Management Accounting - Pavestone Assignment Sample

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Management
Accounting

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Table of Contents
INTRODUCTION...........................................................................................................................3
ACTIVITY 1...................................................................................................................................3
Management Accounting Systems:.............................................................................................3
Management Accounting reports:................................................................................................4
Benefits of management accounting system:..............................................................................5
Evaluation of manner of integration of systems and reporting within process of business
entity:...........................................................................................................................................6
Costs using appropriate techniques of cost analysis to prepare an income statement using
marginal and absorption costs:....................................................................................................6
Interpret Financial reports prepared and data for a range of business activities:......................11
ACTIVITY 2.................................................................................................................................11
Explanation of different planning tool used for budgetary control...........................................11
Comparison of manner by which organisations are using management accounting systems to
respond financial problems:.......................................................................................................14
Analysis of the way in which management accounting lead to respond financial problems....15
Use of planning tools to respond financial problems:...............................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
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INTRODUCTION
Management accounting defines as a process to analyse business costs and operations, for
preparing the internal financial report and records. This would help managers of a company in
taking proper decisions related with achievement of business objectives. Along with this,
management accounting also aid in making sense of costing data by translating the same into
useful information for managing the business (Plumb and et.al., 2017). The present report is
going to describe the concept of management accounting and its role in managing a company.
Here, different reporting methods are also analysed to get internal business information and its
uses in managing the cost of production. For this purpose, Pavestone Company of UK has been
taken that deals in small level and manufacture as well as trade the concrete products to other
construction companies. It uses the concept of management accounting techniques like planning
and contingency tools, in order to respond future financial issues.
ACTIVITY 1
Management Accounting Systems:
Management accounting considers as an important concept in a business that helps in
analysing present situation and forecast the future condition also, on the basis of internal
analysis. It facilitates the information to managers of a company in making appropriate decisions
for increasing effectiveness of business (Hilton and Platt, 2013). For this purpose, it helps in
making record of overall fiscal transaction and other activities that includes financial and non-
financial data. Pavestone Ltd. deals in construction business and offers products like building
materials, paving, paver stones and more, to other builders on reasonable rates. This company
use management accounting system to determine number of labours used for manufacturing and
delivering its products to right customers (Hopper and Bui, 2016). It also forecasts the inventory
needs to reduce expenses and complete demand of marketplace on time. Along with this, to
increase the performance of business, this company uses a number of management accounting
tools such as inventory management, cost accounting, job costing and more, as explained
beneath:-
ď‚· Job costing system - It is used to allocate costs in production due to diversify product
range which are entirely different from each other (Stein and et.al., 2015). It mainly
focuses on assigning costs as per classified jobs and batches to improve efficiencies of
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production. For better assessment as well as accountability, Pavestone Ltd. can apply
process costing method instead of batch costing for increasing efficiencies of its
production cost.
 Price management – It is generally used for analysing how demand of customers
fluctuate with change in price of products. As Pavestone deals with construction
materials therefore, any fluctuations in price will directly impact on its supply and
demand. It also helps in analysing factors that impact on price strategy of company, so
that concrete materials can be offered at better price on competitive rate.
 Cost accounting – This system is mainly designed to keep track the inventories flow
during each stage of production (Turban, Volonino and Wood, 2015). Hereby, respective
company can assess the viability of different project by applying cost accounting system
because it provides a fixed cost structure, through which annual financial budget can be
planned. Along with this, Pavestone can also use this system to record production
activities as well, for keeping stock available in inventories to fulfil demand of customers
on time.
 Inventory management – This system can help Pavestone in specifying the shape and
manner of placement of stocks as per consumer demand. For minimising the inventory
cost, it is required by management of this company to precede the regular as well as
planned course of stocks at each location of a supply (Nielsen, Mitchell and Nørreklit,
2015). As this company manufacture concrete materials, therefore, to handle the storage
of these products, it can adopt the concept of FIFO i.e. first in first out. It helps in
minimising cost of stock handling and storage by giving priority to sale products which
are manufacturing first so that quality of them can be managed.
Management Accounting reports:
Managerial accounting reports generally used by small entrepreneurs to monitor the
performance of company during an accounting period, so that necessary actions can be taken
timely to improve the same (Leitner, 2013). As per dependence on type of project and its time
limitation, Pavestone Ltd. can prepare reports in terms of monthly, quarterly, weekly or even
daily basis. Hereby, reporting method will help in circulating the precious information
throughout entire management chain by proper communication, so that top managers can take

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better actions for improving the performance. But before applying any concept, it is better for
Pavestone Ltd. to understand the concept of each phase of reporting in following way -
Budget Report – This method of reporting helps respective company in evaluating the
performance of company and determining if business is able to meet its costs of production
(Lavia LĂłpez and Hiebl, 2014). By analysing the performance of each department and cost
required for completing any project, managers of Pavestone Ltd. find feasible ways in order to
trim costs and prepare budget for further process.
Cost accounting reports: This report provides information related to cost required for
production and completion of any product. It helps in developing a basis for preparing budget by
using different kind of cost analysis method. In context with Pavestone, as it deals in
construction sector so cost refers to be a key factor for determining its profitability.
Inventory management report: This report is used by those companies that have
physical inventories in order to make manufacturing process more efficient. It mainly concerns
on terms like inventory wastage, per unit overhead costs and hourly labour costs etc. to
determine exhibits value of stock that a company has in its stores and warehouse. Therefore,
tracking of real time inventory movement and above stages, management of Pavestone Ltd. can
determine area where improvement is necessary to get best performance from each department,
so that profitability ratio can be increased by minimising expensive cost of production.
Benefits of management accounting system:
Adopting the concept of management accounting systems give various advantages to
Pavestone Ltd. in taking proper decisions related to price, management of inventories and more,
as shown below -
Price Optimisation System
This system aid Pavestone in developing the optimum price
strategy for its product with purpose to get high profitability
margin, as per customer requirements.
Inventory Management
System
Through techniques of this system, respective company can
manage its inventory well and make it available as per
customer demand.
Job Costing System
The management of respective manufacturing company in
estimating the cost of each specific task to analyse the overall
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cost required for producing the product.
Cost Accounting System
This system can help Pavestone in minimising its expenses
or unproductive cost activities.
Evaluation of manner of integration of systems and reporting within process of business entity:
For increasing efficiencies of production and minimising the wastages, it is essential for
Pavestone Ltd. to integrate the management accounting and reporting system within business.
This would help in developing better strategies for managing costs and improving performance
of each department, so that ratio of profitability can be increased (Senftlechner and Hiebl, 2015).
Along with this, managerial accounting reports also aid this company in determining area where
improvement is essential for managing budget and controlling the wastages.
Costs using appropriate techniques of cost analysis to prepare an income statement using
marginal and absorption costs:
Marginal costing method: This concept is used to determine changes in total costs,
when quantity of products is increased by one unit. In other words, marginal costing method is
used to analyse the impact of variable cost on total volume of production (Wickramasinghe and
Alawattage, 2012). Therefore, managers of Pavestone can use this costing method for examining
the optimum production quantity where, company requires to put least costs for producing
addition units of inventory. Along with this, it also helps in meeting demand of customers when
they seek to get certain products on lowest price as much as possible.
Absorption costing method: This method of costing indicates that for producing any
additional quantity of products, all manufacturing costs will be calculated, in terms of direct
material, labour, fixed and variable overhead expenses etc. Pavestone Ltd. can use absorption
costing method calculating income tax reporting and external financial reporting, so that better
actions can be taken.
ANNEX (A)
Income statement in terms of marginal costing method:
Particulars Quarter 1
Product A
Product
B
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Sales 2566500 1440000
less: unit variable costs
Direct materials 935250 320000
Direct labour 391500 480000
Prime cost 1239750 640000
less: Variable production overheads 108750 80000
Contribution 1131000 560000
less: Fixed costs 410000 410000
Total profit/loss 721000 150000
Particulars Quarter 2
Product A Product B
Sales 1003000 1719000
less: unit variable costs
Direct materials 365500 382000
Direct labour 153000 573000
Prime cost 484500 764000
less: Variable production overheads 42500 95500
Contribution 442000 668500
less: Fixed costs 482000 482000
Total profit/loss -40000 186500
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.

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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
Particulars Quarter 1
Product A Product B
Sales 2566500 1440000
less: Cost of sales
Opening inventory - -
Direct materials 935250 320000
Direct labour 391500 480000
Variable overheads 108750 80000
Fixed costs 410000 410000
less: Closing inventory -650 1844850 -4000 1286000
Gross profit/loss 721650 154000
Particulars Quarter 2
Product A Product B
Sales 1003000 1719000
less: Cost of sales
Opening inventory 650 4000
Direct materials 365500 382000
Direct labour 153000 573000
Variable overheads 42500 95500
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Fixed costs 482000 482000
less: Closing inventory -3500 1040150 -2900 1533600
Gross profit/loss -37150 185400
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 = ÂŁ6000*1 = ÂŁ6000
Product Y = ÂŁ8000*2 = ÂŁ16000
Labour hour = ÂŁ2,64,000
------------
22,000
= ÂŁ12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
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= 12 = 24
Total Overheads = ÂŁ6000*12 = ÂŁ8000*24
= ÂŁ72,000 = ÂŁ192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = ÂŁ6000*4 = ÂŁ24,000
Product Y = ÂŁ8000*2 = ÂŁ16,000
Cost driven rate: -
Production set up = ÂŁ179,000 = 2893 per set up.
60
Order handling = ÂŁ30,000 = 416.666 = 417 per order
72
Machine cost = ÂŁ55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15 x 2983 = 44,745
Order = 12 x 417 = 5004
Machine cost = 24000 x 1.375 = 33,000
Total 82749
Y
Set up = 45 x 2983 = 134,235
Order = 60 x 417 = 25,020
Machine cost = 16000 x 1.375 = 22,000
Total 181,255
Correctly use of techniques of management accounting and generate financial reporting
documents:
The different costing techniques give advantage to Pavestone Ltd. in deriving appropriate
profit from the available information like absorption, marginal and other that further reflect it in

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financial statements (Soin and Collier, 2013). Hereby, marginal costing can be used to obtain net
operating income require for producing external quantity. Along with this, by using concept of
break-even techniques, managers of this company can analyse the point where gross profit
income can raise high, so that price of products can be decided appropriately.
Interpret Financial reports prepared and data for a range of business activities:
From the above income statements, which has prepared via absorption and marginal costing
method, it has been interpreted that difference is occurred in both results due to application of
different approaches. As per marginal costing, net income required for increase one single
commodity is 721k for product A and 150k for B respectively, while for second quantity it is 40k
and 186.5k for product A and B respectively. While through absorption costing, the net income
is analysed for Q1 is 721.65k and 154k for product A and B respectively, on the other hand for
Q2 it is estimated as -37.15k and 185.4k. So, it is recommended to Pavestone to use absorption
costing method to produce additional quantities of inventory.
ACTIVITY 2
Explanation of different planning tool used for budgetary control
Budget and budgetary control can be defined as document which is prepared to
estimate the income that may acquire during an accounting period and expenses required for
producing and managing the inventory stocks. Having a specified budget can help managers of
Pavestone Ltd. in analysing entire funds required for operating different functions in desired
way. Along with this, by preparing the budget plan, managers of respective company can also
keep record of planned activities as well as control expenses required for manufacturing and
delivering its concrete materials to other construction companies (Ward, 2012). To formulate the
specific budget plan, this company also needs to analyse cost required for entire production
activities first so that strategies can be made to allocate finance in appropriate way to each
department. Furthermore, to keep finance and appropriate budget to meet future demand, it is
also essential for management of Pavestone to use proper planning tools as described below –
Zero based budget: This kind of budget plan starts with initial or zero base that guide
managers of respective company to keep record of each expense in books. In this regard, to begin
with each accounting year, a company needs to generate a new zero based budget plan, where
outstanding figures are generally ignored to analyse need of cost required for further activities.
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The main advantage and drawbacks of this type of budgeting plans can be analysed in following
way -
Advantages Disadvantages
Zero budget plan helps in allocating funds in
different departments efficiently for getting
high performance because having information
of entire expenses aid managers of Pavestone
Ltd. in taking right decisions for increasing
effectiveness of production cost.
As this method avoid outstanding figures
therefore, performance of previous accounting
year cannot be determined for evaluating the
efficiency of current year.
Master budget: To keep record of entire budget plans that gives detail of overall
financial projection, a company mainly use master budget plan, which is considered as
aggregation of all. The main benefits with limitation of this budget for Pavestone Ltd. can be
described as -
Advantages Disadvantages
Summarising information of each budget will
aid respective company in making proper
decisions for further forecasting of budget.
This method also give details of information
related to achievement of goals in terms of
cash flow, expenses and revenue.
Brief data may create issues in analysing
overall transaction that create issues between
stakeholders for making appropriate decisions
for future budget plans.
Capital budget: This kind of budget plan is prepared to make records of each capital
expense required to determine profitability of various projects, that are developed to increase
efficiency of business (Maas, Schaltegger and Crutzen, 2016). Therefore, using capital budget
plan, management of Pavestone Ltd. can make records of current financial position of business
so that, better investment can be made for attainment of future goals. Advantages and
disadvantages of this budget can be examined in following way -
Advantages Disadvantages
This method helps in making appropriate
decisions for making investment in those
Any wrong decision related to make
investment in a project which proves not
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projects that raise profitability of business, by
determining various risks associated with
same. formulate decision regarding making
investment in most profitable project.
beneficial, may result to acquire heavy losses
in such case of budget plan.
Annex (C)
Year X
PV @
12%
Dis. Cash
flow Y
PV @
12% Dis cash flow
0 -5000 -8000
1 2500 0.893 222.14 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.78 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.14 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 3406.644 7182.648
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= ÂŁ416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - ÂŁ817.353
Analysis of uses of different planning tools:
For formulating effective planning strategies and controlling the budget to meet future
goals, Pavestone Ltd. can use a number of planning tools. By using zero based budget, all
expenditures can be justified on the basis of benefits. While master budget allows for considering
the entire factors like sales, assets, operating expenses, income streams and more, for evaluating
overall performance of business.

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Comparison of manner by which organisations are using management accounting systems to
respond financial problems:
Financial or budgetary problems in a company can raise by various issues like shortage of
resources, ineffective features of products or services, inappropriate way of processing and more.
All these problems can affect directly the profitability and productivity of business (Maas,
Schaltegger and Crutzen, 2016). Therefore, to respond over such issues, a company can use a
number of techniques like KPI, financial governance, benchmarking and more. In context with
Pavestone Ltd., the major financial issues has been occurred generally due to ineffective
management system, where lack of awareness of accounting principles, inability of recording
information in ledgers and books leads to increase financial crisis that affect entire performance
of business.
Therefore, in order to respond towards such financial issues, managers of Pavestone Ltd.
can use following techniques of management accounting -
KPI (Key performance indicators): The technique is used to determine how well a
company is doing to meet its desired goals, by evaluating the past record where it has gained
high profitability. Therefore, this would help Pavestone in identifying the area where
improvement is necessary so that chance of financial crises can be reduced.
Benchmarking: This technique is generally used for identifying internal opportunities
that a company has, for better improvement. It emphasises on measuring features of product or
services of a company by comparing with other competitors’, so that further improvement can be
made to increase efficiencies of same. This would help Pavestone in setting a benchmark of its
business against its major competitors and respond in better manner towards any financial issues.
In Pavestone Ltd. its managers mainly use KPI technique to resolve its financial issues by
identifying different factors that lead to raise such problems. This would help in identifying the
potential improvement that company can make for increasing the chance of getting high return of
investment on a particular project.
Comparison: To analyse the effectiveness of applications or techniques used by
company in order to respond different budgetary challenges, a comparison is done between
Pavestone Ltd. and one of its major rivalry as below :-
Pavestone Ltd. Aggregate Industry Concrete
Managers of Pavestone Ltd. mostly use capital Master budget plan is used by Aggregate
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budget plan before making any investment in
projects so that ratio of generating high return
on investment can be increased.
Industry Concrete deal with budgetary issues
and make proper plans for further investment
by analysing overall risks associated with
same.
This company use KPI technique like balance
scorecard to evaluate the success of any project
before making investment on it.
While Aggregate company uses the concept of
benchmarking for improving in cost structure
and internal process so that chance of getting
high return on investment can be increased.
Analysis of the way in which management accounting lead to respond financial problems
By applying different concepts of management accounting systems such as KPI and
benchmarking, managers of Pavestone Ltd. can recognise how to respond towards budgetary
issues. This would help in taking proper action against different problems by developing
effective strategic plans (Plumb and et.al., 2017). Hereby, benchmarking process will help
respective company in measuring current performance of products or services in a particular
marketplace, by making a comparison with other companies of same sector. While, KPI
application may help in determining the success of particular project by performance
measurement system. Thus, both processes help Pavestone in making proper decisions for
budgetary control and responding towards different situations, for increasing efficiencies of
business.
Use of planning tools to respond financial problems:
By using different planning tools such as master budget, capital budget, zero budget and
more, management of Pavestone Ltd. can make better plans for future expansion of business.
This would also help in analysing on which project, company needs to make investment so that
higher profitability ratio can be gained (Laudon and Laudon, 2015). Along with this, decisions
can also be taken for responding towards future demand of business, by keeping finance enough
to meet the same.
CONCLUSION
It has been summarised from this entire report that to manage entire profitability of
business and cost of production, it is essential for a company to apply different techniques of
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management accounting. This would help in making appropriate decisions for increasing
efficiencies of production by minimising the costs and expenses required for manufacturing the
products. Along with this, for making appropriate plans for strengthening the business
capabilities, organisations can apply different concept of managerial reporting and budget plans.
Furthermore, for responding towards various situations related to budgetary plans, a company
can also different applications like Benchmarking process, Key performance indicators and
financial governance.
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