Management Accounting | Managerial Accounting | Assignment

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Management accounting and requirements of different management accounting system.....1
B. Various accounting management reports used by Ovation system and importance of such
reports..........................................................................................................................................2
C. Benefits of types of inventory management and job costing system.....................................3
D. Integrated features of management accounting system and management accounting reports
in organization.............................................................................................................................4
TASK 2............................................................................................................................................4
A1. Absorption and marginal costing methods...........................................................................4
A2. Preparation of income statements........................................................................................6
C. Significance of Prepared Financial Statements....................................................................10
D. Interpretation of Financial Reports for Ovation Systems.....................................................11
TASK 3..........................................................................................................................................12
A. Advantages and disadvantages of various planning tools for budgetary controlled............12
B. Application of planning tools for analysis, forecasting and preparation..............................13
C. Comparing methods of management accounting systems with regard to financial problems
...................................................................................................................................................14
D. Analysis of management accounting techniques for financial problems.............................14
E. Evaluation of management accounting techniques for financial problems..........................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is analysis of business costs and operations that help in
preparation of internal financial reports, accounts, records which aid managers in making
decisions. It is an important responsibility and its financial data is required in order to determine
various information which can be beneficial for management of an organisation. This report will
give an understanding of management accounting systems and their different methods that are
been used. It will evaluate its benefits and application in Ovation systems, an SME which has 23
employees and is located in UK. Calculations of costs with the help of appropriate cost analysis
will be done and determine income statements using marginal and absorption costs. It will also
explain uses of planning tools, its application while preparing forecasting budgets and their
advantages and disadvantages. Comparison of methods that can solve financial problems and
how they respond to them will be done, which will lead organisation in sustaining its growth
successfully.
TASK 1
A. Management accounting and requirements of different management accounting system
Management accounting is a tool used by managers to manage financial position of the
enterprise and provide accurate report of financial and economic status of a company.
Management refers to advising company for the best use of provision of financial data. In simple
words it is also defined as identifying company's cost and operations and preparing financial
report (Quinn and et.al., 2018). Management is analysing, identifying, planning and managing
activities according to needs of the business.
 Accounting management has a selective nature of selecting the limited information out of
wide range of data.
 It emphasis on future planning and growth of business.
 It only provides large amount of data but no decision.
 Wide variety of options available to solve a particular problem.
 Reports focuses on preparing a financial information for external parties, such as
stockholders, public regulators etc.
Requirements of Management accounting system are:
1

Inventory management: Managers of Ovation system requires lot of information regarding the
management of accounting. Inventory is also a kind of management which needs to be managed
properly to get the correct financial reports of the business. Inventory management refers to
keeping the records of production and sale of goods. Stock management identifies the
availability of raw material and finished product in company (Otley, 2015). It deals with demand
and supply of products. Stock of the Ovation system required to be properly managed. Inventory
management consists of keeping information about sale of products and services and stock which
is still available in storage.
Job costing system: It is termed as assigning different cost structure to different products. This
system focuses on the cost of individual product. In small companies like Ovation system, cost
of product and their selling rate plays an important role in generating the profits of the company.
So this costing system ultimately affects the activities which are involved in managing the
financial reports of the business entity. This system is concerned with manufacturing cost of the
product. Different types of products vary in their costs and this variation in costs effects job
costing system of the organization.
B. Various accounting management reports used by Ovation system and importance of such
reports
Business entity uses different types of reports for the company. These reports provide
information regarding cost of product, performance of an employee and budget stated for the
production. The managers of Ovation system require Accounting management reports because
this provides them information’s about various kinds of financial activities (Melnyk and et.al.,
2014). Such reports can be concluded from various departments of an organization. This is
helpful in decision making of the management. Different reports provides comprehensive view
about the management of financial status in business. Following such reports are described
below:
Cost report: This report gives a view about the total cost incurred of a product. This includes
cost of raw material, labour expanses and extra costs in manufacturing the product. Cost report
gives an extracted orientation of all this information in respect with a manufacturing of
commodity. This report is used to ascertain the actual cost of the commodity. This report tells
about the overhead expanses of a product.
2

Performance report: This report gives an overview about the performance of the company as a
whole. This report also provides the presentation of various departments in organization. It is
facilitates managers in decision making for growth and development of firm. Performance
reports are generally used to estimate the capabilities of the business in and its employees. It is
important for Ovation system in order to improve performance of business and making correct
decision for the successful growth of company.
Budget report: Budget managerial accounting reports are created according to previous data of
business. This is basically an estimated approx. figure which is generated to get an idea about all
the expanses and earnings of business. This report is generated to give an overview about
budgets of company and this budget can be further used for development of the business. Larger
budget of Ovation system can also guide managers to offer incentive plans to their employees. It
possesses a good quality of preparing plans of business activity to achieve common objective.
C. Benefits of types of inventory management and job costing system
Inventory management: These records help to keep information aboutsale and production of
the product. This is very important information which helps in smooth flow of production and
sale of the product. Stock is considered as one of the important assets of company and needs to
be well maintained. So inventory management provides managers with an appropriate
knowledge about managing stock of business. This is helpful in balancing the supply and
demand of product. It is also provides streamlined operations in business. Inventory or stock
management is also involved in adjusting time efficiency in product manufacturing. It reduces
the burden of liabilities in an organization.
Job costing system: This accounting managerial activity helps in providing data about cost of
the product incurred in manufacturing of product. This system is helpful in providing accurate
cost or figures of production. In many SMEs like Ovation system this factor is considered as
source of revenue generation or loses incurred in business (Otley, 2015). This system is helpful
in predicting cost of commodity and labour included in manufacturing of a specific product. It
provides managers with summarised information of direct expenses and cost of labour and
material included to get correct visual idea of company's profits. It determines the profitability of
firm. It controls the comprehensive costing structure of goods and services. It provides the
estimated calculations about profits earned in individual jobs. These operations are carried
against the specific demands of customers.
3

D. Integrated features of management accounting system and management accounting reports in
organization
The role of management accounting in an organization is to support decision-making and
management helps in controlling financial and non-financial activities of business. As this is
helpful in estimating economic status of firm so it effects company's strategies and decision
making policy. This process of estimating the situation of business is identified by preparing
multiple reports of an organization. These accounting reports provides short summary of
information about management and operational activities performed in the entity. So basically
accounting management is a system that has capabilities to manage various activities of different
departments and accounting reports and shows the actual status of business. This way
management accounting plays an important role in the organization. Managers of Ovation
system plan, control and evaluate processing of strategies according to these management
activities and reports of the firm. Cost accounting tracks information related to cost of product
while inventory management estimate demand and supply of a particular product. Management
of these separate activities as a whole is referred as management accounting (Quinn and et.al.,
2018). This can be concluded that process of management accounting is the technique of creating
and using the cost quality and time based information to take effective decisions within the
organization. Overall, controller of an Ovation system contributes in planning decision making
and evaluating the performance of business.
TASK 2
A1. Absorption and marginal costing methods
Absorption costing is a system in which valuing of inventory is done. Expenses related to
manufacturing of specific products are absorbed, that include fixed and variable costs. Overhead
expenses, which are indirect, are considered as inventory's price. This provides an accurate view
of the amount spent on production of inventory and is a method of variable costing (Senftlechner
and Hiebl, 2015). Its results are accurate when it comes to end year inventory. It is also known as
full costing. Elements of absorption costing include:
 Direct material
 Direct labour
 Fixed manufacturing overhead.
4

 Variable manufacturing overhead
The costs which are considered under this method consists of:
 Variable selling and administrative
 Fixed administrative and selling
Illustration 1: Costs Overview
(Source: Absorption Costing, 2018)
§
Marginal costing is a method in which all variable expenses are included in costs unit and
fixed cost is written off in full as it is not favourable of specific contributions of that period
(Kokubu and Kitada, 2015). It is related to marginal cost and its impact on changes of profits
regarding volume or outcome that creates variation in fixed and variable expenses.
5

Illustration 2: Marginal costing approaches
(Source: Marginal costing, 2018)
Marginal and direct costing are specified as interchangeable terms. Their key difference is
that expenses which are determined as variable in nature and is covered in marginal expense,
while costs that are fixed in nature come under objective of cost. This is a different technique,
used by managers that have to make decisions and provides them a base for understanding
profitability of various products. Cost behaviour varies across different levels of volumes and
their results.
A2. Preparation of income statements
Using Absorption costing method:
Income Statement of Ovation systems
6

Preparing income statement through absorption costing method of Ovation System shows
that total revenue is £3300, direct materials and labour amounts to £5600 and £4800 respectively
(Nielsen, Mitchell and Nørreklit, 2015). Variable sales overhead is £12800 and production cost
in £9400. The contribution per unit is £23600 and their net income is £17700.
Using Marginal costing method:
Income Statement of Ovation systems
7

Preparing income statement through marginal costing method of Ovation System shows
that total revenue is £3300, direct materials and labour amounts to £5600 and £4800 respectively.
Variable sales overhead is £12800 and production cost in £9400. The contribution per unit is
£23400 and their net income is £17500.
B. Break-Even analysis formula application
8

Break even analysis helps in determining what is needed to be sold and how costs are to
be covered while running business operations (Van der Stede, 2015). Its formula calculates total
number of units that have to be sold so that company can generate enough revenues to cover all
expenses.
Break Even Point in units = Fixed Costs/ Sales Price per Unit – Variable Cost per Unit.
Or Break-Even Point in £ = Sales Price per Unit x Break Even point in units
The average per unit sales price, cost and monthly fixed costs are analysed. Ovation
Systems has a selling price of £40 per unit and variable cost of £13 which leads to a contribution
of £27 each. Their fixed expense amounts to £6000. Breakeven point is £8889 with £222 per unit
contribution. If they want to aim at achieving a desired profit of £10000, they have to contribute
£926 per unit.
9

C. Significance of Prepared Financial Statements
In absorption costing, fixed costs are replicated for production and addition of valuation
of major closing stocks is to be considered. High profits are reflected when there is absence of
fixed costs during valuation of inventory due to replication of loss in specific books. Fluctuation
of sales causes replicating of less profits even if production is constant. Revenues and costs have
to match which will lead to correct measures. It is advantageous to Ovation systems, as managers
can set prices above total costs if fixed cost is included in it. Marginal costing is comparatively
10

easy for operations and can be understood well. In production costs, it considers fixed costs as it
avoids complicated and misleading statements. Margins are not overstated in the above scenario
because unsold stocks do not consist of fixed stock (Vladychyn, 2017). Problems are not
specified due to absorption of overheads. Management can take proper decisions by application
of different details of contribution.
Break-Even analysis is considered to be an important tool that helps in understanding
relationships of cost output profits that usually vary at different levels of outcome. This helps
managers in financial decision making. It is used to estimate profits at specific levels of
production as well as sales. Break even charts helps in clearly depicting alternations that arise in
outcome and increase in selling prices so that same levels of margin can be obtained before
increment of salary and wages. Ovation systems' capital structure can be created in a very
systematic manner by application of the above model (Millo, Barman and Hall, 2016). Margin of
safety has been extracted from break-even point and is known as difference between actual sales
and break-even point. Its expression can be monetary or in percentage terms according to total
sales that indicate strengths of an organisation.
D. Interpretation of Financial Reports for Ovation Systems
Details of production and sale of single products have been specified in the above
scenario. Application of both marginal and absorption costing has been done. In terms of
marginal costing, with regard to all variables an outcome of £3200 has been generated, which
totals production cost to £9600. While in absorption costing, production overhead in variable has
not been considered, hence its cost is amounted to £9400 per unit. Analysis of profit and loss
statements shows that Ovation systems should apply absorption costing as it gives more margin
by £200. Break even analysis displays that new products have been introduced in the market,
whose selling price is £40 per unit and variable is 13. Its contribution per unit is £27 according to
the costs after altering adjustments of fixed cost (Hemmer and Labro, 2016). Extraction of
number of products that are sold at breakeven is 222, and generation of revenue is £8888.89. If
the desired profits of company are £10000, there will be a requirement of selling 592.60 products
in order to achieve it.
The above scenario shows that in margin of safety, if 800 products are sold, sales revenue
can decline by 72% without any loss. Margin of safety is known as the variation between
11

budgeted and break even sales. It is a standard percentage for Ovation Systems and a safety
cushion. If sales get decreased by 72% of forecasted amount, company will incur losses. This
equation expresses buffer zone regarding sales and percentage.
TASK 3
A. Advantages and disadvantages of various planning tools for budgetary controlled
Budgetary control is the process to control financial activities of business and this is done
by comparing previous data with present reports. This can be concluded by estimating the actual
profits and loses of the company (Mohamed, Kerosi and Tirimba, 2016). There are several tools
used in maintaining financial balance in business, these tools are explained below:
 Activity based budgeting: This budget is prepared in considering the cost factor of
production activity.
Merits:
 This budgeting technique avoid comparison of previous financial data with present
information.
 This tool substitutes the irrelevant information and focus in collecting on activity based
data.
Demerits:
 This technique is time consuming as it only tracks the related data out of huge
information.
 It only includes fixed expenses and other preliminary expanses are excluded here.
 Zero based budgeting: It is considered as one of commonly used tool in business entity
as it prepares the budget according to current year planning of firm (Millo, Barman and
Hall, 2016). This tool do not require previous year data to compare the budget of
industry.
Merits:
 Resources are effectively used in this technique as individual department
activities are observed.
 Here complete budget planning is done without wasting time to compare the data.
Demerits:
12

 This planning tool effects the working efficiency of employees as it is time
consuming procedure.
 Whole budget is formulated from zero so it takes time to prepare the reports.
 Incremental based budgeting: It is considered as one of simplest technique which an
organization can easily adopt method (Vladychyn, 2017). This tool helps in preparation
of budget by an increment in the values of previous year.
Merits:
 It is very fastest method amongst all.
 No complex calculation is required to adopt this budgetary tool.
Demerits:
 This cause wastage of the fund and departmental needs are not considered while
preparing a budget.
 One of the greatest disadvantage of this tool is wastage of money in analysing
current requirements of the firm.
B. Application of planning tools for analysis, forecasting and preparation
Ovation system can utilize above mentioned planning tools as they are important and
their organisational objectives can be achieved effectively with its application. Activity based
budgeting can be applied in company so that each cost that is associated with an activity can be
taken into account. Analysis on the cost per unit and allocation of cost driver can be done so that
Ovation Systems can control them accordingly. While zero based budgeting is another important
tool by which company can prepare financial budgets through analysis of department
requirements in order to control costs. This helps in effectively analysing needs and creates
forecasts with ease (Nielsen, Mitchell and Nørreklit, 2015). Application of incremental
budgeting can be done by company, in which it can be able to prepare budgets through
incrimination of past years' figures. Businesses can easily formulate financial plans from
previous year's budgets but it is not recommended as circumstances keep changing. There are no
new ideas for developing and reducing costs and usually go out of date.
C. Comparing methods of management accounting systems with regard to financial problems
Management accounting system consists of various methods that can be used by Ovation
Systems. They are follows:
13

Benchmarking: It is technique that is very useful in assessing best performing companies in an
industry and adopting various strategies so that they are able to enhance their productivity
effectively. Ovation System can use certain strategies to enhance their profitability. These may
include best practices, a report in which company can look at other organisations and aspire to be
like them. They can conduct SWOT analysis and determine areas that need to be worked on.
Variance Analysis: This is used in comparing actual performances with budgeted ones and
analyses if there is any variance. If there are any deviations, company can take corrective steps
that will lead to improvement of activities and achievement of objectives. These include
purchase price, labour rate, fixed and variable overhead variances (Kokubu and Kitada, 2015).
This will help in rectifying any differences or problems that have occurred.
Budgetary Target: Capital and operational expenditures have to be analysed and to do that,
Ovation Systems are required to create financial goals. It is an estimated amount that a company
fixes and utilizes throughout the operating period. This covers any sort of deficiencies or
problems that may arise in the future (Ball, Grubnic and Birchall, 2014).
Balance Scorecard: It is an effective tool that is used in measuring internal performances, by
which relevant outcome can be generated. Ovation Systems utilize this and take feedbacks which
minimise drawbacks to a great extent (Vladychyn, 2017). It will help in resolving financial
problems effectively and lower the chances of risks.
D. Analysis of management accounting techniques for financial problems
Management accounting techniques have to be analysed in order to choose which one
would work best for Ovation Systems. They help in solving financial problems that occur in the
company so that it performs effectively and achieves goals efficiently. Activity based costing is a
tool that assigns cost activities based on required resource usage. It identifies and gets rid of
products and services that do not help company is achieving profits (Van der Stede, 2015). Cash
flow statements aid managers by providing information about cash that go in and out during
business operations. It gives them an idea about company's liquidity position and helps in
controlling flows if they are excessive or less. Revaluation accounting revalue assets and
analyses their current market and book value. This gives an idea of company's position, financial
problems and finds methods in resolving them (Baccouche and Omri, 2014).
14

Statistical and graphical techniques are used by company in order to gather information
so that accurate presentations can be prepared and analysed which helps in making decisions.
Ratio analysis helps Ovation Systems in controlling business operations by analysing various
ratios that helps to determine the position of company and any drawbacks that they are facing.
This helps managers in getting detailed information on operations and take important decisions
effectively. Management reporting is one of the many tools in which reports that include profit
and loss account and balance sheet are prepared so that managers can analyse different factors
across financial activities, control and correct any sort of issues (Millo, Barman and Hall, 2016).
Ovation Systems can choose from the above tools and techniques to achieve sustainable success
and solve financial problems and issues in an effective and efficient manner, as well as to ensure
that company smoothly operates and earns targeted profits while achieving organisational goals.
E. Evaluation of management accounting techniques for financial problems
Various techniques can be used to resolve financial problems effectively in an
organisation (Kaplan and Atkinson, 2015). Cash flow statements can help in solving issues
particularly related to cash position of business. The increase and decrease of working capital
can help ascertain requirements of company. Operating, investing and financing cause’s
generation or use of cash, and proper analysis by Ovation System can be done to determine the
flows of cash and operation expenses can be controlled as well. Revaluation accounting is
helpful in revaluing of assets, by finding out its current market value and book values. Correct
valuation can be done and proper solutions can be determined to fix financial problems.
Managers of Ovation Systems can use these tools to assess any issues that occur throughout the
operating period of company and apply them when required (22 Management Accounting
Techniques, 2016). They are great methods of rectifying various problems that happen
financially. Statistical and graphical techniques can be used by accountants so that information
can be more accurate and presentations can help in making decisions. Master, sales, earning,
investment charts and statistical quality control can be done to solve various problems.
Ratio analysis can help control business operations and correct any issues that may
hinder achievement of organisational goals and monetary targets. Managers get detailed
information on operations and can take important decisions effectively (Fullerton, Kennedy and
Widener, 2013). Management reporting is another tool that involves preparation of reports that
include profit and loss account as well as balance sheets and provide them to top management so
15

that they can analyse strengths and weaknesses across financial activities, exercise control and
correct problems accordingly (Senftlechner and Hiebl, 2015). With the help of above tools and
techniques, Ovation Systems can achieve sustainable success by solving their financial problems
in an effective and efficient manner, so that company can smoothly operate and earn targeted
profits.
CONCLUSION
On the basis of the above report, it can be concluded that management accounting is an
integral part of Ovation Systems and has helped them in growing sustainably and successfully. It
is a branch of accounting that deals with records provided by financial accounts and provides
valuable information to mangers so that they are able to make proper decisions in order to
strengthen internal functions of an organisation.
Their financial statements were prepared using absorption and marginal costing methods.
They were analysed and displayed a difference of £200 in the net income. Break even analysis of
Ovation System's data shows that break-even point of company is £8889 with £222 per unit
contribution. They will have to contribute £926 per unit, if they want to attain a profit of £10000.
Ovation Systems uses a list of planning tools of management accounting, which they
have evaluated, in order to analyse situations, determine issues and problems that they are facing
or may face in the future and find solutions to rectify them. This ensures that they will operate
smoothly without any hassles as well as achieve organisational targets and goals.
16

REFERENCES
Books and journal
Baccouche, S. and Omri, A., 2014. Multiple directorships of board members and earnings
management: An empirical evidence from french listed companies. Journal of Economic
and Financial Modelling. 2(1). pp.13-23.
Ball, A., Grubnic, S. and Birchall, J., 2014. 11 Sustainability accounting and accountability in
the public sector. Sustainability accounting and accountability. pp.176.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control
practices in a lean manufacturing environment.Accounting, Organizations and Society.
38(1). pp.50-71.
Hemmer, T. and Labro, E., 2016. Productions and Operations Management & Management
Accounting.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production. 108. pp.1279-1288.
Melnyk, S.A., and et.al., 2014. Is performance measurement and management fit for the future?.
Management Accounting Research.25(2). pp.173-186.
Millo, Y., Barman, E. and Hall, M., 2016. Accounting measurement tools and their impact on
managerial decision making. economic sociology_the european electronic newsletter.
17(2). pp.17-23.
Mohamed, I.A., Kerosi, E. and Tirimba, O.I., 2016. Analysis of the Effectiveness of Budgetary
Control Techniques on Organizational Performance at DaraSalaam Bank Headquarters in
Hargeisa Somaliland.
Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision
making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-
82). Elsevier.
Otley, D., 2015. in Management Control. Critical Perspectives in Management Control. p.27.
17

Quinn, M., and et.al., 2018. Future research on management accounting and control in family
firms: suggestions linked to architecture, governance, entrepreneurship and stewardship.
Journal of Management Control. 28(4). pp.529-546.
Senftlechner, D. and Hiebl, M.R., 2015. Management accounting and management control in
family businesses: Past accomplishments and future opportunities. Journal of Accounting
& Organizational Change. 11(4). pp.573-606.
Van der Stede, W.A., 2015. Management accounting: Where from, where now, where to?.
Journal of Management Accounting Research. 27(1). pp.171-176.
Vladychyn, M., 2017. Using Managerial Accounting Tools for Analysis, Control and Operative
Regulation of the Foreign Trade Activities of Trading Enterprises. Accounting and
Finance. (4). pp.20-27.
Online
22 Management Accounting Techniques. 2016. [Online]. Available through:
<https://simplicable.com/new/management-accounting-techniques>
18