Management Accounting Assignment (Aston Martin)

MANAGEMENT
ACCOUNTING
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Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Part A...........................................................................................................................................1
Part B...........................................................................................................................................5
ACTIVITY 2....................................................................................................................................9
Part A...........................................................................................................................................9
Part B.........................................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the process of preparing management reports & accounts
which provide accurate & timely financial & statistical information that is helpful for the
management to take effective decisions (Kaplan and Atkinson, 2015). It provide information to
different stakeholders about the financial position of organisation and on the basis of it they take
important decisions. As the accountant of corporation is responsible to following principles of
management accounting so that books of accounts can prepare as per the requirement. To better
understand this concept Aston Martin has been chosen which is a luxury sports car
manufacturing company of United Kingdom. This report discuss about various topics such as:
the concept of management accounting & distinct types of management accounting systems,
methods used for management accounting reporting and to use appropriate techniques of cost
analysis to prepare an income statement using marginal & absorption cost. Apart from this, it
also discuss about planning tools used in management accounting and how management
accounting systems are helpful to solve the financial problems.
ACTIVITY 1
Part A
Management accounting is also known as managerial accounting. It is used by the
managers for taking decisions for performing operations and to control various functions for the
betterment of organisation (Ward, 2012). It involves preparation of management reports to
provide accurate and reliable information for framing short term as well as long term plans for
the purpose of achieving objectives of firm. Using such accounting, budgets along with trend
charts are designed for allocating key resources for generating revenues to attaining growth. This
accounting plays very crucial functions to manage internal operations of any business. Such
accounting helps in building positive variances by applying techniques to eliminate or reduce the
negative ones to ensure that work is performed as per the planned activities. Some of the types of
accounting systems are the followings:
 Cost accounting system: Cost accounting system is a type of management accounting
which is used by the managers for recording activities, analysing production costs and
tracking materials at different phases of production from raw material to finished
products. Such system is helpful in estimating associated costs for analysing profitability,
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controlling cost as well as valuation of inventory (DRURY, 2013). Aston Martin Plc
applies such system for evaluating various costs at each stage of product to focus on
those products or services which will be more beneficial to the organisation. This system
is essentially required for evaluation of costs such as direct, indirect, fixed and variable
costs in the selected firm.
 Job costing system: Job costing system includes procedures to accumulate information
related to costs associated in production of particular product or specific job. It uses
material cost documents, overhead cost documents, job cost sheets for tracking expenses
incurred on producing jobs. Chosen firm provides numerous services to its clients so it is
an important function to make proper and accurate estimation of individual unit costs
associated with the jobs. Such system is essentially required in the firm to track the true
value of costs integrated with delivering specific job.
 Price optimisation system: Price optimisation system involves the usage of
mathematical programs for determining reliable prices of products and services in such a
manner which are suitable for customers as well as helpful in maximising profits of
business entity. It is used by respective company to tailor prices of their products as per
the perceptions of clients, dynamic market situations, developing strategies as well as to
attract target clients. It is essentially required to set pricing strategies along with
promotional strategies for attaining customer satisfaction and organisational profits.
 Inventory management system: Inventory management system is useful for production
managers to track status of available as well as required inventory for continuous
performing of operations. It is helpful in minimizing situations such as under stock or
overstock of inventory at work place. In relation to Aston Martin Plc, such system is used
for tracking the stock at warehouses and shipping to track the incoming as well as
outgoing of goods with the help of supply chain management. Inventory management
system is essentially required for checking status of inventory available and placing the
order at correct time, in correct quantity and at right place (Parker, 2012).
Management accounting reporting: Management accounting report is a statement
which is helpful to identify different aspects of business accounting system. By using this report
corporation can analyse the performance of its business. As the organisation prepare it on
quarterly or yearly basis as per its requirement. Aston Martin use this so that it can know the true
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and fair picture of its business and there are various management accounting reports which are
being discuss as below:
 Budget reports: Budget is a formal statement which is an estimation of revenue
& expenditure and it prepare for future in order to achieve goals of business. As
budget reports can prepare for short term as well as long term purpose
(Wickramasinghe and Alawattage, 2012). It is beneficial for planning &
performance measurement purpose and it is useful to take important decisions for
the business growth. As Aston Martin prepares budget in order to anticipate
income and expenses for future and which help the company to take effective
decisions for the expansion of business. It is the responsibility of management to
prepare appropriate budget by analysing all variable factors which can affect the
business operations of corporation.
 Account receivable ageing report: This report is prepared by the organisation in
which it records the details of those consumers who purchase the goods on credit
basis. Such report is only prepared by those businesses which performs trading in
credit. It is useful for financial purposes to examining the due amount for payment
by multiple customers. Dates are clearly mentioned along with name and further
details related to the credit transactions. Aston martin prepares this report by
collecting information for determining invoices which are due for payments. It is
used by management for analysing potential bad debts and further they are revised
for doubtful accounts.
 Performance reports: This report is prepared for analysing and evaluating
performance of employees or projects in any business. These are helpful in
monitoring as well as evaluating financial along with non financial performances
for generating actual results. Such reports are used by shareholders, employees,
managers, government authorities and many more for analysing performances for
current and future events. Herein, the managers of Aston Martin uses such reports
to understand performances and improve them by formulating plans, programmes
as well as policies for successfully performing operations towards achievement of
objectives. When performance is not up to the standards various decisions are
taken to improve them using such reports (Hilton and Platt, 2013).
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 Cost managerial accounting reports: Such report is used for computing
associated costs in manufacturing of organisational products or services. Costs
related to overhead, labour and so on taken into consideration. Information related
to costs, product lines, employees and investments are recorded under such
reports in appropriate manner (Fullerton, Kennedy and Widener, 2014). It
involves calculation of expenses before any product is offered for selling purpose
and comparison of expenses is done to earn profits. The profits are calculated by
analysing cost managerial accounting reports. Managers of selected entity
prepares such reports for analysing profits as well as losses and formulating plans
for future situations.
 Inventory cost reports: Inventory cost reports is a combination of various
elements which are belonged to the business. Such report is helpful in computing
cots assigned at different organisational stores. This report is very useful for
tracking the required and current inventory to complete the work on time without
any delays. It break downs items related to material, fixed overheads, variable
overheads, labour and service costs. This report helps the selected business for
providing accurate information related to the inventory and costs for the purpose
of determining efficiency in the inventory system.
Evaluation of benefits of various management accounting systems
Management accounting methods have their own importance and benefits applied in
different businesses. It depends on the managers of companies in relation to their usages in
appropriate manner (Otley and Emmanuel, 2013). Benefits of management accounting systems
applied at Aston Martin are the followings:
Advantages of cost accounting system: This system benefits the business by effectively
measuring aspects related to time, costs and expenses. With the help of such system, manager
scan ascertain profitable as well as unprofitable activities which causes profits and losses. Cost
accounting system is used by Aston Martin managers to assign engineering projects at right
prices.
Advantages of job costing system: Such system is helpful to managers for calculating
costs involved in particular jobs. It is also helpful as through such system executives can
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ascertain the desirability of specific jobs for the future situations. It provides advantage to chosen
firm by providing fair values of costs associated with delivering particular job.
Advantages of price optimisation system: Price optimisation system provides
advantage of determining reliable prices of business products or services in the open market. It is
helpful in determining price level which benefits to customers as well as organisation. Such
system is useful for selected business managers as it helps in assigning accurate prices of
engineering projects by considering clients perceptions towards prices.
Advantages of inventory management system: This system provides status of present
along with required inventory for eliminating the delays in completion of projects (Renz, 2016).
Such system benefits selected entity to effectively achieve efficiency along with productivity in
completing operations by minimising expenses and maximising profits. It saves time by
preparing the status of inventory in proper format which can be used anytime.
Management accounting system and reporting integration within the organisational processes
Management accounting systems and management accounting reports are inter related
within the organisational processes. Accounting system includes various systems such as cost
accounting system, job costing system, price optimisation system and inventory management
system. All these systems plays very crucial function for preparation of management accounting
reports by providing financial as well as non financial informations. If such systems fails to
provide required information then it becomes very difficult to prepare the management
accounting reports. Financial mangers of Aston Martin uses management accounting systems for
carefully preparing the management accounting reports with the help of various tools and
techniques. Accounting systems reduces the complexity for composition of reports in accurate
manner. Such reports are used by various stakeholders for taking investment decisions. All
management systems and accounting reports are used for taking critical decisions for the
betterment of the companies to achieve desired profits and builds brand image in the competitive
market place. Thus, management accounting systems and reports are integrated within
organisational processes (Maas, Schaltegger and Crutzen, 2016).
Part B
ANNEX (A)
Marginal costing method: Marginal costing method is an accounting technique which is
used by cost accountants to charge the variable cost to the cost of unit and total fixed cost is
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allocated to the aggregate contribution. It is also knows as the principle costing methods which is
used by mangers in decision making process.
Absorption costing method: Absorption costing method is an accounting techniques
which is basically related to manufacturing of product (Taipaleenmäki and Ikäheimo, 2013). This
cost is also known as full costing which includes the charges related to fixed overhead are taken
in to the cost of production of that product. It includes the cost directly related to the production
of product.
Income statement by marginal costing method:
PARTICULARS AMOUNT
SALES 427500 427500
LESS VARIABLE COST
DIRECT LABOUR (15*5000) 75000
DIRECT MATERIAL (18*5000) 90000
VARIABLE PROD ( 9*5000) 45000
VARIABLE 10% OF SALES VALUE 42750 252750
LESS DIRECT LABOUR (15*500) 7500
DIRECT MATRIAL ( 18*500) 9000
VARIABLE PROD (9*500) 4500 -21000
CONTRIBUTION 195750 195750
LESS FIXED EXP (180000/4) -45000
PROFIT FOR THE YEAR 150750 150750
Income statement by absorption costing method(1st quarter)
PARTICULARS AMOUNT
SALES (4500*95) 427500 427500
COGS -231750
GROSS PROFIT AT NORMAL 195750
UNDER/OVR ABSORPTION 6800
GROSS PROFIT AT ACTUAL 202550
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-FIXED EXP -45000
NET PROFIT 157550
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method(2nd quarter)
SALES (3000*95) 285000
COGS -180250
GROSS PROFIT AT
NORMAL 104750
Under ABSORPTION -5476
GROSS PROFIT AT
ACTUAL 99274
-FIXED EXP -45000
NET PROFIT 54274
Working notes:
1.
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Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
2.
Per quarter standard
production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
Interpretation: The above calculation shows that the total profit earned by a company if
it uses marginal costing technique is 150750 whereas if the company uses the absorption costing
technique the total profit earned by a company is 157550 in the first quarter. From the above
comparison it is observed that company is generating more profit if it is using absorption costing
method as this method shows the proper allocation of its cost and is easily interpreted by the top
level of management in order to take decision to improve the efficiency of its operations. Above
calculation also states the profit earned by the company in the second quarter which is states as
54274.
ANNEX (B)
Absorption costing Method: It is an accounting method which absorbs all the
manufacturing cost such as direct labour, direct material, variable overhead, fixed overhead to
the number of units produced (Hiebl, 2014). This costing method is mostly used for income tax
reporting and financial reporting purposes.
Activity based costing method: Activity based costing is an accounting technique of
allocating cost on the basis of the activities involved during the production process. In this type
of costing techniques company identifies the number of activities which are involved in the
process of product and assign the cost as per the activities used by each unit of goods produced.
(a) Labour hour: -
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Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
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Order handling = £30,000 = 416.666 = 417 per order
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Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
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Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Interpretation: From the above calculation it can be observed that the total production
overhead for product X is 72000 and for the product Y is 192000 using the absorption costing
approach. Whereas in the case of ABC method total production overhead for product X is 82749
and for product Y is 181255. The above calculation also shows the different activities which are
involved in the production process, in case of activity based costing method the machine hour
per period for the product X is 24000 on the other hand for product Y machine hour per period
is 16000.
ACTIVITY 2
Part A
Budgetary control: It is a powerful tool which is used by financial managers for setting
performance as well as financial objectives with standards and budget statements. Such control is
helpful in monitoring and controlling costs in particular financial period. It involves activities
related to planning the objectives, co – ordination of business activities and controlling the
deviations to take corrective actions (Cadez and Guilding, 2012). Budgetary control plays
important function to help the senior management in operating and monitoring operations in
effective manner to increase the purpose of achieving objectives efficiently. Various types of
planning tools are used by financial managers of Aston Martin for framing financial and non
financial objectives with set of activities to achieve them. The advantages and disadvantages of
different types of planning tools used for budgetary control are the followings:
Flexible budgets: This tool is helpful to managers for analysing any deviations between
actual output and expected output for making changes in budget statements during the time
period they occurs. Financial managers of selected business uses flexible budgets to adjust
changes in statements related to changes in activities to achieve desired outputs.
Advantages:
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 Flexible budget allows managers to find deviations between actual output and expected
output by comparing the results and taking correct decisions.
 It benefits the organisation by providing accurate results by covering diverse range of
transactions as per the organisational objectives.
Disadvantages:
 Procedures involves in identifying and segmenting transactions in flexible budgets
involves complex plans.
 As the activities while preparing flexible budgets fluctuates with changes in results,
hence it becomes very difficult for financial managers of selected business to administer
each variable.
Contingency planning tool: This tool is used for managing the unexpected situations
while performing tasks to achieve results in the business. Such tool is helpful for Aston Martin
for formulating and implementing plans, actions, strategies to handle risky as well as
unfavourable situations arising at workplace.
Advantages:
 With the help of such plan, the organisational managers can quickly addresses problems
for eliminating the risks to achieve desired results.
 Contingency planning tool benefits by finding unfavourable situations and taking
corrective actions to reduce the hurdles.
Disadvantages:
 Actions taken may not be helpful to overcome from the situations due to inadequacy of
knowledge to understand situations.
 It is a time taking process and reactive process which helps in analysing circumstances
and taking current situations which does not overlook on the future impacts.
Incremental budget: Incremental budget is used for preparing current year budget by
making changes in past year budget (Herzig, et.al., 2012). Previous year budget is used for
getting ideas related to current performance. Aston Martin managers applies such budget to
arrive at new budget by modifying past budget,
Advantages:
 Incremental budget benefits the firm to eliminate the unnecessary expenses in current
year budget.
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 It do not require any special qualifications so can be prepared by any individual by
understanding the past budgets.
Disadvantages:
 Estimations used in past year budget may not be reliable in present year budgets It involves huge spending to obtain favourable variables for current budgeting of the
organisational transactions.
Use of different planning tools and their
application
The planning tools are considered as an important tool in process of decision making
process and it help managers to take necessary decision to improve the efficiency of the
company's operations in order to earn maximum profit and increase its stability in the market and
improve its financial position. With the help of planning tools such as Flexible budgets,
Contingency planning tool and Incremental budget help the managers to analyse its previous
performance and find out the problems due to which the company was not able to achieve its
previous budget and overcome those problems to increase its market position and financial
position (Lukka and Vinnari, 2014). In Aston Martin mangers uses its previous budget to make
new strategies in order to increase the company's profitability and improve its market position.
They reporting and planning tools help managers to create a road map to achieve its
organisational goal i.e., to increase its profit margin and improve its financial position.
Annex (C)
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NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
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Part B
Financial Problem: Financial problem is a problem which refers to a situation when an
organisation faces the problem of funds required by a company to operate its business. This is a
problem which causes the reduction in efficiency of its business operations. In this type of
problems company uses various sources to raise its funds and identify the internal problem which
causes these financial problems Morales and Lambert, 2013). Following are the various tools
which are used by the companies to identify and over these problems to improve its financial
position.
Benchmarking: It is a process in which the company measures its performance with the
comparison of different business working in the same industry. With the help of benchmarking
companies find out the internal problems and take necessary step to overcome these problems
and improve its financial conditions. Managers of Aston Martin uses benchmarking to identify
the financial instability due to late payments of debtors, company is facing the instability in its
financial conditions. In this process company measures its financial position with the high
performing business in the same sector.
Key Performance Indicator: Key performance indicator are the measurable values
which help companies to find out its key performers and identify the problems and demonstrates
that how effectively and efficiently a business is performing and achieving its organisational
goal. In Aston Martin company uses key performing indicators to find out the financial problem
of the company. With the help of this company find outs the missed payments and take necessary
steps to improve those problems and make provisions in case these missed payments arise in
future.
Financial Governance: Financial governance is a way in which a company monitors,
controls, manages and collects the financial information of the company in order to resolve the
problems identified by KPIs and Benchmarking (Bouten and Hoozée, 2013). It also includes that
how companies manage performance, operations and track financial transactions. In Aston
Martin managers uses the financial governance to resolve the financial problems
Comparison among two organisation that used techniques to solve the financial problems
Aston Martin Bentley Motors Limited
It is an independent manufacturer from British
which manufactures iconic luxury sports cars
It is an engineering company which
manufacturers as well as frame promotional
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along with grand tourers. It provides various
financial services to end customers.
This company is facing problem of late
receipts from debtors while performing
business operations.
In order to identify this issue managers should
apply the approach of benchmarking which
will help in measuring and comparing
performances with other firms in same
industry.
strategies for luxury cars.
This company is facing financial problem
related to unstable financial position in the
competitive market place.
In order to identify such problem, financial
managers are applying approach of key
performance indicators.
To solve this problem inventory management
system must be followed. Such system helps in
tracking status of inventory related to luxury
and sports cars.
To solve such problem performance
management system must be followed.
Management accounting in solving financial problems and ultimately leading to organizational
success
Management accounting system such as KPI are used by companies to identify the
financial problems and non financial problems, it also uses the benchmarking approach which
helps the company to measure its business performance with its competitors (Figge and Hahn,
2013). Company uses management accounting system to overcome the financial problems by
using inventory management system to manage its inventory in order to improve its efficiency in
delivering their car and improving their financial position.
Evaluation of planning tools for accounting to solve problems and support industry with
sustainable success.
Planning tools help mangers to plan for its future growth and respond to the problems
which are identified after the analysis of its budgets. Companies apply various management
techniques and planning tools to expand its business.
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CONCLUSION
As per the report it has been concluded that management accounting is required for
preparing financial as well as non financial reports to take important decisions for the betterment
of company. Management accounting concepts, systems with their benefits are briefly described.
This report includes various kinds of management accounting reports, accounting techniques
along with advantages and disadvantages. It also includes management approaches such as
benchmarking and KPI for solving financial problems to lead towards sustainable success in
competitive environment.
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