Management Accounting Report

This report provides a comprehensive analysis of management accounting, covering its systems, reporting methods, cost analysis techniques, and its role in addressing financial problems. It uses LM Engineering Ltd. as a case study to illustrate the application of management accounting principles and tools in a real-world business context.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................5
TASK 1............................................................................................................................................5
P1. Management accounting and its different types of system...................................................5
P2. Explain different method of management accounting reporting. ........................................6
M1. Evaluation of benefits of various management accounting systems...................................7
D1 Management accounting system and management accounting reporting are integrated
with organisation process. ..........................................................................................................8
TASK 2............................................................................................................................................9
P3 .Appropriate techniques of cost analysis to prepare an income statement.............................9
Annex (A)....................................................................................................................................9
Annex (B)....................................................................................................................................9
M2. Management accounting techniques and financial reporting documents..........................11
D2. Financial reports which applies to interpret many business activities...............................12
TASK 3..........................................................................................................................................12
P4. Advantages and disadvantages of different types of planning tools used for budgetary
control.......................................................................................................................................12
Budget: A plan to control the accounts in future. It is always stated in value of money. It is a
idea to predict that how much amount is required for our business or for each department of a
company. Budget are made annually. Mostly it is used by firms as a pricing tool..................12
M3. Usage of different planning tools for preparing and forecasting budgets.........................15
TASK 4............................................................................................................................................1
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems.......................................................................................................................1
M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success............................................................................................3

D3 Various planning tools to resolve financial problems...........................................................3
CONCLUSION ...............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Management accounting can be defined as a process which involves partnering in
management decision making, planning and performance management system. It also helps in
providing expertise knowledge related with the financial issues and controlling the management
properly in accordance with the formulation and implementation of an organisation's strategy
(Adler, 2013). It is also known as cost accounting and assist in analysing the cost involved in the
business operations to prepare the financial reports, records to successfully accomplish the
business goals. To understand the concept of management the present report is constructed and
it is based on the LM Engineering Ltd. which deals in civil engineering and planning services
based in UK and serves the people of northern British Columbia. The report will include the role
of management accounting and will describe the importance of different types of management
accounting systems, different methods used for the management accounting reporting. The report
will also show the appropriate techniques used to conduct cost analysis for preparing an income
statement using marginal and absorption costs. Further, the report will include the use of
planning tools for budgetary control. In last it will discuss the ways adopted by the organisation
in management accounting system to respond with the financial problems.
TASK 1
P1. Management accounting and its different types of system.
Management accounting: It can be described as the accounting process related to the
management of the internal part of an organisation. This process is majorly used in formulating
managerial reports which helps the organisation in constructing suitable policies and business
plans for the future. The accounting system is not mandatory to be maintained, it depends on the
companies if they want to maintain it or not. In general, the accounting system has its own
importance in the internal part of the business organisation and helps in achieving the desired
objectives effectively and efficiently. The different types of management system are as follows:
 Cost accounting system: This accounting system helps in analysing the costs of the
products which will include all elements like fixed cost, variable cost, etc. the cost
accounting system is very essential for the organisations to maintain the estimated costs
of the products and services as it helps in generating information about profit and loss of

the organisation. The LM Engineering Ltd. uses this cost accounting system for
analysing the cost of their different services that helps them in focusing on the services
which are beneficial.
 Price optimisation system: The price optimisation system is the process that
demonstrate a framework which helps in determining the price of the products and
services in appropriate manner which will satisfy the perspective of customer as well as
the organisation effectively. It also helps in analysing the view of the costumers on the
various pricing levels. The main purpose of this system is related with providing the
factors that play a important role in price setting. The LM Engineering Ltd. use this
accounting system for setting the price of the products and services at that level where it
will be suitable for the company and customers as well.
 Job costing system: This system is used to calculate the total cost that is involved in
rendering products and services and also tracks the costs by the jobs and determine
standardized reporting of the profitability by the job (Arroyo, 2012). This accounting
system is used by the organisations which provide varieties of products and services. The
LM Engineering Ltd. deals in different financial services so, they are required to
construct an estimate about the cost incurred in each individual unit.
 Inventory management system: This is considered as one of the important accounting
system as it is used to track the status of the products and services which helps in
analysing the requirement of goods and services for the organisation. This management
accounting system works properly in the overall supply chain management within an
organisation. LM Engineering Ltd. has adopted this system to keep a track on their
services and also helps in keeping a check on the financial products and services.
P2. Explain different method of management accounting reporting.
The different types of accounting reports holds their own importance for the business
organisation but management accounting reports have their own significance. These accounting
reports has a great impact on the internal management of an organisation. It helps the accounts
manager to formulate the effective strategies and decisions for the company. These management
accounting reports consist of both the monetary and non monetary informations. The LM
Engineering Ltd. prepares different types of reports which are described as follows:

 Performance reports: This report is constructed to measure the performance of the
organisation. In relation with the management accounting, the performance report is
formulated to measure the performance of the employees and of the products and
services. It helps in analysing the best performers and make the task easy of distributing
rewards. LM Engineering Ltd. construct these reports to analyse the performance of the
employees and the organisation and to take the required measures accordingly.
 Budget report: The budget report is constructed to measure the estimated performance
of the organisation with the actual performance. This report also helps in constructing
suitable policies and strategies for future plans. The basic role of this report is to make an
estimation of the incomes and expenses of the organisation for a certain period of time
and the organisation use it to achieve their desired objectives effectively. The LM
Engineering Ltd. use this report to measure their performance with the desired plans and
formulates effective strategies appropriately.
 Accounts receivable ageing report: This report contains the informations which is
related with the credit transactions. It is considered to be helpful for the organisations that
proceed their business operations mostly in credit. This report assist the finance
department in analysing the financial condition of the organisation and to analyse the
information of the credited amount in the market. The LM Engineering Ltd. construct
this report to check the total collections the company has got from the customers and it
also helps in bringing transparency in credit collection within the organisation and also
helps in maintaining clear image in the market (Bennett and James, 2017).
 Cost managerial accounting report: This report helps in providing a framework to the
organisation for evaluating the profit or loss occurred from the different business
activities. This report also helps in calculating all the expenses before selling and the
money earned by the organisation after selling. If the expenses are more than the selling
amount, then it will definitely result as a loss for the company and vice a versa. The LM
Engineering Ltd. construct this report for analysing the profit and loss for the
organisation and to formulate the required strategies and future plans to improve the
business conditions effectively.
M1. Evaluation of benefits of various management accounting systems.
Advantage of cost accounting system:

 It is accommodating in producing computation of cost related with the products and
services which the organisation offers in the market.
 Helpful in determination reason incidental to the high cost occurring in the production
process of products and service the organisation is planning to offer.
Advantage of inventory management system:
 this system is beneficial in keeping a track on the status of different products and services
provided by the organisation.
 It helps in redeeming time and cost for the welfare of the organisation.
Advantages of price optimisation system:
 This system helps organisation in deciding the level of price which will be appropriate
for both the company and customers as well.
 It gives a structure to examine the reactions of the customers at various pricing level.
Advantage of job costing system:
 this system is important as it assist in calculating and assigning the costs of each unit's
individually.
 This aid in maintaining a constant observation on the all the business activities of
business particularly on the cost occurring activities.
D1 Management accounting system and management accounting reporting are integrated with
organisation process.
The integration of management accounting system with the accounting reporting is
considered to be very important for the organisational process to flow in a smooth manner. This
integration is important as these both have good interrelation with each other. For instance, a
organisation are preparing some managerial reports so, they are required to gather information
like facts and data and it can be accomplished by the help of the management accounting system.
Without this the organisation will not be able to make the future plans appropriately (DRURY,
2013). The LM Engineering Ltd. constructs different management reports by the help of various
accounting techniques and tools which helps in eradicating the complexities from the preparation
of these reports.

TASK 2
P3 .Appropriate techniques of cost analysis to prepare an income statement
Absorption costing: The absorption costing can be defined as the method which
calculates the costs involved in manufacturing the product and services and it involves both fixed
cost and variable cost. This method is also known as the full costing method.
Marginal costing: This method can be defined as the process of costing in which the
variable cost is taken in the form of unit cost and fixed cost as the period cost.
Annex (A)
Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
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.
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
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286

2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M2. Management accounting techniques and financial reporting documents.
The management accounting techniques are very important to construct the financial
reports and statements. The organisation is required to form various financial documents like
balance sheet, profit and loss accounts, etc. with the help of various accounting techniques and
tools. The LM Engineering Ltd. Formulate their financial statements with the help of various

accounting tools and methods because financial data which is essential for the financial reports
can be obtained by the management accounting tools (Gibassier and Schaltegger, 2015).
D2. Financial reports which applies to interpret many business activities
The Financial reports indicate all the business activities in way which is easy to realize.
With the usage of financial statements like p&l, balance sheet, organisation can check about the
financial position. These financial reports are connected up with the business activities because
all the data in these reports comes from the business activities. Basically, financial reports shows
the business activities in a financial form (Hartmann, Perego and Young, 2013) . Aim of
preparing of these reports is to evaluate the organisation and also to show the external parties like
shareholders the financial position. LM Engineering Ltd. prepares many financial reports like
p&l, income statements to check the effectiveness of the business activities.
TASK 3
P4. Advantages and disadvantages of different types of planning tools used for budgetary
control.
Budget: A plan to control the accounts in future. It is always stated in value of money. It is a
idea to predict that how much amount is required for our business or for each department
of a company. Budget are made annually. Mostly it is used by firms as a pricing tool.
Types of budget:
Operating budget: are those which held by a company to bear its day to day expenses. It
include all factors such as sell, purchase, material and labour cost. It can be made annually,
quarterly, monthly and at last to be matched with actual output that company is not much
spending from his estimated prices.
Cash flow budget: includes debtor, creditor etc. and help a company to know whether
its cash is being managed properly or not. It help to know that on what average cash come in and
go out from our business.
Budgetary control:
To match the figures of the budgets with our actual output. It is a daily process for our business.
If there is any loop hole remain in budget we can fill it by co-ordinate and evaluate with
budgetary control process.

It can help to achieve the objective of an enterprise by make strategy and to co-ordinate between
all the activities of departments. If any department is not able to take responsibility than
corrective steps can be taken by the company with the help of budgetary control.
Top management will take all decision related with budget and budgetary control. All policies,
plans, goal and objectives are set by them related with monetary decision either directly or in-
directly.
Planning tools used for budgetary control.
Contingency planning: To control the small or large activity of future if things are not
going in correct direction then contingency plan are applied to cover up from uncertain situation.
Many companies used contingency plan as a routine work. Contingency plan are also made for
dynamic changes if they are already predicated.
Example-
Advantages of contingency plan.
Maximum profit- with these planned activities can be done in sequenced manner and at end
result companies will face high profits if they go through with actual plan (Kokubu and
Kitada, 2015).
Individual goals- different goals are made for different department with these plan each one
is capable to achieve its actual output.
Cover up from week points- when end result is not having a similar output at that time we
can easily find that this department is unable to achieve his goal and we can pay
attention towards it.
LM limited has its supplies from different supplier if at end they face a irregular supply then
they go for contingency plan that this country has enough resources to fulfil demand of them.
Disadvantages:
 Future is always uncertain therefore when plan is applied it is not necessary that it is
always effective. Sometimes because of wrong forecast it can be inaccurate.
 Plan are always made for uncertain future so if conditions change then may prices are
increased because condition are also different in future.

 Sometimes clashes are also raised between departments regarding budget because each of
them is given as per their needs and expenses.
Flexible budget: convert in income, revenue, change in regarding to fixed cost when a budget is
completed then it is compared to actual output after that if there is uncontrollable circumstances
than a company include flexible budget to divide it equally (Lambert and Sponem, 2012).
LM limited have a sales force in U.K. Then they have low expenses similarly if they want to
expand their business in abroad at that time they have to increase their budget as per country
currency.
Advantages of flexible budget.
 it is very useful when a business is in construction industry or which a major role of
operations activity at end they can be changed easily.
 Since flexible budgets are a tool for evaluating performance of department because it is
transform easily. Like in sales a person who achieve its target should be paid more.
Disadvantages of flexible budget:
1) Budget are convert by top management till at last it can be delay in performing the actual
activity.
2) At end result when it is time for compare our actual revenue with estimated revenue they
cannot be match because of its flexible character.
Forecasting tool: It is to predict future capital of a firm, it has four method for forecasting which
are as follow.
1. Straight line method in this we can use the last years figures and trends and calculate it to
predict present.
2. Moving average method include data in vertical direction and then make a groups of 3 or
5 month including current month and then use formula of average.
Advantages of forecasting tool:
1. It can help a company to collect resources that are used by them in future. With these
they are also capable to find out future demands of their customer.

2. It is first step of every organization to start a work with tool of forecasting company can
retain themselves for a long period in dynamic environment.
Disadvantages of forecasting:
 it is only depend if a company have a past data with them. Heavy cost more time are
factors that can be slow down our predication process.
 High experienced person is also not able to predict future accurately because of external
environment that are not under control of company management.
M3. Usage of different planning tools for preparing and forecasting budgets.
The budgetary controls describes the clear picture fro any organisation by providing tools
and techniques that assist in preparing and implementing the future financial plans and objectives
by analysing the past budget of the organisation. These controls help the LM Engineering Ltd.
To plan the results and financial position for the future with the evaluation of present and past
budgets (Lukka and Vinnari, 2014). The planning tool for formulating and forecasting the budget
are contingency planning. The contingency planning tool is used to design different back up
program, schemes and schedules to obviate the track event in performing daily business
operations as well as reducing the unwanted situation in the organisation as well. The flexible
budget methods are used to prepare the different budgets for the business operation which are
uncertain in the nature. The described planning tools are utilised to construct and forecasts the
business budgetary activities in such a manner that will help in creating profitability and it will
also maintain the financial position in competitive environment.

TASK 4
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems.
Financial problems:
These are financial pressure which a business concern suffers from in order to meet the
basic requirements. There are several financial problems which directly effects the operational
efficiencies and the profitability of a business (Modell, 2014). At the same time various policies
and strategies are being formulated and implemented so as to overcome those financial issues for
the accomplishment of organisational goal. Thus the LM Engineering Ltd. makes various
suitable;e strategies so as to deal with its financial issues. Some of the financial problems are
specified below:
 Cash flow problems: Such issues take place in an organisation when the business don't
have sufficient cash to pay for its liabilities and the main reason behind this are losses or
low profitability margin. The LM Engineering Ltd. faces such issues when more
expenses are being incurred for promoting its brands and are unable to pay back their
debts to the creditors.
 Risk management: In order to sustain in market it is very much essential for the
management to take risk factor into consideration as risk is term to be uncertain which
may take place anytime during performance of several operational activities. Risk can
take place in the form of shortage of funds, poor use of technology, lack of knowledge
and skill. Unskilled employees etc. So taking such risk factors into consideration
management of LM Engineering Ltd. must frame its strategies and policies so as to deal
effectively with such kind of financial problems.
 Working capital: It refers to the availability of the capital with an organisation that is
being used so as to manage day to day operational activity in order to meet financial
liabilities. In case if there exist shortage of working capital with LM Engineering Ltd.
company then it may lead to excess of liabilities over assets which result in the form of
financial problem for an organisation.
Financial governance:

It defines the way a firm collects, manages and control the financial data as good
financial governance will help the LM Engineering Ltd. in the management of the problems. So
its the prime responsibility of the higher managers of business concern to control the accuracy of
financial statements.
Management accounting approach:
It is defined as a use of accounting techniques for resolving issues in an organisation by
collecting financial data from business concern performance such as sales details, transferring
the details to analysis report etc. This approaches render efficient information to employees and
managers of LM Engineering Ltd. so that they can make best and optimum utilisation of its
resources. Thus LM Engineering Ltd. uses several management approaches in order to resolve
problems and they are explained below:
 KPI: It refers to key performance indicator that is being used to measure the
performance of firm by making comparison with other organisation so as to achieve its
long term and short term goal effectively and efficiently (Otley and Emmanuel, 2013).
Thus, this technique will be helpful for LM Engineering Ltd. for setting and comparing
their standards so as to measure the goal, and the progress of an organisation
performance level towards the attainment of an aims and objectives.
 Bench marking: It is technique which is being used by a business concern so as to
measure its performance level with its several competitors. Comparison is done on the
basis of strategies, policies, quality and programmes in order to determine the
requirements for improvements or changes as well as to reduce the gap with the
competitors. Thus, it helps in measuring and interpreting the organisational and the
individuals performance towards the objectives.
Comparison between L.M Engineering Ltd and Bright star financial Ltd.
Basis of differences LM Engineering Ltd. Bright star financial Ltd.
Problem Poor and ineffective management of
working capital are the main
problem that is being faced by LM
Engineering Ltd. . Such issues
negatively effect working
operational activities of a firm as
Cash flow problem and risk
management are the major
issue faced by Bright star Ltd
as this organisation fails to
identify and formulate
appropriate policies and
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revenue run short as compared to
expenses.
strategies taking risks factors
such as shortage of funds,
unskilled labour, poor
technology etc. in to
consideration.
Approach In order to overcome financial
problems management of LM
Engineering Ltd. must apply Key
Performance Indicator(KPI)
approach so as to make effective
comparison and to set strategies
accordingly in order to give stiff
competition to its competitors in
market as well as to manage its
working capital ratio.
Whereas management of
Bright star Ltd applies
benchmarking approach in
order to make effective reports
related to risk factors as well
to formulate effective
strategies for managing
working capital and to reduce
the competition level in market
place.
M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success.
For LM Engineering Ltd. and for Bright star Ltd management accounting approaches
like key performance indicator and benchmarking plays a vital role in formulating effective
strategies and tactics which result d in reducing financial issues and helped in achieving
successful growth. Key performance indicator approach of LM Engineering Ltd. is being used
to compare the performance and the activities with its competitors or with same industry so as to
reduce hurdle which may take place towards achievement of successful growth (Renz, 2016).
Whereas benchmarking approach that is being used by Bright star Ltd is used to identify any
opportunities for any kind of changes or improvements so as to reduce the gap with competitors
as well as to monitor performance level of business on daily basis.
D3 Various planning tools to resolve financial problems
Due to unexpected situation various problems were faced by Bright star Ltd and LM
Engineering Ltd. , so in order to deal with such issues effective planing were made which
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included effective formulation of policies and strategies as well as various tools like flexible
budget, forecasting tools for predicting and forecasting unexpected hurdles, contingency
planning etc. So as to enhance the profitability margin and to overcome the financial issues in an
effective manner.
CONCLUSION
It can be concluded from the above given report that the management accounting plays a
very important role in an organisation to achieve the desired objectives effectively. The
management accounting involves different types of systems like cost accounting, price
optimisation, job costing and inventory management system. These system result beneficial for
the business organisation which are clearly stated. The various reports are defined which are
constructed by the organisation for the proper management of accounting. The absorption and
marginal techniques for the cost analysis are defined which are used for preparing the income
statement. Various planning tools and there advantages with their disadvantages are clearly
described. The approaches to resolve the financial problems are defined with the help of KPI and
benchmarking.
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