume. Eventually, organisations make this
type of budget for those activities which are going to remain fix in the future. The above
selected engineering company makes the flexible budget for small time period projects which
can be completed in less time. Herein, some advantages and disadvantages of this budget are
mentioned below:
Advantages-
 This budget does not require to be update each month which ultimately saves the
time of managers. In O'Keefe construction limited company they prepares this
budget for one time and after that they do not change it.
 Another advantage of this budget is that it is easy to track the information of this
budget. This is why because it does not change so it becomes easy to track.
Herein, the above company, financial managers can track the performance easily
by this budget.
Disadvantages-
9

 This type of budget is confusing to understand because it does not change
according to change in the sales and volume. Due to this there can be mismatch in
the values after a time period.
 As well as this budget can not be change in future whether any change occurs in
the sales or volume. It is a huge disadvantage.
Flexible budget- Flexible budget is a type of budget, that can be change as per the
change in the volume or sales. Eventually, this budget is more comfortable to use in compare to
the static budget. The O'Keefe construction limited company prepares this budget for the long
time period engineering projects. This is why because in long time period certain changes can be
happen in the income and expenditure so that changes can be done in the budget. The flexible
budget has some advantages and disadvantage which are as follow:
Advantages-
 Flexible budget is less stressful, because it provide the facility of making change
in the estimated income and expense. The above engineering company can make
change in their budget as per the change in their income.
 This budget encourage communication and coordination among the different
department of company.
Disadvantages-
 In this budget there can be possibility of cheat because it offers the facility of
change in the budgeted amount.
 Another disadvantage of this budget is the lack of discipline because it can be
prepare without any particular rules and regulation.
Zero based budget- It is a type of budget in which each activity is justified before
entering in the budget(Richardson, 2012). Eventually, this budget starts from a zero level without
considering the data of previous year budget. The O'Keefe construction limited company
prepares this budget for those activities which are important in the context of profitability. Some
advantages and disadvantages are mentioned as below:
Advantages-
 It brings accuracy in the budgets because each activity has it justification.
 This budget enables efficient allocation of the resources. The above engineering
company makes this budget for efficient use of material in the projects.
10

Disadvantages-
 This budget takes too much time in the preparation process.
 Zero budget making is a complex process, it requires knowledge.
Different planning tools and their application for preparation of budgets.
The various planning tools of budgetary control are very important for accurate
forecasting of the budgets. This why because all the needed information required for preparing
the budget utilised from the planning tools of budgets. Herein, the aspect of the O'Keefe
construction limited company, they use different planning tools like fixed budget, flexible budget
and zero based budget for accurate forecasting.
ANNEX(C)
11

PART(B)
Comparison of organisations to solve the financial problem with the use of management
accounting system.
Financial problem- Financial problems are those problems in which organisations face
the issue of lack of fund or money(Adler, 2013). Due to these issues other functions of the
company also get impact. There can be many reasons of financial problems like lack of proper
management. Herein, some types of financial problems are mentioned below:
Lack of cash flow- In this problem companies have the issue of lack of cash for their
functions. This problem arises when organisation expands more cash in compare to earn.
12

Spending more then income- This is a financial issue in which companies spends too
much but earns low. There can be many reasons of it, like if company's profits are low. It is a
serious financial issue which is needed to be overcome.
Financial governance- Financial governance includes collecting, monitoring, managing
the financial informations to solve the issues regarding to the finance. The main purpose of this
is to resolve the issues regarding to the finance. It consists various tools and techniques, which
are as follows:
KPI(Key performance indicator)- It is a kind of tool that analyse the financial
performance of the companies. As well as this ensures about how well an organisation is
achieving its objectives.
Benchmarking- Benchmarking is related to the comparison of organisational process,
policies and products with the other companies of the business environment. Additionally, it is a
method of identifying the internal opportunities for better improvement.
Herein, comparison of O'Keefe construction limited and GKL group limited is mentioned
below:
Basis O'Keefe construction limited GKL group limited
Financial
issue
This company is facing the issue of
spending more then income. Due to
this their financial performance is
getting down. Their expenditure of
various engineering projects is high in
comparison to the income. For example
they invest £800000 in a construction
project. They expect their earning more
then £800000 but company earns just £
650000. So overall company spends
more and earns less.
The GKL group limited is also a civil
engineering company that performs
same activities as the comparative
company. They are suffering from the
problem of unbalanced cash flow and
due to this they are facing many other
financial issues.
Financial
approach
Herein, the situation of above company
they need a method to overcome from
Their problem can be solve by
implementing a appropriate approach
13

the financial issue. Their problem can
be solved by the KPI(key performance
indicator). This tool can manage their
financial performance and can guide to
the company for adapting new plans
and policies in their projects.
and that is benchmarking. It is a kind
of technique that is helpful in
comparing the plans and policies with
other companies for better result. If
above company applies this tool then it
would be helpful for them to innovate
their policies and this can result in
better financial performance.
Management accounting in solving financial problems and ultimately lead to organizational
success.
Management accounting approach of key performance indicator is helpful for monitoring
financial as well as non financial performances to ascertain the growth of business in the
competitive world(Chiwamit, Modell and Yang, 2014). Accounting approach of benchmarking is
useful in searching the best practice and evaluating improvements in business activities.
Financial manager of O'Keefe construction limited should apply approaches to resolve problem
of spending more than earnings, lack of profitability and instability in business for the purpose of
reducing associated expenses. Such reports are used for preparation of budgetary reports, cost
managerial accounting reports and inventory cost reports which are helpful in better
performances for achieving profitability.
An evaluation of how planning tools for accounting help to solve problems and support industry
with sustainable success
Planning tools are used for preparing strategies and programmes in advance to deal with
uncertain as well as future situations(Hasniza Haron, Kamal Abdul Rahman and Smith, 2013).
There are various planning tools which are helpful for responding towards the financial issues for
the purpose of maintaining sustainable success of the business entity. With the application of
management techniques along with planning tools excess expenses can be controlled arises while
performing tasks. Planning tools are useful for identifying various opportunities for reducing the
14

deviations and making improvements for solving financial problems to lead towards sustainable
success.
CONCLUSION
From the above discussion it can be concluded that management accounting is a
important element for managing the performances of any business. It includes various types of
management accounting systems such as inventory management system, price optimisation
system, cost accounting system, process costing system and so on. It also discusses about various
management accounting reports. It has been concluded that management accounting systems are
inter related with management accounting reports. Some numerical problems in relation to
absorption costing method, marginal costing method and net present value methods are briefly
discussed. Management approaches related to benchmarking and KPI are used for solving
financial problems to lead towards sustainable success in competitive environment.
15