Management Accounting: Ella's Kitchen Case Study

The assignment is based on Ella's Kitchen, a small-sized business operating in the UK. It requires students to analyze different types of management accounting systems and their applications in solving financial problems. The report also explores the use of management reporting tools in taking better decisions and controlling business operations. The assignment draws on various academic sources, including books and journals, to provide a comprehensive understanding of management accounting principles.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Meaning of management accounting and different types of management accounting system
.....................................................................................................................................................1
P2 Different methods of management reporting.........................................................................4
TASK 2............................................................................................................................................6
P3 Calculation of cost through Marginal costing and absorption costing and difference
between the two...........................................................................................................................6
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different types of planning tools for budgetary control...8
P5 Adaptation of management accounting systems response to financial problems................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

Illustration Index
Illustration 1: Computation through Net profits through Marginal costing.....................................6
Illustration 2: Computation of Net profits through Absorption costing..........................................6

To
The General Manager
INTRODUCTION
Management accounting is an effective method of analysing financial statements so that
efficient decision making process can be initiated in the organization. The financial statements
are, statement of financial position, statement of income and expenses and statement of cash
flow. Ella's Kitchen group limited is a small scale organization functioning in UK which is
involved in providing nutritious and organic food to children between the age of 4 months and 7
years. The report makes comprehensive discussion on different types of management accounting
system that can be used by the entity with the aim to ease out its business activities. Further,
varied methods of management reporting will also be discussed in the report. In the end,
calculation for net profit will be made using absorption costing and marginal costing methods.
TASK 1
P1 Meaning of management accounting and different types of management accounting system
Management accounting is the process of analysing financial statements which can
further help in decision making process of the organization. Management reports are prepared
based on it reflecting financial and statistical information available to the managers. The
performance of the business can be controlled which has strong influence over the organizational
goals. Ella's kitchen can take help on management accounting process for making better short
term and long-term decision for the business. In order to analyse the financial statements, three
types of statements are required, which are, statement of financial position, statement of income
and expenses and statement of cash flow (Ward, 2012). It helps to improve the operations of the
enterprise coinciding with the abilities of the entity. Further, it plays a vital role in drawing
competitive advantage over other companies that are present in the market. In addition to this, it
helps in increasing the return of the business as forecasting of the cost is done through the past
trends of sales and purchases. Potential change in the market place can be gathered for which
policies can be mad in advance.
Management accounting systems helps in easing down the process. It helps in devising
the plan, helps in decision making and manages the performance of the organization. Some of
1

the management accounting systems that can be suggested to Ella's Kitchen are discussed as
under: Cost accounting system: It helps in ascertaining the total cost of product from the
manufacturing to the delivery to the end consumers. Ella's Kitchen is involved in
providing baby food products for children of 4 months to 7 years old. Hence, the total
cost incurred in preparing the food and delivering it to the customers are considered in
the cost accounting system. The cost that are not directly related to it but have direct
impact on the production or delivery process are also taken into consideration into it. In
addition to this, it helps in drawing out the amount of profits that have been earned by the
company at the end of a particular quarter or an accounting year can also be calculated.
The cost is further divided into three main categories. They are mentioned below:
◦ Actual costing: It is a type of costing where the actual cost incurred in the past period
is taken into consideration to calculate the total cost. The actual cost availability such
as cost of labour, cost of material and pre-determined overheads are used to calculate
the actual cost (Christ and Burritt, 2013).
◦ Normal costing: The actual cost of material and labour are considered to calculate the
actual cost incurred by the organization. However, the estimated cost of overhead is
taken in to consideration. The approximate cost involved in for the overheads and
actual cost is for the material and labour.
◦ Standard costing: The technique of costing involves preparation of budget based
upon the past trends of the organization. It helps in managing and controlling the cost
of the product and making appropriate usage of available resources. The costing
policies followed in the past years is considered to develop the costing account of the
entity. For instance, sales budget for Ella's Kitchen is to be prepared, in that case, the
sales made by the enterprise will be taken in to consideration in order to assess the
forecasting of sales and preparing the sales budget.
 Inventory management system: It is a type of software which is used to track level of
inventories, orders, sales and deliveries that have already been made or to be made to the
customers. This software is basically used by the manufacturing industry to assess the
requirement of production and generate the supply based on it. Ella's kitchen can use this
software to assess which raw material is going to be finished and need to be ordered from
2

the supplier again. over stock and outrage conditions can be removed with assistance of
this software. Some common functions that are performed by inventory management
systems are as follows:
◦ Assess the reordering point when material is to be ordered from the supplier again.
◦ Receive, adjust, allocate and disposition of stock
◦ Place order for sales which is to be fulfilled by the manufacturing department of the
company.
◦ Packaging and shipping of finished goods to the destination
◦ Assessing order cycle and intimating the management to consider the activity of stock
refill (Lambert and Sponem, 2012).
◦ Printing bar codes which makes product code specific to every material that is to be
sold to end consumers. These are used at the time of sales in order to generate
automatic bill for the products.
The main aim of inventory management system is to reduce the time involved in the
process of managing in the inventory in the organization. Further, it makes sure that no ideal
time is left for the departments due to unavailability of the resources. Job costing systems: The cost incurred in performing a particular job or service is
analysed through job costing system. The information holds great importance if cost is to
be reimbursed from side of customers. It is basically used by companies who are
involved in rendering tailor made or customized products to its customers. Accurate
estimation of cost involved in producing the product can be made further quoting same to
the customers. There are three important parts of information that are accumulated in job
costing system. They are mentioned as under:
◦ Direct material: The cost of the material that have been used for the production of the
goods and services is tracked. The extra cost incurred in making the tailor made
product can easily be found through this process. While performing the process for
the first time, manual tracking of the cost can be taken into consideration. Afterwards,
calculation through the software can be considered to ascertain the cost derived
(Taipaleenmäki and Ikäheimo, 2013).
◦ Direct labour: The cost of labour that have been incurred to develop and deliver the
material is calculated so that it can be reimbursed by the customer. Based on the
3

number of hours worked on the product to produce it and efforts that have been
inculcated to perform the work is considered to find out the right cost of labour.
Punch clock and time sheet is taken is viewed with regard to the same.
◦ Overheads: The overhead cost is the expense that is not directly related to the
production process but have adequate impact on its process. Some of the examples of
overhead costing is depreciation of the equipments and assets, rent of the premises
etc.
 Price optimizing systems: It is the software which helps in ascertaining the reactions of
the customers at different price levels if the departure is made through different channels.
It further helps in determining that which is the best suited price of the product through
which the entity can earn the highest. It also takes care of profits of the organisation.
Adoption of this management system by the Ella's kitchen will help in ascertaining the
best suited price of different products being offered by it. It will help in maximizing the
profits of the enterprise.
P2 Different methods of management reporting
The main aim of management accounting is to record, classify and analyse financial
information available to it so that appropriate decisions can be made. It focuses on information
generated by the financial accounting managers so that it can be used in planning and controlling
process of the organization. The three main statement to make the analysis process successful is
balance sheet, statement of cash flow and income statement. It considers other statements as well
to make the decision concrete. Management accounting reporting methods are used in order to
plan and prepare budget used for decision making process. It helps in measuring the performance
of the company and increase profitability. There are different methods of management reporting
that can be used by Ella's Kitchen which are discussed below in brief:
 Cost reporting methods: All the cost that has been incurred by the company in
production of the products or services are included in cost report method of Ella's
kitchen. In order to find out the cost, the total cost of products is divided by number of
products produced. The cost is the sum of all the material, labour and overheads and
other cost involved if any (Lavia López and Hiebl, 2014). All the information is used by
reporting the cost. The report is further used by the management of the company to make
better decisions. It can be used to assess that whether proper utilization of the resources is
4

made by the entity or not. Moreover, policies to reduce the cost can also be made by them
so that available resources can be efficiently utilized.
 Budget reporting methods: Budget preparation is the another important bioactivity that
is performed by the management of the company. The assumptions made during the
preparation of the budget depends upon the outcomes of previous financial year. It helps
in ascertaining the revenues and expenses that are expected in the forthcoming period.
Better decision-making can help in preparing the budgets that are reliable enough and can
be adopted by the companies. Ella's kitchen can take appropriate actions beforehand to
reduce the expenses and increase the revenues of the company. It help in promoting
efficient working environment at the workplace.
 Performance reporting methods: The budget prepared for the company is then
compared to the actual outcomes in order to ascertain the variances generated through it.
All the appropriate information is used in performance reporting. Based on it, assessment
of future demand, profits and income is made to make the budget of upcoming year much
more authentic than the previous one. Ella's kitchen can use this type of reporting for
planning purposes which in turn will increase the profitability of the company. Monthly
reports can be assessed by the planning manager to evaluate the current performance
based on which further budgets for the entity can be created.
 Job costing reporting methods: It helps in evaluating the cost that has been incurred at
every job. Analysis of performance in every job can be performed in order to compare it
with the expected one. Ella's kitchen have to take care of different types of job such as,
employees at different department, maintaining the inventory level, workers in the
factory premises etc. The cost incurred in all the jobs are calculated.
 Accounts receivables reporting methods: It acts as an important report for Ella's
kitchen as the products are also provided on credit basis to some of the reliable
customers. The reports help in providing information regarding credit balance and its due
date as well (Drury, 2013). It provides assistance is assessing that at what time the bill
will get expired and the amount will be received by the company in order to invest it back
in the organization for better functioning
 Other reporting methods: It includes preparation of other important reports for the
company. Ella's kitchen can prepare comparative reports which compares the current
5

performance of the company with that of previous year's one. These reports are prepared
for planning purpose so that the order can be finished in adequate amount of time.
Hence, it can be concluded that, adoption of these types of reporting tools make the
planning function of the company efficient further taking adequate decisions for the profitability
of the business.
TASK 2
P3 Calculation of cost through Marginal costing and absorption costing and difference between
the two
Computation of net profit
Calculation of cost through Marginal costing method
Calculation of cost through Absorption costing method
6
Illustration 1: Computation through Net profits through Marginal costing

Marginal costing method is the method used in assessing the net profits of the company.
Variable cost is taken into consideration which is charged, based on the per unit cos t of
production. Fixed cost is also taken into consideration in order to asses the profits. Fixed cost of
the company does not change based on the units of production.
However, in case absorption costing, all the cost are consideration while making the
calculation irrespective of the fact that if it is variable or fixed. Therefore, direct material, direct
labour, fixed overhead and variable overhead are considered to calculate total cost and then net
profits.
There is a significant difference between the absorption costing and marginal costing.
Some of then are discussed below:
 Marginal costing is major used to assess the costing of the product and ascertaining the
value of the inventory, only variable cost is taken into consideration. However, in case of
absorption costing, the net profit is calculated considering both variable cost and fixed
cost.
 The accounting treatment is different for foxed cost, in case of marginal costing. The
consideration is made through period cost by profit volume ratio, that is, contribution
7
Illustration 2: Computation of Net profits through Absorption costing

amount. The profitability through varied product is different. However, in case of
absorption costing, fixed cost is considered as a charge over the production cost only.
 In case of marginal costing, data highlights total cost of contribution. It is calculated by
deducting cost of goods sold from sales revenue. However, in case of absorption costing,
data analysts are presented with conventional pattern of costing. Fixed cost is considered
to generate the cost of every product (Cadez and Guilding, 2012).
 Profit volume ratio is used to measure the profitability, in case of marginal costing
method. However, there is a direct impact of fixed cost on the profitability in case of
absorption costing method.
 The highlight in marginal costing is contribution per unit. However, it is net profit per
unit in case of absorption costing.
 In order to measure the profits, contribution margin is used in case of marginal costing.
However, the application is made to the products in case of absorption costing method.
Comparing the results received from marginal costing method and absorption costing
method, it is necessary to have under absorbed and over absorbed cost of overheads. The
difference between normal level of activity and actual level of activity tends to generate the
situation of over absorption and under absorption.
TASK 3
P4 Advantages and disadvantages of different types of planning tools for budgetary control
Budgets are prepared for future period considering the budgetary control techniques used
in the current period. Every organization is required to adopt the practice of budgeting as helps in
making the process of planning easy and reliable so that the objectives of the organization can be
achieved. Preparation of budget is an important tool that is considered as a planning tool. In
order to opt for authenticated results through the budget, it is important to have adequate
planning and consider all the important aspects. Ella's Kitchen can take help of budgeting
technique in order to promote better decision making in the organization. It leads to
maximization of profits and reduce down the cost involved in performing the operation
functions. Actual results can be generated and variance can be reduced to the minimum.
Investment can be planned by the entity so that effective budget can be prepared. Different
8

budgetary control methods can be used for expansion of the business. Some of the planning tools
in budgetary control are as follows:
 Capital budgeting techniques: Capital budgeting helps in assessing that whether the
fixed asset investment in which the company is planning to investment will prove to be
beneficial for the company or not. It is basically the long term investment which can be in
the form of machinery, new plant, equipment etc. It considers the amount of funds that
will be utilize to own that asset further considering the amount of inflow of the funds that
can be generated from it every year. It helps in assessing that whether the assets will be
able to generate appropriate amount of profit through the investment being made or not.
There are several methods of capital budgeting. They are Net present Value (NPV),
Internal rate of Return (IRR), Average rate of Return (ARR), Payback Period etc
(Merchant, 2012).
The main advantages of capital budgeting are the following:
◦ It helps in making investment decisions which is reliable and authenticated.
◦ It helps in creating and evaluating the opportunities that comes up to the business and
assess that whether it will prove to be beneficial or not.
◦ Future cash flows can be ascertained and capital expenditure can be controlled.
◦ Long term strategic decisions can be made through it.
◦ Adequate control can be offered to the expenditure of the project.
However, there are certain disadvantages to the methods as well. Some of them are
discussed below:
◦ The decisions made once are irreversible in nature.
◦ Analysis is based upon estimations and hence any change in the economic conditions
of the country can deviate the results.
◦ A wrong decision through capital budgeting can affect the durability of the product
which can drive the company into losses (Papaspyropoulos and et.al., 2012).
 Budgets: Budgets are the estimation being made by the company over its revenue and
expenditure. The compilation made by the analyst is re evaluated after specific period of
time. It acts as an internal tool and hence can not be utilized to disclose it to the external
parties. It ensures that adequate amount of money is available with the organization in
order to meet out its expenses. Various types of budgets can be prepared, such as, cash
9

budget, sales budget, operating budget, etc. Ella's kitchen can plan its expenses and assess
that how much profit can be generated in the coming years. There are various advantages
to the budgeting. Some of them are discussed below:
◦ It helps in taking hold of the expenditure and promotes income for the company
◦ It helps in evaluating the goals of the business and of the employees as well.
◦ It helps in assessing the amount that will be required in the day to day operations of
the business.
◦ Cash allocation to different department becomes an easy process.
There are certain disadvantages to the budgeting process as well. Some of them are discussed
below:
◦ It is a time consuming process to maintain the budget for every aspect.
◦ There may be high variance in the budget leading to issues in the acceptance and
inculcating it.
◦ If the budgeted outcomes are not received by the department then the analysts will be
blamed for the same.
◦ Budget may change due to changes in the economic conditions as well. Hence, it is
difficult to have high dependence on the prepared budget.
 Ratio Analysis: It is considered as one of the major tools of budgetary control where
different types of ratios are calculated to assess that performance of the business in
comparison to the previous year. It plays vital role in comparing the figures obtained in
the preceding year and in the current year. It helps in giving clear indication of the
financial performance of the company. Some of the common ratios calculated includes,
solvency ratios, profitability ratios, financial ratios etc.. Some of the advantages of ratio
analysis are as follows:
◦ It helps in assessing the operational efficiency of the company
◦ It is useful in simplifying accounting figures.
◦ It is a vital tool to forecast the information for next year as well
◦ It helps in locating weak spots of the enterprise.
◦ Comparison of the performance becomes an easy task if the companies belong to the
same sector (Otley and Emmanuel, 2013).
However, there are certain disadvantages to the method as well. These are discussed below:
10

◦ Ratio analysis is performed based on historical values. However, the values can not
be same in the near future.
◦ Any change in the rate of inflation can bring significant change in the results of the
ratios as well (The limitations of ratio analysis, 2017).
◦ Change in the accounting policies of the business further change in the recording
procedure can also have significant impact on the results.
P5 Adaptation of management accounting systems response to financial problems
The adoption of management accounting system helps in easing out the business
activities. Further, problems arising in the organization can be solved in efficient and effective
manner. Ella's Kitchen is a company involved in providing baby food products to children
between the age of 4 months and 7 years. In this case, the entity can keep a check on the
requirement of the customers and fulfil their needs. To achieve this task in the most efficient
manner, inventory management system can be installed to find out the trend line of the
customers. Based on the demand, stock can be refilled by the entity and production can also be
generated based on it. It helps in making the products available at the right time.
Internal and external decision making activity is also affected by the adoption of
management accounting systems. Changing needs of the customers can help in assessing that
what type of food must be made available to them which can help the entity to flourish and
expand. Substantial use of data produced by inventory management system can help in better
forecasting of demand, based on which supply can be initiated. Further, problem of
unavailability of the stock, unavailability of resources etc can be dealt with so that he products
can be delivered on time to the stated destination.
Cost accounting system is the another tool of management accounting system. It helps in
ascertaining the cost involved in the production of a particular product. The tool can be used by
Ella's kitchen to assess the actual cost of the products. It also helps in deciding that whether the
company will be able to generate adequate return on the stated price or not (Romney, M. B. and
Steinbart, 2012). This management accounting system can help in removal of various financial
problems, such as, correct assessment of the expenses and cost, expansion of the product line wit
h available level of profits etc. It keeps in mid the perspective of the customer as well further
contributing to the organizational goals as well.
11

Job costing is another important tool of management accounting system where cost is
allocated based on the job performed. Same cost can not be charged from the customer who have
got his product customized. Hence, in that case, all the important aspects must be considered to
find out the cost incurred in performing that job. In case of Ella's kitchen, it can include, material
used in production, workforce expenses, etc. The tool is helpful in assessing the expenses
incurred in the particular job.
CONCLUSION
Based on the above report, it can be concluded that, management accounting plays a vital
role in the process of decision making in the organization. Ella's Kitchen is a small sized
business which is functioning in UK. The report discusses different types of management
accounting systems, such as, inventory management system, cost accounting system, job costing
system and price optimization system. Further, these systems helps in solving different financial
problems that arise in the business. Management reporting tools help in taking better decisions in
the organization further helping in controlling the business operations as well.
12

REFERENCES
Books and journals
Cadez, S. and Guilding, C., 2012. Strategy, strategic management accounting and performance: a
configurational analysis. Industrial Management & Data Systems. 112(3). pp.484-501.
Christ, K. L. and Burritt, R. L., 2013. Environmental management accounting: the significance of
contingent variables for adoption. Journal of Cleaner Production. 41. pp.163-173.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Lambert, C. and Sponem, S., 2012. Roles, authority and involvement of the management
accounting function: a multiple case-study perspective. European Accounting
Review. 21(3). pp.565-589.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of
Management Accounting Research. 27(1). pp.81-119.
Merchant, K. A., 2012. Making management accounting research more useful. Pacific
Accounting Review. 24(3). pp.334-356.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Papaspyropoulos, K. G., and et.al., 2012. Challenges in implementing environmental
management accounting tools: the case of a nonprofit forestry organization. Journal of
Cleaner Production. 29. pp.132-143.
Romney, M. B. and Steinbart, P. J., 2012. Accounting information systems. Boston: Pearson.
Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and
financial accounting–the role of information technology in accounting
change. International Journal of Accounting Information Systems. 14(4). pp.321-348.
Ward, K., 2012. Strategic management accounting. Routledge.
Online
The limitations of ratio analysis. 2017. [Online]. Available through
<https://www.accountingtools.com/articles/what-are-the-limitations-of-ratio-
analysis.html>.
13