Management Accounting - KEF Ltd

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
Explaining the meaning of management accounting and essential requirements of the
management accounting systems................................................................................................1
Explaining several methods of reporting under management accounting..................................2
Evaluating the advantages and the application of the management accounting systems............3
Evaluating the integration in between the management accounting reporting and the systems. 4
LO2..................................................................................................................................................4
Preparation of the income statement for the month of June &Calculation of per unit
production cost &computing total cost of production &Advising the best technique for
evaluating the net profits ............................................................................................................5
Interpreting the difference in the actual and the budgeted profit for the month of June ............6
LO3..................................................................................................................................................8
Explaining the benefits and the limitation of the several planning tools under the budgetary
control ........................................................................................................................................8
Analysing the uses and the application of planning tools used for forecasting the budget .......9
Evaluating the use of the planning tools in responding to resolving the financial problems....10
LO4................................................................................................................................................10
Comparing different organization in respect of adopting the systems of management
accounting in order to respond financial problems...................................................................10
Analysing the ways in which resolving the financial problems leads the company towards
sustainable success....................................................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is defined as a process of preparing and presenting all the
financial as well as statistical information of the business in form of internal managerial report.
With the help of such report, it aids the management of the company in decision making process
related to business operations and investments. The present report is on KEF Ltd. Which is a
medium sized enterprise engaged in the manufacturing business. It will define about different
management accounting system and their use in business issues. Statements will be produced
using Absorption and Marginal costing techniques. Further, it will discuss about various types of
budgetary planning tools by use of which, company can make more profit and improves its
business performance. At last, it will streamline about techniques of management accounting
which can assist in resolving financial problems of the company.
LO1.
Explaining the meaning of management accounting and essential requirements of the
management accounting systems
Management accounting is the process of formulating the management reports and the
accounts which provides for the accurate and the timely financial as well as the statistical
information needed by the managers in order to make the routing and the short term decisions
(Management accounting and its importance, 2019). There are various management accounting
system that plays an essential role in efficient functioning of the business as follows-
Inventory management system- It refers to the system that includes proper planning of
the purchases, storing and handling the material or stock within the organization. It aims for
reaching the optimal inventory for the company and a detailed information regarding the material
that is to be purchased, the quantity of the material and the place from which it is to be purchased
with adequate details of associated storage cost (Huang and et.al., 2015). This system is essential
for tracing the supply of the goods and in maintaining the adequate level of the inventory in the
organization.
Cost accounting system- This system of MA considered as the framework that is used by
the organization in order to estimate their product cost for the purpose of making the profitability
analysis, valuation of the inventory and the controlling the cost. It is critical for the organization
to estimate accurate cost in producing the product which in turn results in the profitable
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operations (Gerrish and Spreen, 2017). Through this system the firm can know about the
products that are profitable and the which leads to loss anticipation of the correct cost.
Price optimization system- It is the system that act as the mathematical program which
computes the varying demand of the customers at various price levels and then combining the
data with the information relating to the cost and the level of inventory for recommending the
prices that improves the profits (Lasyoud and Alsharari, 2017). This system is crucial because it
allows the organization in using the pricing as the powerful tool of the profit lever, that is often
considered as underdeveloped. It also helps the enterprise in achieving its objective like customer
satisfaction, forecasting demand, creating promotion strategies.
Job costing system- It is the practice that include accumulating the information relating
to the associated cost with the particular production and the service job. It is counted as an
essential information as it helps in determining the adequacy in the estimating system of the
company which is to be made for quoting or fixing the best possible price that accounts for the
reasonable profits. Job costing system accumulates mainly three kinds of the cost that involve
direct material, labour and the overhead cost (Otley, 2016). It also facilitates managers in
keeping the track of the individual as well as the performance of the team in context of the cost
control, productivity and the efficiency.
Explaining several methods of reporting under management accounting
The reports prepared under managerial accounting are been used for regulating, decision
making, planning and in measuring the performance. The reports are formulated on the
continuous basis throughout the period of the accounting as per the requirements. Major crucial
decision of the organization depends upon the preparation of the reports with authenticity.
Managers analyse the reports for highlighting the particular pattern and converting it into the
useful information (Papa and et.al., 2017). There are several reports that are prepared by the
managers as follows-
Budget report- This report involves the anticipation of the sources of the earnings and the
expenditure for the organization. It plays a critical role in measuring the performance of an
overall enterprise. Estimations in the report are made on the basis of previous experiences so that
any unforeseen event in the future could be met. Firm could function its operations in budgeted
amount for achieving its goals and the mission effectively (Shil and Das, 2018). Budget report
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guides the managers in offering the better incentives to the employee, renegotiating the terms
and cutting the cost.
Accounts receivable report- It includes the information in relation to the remaining
balances of the clients and the distributors that the organization need to collect into the particular
time periods. It helps the mangers in identifying the defaulters and the issues that are present in
the process of collection (Tsoutsos and et.al., 2017). If the resulted defaulters are large, then
organization need to tighten its credit policies which in turn helps in maintaining the cash flow
within the operations of the company.
Performance report- This report is been created in order to review the performance of
the overall organization and the employees. Mangers make use of this report for making strategic
decisions relating to the future of organization. Individual or the staff are rewarded towards their
commitment of working with excellence for achieving the vision and the goals of the company
(Toussaint and et.al., 2017). Performance report plays a vital role for the organization in keeping
the accurate measure of the developed strategy according to their mission.
Cost accounting report- It refers to the report that accounts for computing the cost of the
articles incurred in manufacturing the product. It includes all the cost such as material cost,
labour cost and the overhead cost. It provides for the summary of information relating to these
cost. Cost management accounting report allows the capacity to the managers in realizing cost
prices against the selling price of the product. This report provides for the estimation of the profit
margins and a clear picture of the cost involved in the production and the procurement of the
material (Said, 2016). It facilitates exact understanding relating to all the expenses that are
essential for attaining optimization in the use of the resources among all the departments.
Other reports- It involves the project reports, information reports, competitor analysis
report and the other reports that are critical for the business (Quattrone, 2016). These reports are
created by the professionals or been generated internally by the managers.
Evaluating the advantages and the application of the management accounting systems
Management accounting systems Benefits and applications
Inventory management system This system helps the organization in saving its
time and the money as it traces the inventory
so that accurate record keep is ensured.
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Price optimization system This system helps the business in assessing the
purchasing pattern of customers with respect to
their taste and the preferences (Ahmad and
Mohamed Zabri, 2015). It is applied by the
organization for making analysis of customer
behaviour which in turn assist the firm in
setting up better prices.
Cost accounting system It facilitates the analysis of cost objects where
the revenues and the expenses are been
accumulated by the cost object like product,
distribution channel, product line etc
(Donaghue and et.al., 2018). This in turn
enables the organization in determining the
profitable and unprofitable segments of the
product.
Job costing system It helps the company in keeping the track over
the performance of individual and the team
which in turn leads to cost control, productivity
and efficiency.
Evaluating the integration in between the management accounting reporting and the systems
Management accounting system and reporting highly interrelates as efficient functioning
of the systems helps in continuous improvement for the organization through the development
and the integration of the cost related information. This leads to effective preparation of the
reports by the managers which leads to achievement of the goal with high efficiency.
LO2.
Marginal Costing – The term Marginal costing is known as the system of accounting
where all the cost that are of variable nature are been charged against the cost units. However, in
case of fixed costs incurred in continuing the business operations for the definite period are been
written off in full against all the contribution made on aggregate basis (Gerrish and Spreen,
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2017). This method of costing is applied only to those business cost to inventory which was
incurred at the time of production of each individual unit.
Absorption Costing – This technique of costing reflects that all the cost related to
manufacturing operations had been assigned to all the units that are produced. The cost of
producing the product involves all the costs like as direct materials, direct labour etc.
Preparation of the income statement for the month of June &Calculation of per unit production
cost &computing total cost of production &Advising the best technique for evaluating the
net profits
A. Budgeted Profit and Loss Statement
Absorption Costing
Particulars Amount in £
Sales (16000*60) 960000
Cost of sales:
Opening inventory 0
Direct Material (18000*12) 216000
Direct Labour (18000*20) 360000
Fixed Overhead (18000*6.6) 120000
Variable Overhead (18000*8) 144000
840000
-Closing inventory (2000*15) -30000
810000
GP 150000
-Selling expenses of Fixed nature 0
-Selling cost of Variable nature 0
Actual NP 150000
Marginal Costing (MC)
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Cost per unit
(in £)
Material 12
Labour 20
Variable O/h 8
Marginal cost per unit 40
SP 60
Marginal cost per unit 40
Variable selling price 0
Contribution (per unit) 20
Particulars Amount in £
Sales (16000*60) 960000
COGS:
Inventory at beginning 0
Material (18000*12) 216000
Labour (18000*20) 360000
Variable O/h (18000*8) 144000
720000
-Closing inventory (2000*15) -30000
690000
GP 270000
-Variable selling cost 0
Contribution (16000*20) 320000
-Fixed costs 120000
-Fixed selling expenses 0
Actual Net profit 200000
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Interpreting the difference in the actual and the budgeted profit for the month of June
B. Budgeted Profit and Loss Statement
Absorption Costing
Particulars Amount in £
Sales (16000*60) 960000
Cost of sale:
Opening inventory 0
Material (19000*12) 228000
Labour (19000*20) 380000
Overhead - Fixed (19000*6.6) 125400
Overhead - Variable (19000*8) 152000
885400
-Closing inventory (3000*15) -45000
840400
Gross Profit 119600
-Fixed selling expenses 0
-Variable selling cost 0
Actual Net profit 119600
MC
Cost per unit
(in £)
Direct Material 12
Direct Labour 20
Variable O/h 8
Marginal cost per unit 40
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SP 60
Marginal cost per unit 40
Variable selling price 0
Contribution per unit 20
Particulars Amount in £
Sales (16000*60) 960000
Cost of sales:
Opening inventory 0
Material (19000*12) 228000
Labour (19000*20) 380000
Variable O/h (19000*8) 152000
760000
-Closing inventory (3000*15) -45000
715000
GP 245000
-Variable selling cost 0
Contribution (16000*20) 320000
-Fixed costs 120000
-Fixed selling expenses 0
Actual NP 200000
Interpretation – From calculations made it can be interpreted that contribution per unit is £20
per unit. Under marginal costing method, NP has been determined for making comparison. The
amount of net profit calculated under marginal at 18000 units is £200000 and for 19000 units in
it is £200000. The net profit amount for 18000 & 190000 units is as calculated under absorption
costing technique is £150000 and £119600. Thus, it can be concluded that by using marginal
costing method, organization is making a net profit of £200000 at both unit level viz. 18000 and
19000. It is better to use absorption method for determining the amount of net profit for 18000
units as it is yielding more profit of £30400 as compared to marginal one.
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LO3.
Explaining the benefits and the limitation of the several planning tools under the budgetary
control
Zero based budget- It is the planning tool that provides for building the budget from
zero-base by justifying all the expenses for the new period (Hansen and Schaltegger, 2016). It
does not take into account the past year's results or allocations so it is also called as the revised
budget.
Advantages Disadvantages
Zero based budgeting prioritize the profits over
the expenses and thus act as the profit centre.
This helps the organization in getting large
funding for generating more and more sales
and the profits.
It allows the organization to be strategic in
relation to their approach and provides for
expanding the amount that grows in the future.
This budgeting method requires the detailed
analysis and the attention so it is considered as
the complex job for the managers of the
organization.
It does not provide the focus on the cost
centres as it does not enable in generating the
immediate profits. This budgeting technique
does not encourage funding which in turn
affects the long run growth of the organization.
Activity based budget- It is the method of budgeting in which the budgets are been
framed after making consideration of the overhead cost (Kaplan and Atkinson, 2015). Under this
all the activities are analysed that incurs the cost and the allocation of the resources is made to
each activity.
Advantages Disadvantages
This tool of budgetary control eliminates all
kinds of the irrelevant activities that in turn
helps organization in saving cost so that profit
margins increases.
It enables the organization in gaining the
It provides for the short term view and not
takes into account the long term prospect of the
business.
A huge cost is involves in adopting this tool as
it needs skilled staff which in turn involves
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competitive edge in the overall market. cost of training to the employees.
Rolling budget- It referred as the updated budget on a continuous basis as the new period
of the budget is added and completed (Mourtzis and et.al., 2016). It includes incremental
extension of existing model of the budget as it extends the one year into future.
Advantages Disadvantages
This planning tool incorporates the changes
from past year into the coming period. This
helps the organization in getting the more
updated information for making the forecast
effectively.
It helps in being responsive towards the
unexpected changes that might occur in the
future as it allows for making the adjustments
and facilitates flexibility.
It is not advisable to opt for rolling budget in
the business when the conditions are not been
changing constantly.
It involves a lot of time and the resources for
assessing the varying circumstances
appropriately.
Rolling budget needs robust information and
highly skilled personnel for extracting the
information and implementing it into the
specific version.
Analysing the uses and the application of planning tools used for forecasting the budget
Planning tools Uses and application
Zero based budget It is the most useful tool for the organization as
it helps in re-evaluating or re-examining all the
expenses and the programs for each of the
budgeting period by assessing the efficiency
and the workload measures.
Activity based budget It acts as the useful tool in the organization as
it improves the relationship among the workers
and also in between the organization and the
customers.
Rolling budget This planning tool is useful for the
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organization because it provides flexibility and
the responsiveness in dealing with the
uncertain situations.
Evaluating the use of the planning tools in responding to resolving the financial problems
Planning tools provides for the allocating and utilizing the resources optimally with
appropriate information which in turn helps in resolving the problem relating to the lack of
resources and the cash (Muda and et.al., 2018). It helps in making the strategic planning for
achievement of the goals and the objective of the organization by assessing all the activities that
impacts internal as well as the external working of the enterprise.
LO4.
Comparing different organization in respect of adopting the systems of management accounting
in order to respond financial problems
There are various management accounting systems that are companies utilize for resolving their
financial problems as follows-
KEF Limited ABC Limited
This company make use of benchmarking and
balanced-scorecard for solving its financial
problems.
Benchmarking- It is the process that measures
performance of the firm's products, processes
and the services against the industry that is best
performing in the market. It helps the
organization in attaining the competitive edge
and in determining the internal opportunities
which in turn helps in achieving continuous
improvements. This technique enables the
organization in resolving the financial problem
relating to occurrence of irrelevant cost and in
This entity uses key performance indicator and
variance analysis as their management
accounting tool in order to deal with their
financial problems.
Key performance indicator- ABC Limited
uses this method for defining the standards on
the basis of which the employees of the
company has to perform (Evers and et.al.,
2019). This enables the organization in dealing
with most of the financial problems that
include ineffective performance, strategies
failed etc.
Variance analysis- It is the tool that helps in
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reaching the low cost of the production so that
larger profits can be earned.
Balanced scorecard- It is the performance
metric that is used by the organization in its
strategic management in order to identify
several internal functions and the resultant
outcome of the business (Use of balance
scorecard in financial problem, 2019). It
provides the enterprise an overview of the four
major perspectives that include financial,
customer, business process and the growth
outcome. This in turn helps the firm in
resolving the financial problems in relation to
the lack of cash availability, dis-satisfaction
among customer and wastage of the resources.
studying the deviation in between the actual
and the budgeted results. This assist the
organization in resolving the financial problem
relating to the performance gap and inaccurate
estimation of the standard or the budget.
Analysing the ways in which resolving the financial problems leads the company towards
sustainable success
There are various tools such as benchmarking, variance analysis, key performance
indicator, balanced-scorecard and the financial governance which is used by the organization for
resolving its financial problems and this in turn leads the company in attaining the sustainable
success in the overall market across the globe (Donaghue and et.al., 2018). Theses techniques or
the system helps in assessing the long run prospects of the enterprise in respect of the adequate
availability of the cash in running the operations efficiently even in the changing conditions.
CONCLUSION
From the above report it can be concluded that by having sound and effective strategies,
plans and policies it helps the management of the company in making crucial business decision.
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By interpreting all the information of financial and statistical nature with the help of proper
management accounting techniques, it has been able to gain competitive advantages. The report
has discussed that by formulating and adopting proper management system, budget related
policy KEF Ltd. Has been able to attain its business goals and objectives in a cost effective
manner. Also, by using Key performance indicator it has been able to determine its main issue
related to optimal utilisation of business resources, improving business efficiency and
performance level as well.
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