Management Accounting and Budgeting Report

The provided assignment is focused on management accounting and budgeting, exploring various aspects such as activity-based budgeting, balanced scorecard, zero-based budgeting, and management accounting research. The report includes multiple sections, including accounts receivable aging reports, job cost reports, inventory and manufacturing reports, and a balanced scorecard illustration. The goal of this assignment is to analyze and understand the importance of management accounting in business decision-making and performance evaluation.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting and different types of Management Accounting System.............1
P2. Different management accounting reports............................................................................4
TASK 2............................................................................................................................................6
P3. Calculation of cost and preparation of Income statement.....................................................6
TASK 3............................................................................................................................................7
P4. Advantages and disadvantages of planning tools for budgetary control..............................7
TASK 4..........................................................................................................................................11
P5. Use of management accounting system to respond financial problem...............................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
Illustration Index
Illustration 1: Budgeting Process...................................................................................................10
Illustration 2: Balanced Scorecard.................................................................................................12

INTRODUCTION
Management accounting means provision of the financial data and advising the
management of company for using the financial data in organisation and development of its
business. It is the accounting system which includes the management decision making,
budgeting, performance analysing and the implementation of all these systems. The present
report is based on Tech which is a UK based company producing charger for mobile telephone
and other gadgets for retail outlets. Management accounting information is an important tool of
decision-making for department managers. The report will shed light on cost accounting system,
inventory management systems, Job costing systems and the different types of managerial
accounting reports. This report also discuss that department managers should have more
involvement and should take more responsibilities for their departments. ZBB is based on the
assumption that previous year’s budget is zero and to make the new budget of the current year
management must take zero as the base.
TASK 1
P1. Management accounting and different types of Management Accounting System
Management accounting is also known as managerial accounting. Management
Accounting helps manager in making provision for financial and non- financial decision-making
information. According to the IMA (Institute of Management Accounting), it is a profession that
involves management decision making, performance management systems, devising planning
and it also helps management in formulation and implementation of organisational strategy.
Management accounting looks after the business events in consideration with the need of the
business (Takeda and Boyns, 2014). It is the process of identifying, analysing, measuring and
interpreting the information. It also provides timely and accurate statistical and financial
information with the help of management reports that are required by managers for making their
short- term and day- to- day decisions.
Management Accounting System:
Management Accounting system consists of components of management accounting that
includes budgets, income and expenses report, return on investment report, management
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performance report to compare budget results with actual results and sales analysis. Some other
less known components of management accounting are standard costing of cost of goods sold,
ABC (activity- based-cost) analysis and balanced scorecard.
Importance of Management Accounting System in organisation:
 Management accounting system play a critical role in the group learning of the
organisation.
 The main purpose of management accounting in an organisation is to help management
in decision making by collecting, communicating and processing information that will
help to plan, control and evaluate the organisational strategy and business processes.
 It helps in forecasting the future that aids decision making by giving answers to the
following questions- should investment be made in more equipment? Is there a need of
diversification? Should the company merge or acquire a new company? It forecasts the
future trends by answering all these questions.
 It helps in making decision related to the make or buy a product from a third party.
 Management accounting helps in forecasting cash flow and its impact on business.
 It helps in knowing and understanding the variances and discrepancies in what is actually
achieved and what was predicted. It analyses the expected rate of return to the organisation.
Management Accounting vs Financial Accounting
Basis Management Accounting Financial Accounting
Meaning It provides related information to
the management for decision-
making.
It focuses on preparation on financial
statements for providing financial
information to its users.
Interested parties External as well as Internal parties
like management.
Only External parties like
shareholders, investors, etc.
Format It does not have specified format. It has specified format to present
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information.
Time The reports are prepared as per the
need and requirement of the
managers.
It is generally prepared at the end of
financial year.
Audit of reports Audit of management reports are
not to be audited by statutory
auditor.
Audit through statutory auditor is
mandatory.
Types of management accounting system
Different types of management accounting systems are:
 Cost accounting system: It is the framework used by management for estimating the
cost of their products and services with the purpose of analysing the profitability, cost
control and inventory valuation. Calculating the accurate cost of products and services is
typical hence the system is critical to operate. Tech Ltd. can use this system in estimating
the cost of its mobile phone charger.
 Inventory management system: Inventory management system helps the management
to mange the inventory of the organisation. This includes both types of inventory that is
finished goods and raw material. Inventory management system in the modern era is been
managed by various inventory management software's. Tech Ltd. may use any software
from the available choices of inventory management software's.
 Job- costing system: It is the system to assign the variables of manufacturing cost to
different individual products or product batches. It is generally used when manufactured
products have significant difference (Klemstine and Maher, 2014). In the case of identical
products, process costing is used. Tech Ltd. is indulged in manufacturing of various
products so it may use job costing for assigning manufacturing cost to mobile phone
charger.
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 Price- optimising system: It is the mathematical system to calculate the variation of
demand at different price levels. Then the data is combined with cost information and
inventory levels to recommend the best price to improve profits.
Benefits of the above accounting systems:
 Accounting systems helps the management to estimate the cost of their product and to
identify profitable and non- profitable products and services.
 This will also allow the management to manage their inventory. To know the available
quantity of finished goods, raw material, economic order quantity, etc.
 This will enable the management to know the manufacturing cost of various products.
Through this management can create the job- cost order for each item (Groot and Selto,
2013).
P2. Different management accounting reports
Management accounting reports helps the management and owners of other small
businesses to manage and monitor the performance of their organisation. These reports are
prepared frequently as needed throughout the accounting period. Following are the types of
management system accounting reports:
Management Accounting System Reports
Budget report:
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Budget Report
Accounts Receivable Aging
Report
Job Cost Report
Inventory and Manufacturing
Report

In management accounting, budget report is the most fundamental report. It helps the
management n understanding and controlling the costs across the organisation. Through the
budget report, expenses of prior year can be evaluated and budget can be estimated for the
following year and places to cut the cost can also be identified. Estimated budget of the current
financial period is generally based on the actual expenses of part year. This report can also be
used by the managers to provide incentives to the employees.
Accounts receivable aging report:
This report is crucial and critical tool for managing cash flows for those businesses who
provide credit to their customers. This report provides an overview of credit balance by breaking
down the customer balances on the basis of the time period of the money owed. Mostly report
separate the category for invoices that are 30, 60 and 90 days late (Bryer 2013). This will enable
the management to align the customer's repayment capabilities to their credit policies. This can
also be used to find out the problems in the collection process of the organisation.
Job- cost Reports:
Job cost report shows the side by side view and actual expenses for a specific project
which is comparable to the expected revenue yielded through that specific project. This report
helps the management to evaluate the most profitable jobs and projects. Through this
management can optimize its operations by focusing on the most profitable jobs. Management
can identify high- earning areas with this report. This also analyses the expenses during the
project is on, this will allow the manager to correct the areas of cost escalations.
Inventory and Manufacturing Report:
This report can be used by the manufacturing companies for physical inventory to make
their manufacturing process more efficient. This report is essential and more valuable for the
organisation with low fault tolerance. This report helps in centralizing data of labour cost,
inventory cost and other forms of overhead involved in the process of production. Inventory and
manufacturing report includes inventory waste, per-unit overhead costs or hourly labour costs.
The information presented in the report must be in understandable form. The accounting
information has qualitative as well as quantitative characteristics (Soheilirad and Sofian, 2016.).
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Business reports are used to make various important decisions of the organisation therefore, the
information must be appropriate as inappropriate information can hamper the decisions or it may
provide wrong assessment to the managers. An appropriate report must have following features: Understandable: The information in the report must be understandable as it is the
important qualitative characteristic of financial information. Financial information is
technical and hard to be understood by anyone. For making the information of the report
more understandable, management should appoint the accountant with good skills. A
report that cannot be understood is of no use for the internal as well as external users of
the report. Relevant: the information in the report must be relevant i.e. the information must relate to
the specific time period. While reviewing the financial information, management should
often conduct trend analysis. For example, cost of goods sold would be irrelevant for
inventory management report.
 Reliability: The information used in the report must be reliable and not hypothetical. This
will ensure the management that the accounting information presents the accurate picture
of the organisation.
TASK 2
P3. Calculation of cost and preparation of Income statement
 Absorption costing- The methods used by management in calculating the cost of product
or an enterprise by taking both direct and indirect cost into account. Direct cost includes
all cost associated with the manufacturing of product including wages for worker, raw
materials used in producing a product and all overheads costs like utility cost. It is also
called as full cost as including all cost like the fixed overhead as well. The direct cost can
be easily identified by individual cost centres and distribution of overhead among the
department is called apportionment (AbRahman and et.al., 2016). The various methods
for absorption are direct material cost percentage rate, direct labour cost percentage rate,
prime cost percentage rate, labour hour rate and the machine hour rate.
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 Marginal cost methods- The increase or decrease in total production cost if the output is
increased by one or more unit. It is the change of cost divided by the change in the
quantity. Basically, measured as the opportunity cost which arises when quantity
produced is increased by one unit or more unit of the good. Marginal cost at each level of
production includes the cost of any additional inputs required to produce the next time.
Marginal cost is a function of quantity if the cost function is non-linear. Marginal
analysis is segregated into short and long run cases so that over the long run all costs
including the fixed cost become marginal.
Income statement with the help of Marginal costing:
Particulars £ Amount (millions)
sales 52500
less: variable COGS -30000
production contribution margin 22500
less: other variable expenses 7875
total contribution expenses 14625
less: fixed expenses 10000
less: fixed overheads 15000
Net Profit -10375
Income statement with the help of Absorption Costing:
Particulars £ Amount (millions)
Sales 52500
less: COGS 30000
Gross profit 22500
less:
selling expenses 7875
other expenses 10000
Net profit 4625
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Interpretation: Tech Ltd. should use absorption costing for preparing its income statement as it is
showing net profit of £4625 million, while marginal costing is showing a loss of £10375
million.
TASK 3
P4. Advantages and disadvantages of planning tools for budgetary control
Following types of budget with their advantages and disadvantages are:
Activity- Based Budgeting: This is a budgeting method in which overhead costs are considered
and Activity based costing is used for preparing budgets (Nørreklit, 2014). This method does not
consider the past year budget for preparing the current year budget. High cost incurring activities
are identified and researched in this method. Resources are then allocated based on the outcome
(Activity Based Budgeting, 2017.).
Advantages:
 This method evaluates all the cost drivers while considering all the steps in an activity.
This eliminates the irrelevant activity and necessary activities are then focused for the
business.
 This helps the business in saving the cost by eliminating all the unnecessary business
activities.
 This method views the business as a single unit and top-level managers prepare the
budget for the whole business unit.
 With a deep research and analysis this eliminates all the bottlenecks of the activities.
Disadvantages:
 This method requires a deep understanding of all the functional areas of the business.
Therefore, manager must be capable of understanding and evaluating all the areas of the
business in a proper manner.
 This method is complex in nature.
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 Activity- based budgeting consumes lot of resources of the organisation, like highly
trained employees to conduct this method.
Zero- Based Budgeting: Unlike other methods of budgeting, this method assumes prior year
budget base as zero and not the past year expenses and prepares new budget for the next period
from the scratch (Tucker and Parker, 2014). For example, if the past year expenses of the
production department of Tech Ltd. were £5000, then the management cannot claim the £5000
amount for the current year budget. All the expenses need to be justified by the management
before claiming any amount for the budget (Zero-based Budgeting (ZBB), 2012).
Advantages:
 It is based on needs, requirements and benefits therefore, effective allocation of
resources.
 Cost effective ways can be identified to improve operations.
 Increases coordination and communication within the organisation.
 Identification and elimination of obsolete and wasteful resources.
Disadvantages:
 Difficult to justify expenses for obtaining the amount of budget.
 Time consuming as it needs to define decision packages and decision units. Includes all levels therefore, should be understood clearly by various level managers for
successful implementation.
Incremental Budgeting: As per this method to arrive at new budget, small changes are made in
the existing budget. Current fiscal year's budget becomes the base for preparing the budget for
forthcoming year (Khodzytska and Ivchenko, 2014). The management operates at the current
level of budget and in case when needed an additional amount is added to arrive at the budget of
next year.
Advantages:
 Very easy to implement and doesn't require complex calculations.
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 No detailed analysis is required and ensures continuity of funding.
 Provides immediate reflection of the impact of change.
 Simple to understand and prepare.
Disadvantages:
 No incentives are provided in innovation and development.
 Encourages more spending for the budget.
 Doesn't eliminate non-effective operations.
There can be three phases of budgeting process. Tech Ltd. may use the following budget
preparation process:
Illustration 1: Budgeting Process
1. Obtaining the estimates: The company should obtain the estimates regarding to its sales,
expected cost, production level and availability of resources. Department heads are
required to provide future estimates of the activities that can have an impact on the
company.
2. Coordinating the Estimates: Various plans of the different organisational units are
evaluated by the budget committees in the organisation for the determination of
potentiality of the plans.
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3. Communication of budget: After the approval of all the individual budget plans from the
view of organisational goals and availability of resources, Budget is then communicated
to the concerned department or responsible manager.
4. Implementation of the budget plan: The next step is to implement the approved budget
plan i.e. the final budget is then presented to the concerned managers for operating the
budget of coming period.
5. Evaluation of budget: At the final stage the implemented budget is evaluated,
performance reports are prepared to evaluate that the targets are achieved or not (Joshi
and Li, 2016). It may also require the management to revise the budget.
Different pricing and costing systems:
Marginal costing: In marginal costing at a given level of output, without increasing all cost
proportionately, the level of output can be increased. It is because certain cost will remain fixed
even if the level of output increases.
Process costing: this type of costing can be used in industries where identical products are
manufactured and the products cannot be identified separately.
Job costing: This type of costing is used where the jobs are different and are performed as per
the specifications of customers example construction industry, etc.
Absorption Costing: This costing system is applied where there is always difference between
forecasted budget of cost and sales and the actual costs (Bertz and Quinn, 2014).
From the above-mentioned costing systems, Tech Ltd. may use marginal costing system
or job costing system for the manufacturing of mobile phone chargers.
Budgeting plays an important role for planning and controlling purpose.
 These are the quantitative expressions of organisational goals and objectives and also the
actions required to achieve them.
 Budgets are prepared and then used to compare the planned outcomes from actual
outcomes.
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 This can help the management to eliminate the non-profit areas and therefore reducing
the costs.
TASK 4
P5. Use of management accounting system to respond financial problem
Tools of management accounting system can be used to overcome and respond financial
problem of an organisation. Tech Ltd. has suffered a huge loss of £1.5 million in the last
financial year. The management of the company with the use of balance score card, a tool of
management accounting system can overcome its loss and can respond to its financial problem.
Balanced scorecard is a management and strategic planning system that is used by
organisations to align the day to day work with their strategy, to communicate what the
management is trying to accomplish, to prioritize products, services and projects and to monitor
and measure the progress of their strategic targets. The balanced scorecard model views the
organisation from the following four perspectives (McLellan and Sherine, 2013):
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Illustration 2: Balanced Scorecard
(Source: Balanced scorecard, 2017)
Financial: In this perspective, the question arises that what an organisation can do to
create its sustainable economic value. Tech Ltd. should analyse that where they are lacking
behind and what steps should be taken to overcome their inefficiencies. Tech Ltd. Should
improve its financial performance measure like net income and return on investment.
Customer: Customer perspective enables the management to evaluate customer needs
and requirements. Tech Ltd. should conduct research on what is the demand of its customers and
where the company is lacking behind.
Internal Business process: This perspective involves the satisfaction of the company's
stakeholders. To evaluate the levels of efficiency, productivity and quality of the organisation.
For this Tech Ltd. Should conduct stakeholder analysis.
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Learning and Growth: The perspective involves the employee performance management
system. It refers to staff development and training. The concerned company should arrange
training and development programs for their staff (Novas, Alves and Sousa, 2015).
One of the competitor of Tech Ltd. is British telecommunication plc. Both the companies
use various management accounting systems like benchmarking, budgetary control, KPI's, etc.
But, the management accounting system of British Telecommunication plc is much better than
that of Tech Ltd. because, being a public company, the management is more focused on financial
governance. Through this the deviations in the performance can be easily identified and
rectification steps can be further initiated.
CONCLUSION
From the above report on management accounting it is concluded that management
should use financial data in organisation for development of businesses. Activity based
budgeting is a better tool for making budget of organisation as compared to Zero Based
Budgeting method. As the former is used to develop budget based on different activities of the
organisation and latter is used assuming that last year budget is zero and is not taken into
consideration. Management accounting report helps management to manage and monitor the
performance of businesses in a certain year. The report also tells how management accounting is
different from financial accounting as former informs the management how to make decisions
relating to management and latter gives the financial data to the users.
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