Management Accounting and its Essential Requirements

This report discusses the concept of management accounting and its essential requirements. It also focuses on different planning tools and their impact on an organization. The report includes a calculation of an income statement and analysis of different management accounting techniques.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and its essential requirements...................................................1
P2 methods of management accounting report......................................................................3
M1 Benefits of management accounting system....................................................................4
D1 Management accounting report integrated within organisational....................................4
TASK 2............................................................................................................................................5
P3 Calculation of an income statement.................................................................................5
M2 Management accounting techniques................................................................................8
D2 Analysis and interpretation of data ..................................................................................8
TASK 3............................................................................................................................................8
P4 Analyse advantages and disadvantages of different planning tools used for budgetary control.
..........................................................................................................................................................8
M3 Analyse the use of different planning tools for preparing and forecasting budgets......10
TASK 4..........................................................................................................................................10
P5 management accounting systems and its response to financial problems.......................10
M4 Organisational sustainability through management accounting ..................................12
CONCLUSION .............................................................................................................................13
REFERENCE.................................................................................................................................14

INTRODUCTION
Management accounting is a term used to describe an accounting methods, system and
techniques which provides information to business managers. This would help in making
decisions related to day-to-day operation of a business. With regards to small organization, this
concept aid them to monitor performance of business in regular manner. This report is carried on
C&S Builder Merchants LTD to discus concept of management accounting and to understand
different planning tools impacts an organization (Fullerton, 2014). Apart from this, report will
keep its focus over Planning tools of budgetary control, different techniques of cost analysis, use
of planning tools and adaptability of management accounting in an organization. Lastly,
assessment will put light on usage of management accounting and understanding of different
techniques of cost analysis and control.
TASK 1
P1 Management accounting and its essential requirements
Management accounting is the process of preparing reports. In this accounting
information goes through several steps such as interpretation, analysis, identification and at last
presentation. The overall information is obtained with a help of financial and cost accounting.
These type of information which are required by a manager for making daily task preparation
and to make short term decision for an organisation. There are different uses of management
accounting in every field and their application are as follows: It is used to measure performance
of employee and identifying of risk possibility, it is also used in allocation of resources in an
optimised way as C&S Builder Merchants LTD can use different techniques to allocate the
resources so where the resources are needed first should supply there first. It helps organisation
to achieve the long term goal and to sustain for the longer period (Renz, 2016). The management
accounting used to provide the proper presentation of the position of organisation in terms of
finance, Which helps to prepare the financial reports,used in decision-making for future.
C&S Builder Merchants LTD is a manufacturing company which supplies the natural
and man-made stones, concrete, bricks, tiles, and woods like thing for making designer garden.
C&S Builder Merchants LTD uses inventory control management and budgeting control
techniques for handling the the accounts in efficient and effective way.
There are various types of management accounting system which are as follows;
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JOB COSTING SYSTEM
Job costing process involves total cost of material, labour and overhead for the particular
task. This system keeps tracks each and every record and monitor it accurately. It is used to
gather the information at small unit level. For example job costing is used for determine the cost
of the construction,which is the basic function of C&S Builder Merchants LTD. The following
accounting activities which involves in job costing such as labour ,material and over head. Raw
Material used to convert into finished goods,while labour does the given job in the specific time.
Overhead are those expenses which are associated with business for running it effectively.
The process of job costing has a particular procedure consist of enquiry, In which the
consumer is always concerned about the overall quality of raw material,which are required to
make the finished product (Otley, 2016).
Then estimate costing of job is done so that estimated cost could be obtained in mind of the
accountant. Order is placed if consumer is satisfied with the raw material and the cost of material
per unit is fixed before delivery it. Then the final activity are performed which includes the
completion of job,hence raw material are converted into finished product,and payments of bills
are prepared. The company uses Job costing is assigning the fair rate of cost in daily,hourly and
monthly bases , also uses it to distribute the actual cost of each project during process of
manufacturing.
PRICE OPTIMISING SYSTEM
This system is used to control the pricing of each and every resources used in the
company. And keep pricing minimum so that cost price of the product per unit can be
minimised, which helps in making finished product more profitable at time of selling. This
system have been also been utilised to identify the response of consumers towards the fluctuating
price. Hence C&S Builder Merchants LTD can use different price optimization technique. The
company C&S Builder Merchants LTD can use their system to cut down the prices of different
segment for their customer according to the responses (Lavia Lopez., 2014). This system helps in
determining the pricing structure for the activities in the organisation so that it leads to availing
higher profitability for business. The growth,maturity and the declined stage of of the product
determines the pricing of the product.
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COST ACCOUNTING SYSTEM
The cost accounting system helps in finding cost estimate of the product. There are two
types of cost accounting system first one is job order costing ,which gathers the information of
manufacturing cost for each and every job separately. While the other one is Process costing,
which gathers the manufacturing cost separate for each process (Hiebl, 2014). It can be suitable
for company like C&S Builder Merchants LTD because it has developed a process involving
different department and cost flows from one to another department. It is essential to determine
the cost accounting in company to take the construction company to next level of success.
P2 methods of management accounting report
Management accounting is an important part of organisation, it gives clear and complete
picture of company's actual performance. Enterprise prepare these reports quarterly or annually
and these reports are only used for internal use. It is focused on different segments of business
and analyse performance of each segment. Management reports helps organisation in decision
making as they have all information about company performance. C&S Builder is a medium size
organisation, which deals in providing construction materials and products to individuals and
companies. It assist businesses in forecasting future decisions. It is very crucial part for small and
medium organisations to identify their strengths and weaknesses to be competitive in market
place. These reports helps in smooth functioning of operations. The following are some
management accounting reports prepared by organisations:
Budgeting Reports: These reports assist small and medium organisations to identify
their performance. It helps in preparing budget to determine estimated cost and revenues related
to the projects. Budget is prepared on basis of actual expenses of previous years. In C&S
Builder, managers use this report to provide bonus to its employees for achieving desired goals.
Budgets are prepared separately for each department (Cooper, 2017). It also helps enterprise in
cost controlling by identifying areas of wastages and analysing actual performance with
standards.
Inventory and manufacturing Reports: This kind of reports are prepared by
manufacturing concerns who produce physical products. It includes all costs related to
production of products and helps in making efficient process of manufacturing and inventory.
C&S Builder is a manufacturing organisation, these reports will help them to maintain enough
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inventory of stock to complete demands of their customers on time. It helps in improving
assembly line process and to analyse opportunities for various departments.
Job costing Reports: It is prepared to identify related expenses and revenues of a
particular project. It helps in evaluating profitability of project. It helps in identifying areas of
profitability, so that managers can increase productivity and profitability of business. In case of
C&S Builder, these reports assist in determining profitableness of particular task (Tappura,
2015). It identifies areas where company need to put extra efforts in order to enhance efficiency
and effectiveness. Profit margins are forecasted through this report as they have estimated cost
prices of production.
M1 Benefits of management accounting system
System Benefits
Price Optimization
System
For C&S Builder, it will help in cost control and setting prices for
products. This system determine demand fluctuation at different levels
of prices.
Job Costing system It will help C&S Builder in identifying per order cost and determine
operation expenses. It provides necessary information to measure
performance of individual in terms of effectiveness, productivity and
efficiency.
Cost accounting
system
It is helpful for C&S Builder for estimating product cost and control
material, labour and other costs relate to production. It will be helpful in
planing the budget and setting standards for measuring efficiency of
management (Senftlechner, 2015).
Inventory
management system
C&S Builder is a manufacturing business, this system will help in
supervising stock and assets of company. It is beneficial in delivering
customers demand in the right manner.
D1 Management accounting report integrated within organisational
Type of Reporting Integrated within organisation
Budgeting report This report help C&S Builder in analysing performance of company by
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setting standards and comparing those standards with actual
performance. This assist in improvement of productivity.
Job Cost report Through this report C&S Builder can identify areas where management
needs to make efforts to increase efficiency.
Inventory and
Manufacturing
report
It will assist C&S Builder in improving inventory orders, increase sales
and improve delivery process of products.
TASK 2
P3 Calculation of an income statement
Cost - It is a real or actual amount of money that include all payments and contractual
obligation on an organisation which is need to be paid to prescribed parties before a particular
period of time. In business, two types of costs are considered: Fixed cost and variable cost.
Fixed cost is a cost or expense which remain constant during particular period of time. It
is an expense that does not varies with change in level of output. Building rent, machinery and
plant are examples of fixed cost (Bovens, 2014). On the other hand, Variable is a cost that
change with change in level of an output and depends on entire production output. Wages,
materials, utilities are common examples of variable cost.
Absorption costing - It is a cost accounting method for valuing inventory. This includes
all the costs of manufacturing a product including both fixed and variable costs. All cost means
direct material costs and indirect cost like overhead cost are included in the price of inventory.
There are four components of absorption costing: Direct material, direct labour, variable
manufacturing overhead and fixed manufacturing overhead.
Marginal costing is a additional cost incurred for a production of an additional unit of an
output. It indicates a rate at which total cost of a product changes as production increases by one
unit. It happens because fixed cost do not change based on number of products produced, the
marginal cost is influenced only by variations in the variable costs.
Working Notes:
Income statement as per marginal costing:
Net income = (sales revenue – marginal cost of goods sold) = (contribution – fixed cost)
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Particulars Amount
Sales revenue = (no. of units sold x selling price of each = 600 x 55) £33000
Marginal Cost of products sold: £9600
Production = (units produced x marginal cost per unit = 800 x 16) 12800
closing stock = (closing stock units x marginal cost per unit = 200 x
16) 3200
Contribution £23400
Fixed cost ( 3200+1200+1500 ) £5900
Net profit £17500
Income statement as per absorption costing:
Net Incomes = (Sales revenue – Cost of goods sold) = (Gross profit – Selling and
Administrative expenses)
Particulars Amount
Sales = (selling price x no. of units sold = 55 x 600) £33000
Cost of goods sold = (total expenses per unit x actual sales = 23.375 x 600) £14025
Gross profit £18975
Selling & Administrative expenses = (variable sales overhead x actual sales +
selling and administrative cost = 1 x 600 + 2700) £3300
Net profit/ operating income £15675
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Break-Even Analysis: It is defined as point where revenue and expense are equal. BEP
is most commonly used concept of financial analysis, and not only limited to economic use, but
can used for entrepreneur, accountant, financial planner, manager and marketer. In context with
C&S Builder Merchants LTD, it will help to analysis that how much quantity of a product or
service we need to cover all the incurred costs.
A. The no. of products to be sold to Break-Even
Sales per unit 40
Variable costs VC = DM +
DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
B. Break-even point in terms of sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution /
sales * 100 30.00%
BEP in sales 20000
C. Number of products to make sold to generate desired profitability of £10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
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Sales 1333.33
D. Margin of Safety when 800 products are sold
Formula for MOS
Margin of Safety = Budgeted or actual sales – Sales required to Break-Even
Actual sales (in units) 800
Break even sales (in units) 500
Margin of safety 37.5
Margin of safety (MOS) - It is a difference between actual sales and break even sales.
In other words, all sales revenue above break-even point represents margin of safety. A higher
MOS reduces a risk of business losses. It indicates an amount by which a company's sales could
decrease before a company will become unprofitable. As per above tabular calculation, when
actual sales of C&S Builder is 800 units and break even sales is 500 units, then after subtraction,
Margin of safety is 37.5 units.
M2 Management accounting techniques
Accounting techniques are concepts which helps management in planning, controlling,
budgeting and decision making process. It provides financial information to management for
taking financial decisions for increasing profitability and efficiency. These techniques will help
C&S Builder in measuring financial performance of business. It provide information to internal
managers to take decision and in planning controlling activities. Following are management
accounting techniques:
1. Standard Costing: It is an accounting technique, which will be useful for C&S Builder
to analyse differences between actual cost of production and estimated cost of
manufacturing (Christ, 2014).
2. Marginal Costing: This technique identifies the cost of producing one extra product. It
includes variable cost of material and labors and variable cost of selling and
administrative expenses. It will help C&S Builder to identify increment or decrements
in production cost.
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D2 Analysis and interpretation of data
It is analyzed that there are several calculations which are done in order to find out BEP
sales(in units), net income and margin of safety. A major task is to understand flow of income by
adjusting all costs and measure financial position and performance of a company. In marginal
costing, only variable cost is taken into consideration and fixed cost is written off. While in
absorption costing all costs are considered for calculations. So, net income as per marginal
costing is £17500 and as per absorption costing is £15675
TASK 3
P4 Analyze advantages and disadvantages of different planning tools used for budgetary control.
Budgetary control refers to a system which ensures that an organization's potential
revenues and expenditures are closely to its financial plan. The purpose of budgetary control is to
understand a financial position and situation for an organization (Hopper, 2016). In context with
C&S Builder Merchants LTD, manager needs to understand the concept of budgetary control by
help of strong analyze of advantage and disadvantage of planning tools of it. With a help of
budgetary control, Company would realize an effectiveness and function of budgetary control in
response to company's profit making direction. It is difficult to rectify personal/individual and
corporate goals.
There are various factors which effects budget of a company: extra expenditures, taxation
policies, trends of market place and more. Due to vital position of business, manager requires to
prevent company from various uncertainties such as any natural calamities. Climatic condition,
and scarcity of a resources due to any failure. Here for C&S Builder Merchants LTD, its a major
task of a company to plan accordingly with it (Kokubu, 2015). There are various planning tools
of a budgetary control which help company to overcome such problem/issue:
Fixed budget: It is also defined as static budget in which prepare a financial plan that
mainly based on the assumption and set up all the amount for particular financial year. In general
words, these budgets are set criteria for sales as well as revenues. C&S Builder Merchants LTD
apply this budget to analysis the information sales activities changes in actual activity levels.
There are mentioned advantages & disadvantages of this budget such as:
Advantages Disadvantage
It is mainly applied by the small size business In this budget face problem of lack of
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to track the performance and identify
unexpected expenses by putting money aside
speciality for this situation.
flexibility that become reason that there is not
applying any changes as per the requirement.
It supports business to control cost and make
smart spending decisions.
It impact in negative manner on the revenue
stream.
Flexible budget: It is a type of budget in which adjusts all the problems effectively and
apply modification as per the changes in the business situation. The C&S Builder Merchants
LTD apply this budget to add more expenses that arise in the mid of financial year and update
budget that helps to identify actual profit in upcoming year.
Advantages Disadvantage
Seasonable expenses: The main benefit of this
budget that apply the changes to adjust large
purchases which are requiring for any
adjustments.
It is increasing to manipulating of amounts by
accountant that create problem of the fraud.
Less stress, more fun: Through this budget
accounts department of C&S Builder
Merchants LTD did not face the problem of
fixed budget and apply changes any time.
It is creating more planning to prepare effective
budget otherwise face the problem of
confusion.
M3 Analyse the use of different planning tools for preparing and forecasting budgets
Forecasting and contingency are two different types of planning tools. In context of C&S
Builder Merchants LTD, It will help company to protect from future uncertainties like natural
disaster, scarcity of resources and crisis like worker strike or any workplace accidents. These
tools will be helpful for a company to increase their productivity and attaining well-defined goals
(Chiwamit, 2014).
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TASK 4
P5 management accounting systems and its response to financial problems
Every company wants to achieve its target and whether in a form of profit or to maximize
its wealth. But there are several issues due to finance like scarcity of a resources, delay in
allotment time of project, extensive growth of tax rates by government, not getting loans from a
financial institution, higher investment in a less profitable business, not achieving a sales target,
purchasing higher amount of raw material.
Higher investment in less profitable businesses - Investing the higher amount in the less
profitable businesses always tends to decrease an overall growth of the business and due to
which company may have an issue of finance in the future
Purchasing higher amount of material – Purchasing a higher amount of material at a
wrong time when there is no season of business for example in season of snowfall or rain like in
C&S Builder UK Limited can purchase a raw material in the summer so that it can minimizes a
wastage of money ( Nielsen, 2015).
Delay in achievement of sales target - If the sales target are not achieved in time then
there will be loss to the particular company and hence the issue of financing to the different
department of the company such as operation and production will arises.
KPI (KEY PERFORMANCE INDICATORS)
KPI is measurement of performance of the business toward achieving goal and it also
tells that where improvement and modification in specific fields are needed. C&S Builder UK
Limited uses KPI in addressing the different issues related to financial,operational,and
production performance. The issue faced is related to purchase of high amount of material. The
KPI tool help the organisation to analyse the requirement of material on the basis of their past
transactions. The correlation of the same with JIT help in ascertainment of the exact amount of
material required which help to reduce such unnecessary expenses. This would be the way in
which KPI is use by an organisation to overcome the same issue and ensuring the effective
ordering of stock along with its utilisation. This will help to save the cost and improvement of
the profit margin too.
BENCHMARKING
Benchmarking means measuring quality of an organisation in every aspects of their
policies, product and programs and then comparing them with a standard measurement. The
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objective of a benchmarking is used to determine an improvement that can be done to improve
performance of the company. This technique is used by the organisation to overcome the issue of
high investment in less profitable aspects. Application of Benchmarking technique help an
organisation to compare the two different areas on the basis past records and factors. This will
provides an opportunity to analyse at the initial level that how much is cost is going to incur and
the profit attained from the same. This will help to improve decision making and help to invest
on those areas which are profitable in nature.
C&S Builder BMC Stock Holdings
 Company uses benchmarking system to
focus on best performances of
employees and helps in attaining
competitive advantages. This technique
is used by C&S Builder because it helps
in improving standards and quality of
work by analysing current processes
with previous. It is used to reduce
performance gaps. To sort the problem
of higher investment apply the system
of price optimization where set the
effective cost of business than
according to set effective price structure
for business.
 C&S Builder also use Key performance
indicators to resolve its financial
problems. It is important for
determining financial performance and
it provides a road map to company for
achieving organisational objectives.
These indicators are helpful in decision
making process. KPI convert business
strategies into operational actions. To
 BMC Stock Company use Budget tools
to analyse the performance. These tools
set standards to analyse actual
performance with budgeted output and
helps in controlling cost. It helps in
increasing productivity and profitability
of company. The company face the
problem of less utilisation of resources
so for this apply Inventory management
system.
 BMC Stock Holdings also use
Forecasting tools to predict
uncertainties which can occur in near
future. Company forecast on basis of
past experiences and this will help
organisation in controlling cost. To sort
out the problem of cost apply the cost
accounting system and set right cost for
all the cost.
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resolve the problem of sales target
apply the system of job costing system
where prepare plan to achieve right
target on right time.
M4 Organisational sustainability through management accounting
Management accounting techniques and tools helps organisation for effective decision
making process for achieving sustainability. The following two techniques are used by
organisation that can lead to sustainability:
 Benchmarking is used by organisations to analyse performance by comparing present
performance with past performance of employees. It will help C&S Builder in analysing
the differences in their performance and works on them to achieve sustainability in
business.
 Key Performance Indicators are tools to measure performance and they measures how
effectively company is working towards achieving goals of organisation. KPI will
provide right path to C&S Builder for achieving strategic goals (Klychova, 2014). These
indicators differs business to business and are determined by individual performance for
attaining organisational sustainability.
D3 Planning tools for solving financial problems
Every business come across to some problems related to its finances, which can hamper
their sustainable success. There are some management planning tools and techniques that helps
organisation in determining financial problems. These tools provides material information to
managers that can be useful in making financial decisions for achieving organisational success.
These tools will help C&S Builder in controlling and taking timely investment decisions. Some
planning tools are explained below: Planning and controlling: This is an important element for management and it will assist
C&S Builder for creating plans to set goals. This will also be helpful in ensuring controls
in operations. Implementing plans: Managers collect large amount of information regularly from
budgets and performance plans for implementing plans into actions. C&S Builder will be
able to collect required resources as per the requirement of each departments .
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 Competitive edge: Business creates competitive advantages when they have business
focused plans and strategies. C&S Builder will be able to achieve competitive edge when
they have strategies focused on using technologies to satisfy their customers more than
their competitors.
CONCLUSION
It is concluded that management accounting is an integral part of an organisation. Here,
forecasting and planning tools are important to protect company from any future uncertainties
and crisis and realize from past trends occurred. Cost analysis is also required to ascertain
financial position and performance of a company. This concept will help an organisation to
maximize their profitability and cut-down their overall expenses incurred previously. It predicts
that how management accounting and concept is responding to growing scenario of profitability
and capacity of a company and what market will adopt this theory further more. Lastly, company
needs to practices techniques of budgetary control to strong their position and profitability in the
future.
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REFERENCE
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