Management Accounting Systems and Cost Analysis by Absorption and Marginal Costing

This report discusses the concept of management accounting systems, types of management accounting systems, advantages and implications of management accounting system, methods of management accounting reports, and cost analysis by absorption and marginal costing. The report also includes a case study of Nasty Gal Vintage, a retail clothing organization, and how it can adapt the management accounting system to respond to fiscal problems and achieve sustainable success.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
1. Explain the concept of Management Accounting systems.................................................3
2.Explain the various type of management accounting systems............................................4
3. 5. Advantages and implications of management accounting system.................................5
4. Methods of management accounting reports......................................................................6
5. Assessment of management accounting report and system in organisation.......................7
b) 3. Explain the method of Cost analysis by using absorption costing and marginal costing by
formulating income report......................................................................................................7
Part B.............................................................................................................................................10
Prepare a flexed budget for the actual activity for the year..................................................10
1. Advantages and disadvantages of various types of planning techniques useful in budgetary
control...................................................................................................................................10
PART C..........................................................................................................................................12
a) Evaluation of how the organisation Nasty Gal Vintage can adapt the management
accounting system for retorting to the fiscal problems........................................................12
Recommend by giving an analyses how management accounting approaches can lead an
organisation towards sustainable success.............................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is a concept which is used for preparing reports related to the
monetary and non – monetary position of the company. It helps in making choices for the
maintaining the sustainability of the organisation by analysing and communicating the data or
information which is essential for the managers. The Report has taken the organisation named
Nasty Gal Vintage. It is a retail clothing organisation whose headquarters are situated in
California and was founded in 2006. This report has been divided into 3 parts. Part A includes
the concepts of the management accounting by addressing the types, pros, cons and the various
methods of the systems and management accounting reports (Aldredge, Rogers and Smith,
2021). Further, in this part the integration of the management accounting is illustrated.
Moreover, the concept of costing is describes pointing towards the difference of the techniques
used in making the economic decisions. In Part B, the budget for the organisation is prepared
using the planning tools which are used to control the budgetary measures. In Part C, the
financial problems are described by solving these issues adapting the management accounting
and how comparing it with the organisation of the same industry at the end.
PART A
1. Explain the concept of Management Accounting systems.
There are four principles of the Management Accounting System: representing expansion,
arrangement, and positioning control at foundation bookkeeping and the board by a
particular case.
 Planning and arranging: This is one of the foremost things that help the management
keep the account books (Agyekum and Singh, 2018). It helps in keeping the records
of the accounts, on the basis of the evidences to know the performance of the past,
present and predict the future.
 Executive by exemption: In this the data is being showed to the board. The board use
these data for the purpose of decision making. It consists of standard costing policies
and monetary policies for making the continued framework for the administration.

 Control at Source Bookkeeping: Costs are controlled by management by keeping the
data of the accounting and taking into consideration various aspect for ascertaining
the cost.
 Representing Expansion: The capital invested by the proprietor is to be properly
invested and the capital invested should show some return on the sum invested.
2.Explain the various type of management accounting systems.
Management Accounts mainly focuses on the classifying and estimating the objective of the
organization regarding the financial and non-financial objective of the business concern
from the top of the to management to the bottom. Managers use this information for
formulating various budgets and analyse the performance of the employees of the business
concern (Triantafillou, 2020). Financial statements and management accounting both are
different concept. Former is prepared for the external users of the accounts and the latter is
performed in context of preparing entries for the business transactions of the business. It
helps in forecasting the future cash flows and also helps in decision making and forecasting
for the future operation of the business. These forecasts helps the manager in creating
budgets and future planning.
Management Bookkeeping system is technique of influencing and controlling the
employees as the cost associated with the production and also in achieving organisational
goals. In Nasty Gal Vintage this system provides beneficial information for the insights of
the business and its planning process. The data is present in form of charts, flow charts and
tables by the accountants which is used by the top management in preparation of budget and
decision-making process. Below are the various types of Accounting system that can be
explained in context of Nasty Gal Vintage,
 Cost Accounting System is a framework which helps management in estimating the
price of a product and also helps in stock valuation. It helps in identifying the
products which are more beneficial and provides maximum benefits (Loft, 2020).
This system equips the accountants in preparing the financial accounts of the
business concern. This system considers two types of costing job order costing and
process costing. The organization uses both the methods of costing for the
production of clothing and various departments in order to perform its activities. This

system also fixes the accountability of the departments as it helps in determining the
role assign to every department.
 Inventory Management System is a technique used by the administration for the
purpose of ascertaining the changes in the inventory during the business cycle. Nasty
Gal Vinatge uses these systems to maximise the profits and optimize the cost of the
product. Inventory consists of three types namely, raw material, finished goods and
work-in-progress (de Azevedo and et.al 2020). This technique is used by the
organisation for the properly managing the inventory and operational efficiency. This
helps the administration in ascertaining the cost included in the process of
procurement and storing the inventory. This method also helps in keeping the buffer
stock with the company to be used in the emergency situation.
 Pricing Optimising System: This process helps the organisation in examining and
estimating how the demand of a product changes with the changes in the price of a
product. According to the economics, it states that the demand of a product increases
with the decrease in the price of commodity and the demand of a product increases
with the decrease in the price of commodity. Information regarding the inventory and
the cost is used to ascertain the recommendation of the price of a product. In Nasty
Gal Vintage the information is used by the management in determining the market
trends, preferences and consumer demands. This helps in fulfilling the demand of the
customer according to their requirement. This system helps in generating more sales
that ultimately leads to increase in the profits of the business concern. This system
provides information that is used by the company in their marketing and promotional
activities.
 Job costing system: This technique is used to acquire information regarding the
tracking and analysing the cost of a product according to the service done on the
product (de Bruyn, 2022). This method uses various costs to determine the final price
of the cost incurred on the project. It collects data regarding direct material, overhead
and cost. It also helps the business concern in generating profits after separating the
cost incurred on the product. The basic requirement of this method is regular
monitoring of the process and proper maintaining of the records in order to avoid any
odd circumstances.

3. 5. Advantages and implications of management accounting system.
System Profits and representation
Inventory management system It guides Nasty gal vintage to cover shortfall in
stock. It is applied in an organisation with the
help of proper guidance of covering and
recording stock (Tharapos and Marriott, 2020).
Price optimisation system It helps Nasty gal vintage in reducing manual
work and manage errors made by employees to
a larger extent. It is applicable on examining
previous year data and explain company
objectives clearly.
Job costing It is helpful for Nasty gal vintage because it
guides to calculate cost of each project. It is
implemented when company analyses cost
related to job and to predict the progress of
completed tasks and in process tasks as well.
4. Methods of management accounting reports.
Management Accounting Reports are to be prepared on regular basis which is used by
the administration in measuring performance and evolving new plans. These reports should be
maintained properly by the accountant according to the rules and regulations. Managers of Nasty
Gal Vintage analyse the reports of the organisation and accumulate information regarding the
financial position of the business concern. This helps in improving the efficiency of the
organisation as well as motivate employees for better functioning and working of company
(Matsuoka, 2018). There are various methods which help in improving efficiency and
effectiveness of employees. It also helps them to have an idea where they are choosing the wrong
path. There is various management accounting reporting in Nasty gal vintage company:

1. Performance report: This kind of reports help employees to have an idea where the
organisation and employees are lagging behind. It also helps to have a proper assessment
of tasks performed by them over a period of time. Performance report thus will guide
Nasty gal vintage as well as staff persons to understand how their performance related to
work can be improved. It also helps to get an idea which project is generated revenues
and which project is incurring losses which must be eliminated.
2. Job cost report: Job cost report helps to determine what are the costs and expenses
prevailing with a certain project and how they can be covered in a given time frame
(Rubino and Veltri, 2020). These reports help Nasty gal vintage company to assess areas
which would give maximum profits and it also helps to avoid operations and task which
affect profitability of the company.
3. Inventory management report: These are such reports which provide reliable data
collected by Nasty gal vintage company. It also helps to keep a record of stock which has
to be reordered and which will in return increase efficiency in management of stock. It
helps to produce qualitative goods as well which will maintain brand image of the
company in market.
5. Assessment of management accounting report and system in organisation.
Different procedures in an organisation are linked with various management accounting
report and statements. Inventory management report helps company to work together which will
help in optimum utilisation of resources and stocks available. It helps to improve efficiency and
effectiveness of company and employees as well. It also helps to tap various customers present
in market and manage image of company in market (Kosorukov and et.al., 2020). These report
further helps to eliminate conditions which would affect business in adverse ways.
Managers of Nasty gal vintage adapts management accounting methods which help to
organise activities effectively and efficiently. It uses marginal and absorption costing tool which
provide an income record of profit generated within two months. Marginal costing profit have
resulted to be more in the month of November when compared to December.

b) 3. Explain the method of Cost analysis by using absorption costing and marginal costing by
formulating income report.
Cost incurred in manufacturing of product is known as financial price. The sum paid by the
buyer of the product that is known as Price. These are also termed as expenses in final
accounts. In accordance with Nasty Gal Vintage types of cost are as follows:
 Fixed cost: These are the compulsory cost which will arise to the business concern
irrespective of the production activities. This cost remains fix whether there is
product of 0 units or the organisation is producing at the 100% capacity. Nasty Gal
Vintage occurs costs such as rent, depreciation, etc.
 Variable Cost: This cost varies with the increase in the production of the product
and decreases with the decrease in the production (Kiranmai and Swetha, 2018). In
the company packaging cost and manufacturing cost is taken as operating expenses.
Cost Analysis is used to analyse the effectiveness and allocation of the cost in a
systematic manner in order to know the differential products. The methods used by
Nasty Gal Vintage are as follows:
Marginal Costing: In this method the price of the product increases with the
increase in the production of single unit. This can be used by the company in
reducing the price of the product (Tingey-Holyoak and et.al., 2021). By producing
more and more units per unit cost of the product decreases.
Cost cards
November
Sales = 70* 10000 = £ 700000
Direct Materials = £100000
Direct Labour = £ 150000
Fixed Overheads = £ 250000
December
Sales = 70* 8000 = £ 560000
Direct Materials = £100000
Direct Labour = £ 150000
Fixed Overheads = £ 250000
Inventory = £ 2000 units

Income statement under Marginal costing
Profit as Per
absorption costing
£s November
£s
£s December
£s
Turnover 700000 560000
Less: COGS 500000 400000
Direct Material cost 100000 100000
Direct Labour cost 150000 150000
Fixed manufacturing
overhead
250000 250000
Less: Closing Stock 100000
Gross Profit 200000 160000
Absorption costing is a technique which is used to capture the cost associated with
various types of production activities that can be directly or indirect associated with the
production of a product (Malik and et.al., 2021). It is used by the organisation to determine the
profit efficiently and reliably. Income Statement of Nasty Gal Vintage is as follows:
Income statement under Absorption costing
Profit as Per
absorption costing
£s November
£s
£s December
£s
Turnover 700000 560000
Less: COGS 500000 400000
Direct Material cost 100000 100000
Direct Labour cost 150000 150000
Fixed manufacturing
overhead
250000 250000
Less: Closing Stock 100000
Gross Profit 200000 160000

Less: Under
absorption
0 50000
Profit 110000
Part B
Prepare a flexed budget for the actual activity for the year.
Particulars Budget Actual Variances Variances (%)
Sales 100000 122000 22000 22.00%
Less: Cost of Goods
sold
87500 114500 27000 30.86%
Direct Material 50000 60000 10000 20.00%
Direct Labour 25000 28500 3500 14.00%
Variable Overhead 12500 15000 2500 20.00%
Gross Profit 12500 7500 -5000 -40.00%
Less: Fixed
Overhead
10000 11000 1000 10.00%
Net Profit 2500 -3500 -6000 -240.00%
1. Advantages and disadvantages of various types of planning techniques useful in budgetary
control.
Budget can be explained as a microeconomic term which calculates profit and
expenditures over a period of time. It is also flexible when compared to other methods and are
modified on a regular basis for different time intervals. These play a important role in companies
for carrying out operations efficiently. Supervisors of Nasty gal vintage company are provided a
guidance for preparing budgets which would help to attract customers from market for
investment purposes and complete finance related tasks.

Different planning methods which would help Nasty gal vintage company:
 Zero based budgeting: It can be explained as a technique which would be helpful to sort
expenses in a simplified manner keeping future aspects in mind (Anggadini and et.al.,
2021). It helps Nasty gal vintage in proper allocation of resources from different areas.
Advantages and disadvantages linked with it are explained below:
Advantage Disadvantage
This method is helpful for Nasty gal vintage
company in calculating expenses and costs
which are related to operating areas and ideas
which would help to earn more profits. It
provides transparent and simpler understanding
of budgets carried out by the organisation
which would help to evaluate performance of
the goal set by the company.
It is considered as a complex, time consuming,
more cost incurring method to be applied by
Nasty gal vintage in business. It also results to
be a difficult task to tackle and manage brand
image in market.
 Operating budget: It is a estimation of all profit earned and costs which are to be covered
during the life cycle of project. Analysts of Nasty gal vintage apply this tool to manage
present expenses related to company's operation. It also focuses on predicting future
expenses in business and how they can be controlled.
Advantages Disadvantages
It is useful for Nasty gal vintage in predicting
cost and expenses. It also manages company's
operations which would help them to complete
tasks well in time (Edwards and Larson, 2022).
It will also provide enough time to company
for evaluating opportunities which will best
suit its working in the long run.
It results to be non-helpful because it does not
analyse difference prevailing in actual and
estimated costs. It is a rigid tool because
policies planned in it cannot be modified at any
point of time.

 Capital budgeting: It can be explained as a process which helps Nasty gal vintage
company in searching and choosing best option among alternatives for completing long
term goals in a company. It will also help to contribute in their success journey as well.
Advantages: It helps to understand risk associated in investment decisions and what would be its
effect on Nasty gal vintage company.
Disadvantages: Nasty gal vintage can face issues because this method is non reversible and can
have an adverse effect on company in long run.
PART C
a) Evaluation of how the organisation Nasty Gal Vintage can adapt the management accounting
system for retorting to the fiscal problems.
Financial issues are the problems which the company faces when the error occurs in the
business operations due to the monetary issues. It could be faced by any entity due to the
diminishing cash flows, non – generation of the revenues, non performing of the business
activities effectively. These occur when the objective or goals of the organisation is unable to
accomplish due to the irregularity of the funds. Because the key aim of any company is to earn
profit by giving the best services possible to its customers. The organisations set the profit target
which has to be accomplished by the company. If this does not happen then the company is liable
to face the economic crisis.
Nasty Gal Vintage has been dealing with the lack of the cash inflow. Due to which its liquidity
position has been effected. It shows that the entity in inefficient to pay off its debts and the
operations of the firm are affected. This will thus lead to the poor management and can make the
organisation instability in the market (Urakova, 2021). The finances are very essential for the
entity because it ensures the business activities are running appropriately without nay disturbance
due to the funding. It has also suffered the situation of bankruptcy even after doing high
marketing. The entity spent major amounts in the advertisement of its products. Although, the
revenue of the entity started to diminish because the loyal and virtuous customers found that the
quality of their products were no goods. This tends to decrease the loyal of the retailer and
moved towards other organisation such as Marks and Spencer. This avails the company to take

debts and face an economic distress. It withdraws the company to fulling the basic responsibility
of Nasty Gal Vintage.
Distinguish of the financial issue by applying the management accounting systems:
Basis of difference Nasty Gal Vintage Marks & Spencer
Financial problems Nasty Gal Vintage's working
capital is low, which is leading
to difficult day-to-day business
operations and negligence in
providing customer
satisfaction.
Marks & Spencer's cash flow
statements have resulted in
lack of liquid cash which is
leading to the improper
operational activities.
Management accounting
approaches
Nasty Gal Vintage adopts the
approach of benchmarking to
resolve the financial problems
that it is facing. This will help
in prioritizing the business
parts which needs
improvements.
Marks & Spencer adopts key
performance indicators, so that
it can analyse its past and
current factors based on
performance. This helps in
examining the gap between
them (Remenarić, Kenfelja
and Mijoč, 2018).
Management accounting
systems
Nasty Gal Vintage adopts cost-
accounting system, which will
help the company in
identifying the earning and
loosing of money, & it will
also aid in internal cost control.
Marks & Spencer adopts
inventory management
system, which will guide the
company in identifying and
keeping track of inventory
starting from purchase to
sales. This will help in
solving the issue in effective
way.

Recommend by giving an analyses how management accounting approaches can lead an
organisation towards sustainable success
Nasty Gal Vintage make use of numerous management accounting approaches that helps
the company to gain a sustainable success in the marketplace. Company adopts for
benchmarking, financial governance to achieve the success and incompatible position in long run
in the marketplace. These plan of actions will aid Nasty Gal Vintage to overcome the financial
loss that it has incurred. Financial governance will help in monitoring the financial risk and with
the help of this, business risks can be surpassed.
CONCLUSION
It is concluded from the above report that management accounting guides the business plans and
make sure that the business stay on track. Capital budgets are prepared for a firm in order to
undertake the investments projects in time.

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