Management Accounting: Types, Methods, and Cost Analysis

This document provides an overview of management accounting, including its types and methods. It also explains how to calculate costs using cost analysis techniques and prepares an income statement using marginal and absorption costs. The document is relevant for students studying management accounting in college or university.

Management
Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................3
P1 What is management accounting and state the essential requirements of various types of
management accounting system..................................................................................................4
P2 Explain the different methods used under management accounting reporting......................6
TASK 2.......................................................................................................................................7
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................7
1 Preparation of income statements:...........................................................................................7
TASK 3.....................................................................................................................................10
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control......................................................................................................................10
P5 Compare how organizations are adapting management accounting systems to respond to
financial problems.....................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management Accounting is the branch of accounting that relates to the implementation of
professional skills, knowledge, tools and techniques that helps composing of statements that
helps management in evaluating its performance and facilitates plans and policies formulation
with the available accounting information. It focuses on optimum utilization of scarce resources
and their safeguarding, operational efficiency and effectiveness, significant and strategic decision
making process that results in high returns and making the stakeholders pleased and proud. The
users for these accounting statements are only the internal management committee of the
organisation. Both financial as well as non financial factors are included in these type of
information (Appelbaum and Nehmer, 2020). These information have a notable impact on
business operations that are being ignored in the other financial statements. It facilitates
management in identifying the areas of key concern that assists management committee in taking
corrective measures for overcoming these issues and enhance operational efficiency.
Management accounting relates to the preparation of accounting information in context with the
the professional knowledge and skills in a way that facilitates organisation's management in
operational planning, directing and controlling and also in formulating policies, in terms of The
Institute of Cost Management Accounting, London (ICMA). Also, as per The American
Accounting Association (AAA), it is the procedure and concept that is required for a successful
process of planning that assists the organisation in choosing the best alternative among various
available after evaluation, then controlling and interpreting its results.
This report related to the scenario of Connect Catering Services. It is one of the best
brand of UK and have its headquarters in Oxfordshire, established in the year 1989 by John
Herring. This report covers the concept of management accounting, its types and various reports
prepared in context with management accounting (Brustbauer, 2016). Cost calculation with
different methods, budgetary tools advantages and disadvantages and the comparison among two
companies in terms of the approach used by them for solving financial problems.
TASK 1

P1 What is management accounting and state the essential requirements of various types of
management accounting system.
Management accounting is the action plan for developing goals and objectives for a
company by measuring, evaluating, clarifying, and conveying the manager the guidance path for
its achievement. It is also sometimes referred as managerial accounting or managerial form of
accounting. It assist the managers in decision making process with the help of available financial
resources and info (Davis and Davis, 2019). It supports the management committee in
performing their operations effectively and efficiently also to control and monitor the functions
of the organization. These are mainly prepared for the use by internal stakeholders and the
external stakeholders are least or are not concerned with these reports. It helps the management
in timely preparation and giving of the financial statements of the organization to the users. Cash
availability, generation of sales revenue, status of accounts payable and receivables and other
similar reports are some type of reports prepared under management accounting system.
Management accounting system has originated from the financial accounting, despite of
this fact, there is a huge difference in both of the accounting system styles. Management
accounting is more beneficial to the internal management committee thus have a wide
acceptance. Few difference between the management accounting and financial accounting are as
follows:
S. No. Basis of Comparison Management Accounting Financial Accounting
1 Content It consists of all type of
information whether financial
and non financial.
It only relates to the
information having a financial
impact associated with it.
2 Motive and Uses The main objective of
preparation of these statements
are for the use of the internal
management as it facilitates
decision making and
performance evaluation (El-
Helaly, 2016).
It is prepared for providing
financial information to the all
interested stakeholders of the
organisation and helps them in
their decision making.
3 Rules, Regulations and Its preparation does not involve All accounting standards are

laws to be followed compliance of any rule,
regulation and laws to be
followed as it is prepared only
for the use by the internal
management committee of the
company.
required to be followed, along
with the all laws and rules that
are applicable on the
organisation as stated by
different authorities.
4 Auditing of the
statements
It is the tool that helps in
evaluating the performance of
the company, identifying
variances in the performance in
comparison with the set
standards and taking corrective
actions for the same. It have no
involvement of the external
stakeholders, so do not require
any independent audit to be
done and does not involve
external interferences.
These are majorly prepared for
the external users and the
information provided should
be authenticated, thus it
involves the independent
audits to be performed and
include external interferences.
It ensures the compliance of all
laws and regulations and
accurate information to the
users. Few of the audits are
corporate audit, revenue audit,
etc.
Management accounting have different systems, few of them are explained below:
 Cost Accounting System- This process involves recording, investigating and recording
of all costs (such as variable, fixed and semi variable) associated with the product of
services manufactured and provided by the organisation. It helps management in
evaluating the areas of improvement and taking appropriate actions for overcoming the
lacking areas (Giner and Mora, 2019). This is also referred as costing system of the
product costing systems. This system smooths the cost evaluation of a product or a
service, its profit making capacity and inventory valuation technique. The main objective
of this accounting system is to maximise the profit earning capacity of the organisation.
 Inventory Management Accounting System- This is a systematized approach that deals
with the ordering, storage and management of the raw material and finished goods

inventories and other equipments within the company. It focuses on quality control of the
products manufactured and ensures the availableness of the right stock, in right quantity,
at a right place and on the right time that is purchased at the right cost. It reduces the risk
of shortage of inventory, high inventory storage costs for the organisations having a
complex supply chain management or manufacturing processes. The main aim of this
accounting system is to reduce the cost and over stocking that results in loss minimization
and maintaining liquidity in the organisation.
 Job Costing Accounting System- It is a distinctive process that accumulates the
information related to all the cost associated to a particular product or a service,
performed in accordance with the customer's requirement (Henri and Wouters, 2020).
The main purpose behind this system is to evaluate the profit or loss made on each job or
a service. It allows the organisation to quote the price that allows the firm in making
reasonable profits.
 Price Optimisation Accounting System- This is a mathematical tool used for
determining the price of a particular product. It assists in predicting changes in quantity
and amount and fix a desired price that a customer is ready, able and willing to pay for
consuming or purchasing the organisation's product. It helps the company in using the
price as a powerful profit maker.
P2 Explain the different methods used under management accounting reporting.
Accounting Reports plays an integral part that provides a complete picture of the
organization's performance in relation to the trends running in the industry. It helps in
ascertaining the company's operations whether they are in direction towards the achievement of
organization's goals and objectives. These reports should be absolute, correct, precised and valid
to rely on, so as to make the decisions and formulate strategies and evaluate performance by the
management.
 Budget Report- It is the fundamental report that assists the owners to address and control
the operational cost in the organization. It is prepared on the past experiences and provide
directions to the manager and employees in increasing productivity and providing greater
benefits to employees, cost negotiation with suppliers and vendors (Ipino and Parbonetti,
2017).

 Job Cost Report- It gives the basic view of total cost incurred on a particular product or
a particular job. Its purpose is to evaluate the profitability relating to a single task or
project. It helps in identifying the most profitable business unit and giving it the most
focus and less focuses to the units earning lower returns.
 Inventory and Manufacturing Report- It is the summary report of the inventory held
by the company at the given point of time. The main aim for this report is to enhance the
efficiency in production process and includes items like labor cost, overheads incurred in
the production of a single product.
 Order Information Report- It facilitates evaluation of efficiency and effectiveness in
business trends (Krause and Tse, 2016). It comprises of information regarding the
multiple orders obtained by the company. It assist the organization in achieving cost
leadership and integrates different management operations.
 Accounts Receivable Aging Report- It is related to the credit balances of the shoppers.
It aligns the organization's policy with the paying capacity of its customers. It is used for
finding the problems associated with the organization's credit policy by the managers. It
ensures the removal of old debts that are potentially bad debts.
 Performance Report- This report gives a hostile view of the organization's performance.
It summarize the end results of all the activities or the performance of an individual in
terms of the work done. It is the standard sets for the performance, identifying deviations
and taking correct actions for overcoming the performance gaps (Lev, 2019). It involves
indicators like achievements made, objectives fulfilled, tasks accomplished, etc..
TASK 2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs.
1 Preparation of income statements:
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Fixed Manufacturing Overhead per unit 6 5
Total 10 9

Income statement under absorption costing-
Particulars April May
Sales 16000 16000
Less: Cost of sales 20000 23000
Fixed Manufacturing Overhead 15000 15000
Variable Manufacturing cost 10000 12000
Closing stock 5000 9000
Opening stock 0 5000
Gross loss -4000 -7000
Less: Fixed Non Manufacturing Cost -4000 -4000
Net Loss -8000 -11000
Cost per unit under absorption costing-
Activity April May
Variable Manufacturing cost per unit 4 4
Particulars April May
Sales 16000 16000
Less: Marginal cost of sales 8000 10000
Variable Manufacturing cost 10000 12000
Closing stock 2000 4000
Opening stock 0 2000
Contribution 8000 6000
Less: Fixed Manufacturing Overhead 15000 15000
Less: Fixed Non Manufacturing Cost 4000 4000
Net Loss -11000 -13000
Reconciliation Statement:
Particulars April May
Net loss under absorption costing -8000 -11000
Less: Closing stock -3000 -2000

Net loss under marginal costing -11000 -13000
2 a.
1. Identify which costs are fixed and which costs are variable.
Fixed costs:
Activity Amount
Manager’s Salary 5000
Rent 5000
Insurance 500
Utilities 500
Advertising cost 1000
£ 12000
Variable cost:
Activity Amount
Direct material costs per Pizza 3.50
Direct labour costs per Pizza 1.50
Direct overhead costs per Pizza 0.50
£ 5.50
2. Show the Break-even point using a Break-even graph.
BEP (In units): Fixed cost / contribution per unit
Contribution per unit: Selling Price - Variable cost per unit
= 9.50 - 5.50
= 4.00
BEP: 12000 / 4
= 3000 Units
BEP (In revenues): Fixed cost / PV ratio
PV ratio: Contribution / selling price* 100
= 4/ 9.50*100
= 42.10 %
BEP (In revenues) = 12000 / 42.10 %
= £ 28503

3. What would be the Margin of Safety if the organization managed to sell 2500 Pizzas?
Margin of safety = Sales units - BEP in Units
= 2500 - 3000
= - 500 Units
4. If the manager’s salary is increased to £6,000, how will this affect the BEP in units and in
sales value?
If manager’s salary will increase than it will affect to fixed cost and revised fixed cost will be of
£13000.
New BEP (In units): 13000 / 4
= 3250 Units
New BEP (In revenues): 13000 / 42.10 %
= £ 30878
2 b. Preparation of graph:
Activity Amount
Total Costs (12000+55000) 67000
Revenues per Unit (95000-67000)/10000 2.8 Per unit
Total Fixed Cost 12000
BEP point 28503

3. Variance Analysis Report:
Actual units sold = 12000
Budgeted units sold = 10000
Budgeted price per unit = 9.50
Sales volume variance = (Actual units sold - Budgeted units sold) x Budgeted price per unit
= (12000 - 10000) * 9.50
= 2000 * 9.50
= 19000 Favourable
Flexible budget
Items Actual Budgeted Variance
Sales price 10 9.50 0.50 Fav.
Sales units 12000 10000 2000 Fav.
Revenues 120000 95000 25000 Fav.
Fixed cost 15000 12000 3000 Adv.
Variable cost 5 5.50 0.50 Fav.
TASK 3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
Management Accounting System comprises of tools and techniques that helps the
manager of an organization in improving the performance, developing strategic goals and visions
and adding value in the company's operating process. Its main aim is to enhance the profitability
of the firm by increasing its productivity. It assists the management committee in planning,
directing, controlling, fixing of product price, and making appropriate decisions. Various tools
can be used for different purposes.
Primarily, the planning of the business activities are undertaken by the managers. These
plans of action acts as the base to monitor, control and evaluate the performance (McGuigan and
Ghio, 2019). The tool used by management for the same is budgeting.
Budget is the statement prepared by estimated forecasts made, related to the expenditure
that will be incurred and the revenues that will be earned in the future based on the past
performances. It is prepared for a specific period of time and is re-evaluated on continuous basis.
It is the financial planning done for particular sum of money that is assigned to a project. There
are basically two types of budget namely, Operational Budget and Capital Budget. An

operational budget predicts the expenses and revenues made in the operational process of the
organization for the coming financial year. Whereas the capital budget includes the income to be
earned or expenditure to be made on the long term capital investments made by the company in
the future. Variety of budgets prepared by Connect Catering services are listed as:
Cash Budget
It is the statement used for estimating the cash flows in the given tenure by the company.
It helps in determination of cash generated from the business operations and their sufficiency for
meeting business expenses. It aim is to provide an insight for the cash requirement and its
allocation and results in optimum utilization of the free available cash and cash equivalent
resources. Its purpose is to estimate the efficiency of the company in managing its regular
operations. It gives a summary of estimated revenues, operating expenses, buy or sale of assets,
settlement of debts and the excess cash available with the organization. Advantages- It prevents the overspending of the cash and provides better prospective of
allocation of the surplus free cash available (Miles, 2019). Also, it also minimizes the
debt component as the payments are made in cash.
 Disadvantage- It limits or restricts the spending power of the organization as most of the
cash available is allocated to the processes of the firm, resulting in less free cash
availability. Also it is difficult to track and can be stolen easily.
Sales Budget
It is the basic component required for the preparation of the master budget and includes
expenses made for increasing the sales and the revenue generated over a particular time period.
Its aim is to determine the average forecast earnings on the basis of the historical data and the
management judgment relation to the competitors, demand of the firm's product and the
economical conditions of the environment (Pratt, 2016). It gives the estimation of the quantity of
the products the company would be able to pay and the amount of revenue that would be
generated from such sales. Advantages- It guides the organization for prescribing the targets and motivating the
employees for its achievement by working hard. It also helps in producing the appropriate
quantity of product and neither over production nor under production of goods to be
done.

 Disadvantage- It is a time consuming process and do not assure same results. The
environment in which the organization operates is dynamic, changing and more
competitive and it is prepared in accordance to the management's judgment and
sometimes may result in losses.
Capital Budget
It provides the information related to the capital receipts and payments over a fixed and
per-determined tenure. It is used facilitating the organizations for evaluation of the crucial
projects or investment decisions. It includes analysis of the cash inflows and outflows from a
particular task or project. And evaluates the performances as per the set benchmarks. It includes
methods like payback, discounted cash flows, etc... It provides a quantitative view for the
proposed investment decision and assist in making a rational decision considering all the aspects
related to the asset. Advantages- It facilitates decision making for the investment opportunities available with
the company by evaluating the risks and returns linked with the asset (Tracy, 2016). It
helps in avoiding the problems like under or over investment and determines the right
amount to be invested in a particular investment for making the best returns out of it.
 Disadvantage- it relies on assumptions in estimating the cash inflows and outflows and to
not assure the accurate anticipated value. Also, there is a high risks involved in the
business activities having high cash investment. A wrong decision with respect to funds
allocation can lead to significant losses in the business and sometimes may results in
complete shutdown.
TASK 4
P5 Compare how organizations are adapting management accounting systems to respond to
financial problems.
Financial problems are the situations that demonstrates the ability of the company for not
paying its financial obligations because of the insufficient funds. It is the factor that indicates the
organization's bankruptcy (Wen and Moehrle, 2016). Few of the accounting tools and techniques
that can be used for solving financial problems are:
 Benchmarking
 Key Performance Indicators (KPI)
 Financial Governance

Basis of Difference Connect Catering Service Salsa Catering Service
Financial Issues The significant problem faced
by the connect catering service
is that it is not earning constant
returns and have high
variations over the past years
and reduced profit generation.
Salsa catering service is
expanding its business
existence on a continued basis
but the market share of the
company is not growing at the
same speed, that is creating a
huge problem for this
organisation and the corrective
actions are required to be taken
soon.
Techniques used for issue
identification
The use of Budget Controlling
Tools and techniques are
suggested to be used by this
company, as it helps in
identifying the areas having
the increased operational costs
that have resulted in the
decreased profit earning by the
company and this is the matter
of extreme and increased
distress.
The organisation should
choose the benchmarking tool
for identifying the reasons of
not able to increasing the
market shares. The areas
having ineffective and
inappropriate tools of
marketing involving huge
costs should be minimized and
new policies and procedures
should be framed.
Management Accounting
System Used for solving
Issues
The most efficient and
effective tool that the connect
catering services can use it the
cost accounting system for
solving its problems (West,
2018). It assists management
in evaluation of the cost,
determining the reasons for the
Salsa Catering service is
required build some tools that
help it in making a sustainable
place in the competitive
market and differs its products
and services for its
competitors. Few way of doing
this is fixing low prices then

hike in the costs and taking
appropriate measures for
overcoming these issues by the
manager of the company.
that of the other rivalries,
providing discounts, cashback
offers and coupons, etc. to the
prospective buyers to promote
sales.
CONCLUSION
From the above report, it can be concluded that management accounting spot the essential
role for the growth of monetary value to various companies. This unites the techniques of
management accounting that facilitate the organisation committee with which the same purpose
of management in regards to achievement of goals and objectives that purpose is to expanding
the ratio of productivity and raising efficiency level in the operational level of business.
Integration of various techniques in business procedures helps the business management in
merging the outlook of efforts of all sectors of an organisation in addition to achieve the
organisation target orientation of goals and objectives. The business operates in the dynamic,
undetermined, complex, challenging and aggressive environment and hence for firm to continue
its place it is essential to effectively use these administrative instruments. It helps the
management in making strategies and policies that ensures to give a border to the firm that over
its competitors and that optionally leads to the part of the sustainable growth. Absorption costing,
marginal in addition with the use of FIFO and LIFO techniques the manager ascertain the cost of
business transaction and investing management cost.

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