Management Accounting Systems and Costing Methods

This document provides an overview of management accounting systems and their importance in organizations. It discusses different types of management accounting systems and their applications. It also explains the computation of costs using absorption and marginal costing methods. The document is relevant for students studying accounting and finance.

Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
SCENARIO 1 ..................................................................................................................................1
PART – I......................................................................................................................................1
Management Accounting different types of Management Accounting Systems.........................1
Different methods used for management accounting reporting...................................................3
Important of various MA system and its applications.................................................................4
Critically evaluation of MAS and reports integrated within organization...................................5
SCENARIO 2 ..................................................................................................................................5
TASK 2........................................................................................................................................5
Computation of cost with the help of absorption and marginal costing methods........................5
TASK 3..........................................................................................................................................12
Advantages and disadvantages of different types of planning tools..........................................12
Use of planning tools and their application...............................................................................13
Comparison of organization on the basis of Adoption of MAS................................................13
Role of MAS in responding to financial problems....................................................................15
Planning tools used in solving financial problems....................................................................15
CONCLUSION .............................................................................................................................15
REFERENCERS ...........................................................................................................................16

INTRODUCTION
In its basic form, accounting is a means of communicating to all stakeholders the
financial condition of a company or association. This is a way which help shareholders to
determine assets, liabilities and cash flow within company (Jansen, 2018). Management
accounting is defined as the process of grouping, posting, summarising, evaluating the crucial
accounting information into legal internal accounts to make effective decision. Accounts that are
prepared by the inner manager of company help them to make more authentic judgement in
respect to increase the entire profit making and market image. In the modern business time,
every company wants to have the better management system so that they can efficiently make
use of entire available resources and employees. In order to gain the in depth understanding of
MA Alpha Ltd have been selected that is a medium-sized manufacture company. The firm
produces different types of Pizza and was established in 2001.
in this respective report, several kind of MA system and their importance are shows,
number of useful MA report and their integration to company process are also discussed.
Furthermore, using different kind of costing technique's to prepare income statements and
evaluation of net profit, use of planning tool to strengthen budgetary process is defined in this
report. Various types of MA tool and methods plays a crucial role in company that is to detect
and resolve various financial problems are shown in this report.
SCENARIO 1
PART – I
Management Accounting different types of Management Accounting Systems
The concept of collecting, reporting, summarizing, and assessing the financial and non-
accounting information into authentic account which support manager to make valuable decision.
By qualified professionals is being used within businesses so that senior management can better
develop specific strategies for the smooth running of the company (Rickards and Ritsert, 2018).
Management accounting systems assist to analyze costs involved in various processes, determine
the paths in which prices are cut and the customer is provided with superior products, means of
measuring performance that enhances business productivity and therefore maximizes
profitability. There are number of useful system which can be applied by the Alpha Ltd in order
to make more better functional of different operations. These are discussed below:
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 Job costing: The concepts of this system is relate with evaluating the total cost of
company involved within different jobs. This enables manager to have detail knowledge
about total cost spend on various important position in company. This further support to
make better and proper decision to reduce or cut the unnecessary speeding of company
in jobs which are not favorable in the meantime (Sadikoglu and Olcay, 2014). Thus in
Alpha Ltd can be helpful by using this system as it support in evaluating the total
included in various operation. They can assess the cost spend on production, staffing and
make effective decision to reduce the cost in necessary to increase profit margin. Price optimizing: This is consider to be one of the most valuable MA system that is
related with defining the best price of goods that are favorable to customer and company.
Manager uses information related with jobs, product making and set the suitable price of
goods that might attract the customer to use their goods and company can cover is total
cost. In Alpha ltd, manager by implementing this system can easily fix the price for
various pizza which will increase demand in market. This would let company to increase
sales and cover all their expenses and maintain a decent profit throughout the year. Cost accounting: To order to evaluate the efficiency of the company, to assess the
inventors and to track the total costs, this approach is used. it includes Two costing
approaches exist such as the cost of employment and the cost of processing. Likewise,
Job Costing assist can help Alpha Ltd to define the manufacturing costs associated for
each occupation in which companies have various products and different production for
all. On the other hand, process costs can recognize separate overheads for each method
which can be used where different procedures are involved in producing.
 Inventory management: This procedure assist to maintain and manage stocks properly.
It contributes to good stock management and focuses on supply chain and better stock
turnover (Schulze and et.al, 2016.). Manager of respective company by using this
strategy, they can efficiently handle all their inventories, refill their manufactured goods
on schedule and attract their customers through making products available in retail
stores. It allows authorities to document all inventory levels inside the company in a
physical way. The expense of the enterprise for many other business activities could also
be calculated in order to identify total labor expenditures. It also helps to develop
appropriate plans to cut costs and increase annual overall profit margins.
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Different methods used for management accounting reporting
In present time, businesses could be very productive and efficient when they produce
different report and correctly produce valuable accounts for management. These documents
could be used to schedule correctly, to regulate businesses and to assess financially and
structurally the performance (Seung, 2014). Different types of report have their separate
importance within company so that variation within performance of company can be resolved.
Such reports provide appropriate numbers and statistical data, which improve decision-making
and actually improve the firm's long-term approaches to remain at top in industry. For internal
use manager make decisions to reduce costs or to direct funding on more advantageous product
categories through important information. Some of the common useful reports that can be
prepared by manager of Alpha ltd are discussed below:
 Performance report: This is treated to an effective report for company as it help in
measuring the total performance of different processes and worker employed in different
operations. Manager uses this report to regular record the actual performance of every
aspect of business and compare with expected figures. So that any kind of variation
determined can be improved and overall performance can be increase to improve entire
business figures. In Alpha Ltd, manager can prepare this report to analyses the
performance of various business activities and total number of staff member engaged on
these operations. It would more be effective in increasing the total proficiency and
profitability of company by making strategies that could lead to enhance to working
capacity of of team member.
 Cost accounting report: The report which are mainly prepared to record the relevant
figures of cost involved in various task, operation and jobs within an organizations. This
is basically prepared by manager to get the knowledge about actual requirement of funds
to run specific operation from last year report (Maskell, Baggaley and Grasso, 2017). In
respective firm, manager can formulate this report to record the total actual cost spend on
various respective operations. This can be further effective to reduce the unnecessary cost
used on unwanted activities in order to increase the overall profit ratio in desired time
period.
 Accounts receivable report: This document provides details related with each borrower
for the organization. This also documents the firm's payments receivables revenue as well
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as the length of time they took to pay back the outstanding amount to company. In this
respect, the firm is also aware that the collection policy has to be tightened and is
beneficial to track the debtors who are doubtful those can demand to extend transaction
dates.
 Manufacture and inventory report: The above report is mainly prepared by better
inventory manager of company to make better manufacturing procedures. In terms of
work costs, overhead costs and unavoidable byproduct of stock, the document substance
includes different costs (Tamandeh, 2016). This also enables executives compare the
availability of stock and determine the reason of lacking of different types of stock in
order to improve company productivity. In Alpha Ltd, manager can formulate this report
which support them to check the total raw materiel available for making pizza within a
day. It support to assess the availability of prepared pizza so that deliver can be made to
respective customer and need of actual material for preparing pizzas. It can be also
important in order to increase the overall productivity of firm by making available of
product when required by customer.
Important of various MA system and its applications
Management Accounting
Systems
Benefits Application
Job costing systems  This allows to predict all
expenses during the entire
production cycle (Mishan,
2015.).
 It help in performance
analysis of the work done.
 This approach should
be used when firms
have the same goods
and can track their
prices during the
process of production.
Price optimising system  This enables to identify
customer behaviour
according to various
prices.
 It also support in
maximizing the best-
 It could be used in
order to recognize
promoted prices,
special offers and
market opportunities
during entering the
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priced income. market.
Cost accounting system  Track cost performance
and develop ways to
control them in respective
time.
 This help manager to give
equivalent information
which is essential for
planning.
 This system enables
manager to establish
the cost of products
correctly in simple
manner.
Inventory management
system
 Strengthen stock order
reliability that saves time
and money.
 Thus by using this system
manager can make better
credit policies within
company.
 The main application of
this report is that it
could be used to attain
the desired profitability
by maintaining the
availability of stock at
all time.
Critically evaluation of MAS and reports integrated within organization.
Management accounts and systems are relevant in the current business to make the
business program profitable. Different systems are also used to carry out important payments and
various documents to monitor transactions and establish successful development plans for the
future. With respect to the Alpha Limited Administrator, the managerial accounting system is
used to track and control expenses involved in different activities and the budget statement is
designed in order to review costs and to plan for a reduction in total costs. Inventory control
system is being used to monitor stock levels inside the company over a certain time-span and
stock management accounts are primarily ready to locate accessible stock raw resources, so that
long term steps can be taken to boost the firm's profitability.
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SCENARIO 2
TASK 2
Computation of cost with the help of absorption and marginal costing methods.
Cost is something that is use by companies on different operation and activities in order
to reach the desired results and favorable outcome (Mohamed, Kerosi, and Tirimba, 2016).
These are the expense made to produce something useful for company that will generate future
profit in particular time period. Some of the common methods used calculate cost and determine
profit margin is discussed underneath:
Marginal Costing: The concept of costing techniques is related with evaluate the cost
related with every additional unit of manufacture good. It is a basic technique where the total
cost are categorised into variable and fixed cost for the product and treated separately while
preparing income statements.
Selling price 8
Unit Variable Cost 3
Fixed manufacturing expenses 150000
Non maufacturing expnses 50000
Budgeted activity 75000
Particulars Amount (£)
Apr
’19
May
’19
Jun
’19
Jul
’19
Aug
’19
Sep’19
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening
inventory
0 0 15 0 0 15
Closing
inventory
0 15 0 0 15 10
Profit and loss
account:
Particulars Amount (£)
6

Apr
’19
May
’19
Jun
’19
Jul
’19
Aug
’19
Sep’19
Sales revenue 600 480 720 600 560 640
Opening inventory 0 0 120 0 0 120
Add: Variable cost 225 225 225 225 255 210
Less: Closing
inventory
0 45 0 0 45 30
Margin cost of
sales
225 180 225 225 210 180
Contribution
Margin
375 300 495 375 350 460
Less: Fixed
Manufacturing
Overheads
150 150 150 150 150 150
Less: Non-
manufacturing
Cost Per period
50 50 50 50 50 50
Net Profit/Loss 175 100 295 175 150 260
Income statements by Absorption costing
Absorption Costing: It is a costing process, which mainly focuses on the measurement
and the isolation of costs into one produced unit of costs / expenses related to business
manufacturing procedures (Otley, 2016). The above technique is totally applicable to inventory
profitability reporting standards. The main advantage of using this method is that it classifies as
the costs of goods sold in both the variable and fixed costs relating to manufacturing.
Selling price 8
Unit production Cost 5
Fixed manufacturing expenses 150000
Non maufacturing expnses 50000
Budgeted activity 75000
Particulars Amount (£)
7

Apr ’19 May
’19
Jun
’19
Jul
’19
Aug
’19
Sep’19
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening
inventory
0 0 15 0 0 15
Closing
inventory
0 15 0 0 15 10
Particulars Amount (£)
Apr ’19 May
’19
Jun
’19
Jul
’19
Aug
’19
Sep’19
Sales revenue 600 480 720 600 560 640
Opening
inventory
0 0 120 0 0 120
Add: Cost of
production
375 375 375 375 425 350
Less: Closing
inventory
0 75 0 0 75 50
over/under
recovery of
overheads
0 30 0 0 10 30
Cost of sales 375 270 375 375 340 270
Gross profit 225 210 345 225 220 370
Less: Non-
manufacturing
Cost Per period
50 50 50 50 50 50
Net Profit/Loss 175 160 295 175 170 320
Reconciliation:
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Particulars
Apr ’19 May
’19
Jun
’19
Jul
’19
Aug
’19
Sep’19
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening
inventory
0 0 15 0 0 15
Closing
inventory
0 15 0 0 15 10
Apr
’19
May
’19
Jun
’19
Jul ’19 Aug
’19
Sep’19
Net profits under
absorption costing
175 130 295 175 160 290
ADD: Fixed overheads in
opening
0 30 0 0 10 30
175 100 295 175 150 260
From the above calculation it has been determined that the net profit from marginal
costing method for the different month is lower than the absorption costing techniques. The main
reason for difference in the balance is because treatment of fixed cost that gates absorbed in the
absorption costing technique. Thus, it is suggested to company to implement the absorption
costing techniques in order to get more reliable results.
a) Before installation of the new machine
Contribution Margin Per Unit =
Sales Price per unit – Variable cost per
unit
40-28 = 12 p.u.
Break even point in units = Fixed Costs/ Contribution Margin per
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unit
180000/12
Ans. 15000
Break even point in Pounds =
Sales Price Per Unit x Break even point in
units
40 x 15000
Ans. 600000
P/V Ratio = (Contribution Margin p.u./ Sales
Price p.u.)*100 30
BEP from P/V Ratio 600000
b) After installation of the new machine
Contribution Margin Per Unit =
Sales Price per unit – Variable cost per
unit
40-14 = 26 p.u.
Break even point in units =
Fixed Costs/ Contribution Margin per
unit
(180000+236000)/26
Ans. 1600
Break even point in Pounds =
Sales Price Per Unit x Break even point in
units
40x16000
Ans. 640000
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P/V Ratio = (Contribution Margin p.u./ Sales
Price p.u.)*100 65
BEP from P/V Ratio 640000
From t
2 c. Financial statement
CVP analysis: An assessment of the CVP or the cost-volume-benefit recognized as an
MA method, which involves primarily the assessment of the impacts on organization operating
income on the sales volume and the cost of the products manufactured (Tschopp and Huefner,
2015). This analysis shows how, as a result of changes / flushes in various expenses like
variable, fixed costs, corporate operating earnings are impacted.
Scenario 1.
Without installation
Sales £5,40,000.00
(-) variable cost -£3,78,000.00
Contribution £1,62,000.00
(-) Fixed cost -£1,80,000.00
BEP -£18,000.00
Current installation
Sales £6,00,000.00
(-) variable cost -£4,20,000.00
Contribution £1,80,000.00
(-) Fixed cost -£1,80,000.00
BEP £0.00
Scenario 2.
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After installation
Sales £8,00,000.00
(-) variable cost -£2,80,000.00
Contribution £5,20,000.00
(-) Fixed cost -£4,16,000.00
Profit £1,04,000.00
Installed
Sales £6,40,000.00
(-) variable cost -£2,24,000.00
Contribution £4,16,000.00
(-) Fixed cost -£4,16,000.00
BEP £0.00
The above calculation in the context of two machinery option available for Alpha Ltd, it
has been ascertained that company must implement the new machine in order to carry future
functions. This is because the total profit company can earn by selling 16000 unit is £1,04,000.
The break even point is also favourable when the are selling 16000 units as expenses are equal to
profit.
TASK 3
Advantages and disadvantages of different types of planning tools
Budgeting is used to forecast and list annually, projected spending and revenue for the
next year. The monitoring and alteration of modifications in previous year budget is also re-
evaluated on regular basis so that desired current goals can be attained. Some of the most useful
budget that can be prepared by Alpha Ltd are discussed below:
Flexible budget: A flexible budget, often recognized as variable budget, is fiscal plan of
projected turnover and outlays based on real inputs (Williams and Dobelman, 2017). In simple
words, a flexible budget utilizes revenue and outlays generated in production as just a benchmark
and forecasts how revenue as well as outlays will vary depending on output revisions. A flexible
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budget is typically designed to anticipate the impacts of quantity revisions on earnings and
outlays.
Advantages Disadvantages
 The main benefit of such budget is that
it enables the corporation's
management to assess the scale of
manufacturing in various economy and
industry circumstances.
 It also assist in reclassify the different
stages of earmarked costs together with
revenues so that executives can clearly
identify sectors of gain and therefore
can respond accordingly.
 It relies on reasonable disclosures of
bookkeeping. In case there any errors in
the accounts issued, the outcome of
Flexible budget can't fully turn out to be
right. Flexible budgets are highly
dependent on a prediction of previous
performance. It is therefore necessary to
have precise historical data.
 Skilled employees are expected to serve
this budget. Shortage of skilled workers
is becoming the industry's problem.
Therefore, given its immense benefits,
most companies and businesses can not
adopt Flexible budgets.
Sales Budget: This budget simply contains projection of revenue (both in units term and
value term). It help to set target for selling and distribution division and also assist in pricing
strategy. In Alpha Ltd sales budget also help to determine break-even point and increase
productivity.
Advantages Disadvantages
 It provide a quick review of
performance of organisation in terms of
sales.
 It allow to find out any major variation
in sales due to any key business event.
 Sometimes due to seasonal effects and
contingency in business this budget can
mislead managers.
 It's relevancy also decreases due to
external or macro environmental
impacts on sales.
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Purchase Budget: Just opposite to sales budget it emphasises on projection of purchases.
This budget is normally used by personnel who are responsible for maintaining adequate goods
and raw-material for processing.
Advantages Disadvantages
 It also shows movement of different
inventory items.
 Help to maintain adequate stock and
loss help to minimize excessive
inventory costs (Ye, Yang and Tan,
2015).
 In small and medium-sized firm this
budget report is not so important and
also time-consuming activity.
 Consideration of only purchase figures
sometimes impacts decision-making.
Use of planning tools and their application
In modern business environment, there are different budgets which are mainly prepared
by companies to make assumption about total expenses required to meet the business operations.
It also enables to ascertain the total revenue generation from these operation in specific time
period. Various type of budgets such as sales, purchase, and flexible budgets are helping out
manager of Alpha Ltd to analyse the every segment of business and make valid figures.
Meanwhile it help in ascertaining the several ways due to which financial problems can be arises
within company. So each budget have its equal importance in strengthening the overall
budgetary process of respective firm.
Comparison of organization on the basis of Adoption of MAS
Financial problem is discussed as the situation when company is not able to deal with its
regular activity due to lack of various resources and funds. This also make team member to be
demotivated as they are not able to perform the different valuable assigned work which reduced
the overall financial stability of company (Kaplan, and Atkinson, 2015). There are various types
of management accounting tools and techniques which can be applied by the internal manager of
company in order to determine and resolve financial problem. This is discussed in the context of
Alpha Ltd:
Financial governance: The process related with gathering, recording, analysing the
important financial data into proper account to make better and effective decisions (Financial
governance, 2019). Likewise, the manager of Alpha Ltd gather, organise, report, control and
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monitors the entire financial information within company. This help them to detect the financial
issues like late payment from client, more spending than earning that could reduce the overall
proficiency and profitability. So by implementing this management accounting technique
manager can make better credit policies to remove the financial issue of late payment. As well as
they can control the expenses on unproductive marketing activities which requires huge
investment and total earning are lower.
Comparison of companies adopting MA system
Tesco Sainsbury’s
The company is largest supermarket chain
leading UK. That use to sell number of daily
needs product to large number of customer base
all over the world. In company the major
financial issue is related with late bill payment
from customer side.
It is also one of the second leading super
market group of UK. The ongoing issue in
company is relevant to over utilisation of
monetary resources that decreasing overall
profit margin.
In order to resolve the particular issue manage
uses of Key performance indicator. This help to
ascertain the issue due to which different
operation are getting affected in Tesco. They use
financial indicator in order to detect the reason
for gap in credit cycle due to which there is delay
from customer side.
To find out the financial problem
Sainsbury's manager uses the MA technique
of benchmarking. This help in analysing the
actual usage of funds on different operations
and in order to compare with companies in
same industry. This help them to define the
best possible uses of funds in different
operation to increase overall profitability.
Manager of respective company can implement
Balance scorecard which enables develop and tell
about valuable methods to finance manager to
collect outstanding money. The can provide store
card in which entire information of customer and
outstanding amount is stored. So that proper
intimation can be sent to them on their actual due
dates in order to resolve the problem and
Manager can apply ABC costing technique
which enables to determine the relation
among costs and production activities. This
enables to make sure that they preserve
appropriate funds in order to meet the actual
requirement of entire business operations.
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maintain monetary circulations (Karadag, 2015).
Role of MAS in responding to financial problems
MAS makes it easier to identify many financial difficulties for a company and tends to
make good choices so that priorities can be met efficiently. It enables manager of Alpha Ltd to
overcome the financial difficulties by implementing correct accounting system. For instance by
using cost accounting to systematically analyse the expenses incurred in producing the product
because of overvaluation of services purchased to consumers.
Planning tools used in solving financial problems
In addition to using adequate MAS, good techniques are also needed to plan, so that
companies can effectively address their financial problems. Company faces the problem of the
materials it supplies to clients on the basis of their requirements and preferences. It can be fixed
by using financial governance to analyse the actual data related to availability of stock before
taking any order for customers. This also supports in making effective financial regulations and
practices. The budgeting planning process is strengthened by fiscal management, which aims to
distribute enough funding for all operations of the company (Karadag, 2015).
CONCLUSION
It is reasonable to conclude that businesses can utilize MAS to sustainably achieve their
achievement. Management must report correctly for entire period in order to analyse their profits
of company which enables to achieve the potential aims of business. There are various methods
used to analyse total expenses that can be used by the organization. Likewise variable expenses
and absorption expenses, the best techniques that will contribute to preparation of income
statements and determine the net income and loss. There are several budgets are an effective tool
that companies should schedule in order to assign an acceptable departmental amount and to
measure the sums expected and incurred.
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