Management Accounting and Profitability

This assignment delves into the crucial link between management accounting techniques and business profitability. It examines various studies and research papers that investigate how different management accounting methods influence a company's financial performance. The goal is to develop a comprehensive model that clarifies the relationship between these accounting practices and profitability.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Part (A) ........................................................................................................................................1
Part(B)..........................................................................................................................................5
ANNEX (A) Question 2...............................................................................................................5
ANNEX (B)................................................................................................................................6
ACTIVITY 2....................................................................................................................................8
PART(A)......................................................................................................................................8
ANNEX C..................................................................................................................................10
PART (B)...................................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a type of accounting system that is related to internal
management of the organisations. It consists both kind of information including financial and
non financial. Eventually, management accounting is a wide term which is being used by the
companies to proper management of different functions (Abdelmoneim Mohamed and Jones,
2014). This project report describes in detail about this accounting system including its different
types, their benefits and drawbacks. As well as various planning tools in context to performance
management. Apart from it, report states about the role of management accounting in solving the
financial problems. Herein, the L&B haulage civil engineering contractors limited company is
selected. It was evolved thirty years ago and this company provides services like civil
engineering contracts, recycle and waste management project etc. Majorly this company deals in
construction project.
ACTIVITY 1.
Part (A)
Management accounting system and their essential requirement:
In the context of internal management of the organisations, management accounting plays
a crucial role (Armitage, Webb and Glynn, 2016). This is why because managers use all the
needed information from this accounting system. The basic mean of management accounting
system is the monitoring, analysing, interpreting the financial data in order to take important
decisions. One of the best feature of this accounting system is that it consists monetary and non
monetary information which becomes basis of internal decision making. Additionally, this
accounting system does not require any audit as well as it is not mandatory. The L&B haulage
civil engineering contractors limited implements this accounting system for proper management
of their various kind of civil and construction projects. The management accounting includes a
wide range of accounting systems that are being used by the companies for their different kind of
functions and applications. Herein, the essential requirements of the different accounting systems
are mentioned as below:
 Price optimisation system- The price optimisation system is a kind of accounting system
that is related to the determination of right price of different kind of products and services
( Boučková, 2015). As well as this accounting system provides a basis for analysing the

customer reaction on different pricing levels. Due to this companies enables to evaluate
the impact of change in price level. Additionally, price optimisation system helps in
providing guidance in assigning accurate level of price which is suitable for both to the
customers as well as for company. Herein, the context of the L&B haulage civil
engineering contractors limited they use price optimisation system for assigning right
price of different civil projects. Due to this, they analyse their clients reaction on the
different pricing level. Apart from it, price optimisation is majorly required for fixing the
level of price that can satisfy both to the customers and company.
 Inventory management system- Inventory management system is an accounting system
that is related to the proper management of the raw material as well as of finished goods.
Due to this accounting system, companies can check movement of goods in entire supply
chain system. Additionally, it helps in checking the level of raw material and prepared
goods in the ware houses. In the context of L&B haulage civil engineering contractors
limited company this is useful in checking the quantity of raw material and because of
this they can purchase right quantity of material of construction. As well as this
accounting system is required for ensuring the quantity of goods and material so that
company can order for new material accordingly. Eventually, in the absence of this
accounting system companies can not asses the need of purchasing new material and that
can result in lose (Cleary, 2015).
 Cost accounting system- As the name assists this accounting system is related to the
calculation of cost of different products and services. The main purpose of this
accounting system is to evaluate the profitability of products and services by comparing
cost with the actual money earned. This accounting system is required for analysing
which products are profitable and which ones are not. L&B haulage civil engineering
contractors limited applies this accounting system to check the cost of different projects
and to evaluate the profitability of each projects. With the help of this accounting system,
in the end of any project, they can check that which civil project is beneficial and which
one is not. Basically, this accounting system includes two accounting systems which are
as follows:
Process costing- This costing system is useful for evaluating the cost at different stages. Like in
the above mentioned company, they can check the cost at different step of construction projects.

Job order costing system- Job order costing system is important in calculating cost of each job
involved in any particular activity of product manufacturing or service providing. Herein, the
context of L&B haulage civil engineering contractors limited company, they apply this costing
system for computing cost of each job involved in any particular project (Collis and Hussey,
2017).
Different method for management accounting reporting:
The management accounting reporting is consists various kind of reports which are useful
for both to the internal management and for external stakeholders. Eventually, these accounting
reports are prepared with the use different methods. There are various kind of methods that are
being used by the L&B haulage civil engineering contractors limited company. Some of these
methods are mentioned below:
Budgetary reports - Budgets are also known by the financial plan. It is just estimation of
future income and expenditure. This is very important method for preparation of management
accounting reporting. This is why because it consists different kind of needed financial
information for making the reports. Eventually, it includes two types of informations one is
estimated income and expenditure and another one is actual income, expenditure. If actual
income is more then estimated income then, performance will be best, on the other hand if actual
income is below to the targeted income the, performance will be low. So these types of
informations becomes useful in preparation of the management accounting reporting. Herein, the
context of L&B haulage civil engineering contractors limited company they use this tool for
making their accounting reports (Edwards, 2013).
Inventory cost reports- It is a kind of method which is used for identifying different
assigned cost incurred at particular inventory store. This is helpful in computing overall storage
cost that is assigned in the different stores. Eventually, it is an important method of preparation
of inventory management accounting reports. It provides a base for making strategies and plans
to control storage, caring and ordering cost. It contains all needed cost related informations.
Herein, the aspect of L&B haulage civil engineering contractors limited company they make
these reports to evaluate the inventory costs as well as to check efficiency of inventory system.
Performance reports- Performance reports are used for evaluating the financial and non
financial performance of the organisation (Endenich, 2014). As well as these reports include the
comparison of actual generated income with the actual income earned. Herein, the aspect of

L&B haulage civil engineering contractors limited company they make these reports to check the
financial performance of different engineering projects. Due to this they can evaluate the
efficiency of their projects by comparing the earned revenue with the estimated income level.
Eventually, this report helps them in changing the policies and plans if performance is low.
Cost managerial accounting reports- These accounting reports are those reports which
consist information regarding to the cost. In broad sense, these types of accounting reports
includes raw material cost, labour cost, overhead etc. Eventually, cost managerial accounting
reports help in evaluating the cost so that organisations can make suitable decisions if cost occurs
high. The L&B haulage civil engineering contractors limited company makes this accounting
report for analysing the cost of different projects. As well as it contains the information regarding
to the cost in broad sense. This detailed information helps in keeping an extra sight of eye on the
cost of construction projects.
Benefits of different accounting systems and their application in context to organisational
process:
The various method of management accounting system have their own importance in
aspect of different companies. Eventually, it all depends on the nature of organisation that how
can it helps them. Herein, the aspect of L&B haulage civil engineering contractors limited
company they are using some management accounting systems which are as follows.
 Benefits of price optimisation system- It is useful in determination of accurate price of
products and services (Grabner and Moers, 2013). This accounting system is helpful for
above selected company as it helps in assigning right price of various kind of engineering
and construction projects. As well as it also important for them in evaluating their
customers reaction on different pricing levels.
 Benefits of inventory management system- The inventory management system is useful
in tracking the movement of goods in entire supply chain. As well as checking the
quantity of raw material in the warehouses. In the aspect of L&B haulage civil
engineering contractors limited company, it is helpful in checking the quantity of raw
material for construction projects.
 Benefits of cost accounting system- Cost accounting system is important in calculating
overall cost of production. In the L&B haulage civil engineering contractors limited

company, it is useful in computing total cost of different civil engineering projects. As
well as with the help of this accounting system, they can evaluate the efficiency of
various projects (Holsapple, 2013).
Management accounting system and reporting are integrated within the organisational processes.
The management accounting system and management accounting reporting are
interrelated with the organisational processes (Maskell, Baggaley and Grasso, 2016). This is why
because management accounting system includes different accounting systems like inventory
management system, price optimisation system etc. All these accounting systems are linked up
with the preparation of management accounting reports because needed information comes from
these accounting systems. In the absence of this link, it would be difficult to prepare the
accounting reports. Herein, the context of L&B haulage civil engineering contractors limited
company they use a wide range of management accounting systems(inventory management
system, price optimisation system, cost accounting system) in their projects. Due to these
accounting systems they get all needed information for preparation of accounting reports like
budgetary reports, inventory cost reports, cost managerial reports and performance reports.
Overall this link between management accounting system and accounting reports is interrelated
with the organisational process.
Part(B)
ANNEX (A) Question 2.
Marginal costing method- This costing method is a kind of costing method in which
variable costs are considered as the unit cost (Morden, 2016). On the other hand, fixed costs are
written off against the contribution.
Absorption costing method- Absorption costing method considers all the cost which
occurs in the production including the fixed and variable cost (Schaltegger, Burritt and Petersen,
2017). This costing method is required for income tax reporting and external financing reporting.
Calculating of net profit with MARGINAL COSTING
PARTICULARS AMOUNT
SALES 427500 427500

LESS VARIABLE COST
DIRECT LABOUR (15*5000) 75000
DIRECT MATERIAL (18*5000) 90000
VARIABLE PROD ( 9*5000) 45000
VARIABLE 10% OF SALES VALUE 42750 252750
LESS DIRECT LABOUR (15*500) 7500
DIRECT MATRIAL ( 18*500) 9000
VARIABLE PROD (9*500) 4500 -21000
CONTRIBUTION 195750 195750
LESS FIXED EXP (180000/4) -45000
PROFIT FOR THE YEAR 150750 150750
Calculating of net profit with ABSORPTION COSTING
PARTICULARS AMOUNT
SALES (4500*95) 427500 427500
VARIABLE COST (15+18+9*5000) 252750
VARIABLE COST (15+18+9*500) -21000 231750
COGS 276750
GROSS PROFIT AT NORMAL 150750
UNDER/OVR ABSORPTION 6819
GROSS PROFIT AT ACTUAL 157569
-FIXED EXP -45000
NET PROFIT 112569
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
Interpretation

From above solved numerical it has been analysed that both products X and Y are
incurring different level of costs in the conventional absorption costing method. Product X is
incurring £72,000 cost, on the other hand product Y is occurring the cost of £192,000. In the
activity based costing approach, the machine hour rate per period in product X is of £24,000 and
in product Y is of £16,000. As well as overheads are also different in activity based
costing(ABC) system. The product X is incurring the cost of £82749 and product Y is occurring
cost of £181,255.
ACTIVITY 2.
PART(A)
Planning tools and their advantage- disadvantage.
Budget: This is an estimation of budget which is used in organisation to get fixed amount
of income and expenses in order to run a business speedily. It helps to get estimate of available
resources, expenses and revenues during a particular period of time that shows a interpretation of
future financial goals and situations. Any organisation sets a budget before start a business
activities that gives ideas how much needs to invest to achieve the goals which is decided by the
business concern in order to increase the turnover (Takeda and Boyns, 2014).
Planning tools: Planning tools are the techniques of the organisation that is used to
control the budget and increase profit margin by controlling the cost of the enterprises. L&B
haulage used different types of planning tools for ascertaining the cost of the oragnisation and
make it profitable by overcoming the cost.
Budgetary control: This is the process of defining budgeted results with actual results
for an enterprise. It helps to control the excess budget after comparing budgeted results with
actual results in a fixed period of time. Manager of L&B haulage company prepare an estimation
and compares with actual results for the future period. It helps to make planning and
coordinating with the employees of the organisation. In other words, it is called end results of the
enterprises that focuses on controlling the cost by preparing the budget and performing the
responsibility. Manager of L&B haulage uses this process to control the budget and prepares
budgetary reports that is used to construct high profile building in reasonable budget. Thus,

budgetary control is an important aspect of the company that helps to save time and money by
preparing budget estimation. The company is using different types of budget such as-
Zero base budget: This is the most important tool whi9ch is used to control the budget
by preparing the budget from the zero base. It contains re evaluating of the budget that shows
cash flow statement by defining all the expenses. Therefore, zero base budgeting is used to set
the budget where all expenses are started with new period and new budget which are occurred in
the organisation. The manager of L&B haulage can use this tool to know the actual amount of
revenues and expenses that incurred in reality. In this method each activity need to be justified
clearly that involves actual cost of the company (.Zoni, Dossi and Morelli, 2012).
Advantages: It helps to provides an accurate information about revenues and incomes
that is used to compute the operation cost. It is used to allocate the resources efficiently in L&B
haulage organisation that helps to make profits.
Disadvantages: To apply this tool needs to face challenges such as there is required high
man power who can work extra and need to expertise person. So it may be a drawback for L&B
haulage to hire large number of employees that should be highly experienced.
Incremental budget: This budget is used to prepare current year's budget by changing in
the past year's budget. It is basis on the previous year's budget that helps to give ideas about
current year's budget. The manager of L&B haulage used this tool to prepare incremental budget
with the helps to past year's budget. Such as L&B company finds that there is require to more
expenses in order to build a building then it can make changes in past year's budget.
Advantages: It helps to ignore the wasteful expenses with the help of previous year's
budget. It gives an estimation of expenses and revenues that is used to get estimation of profits
and can control the upcoming risk in L&B haulage organisation. Moreover, it is easy to prepare
because it does not need any specific qualification (Hasniza Haron, Kamal Abdul Rahmanand
Smith, 2013).
Disadvantages: It has demerits also such as manager need to spend more during business
activities. It may be wrong because it depends on past year's information. At the time of
preparing incremental budget there may be chances of risk because of high spendings.
Rolling budget: This means ongoing budget which is used to show the waves ashore on
the beach. Anew waves comes and replace this with last waves that helps to set the financial
plans. Moreover, rolling budget is used to replacing the old budget with new budget by using

budgeting system. The Management of L&B haulage prepares the rolling budget that allows to
allocate the funds among performing and non performing business activities.
Advantages: It helps L&B haulage to prevents from creation of debt and critical
situation that can be arise in business organisation. Moreover, it helps to save the funds and
reduce the inefficiencies by maintaining rolling budget.
Disadvantages: It is time consuming process that takes too much time to understand and
preparing the rolling budget. And it requires highly skilled and experienced person who can
replace old budget with new budget.
Analysis the use of different planning tools and their application for preparing and forecasting
the budget
Planning tools are very useful in any organisation which helps to prepare and forecasting
the budget that gives suggestion what need to do and when need to do in order to make make
profitable organisation by reducing cost. Through application of above mentioned planning tools
such as zero base budget, rolling budget and incremental budget an organisation can perform
well and can make future budgeting that helps to get information about future planning of the
enterprises. Such as L&B haulage uses zero base budget that helps to give information about
actual cost and incomes which helps to maintain profits. By application of rolling budget L&B
can replace the old budget and with new budget that will helps to give information about new
budget with the help of past budget. Moreover, any organisation can use incremental budget that
helps to make more profits by making some changes in the budget that helps to control over the
excess budget in the organisation that leads to future forecasting.
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
PART (B)
Comparison between industry adopting management accounting system to solve financial
problems
KPI: Key performance indicator is the essential techniques that is used to evaluate the
performance of organisation as well as employees. Such as L&B haulage uses KPI to concentrate

on performance and make improvements in order to run a business. Moreover it helps to
understand problems which is arising during business activities and make effective business
decision.
Bench marking: This is also a technique that is used to compare a company with other
company by defining competitive advantages. The manager of L&B haulage company used this
tool to compare the performance of one organisation to other organisation with the help of
comparative data. To measure the performance L&B haulage can adopt the different business
model that is used to upgrade and accelerate the changes for positive responds.
Following financial problems are faced by the L&B haulage company such as-
Spending more than revenues: This means if organisation are spending more expenses
than income than financial problem arises. The manager of L&B haulage prepare a income
statements that states its expenses are high than its incomes because it invest more money on
designing and marketing the services. Hence, it facing financial problem which is arising during
the business activities.
Cash flow problem: It states a company can face cash flow problem because not
matching the business activities. As L&B haulage is facing the problem that is unmatched cash
flow because it has less operating activities than financing activities. It need to solve the financial
problems by increasing the financial activities such as receipt from equity shares and dividend
that helps to increase the finance and will match inflow and outflow of cash.
Financial governance: This includes rules and regulation which is governed by the
government in order to maintain the financial transaction properly. It includes collecting,
managing and collecting the financial information that helps control over the financial
transaction. L&B haulage can solve the financial problems which are relates to financial
transactions.
Comparison among two organisation that used techniques to solve the financial problems
L&B haulage Aston Martin
This is civil engineering contractor limited
company that is facing financial problems
because its spending s are more than incomes
in business enterprises.
This is global holding plc company
manufacture the luxury sports cars and facing
unmatched cash flow problems during business
activities.

To give proper respond on this financial
problems L&B haulage uses KPI tools that
helps to monitor the performance of
organisation as well as employees. It defines
financial and non financial performance of the
organisation that helps to make profitable
business.
To solve this financial problem L&B haulage
uses the benchmarking tools that helps to
measure and compare the performance from
other company and make budget in invest the
money on business activities.
For solving financial problems it need to
follow the job order costing system that will
help to allocate the cost according to job order
and will maintain the purchase and sale order.
For solving the financial problems it need to
follow the inventory management system that
will help to keep the proper records of
inventory of cars and other luxury sports cars.
Statement of management accounting in solving financial problems and ultimately lead to
organizational success
Management accounting system like as KPI helps in growth of the organisation by
monitoring the financial and non financial performance and bench marking helps to support the
system for improvement and getting the changes in business activities. The manager of L&B
haulage can use these techniques to solve the financial problems such as spending more then
revenues, financial instability and lack of profitability that helps to maintain profit by reducing
the cost. Management accounting reports are helpful to prepare costing reports, account
receivable reports and performance management reports that helps to improve the organisation
performance in order to maintain profitability.
An evaluation of how planning tools for accounting help to solve problems and support industry
with sustainable success.
There are number of planning tools that helps accounting to respond the problems and
supports the company with in order to maintain sustainable success by solving financial
problems. By applying management techniques and planning tools an organisation can extend
the business and can control over the excess business expenses which are arising in the
organisation. Such as planning tools helps to understand the market position of the business and

prepare the budget plans that is used to solve financial problems which leads to sustainable
success.
CONCLUSION
From above project report it has been concluded that management accounting is
becoming a mandatory element for internal management of organisations. It is a wide term that
includes the different kind of accounting systems like inventory management system, price
optimisation system etc. As well as it concludes about the link of management accounting
system with the accounting reports. Apart from it, various numerical problems on the basis of
marginal and absorption costing method, activity based costing method, NPV are discussed. In
the end, project report concludes about the role of management accounting techniques in solving
the financial problems.
REFERENCES
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Finance. 25. pp.5-13.
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