Management Accounting (MA) Solved Assignment

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting (MA) is application of different skills and knowledge in a way for
preparing accounting data which assist management to formulate policies, and to plan and in
controlling of operations. In other words profession of management accounting involves part in
planning, decision making, performance management, providing financial reports and controls
for assisting management in formulating and implementing of cost budgets and strategies.
(Kaplan and Atkinson, 2015). It facilitates management pertaining to various aspects namely
strategic, performance and risk factors. In contrast, with the financial accounting, MA is
concerned about providing the relevant data and report to internal users like entrepreneurs and
managers. This report is based on Oshodi PLC which is specialised in JOJO fruit across all age
brackets. This report will include MA and its necessary requirement of various accounting
systems. The report also highlights various methods that are used in MA reporting. It will also
develop understanding about costing system that can be used for preparing profitability statement
namely marginal and absorption. It also entails benefits and disadvantages associated with
different tools of planning which could be used for budgeting control. Further, reports provides
deeper insight about how organisations can use MA systems for responding to financial issues.
LO 1
P1 Explaining management accounting and its essential requirement within organizational
context.
Management accounting: - The tool is used in business to analyse business and its
activities. MA is “ Application of different skills and knowledge in way to prepare accounting
information that enables management in formulating policies and to plan & control the
operations of organisations” (Otley, 2016). It also includes methods and concept that are
essential for efficient planning to choose the best alternative among the available alternatives in
business for acting and controlling by evaluating and interpreting data. MA helps in planning,
decision making, identifying the early signs of the problem, strategic management. It analyses
the financing and non-financing informations and conclude results through information.
Management v/s financial accounting system
Financial Accounting Management Accounting
 FA has focus on the preparation of  On other side, managerial accounting is
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information useful for external parties
who are, lenders, stockholders and
public regulatory authorities in
accordance to generally accepted
accounting principles.
providing information useful to internal
stakeholders about performance of
company. (Maas, Schaltegger and
Crutzen, 2016).
 An efficient management accounting
system expands to all the departmental
divisions of company such as IT,
finance, Human resource, operations &
sales.
Different management accounting system:-
Job Costing:- It is system used to monitor expense and which assigns cost of
manufacturing to each item and enable managers of company to keep record of expenses. This is
a system which determines cost of manufacturing systematically by segregating them at direct
material, labour & overhead cost which estimate the actual value of the products produced by
JOJO fruit juice. It is used for the controlling usage of raw material, direct labour hours, and
equipments by assigning cost of every customer’s order individually. It is most useful for JOJO
fruit juice where the firm do not have identical products it is used for the allocation of each
product costing differently. It accumulates three types of information which is as follows.
 Direct material:- it is the cost related to material directly used in the production system.
 Direct labour:- it is the cost incurred on the labour and direct wages paid to the workers.
 Overhead:- This implies for the extra cost which is incurred over the production like
administration such as depreciation, rent of building etc.
Advantages Disadvantages
 It provides detailed analysis cost such
as raw material, wages and overhead in
the production of different products and
according to different departments,
nature of expense which helps to
 It is an expensive process because it
involves in great clerical work in
recording daily cost of material, wages
and overhead which incurred a cost on
firm (Schaltegger and Burritt, 2017).
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determine the operating efficiency of
production, production centre and
products.
 It enables the management to which job
is more profitable and which is as less
profitable. Also, it finds out the loss
occurring department of organisation.
 Cost comparison is difficult when the
drastic changes take place.
It is essential for the Oshodi PLC because it helps firm to assign the different cost to the
different departments also it assists the costing and profits of different departments.
Price optimisation system:- Price optimisation is mathematical analysis done by
organisations for determining customer responses to the varying price levels for goods and
services by the different channels (Cooper, Ezzamel and Qu, 2017). It is increasing prices over
customer willingness to pay for purchasing products. It helps a firm into deciding the price and
set a price which gives the highest profit to firm. It decides the prices by recording the response
of customers at different level of pricing.
Advantages Disadvantages
 Generate the right prices for the
products by optimised price that
continuously incorporates up to date the
market information.
 Complexity:- it is a complex process to
because recording the different sales at
different prices and find out the
optimum price is complex for the firm.
 Better and quick decision:- prices
optimisation helps in better the decision
and reduce he time of taking decisions.
 Crawling:- the acquisition of external
data relevant for optimisation takes
place using the crawling procedure
where enormous data in volume.
It is essential for the Oshodi PLC to determine prices which increase the probability of
the firm. The prices of product are too high then it may not sell the product and if the prices set
to very low than it cause company do not earn profit. So it can be says that prices optimisation is
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an important for Oshodi PLC because is set the optimum prices which customers is able to pay
and company makes profit from it
Inventory management system:- This is a tool that allows to track the goods across
business supply chain (Weetman, 2019). It is complex process specifically for big size
companies. But basics are same regardless of organisation's type or size. The system combines
technologies, procedures & processes for reducing monitoring & maintenance of stock of
products.
Advantages of Inventory management
system
Disadvantage of Inventory management
system
 Automated reordering and in stock
information:- the system provides the
information about the reordering period
and the stock available in the business
operations also it gives the information
that how much quantity should be
order.
 Reduced Physical audits:- system is
automated than it reduces the physical
audit. Automated system is not able to
take the qualitative decision which can
be take by physical audits.
 Forecasting and planning:- it helps in
forecasting the sales with the help of
software because is there is data
collection system create forecasting and
strategies planning reports which
provide future trends (Granlund and
Lukka, 2017).
 Malicious Hacks:- automated system
has risk of getting hack by the hackers
and can get the information of
consumers and company hidden
information.
It is essential for the Oshodi PLC because it helps in maintain the stock and inventory of
firm also it provides the details of economic order quantity, minimum reorder period, danger
level which reduce the inventory handling cost and cost of ordering. So its is essential
management accounting system. Different tools used are LIFO and FIFO
Lifo- It is the process where stock that comes last in stock are sold out first.
Fifo – It is the process where the stock that comes first is sold out first.
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Cost accounting system:- It is known as the product costing system which is framework
used by companies for estimating cost of product and analysing profitability of firm. Estimation
of exact cost of item is complex process for profitable processes (Järvinen, 2016). A company
must be aware that which product item is profitable & which ones are not. CA helps to estimate
the exact product cost.
Advantages of Cost accounting system Disadvantage of Cost accounting system
 Waste elimination, eliminating losses &
inefficiencies:- good cost accounting
system is used for eliminating wastes
and for fixing standards for everything
 The costs used in old prior year are
different from the current or succeeding
therefore not very useful.
 Cost control:- it controls the cost of the
firm by preparation of budgets and
fixing the standards and expenses are
not permitted to go beyond.
 Unnecessary delay to receive costing
information affects the quality decision
taken to be taken by management
It is essential for the Oshodi PLC because it provides the accurate details of the cost
differently for the products (Speckbacher, 2017). It also helps in controlling cost of product by
finding out the accurate details of the cost incurred by firm. Also, help to ascertain the cost and
sales prices of product. It assists in formulation of business policies.
P2 Explanation of different methods used in management accounting reporting.
There are various reports that are prepared under management accounting system to
plan , regulate, to make decisions and to measure performance. The reports are made through
the book keeping and accounting period as per the management requirements to the
requirements of the management as various critical and complex judgements are taken based on
the accounting statements in the organisation Oshodi plc Ltd should carefully craft these reports
because these reports are helping in taking future decisions. Reports are analysed by managers
for converting these reports into relevant information. Different types of management reports are
defined below (Cleary, 2015).
Budget Reports:- Budget reports are playing critical role to measure the company
performance. Oshodi Plc prepares budgetary report to understand the all the activities in
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organisation. It assists the business owner or managers to define and control the cost. Managers
also create this reports for the employees' performance and provide incentives. The budget is
decided on the basis of previous year actual expenses and sales. It is important as it helps
company to analyse an d costs and overspendings.
Accounts Receivable Aging:- The report is used for enlisting the unpaid consumer
invoices and credit memos which are not used by dates. The report help the managers to
determine the unpaid overdue invoices so that collection can be made. Management uses this
report for determining level of effectiveness in credit collection functions.. A manager of Oshodi
uses aging report for finding out issues faced by company in collection processes. If significant
number of consumers are not able to repay the balance than managers can tight the credit policy.
It helps to determine the defaulters and not payers.
Cost managerial accounting report:- Work of managerial accounting is to compute the
cost of outputs which are produced by Oshodi. All the cost such as cost of raw material,
overhead cost, labour cost are deliberated by management. Division of total cost by total no.
products are produces which gives the per unit costing of the products. Cost report are offering
the summary information of every cost occurred for producing the product. These reports helps
the managers of Oshodi PLC to cost prices and sale price of output. It helps managers in
estimating profit margins of organisations.
Performance Reports:- This report is generated for reviewing the company performance
and its different departments also the employees working in organisation. Managers of Oshodi
PLC use these reports for framing the key strategic decisions related to future trends in
organisation. Employees are often awarded for their contribution in firm which is also analysed
by the performance report.
LO 2
P 3 Calculation of Cost and Income Statement using the Marginal Costing and Absorption
Costing.
Costing can be referred as system which is used for assigning costs to different elements
of business. It used for developing costs for various users and producers. There are different
techniques used in management accounting.
Different techniques of cost calculations
i ) Marginal Costing
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Marginal cost refers to cost of producing each additional output. The method is used for
determining optimal production quantity of company where it can produce each additional output
units at least cost.
Income Statement using Marginal Costing of Oshodi Plc for the month of November and
December
Marginal Costing
Profit or Loss statement of Oshodi PLC for November and December
November December
Particular
s
Price
per
unit Units GBP GBP
Price
per
unit Units GBP GBP
Selling
price 50 10000 500000 50 12000 600000
Less: Cost of goods
sold
Op. Stock @ 25 25 2000 50000
Cost of Prodn
variable 12000 300000 10000 250000
2000
Less: Cl. Stock @
25 2000 50000 300000
250000
Cost of Prodn
variable 5 10000 50000 5 12000 60000
300000 300000 240000 2400000
Contributio
n 200000 360000
Less: Cost of Prodn
Fixed 200000 240000
Production Cost 99000 99000
Selling
Cost 14000 14000
Administration Cost 26000 139000 26000 139000
Net Profit 61000 101000
Profit as per Marginal Costing of
Nov. and Dec.
November 61000
December 101000
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162000
Calculations :
Marginal Costing
Particulars GBP GBP
per unit
Selling
Price 50
Direct Raw Material 18
Direct Labour 4
Producion Overhead
Variable 3
Total 25 25
Contributio
n 25
Working Note 1
Calculations of Variable Costing
Particulars GBP
Direct Raw Material 18
Direct Labour 4
Producion Overhead
Variable 3
Total Variavle cost 25
Working Note 2
Particulars GBP GBP
Selling
Price 50
Production cost cariable 25
Selling overhead variable 5
30 30
Contribution p.u. 20
Working Note 3
Selling overhead variable 10% of sales value
50*10%
5
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Interpretations
Using the approach of marginal costing net profits of company for November is 61000
where for December is 101000. This costing approach do not give accurate and reliable
outcomes as this method do not consider each cost. The difference is seen in profits as company
is using marginal costing
ii) Absorption Costing
It is managerial accounting technique for capturing every cost that are connected to production
of specific products. Absorption costing allows allocation of fix overhead to every unit of
product manufactured during the period.
Income Statement using absorption costing of Oshodi Plc for the month of November and
December
Absorption Costing
Profit or Loss statement of Oshodi For November and December
November December
Particular
s Unit GBP GBP Units GBP GBP
Selling
Price 10000 500000 12000 600000
Less: Cost of goods
sold
Op. Stock @ 34 2000 68000
Absorbed Prodn Cost 12000 408000 10000 340000
2000 68000
340000 340000 408000 408000
Gross
Profit 160000 192000
Adj. for Under/Over
Absorption 9000 -9000
16900 183000
Less: Overhead Cost
Selling Overhead
variable 50000 60000
Selling Overhead fixed 14000 14000
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Admin overhead Fixed 26000 90000 26000 100000
Net profits 79000 83000
Calculation for Under/ Over Absorption for Oshodi PLC for November and
December
Month
Units of
Prodn.
O/H
absorbed
p.u.
Total
Absorptio
n
Actual
O/H
Under/ Over
Absorption
November 12000 9 108000 99000 9000
December 10000 9 90000 99000 -9000
Calculations
Working Note 1
Normal Production
Level 11000 units
Overhead cost Fixed 99000
Fixed O/H absorbed
99000/1100
0
GBP 9
Total
Prodn
Cost Variable Cost + Fixed O/H absorbed
Variable Cost 25
Fixed O/H absorbed 9
Total Prodn Cost 34 per unit
Interpretations
From the study of above it is identified that profit of company as per absorption costing
is 79000 for November and 83000 for the December which shows that results are more accurate
in comparison with marginal costing. Therefore, company has been suggested for adoption of
absorption costing for the company as it gives more accurate results on constant basis.
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LO 3
P4 Advantages and disadvantages of different planning tools for budgetary control.
Budgetary planning refer to the process used for budget construction which then will be used in
controlling operation of business. Motive behind budgetary planning is of mitigating financial
risks. There are various types of budgetary planning tools that are used by organisations for
enhancing their performance.
Rolling Budget
Rolling budgets are used by Oshodi Plc as they are continuously updated for adding new
budget periods immediately after the completion of recent budget periods. Thus rolling budgets
are involving incremental extension to the current model of budget. This budget extends one
year to future and business is always available with business (Murthy and Rooney,2018). This
budget calls for more focus of management than where Oshodi Plc. is producing 1 year static
budgets as updating budgeted activities are to be repeated each month. If participative budgeting
is used by company for preparing RB than workforce time used during the year is substantial.
Companies are generally suggested for using leaner approach over rolling budget where only
people are involved in process.
Advantages
 Control and planning will be on the basis of budgets that are more accurate for Oshodi
Plc.
 Uncertainty element in Osshodi Plc. is reduced by rolling budgets as it concentrates over
short term when there is smaller degree of uncertainty (Nasseri, Yazdifar and Askarany,
2016).
 It lays emphasis on management of Oshodi Plc. for reassessing its budgets on regular
basis and for producing budgets that are updated ones.
 Business is always available with budgets which are extending into future.
Disadvantage
 Rolling budget are expensive as well as time consuming as compared to incremental
budgets.
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 The budgets may affect efficiency of employees of Oshodi if they are consuming
considerable part their time or budgeting targets are changing constantly.
 The budget has risk that it can become last budget of company
 The increase in budgetary work of Oshodi can decrease the control over actual results.
Activity Based Budget
This budget can be defined as planing systems where costs are related with budgeted
activities and expenditures and its compilation is based over expected activity levels. This is a
different approach from traditional budgetary system in which current levels of cost are adjusted
by Oshopdi Plc for revenue changes and inflation for deriving annual budgets. It allows high
refinement for planning of costs and focus attention over types and volumes of activities taking
place in Oshodi. Outcomes of this system helps management of company in reducing activity
level required for generating revenues and improving profits (Spraakman and et.al., 2018). For
enhancing the cost structure of company managers are required to have deep knowledge about
company processes.
Advantages
 It allows Oshodi Plc to balance its operational requirements. This method avoids
financial effects calculations of plans that are operationally infeasible.
 It provides clear picture of relation between resources and activities and managers at
lower level and employees have the discussions in financial terms.
 This budgeting system provides transparency and traceability which allows the managers
of Oshodi to balance their capacity.
Disadvantages
 Implementation of this project requires substantial amount of resources and it is costly for
Oshodi to maintain.
 This system works on assumptions and management insights that can result in budgeting
inaccuracies for company.
Zero Based Budgeting
Zero based budgeting is defined as budgetary tool where justification is required for for
every expense of every new period. Procedure of zero based budgeting starts by taking 0 base
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& each process in Oshodi requires analysis for knowing its costs and needs. Budgets are
prepared as per the requirements of upcoming period by Oshodi and the budgets are prepared
regardless of prior budgets whether they are lower or higher. The budget are prepared aligning
strategic goals prepared at top levels for specified functional areas of organisation. This
budgetary process helps Oshodi to reduce costs by eliminating or avoiding increase or decrease
in previous budgets (Rickards and Ritsert, 2018). The budget favours areas which achieve
straight revenues and production as contributions are easy to justify.
Advantages
 The budgeting helps Oshodi to allocate their resources efficiently as previous budgets are
not considered.
 The budget lays emphasis on departments to look over every cash flow item and for
computing their operational costs.
 The budgetary system increases communication and coordination within departments of
Oshodi.
Disadvantages
 Budget is prepared by Oshodi from scratch and requires large employee involvement.
 The budgetary system is costly and time consuming as new budgets are prepared every
time by Oshodi.
 Explanation for each cost and line item is a difficult task which requires trainings for
managers.
Incremental Budget
Incremental budgets are prepared by Oshodi using budget of prior period or actual
performance as base with increments of costs for budgets of new period. Resources in this
budget are allocated using budgets of previous periods. The approach is used by companies that
do not spend considerable time in preparation of budgets or where the company does not feel the
strong need of re-evaluating the business processes. The budget is best for companies that do not
face competition in industry and profits can be perpetuated over year to year and therefore
Oshodi is not viable for Oshodi (Rickards and Ritsert, 2018).
Advantages
 Incremental budgets can be prepared by Oshodi as they are simple because they are
based on previous financial results or previously verified budgets.
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 If funds are required for multiple years for achieving certain outcome this budgeting
method is structured for ensuring funds are flowing continuously to program.
Disadvantages
 The budgetary system is fostering behaviour of using or losing it regarding budgetary
expenditures which can increase the risk factor for company.
LO 4
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems.
In accordance of MA system respond to the financial issues. They are problems which
can be said that firms uses for the finding the problems of funds. These systems are as follows.
Key Performance Indicators:- the performance indicator is value that can be measured
for demonstrating whether company objectives are achieved effectively be company. These are
by organisations at different levels for evaluating the success they have achieved to reach targets.
High KPI'S at high level generally focus on overall business performance where at low low level
the focus is on departmental processes like sales, support, marketing and others. (Nasseri,
Yazdifar and Askarany, 2016). Main KPI indicators are market, sales, profits and growth where
firm decides the KPI on certain level and finds the problem why firm is not achieve those fixed
criteria. The company is able to find out the problems of not achieving targets.
Balance scorecard:- This is strategic management and planning system which is used by
the company communicate what are the objectives of firm. Prioritise the products, projects and
services. The scorecards helps in measuring and monitoring progress in achieving strategic
targets. It balances the financial measures with the performance measures and objectives related
to organisation. Balance score card analyses the performance of each departments which helps it
to identify the actual problem occurring in achieving targets.
Bench marking:- Benchmarking process is used to measure performance of
organisation's goods, services & process performance data and comparison with those of related
and comparable organisation. This comparison are made from the businesses from the same
sector and same level of activities. In this comparison mainly focus on the Quality, cost, time of
organisation that are about the same size. It is about thee certain features can be relized better,
faster and cheaper. Benchmarking set targets which are to be achieved by company and shows
how much they are lacking when compared with similar organisation.
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Variance analysis:- It is difference between the standard performance & actual
performance. To find out the reasons behind that variance is known as variance analysis.
The analysis is usually associated with manufacturing products cost. In addition, of this
variance analysis is attempt to identify the cause behind the difference between actual and
standard (Golyagina and Valuckas, 2019). There are 3 main variances that are calculated which
are labour variance, material variance & overhead variances. The tool is helping Oshodi to
identify the variances in each processes so that it can improvise it performance or existing
strategies.
Oshodi PLC ABC Ltd.
Oshodi is facing the problems to achieve its
targeted production levels.
The firm is using balance scorecard respond to
the financial problems because information
gained from it provides the deeper insight into
how the current actions within the company
affect the long-term goals. It also improves the
strategy communication and execution of
company's plans (Rickards and Ritsert, 2018).
It improves performances reporting and better
organisational alignment and company can
identify where problems are actually arising.
ABC is suffering with problem of high raw
material cost and high labour expenses.
ABC Ltd. is using the Key performance
indicators for respond to the financial problems
it guides the business on the journey towards
its strategic goals. It translates business
strategies into manageable, operational action
based on the data collect and monitor. Key
performance indicators help to identify the
difference of materials and labour cost so that it
can adopt for new suppliers and abour
contractors.
CONCLUSION
Carrying out the above study it is concluded that MA is very essential for organisation.
Companies for their growth and success has to adopt various management tools in their business.
It is essential for companies to have knowledge about management accounting tools & their
requirements. MA tools have importance for the organisation. This report concludes that job
costing an important accounting system which focus on the cost on the basis of the production of
the products or department wise. This report summarised the methods for management
accounting reporting in which budgetary control is important. Report concludes the accounting
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system that response to the financial problems where firm us the balance scorecard which is an
effective system because it works on qualitative and quantitative terms both.
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