Higher National Diploma in Business: Management Accounting Report

This report comprehensively examines management accounting concepts and techniques for decision-making within the context of a small to medium-sized enterprise (SME), Connect Catering Services. It begins by critically evaluating the integration of management accounting systems, such as cost a...Read More

Management
Accounting Concepts
and Techniques for
Decision Makers

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1 Critically evaluate how management accounting systems and reporting are integrated
within organisational processes.......................................................................................................3
TASK 2 Calculate cost using appropriate techniques of cost analysis to prepare an Income
Statement using Marginal and Absorption Costs.............................................................................6
TASK 3 Evaluate how planning tools for accounting respond appropriately to solving financial
problems to lead organisations to sustainable success...................................................................11
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is apart of accounting which helps the management to
understand financial information produced by financial accounting and make managerial
decisions on its basis. Management accounting is basically a procedure of interpreting, analysing
and communicating financial information which helps the management to identify the
shortcomings and achieve objectives and goals of the organisation (Berg and Madsen, 2020).
Connect Catering Services is a SME and a family owned business located at Oxfordshire. The
enterprise provides catering services within the city. Connect Catering feels that the
implementation of the management accounting systems along with financial accounting systems
would enable them to strengthen its decision making which will help the enterprise to survive in
the long run and in this competitive market. In this report various management accounting
system which are essential while making organisational decisions. Various techniques of cost
determination are used and explained.
TASK 1 Critically evaluate how management accounting systems and
reporting are integrated within organisational processes
Management Accounting assists the management in making significant decisions related
to the activities and management of the organisation. These decisions may include; number of
units to be sold in order to earn profit, price determination or how much bonus can the company
is able to give to its members. This further assist the business in working with efficiency and
grabbing every opportunity of growth and expansion.
Here the situation of Connect Catering services will be analysed with the help of
management accounting systems. Connect Caters will be able to obtain organisational reports
with the help of management accounting and with the help of these reports it will be able to
make necessary changes and take required decisions in the organisation itself and the
management.
Management Accounting will provide the organisation with financial information related
to the sale and development of services which will help in preparing financial budgets to
improve efficiency of the management (Căpușneanu and et. Al, 2020).
Majorly used Management Accounting Systems are:

 Cost Accounting System: It is one of the most significant system of
management accounting system. Accounting techniques in this system helps in
identifying certain costs involved in tasks and projects of the organisation, with
the help of this identification the management will be able to compare their
profits with their costs and take necessary decisions and plan accordingly. In
context to Connect Caters Services, the company uses Cost Accounting System
with which they are able to manage all their relevant cost like that of its
processes, raw materials and of supply and distribution of products manufactured
(Doktoralina and Apollo, 2019).
 Inventory Management System: Inventory management system consists of
various techniques which assists the manager to maintain the level of stock in the
organisation. This system involves the process of stocking and restocking the
organisation's inventory so as to increase overall sales as stock will be available
when needed. Connect Caters Services uses this system with its various
techniques to manage inventory. Techniques may include LIFO, FIFO, JIT and
ABC analysis.
 Job Costing System: Manufacturers of goods and services both use Job costing
system as it helps the accountant in estimating the cost required to perform every
job. With the help of this system the accountant is able to assess costs of every
department separately (Le and Dang, 2020). Job costing system measure the cost
which is required for executing business activities and completion of jobs. The
information obtained by this analysis is used by the managers to formulate
trading strategies which proves to be very useful for the business.
Management accounting reporting is a system which helps the book keeper to display
management accounting information in an effective form which aids the business to make
significant strategic decisions to make the organisation more efficient. Management accounting
reporting highlights the profitability of the business so that the equity capital holders of the
company can analyse it. This segment has various techniques like budgetary report, account
receivable ageing report, job costs report etc.
 Budgetary Reports: Budget reports have proved significant in measuring performance
of any business in financial terms. Budget reports are generally developed for small and

medium scale enterprises but they also are used in large-scale enterprises by considering
various departments. They are made on the basis of past performance of the business and
with this analysis they can predict future unfavourable situations (Mahajan and
Deobagkar, 2020). Budgets are equipped with the information based on the present costs
and expenditure which are compared to expected or future expenditure and costs.
Accounting reports which are obtained from budgets assists the management in forming
strategies to earn more profit, reducing costs and understand the behaviour of suppliers
and stakeholders. It will enable Connect Catering Services to compare present
performance with the predicted performance. With the budget report Connect Caters
estimate the amount of expected profit and filter out activities that can become the cause
of failure in achieving so. It also helps in analysing new opportunities which are there in
the market and also which will arrive in the near future.
 Account Receivable Ageing Report: Businesses dependent on non-cash sales maintain
account receivable ageing reports. These are of great significance for the business itself.
With the help of this report the management is able to identify accounts of receivables
who frequently turn into bad debts and the management also is able to find problems in
the collection process of the organisation (NICOLETA, 2019). Comparatively more bad
debt means the company will have to change its credit sales policy in a away that money
can be realised faster and no bad debts occur. Management with the help of these reports
will be able to keep a watch on the credit period of debtors and also the cash flow of the
business. This will aid the management in taking important decisions such as increasing
or decreasing the credit period as per the requirement of the company. With polices
formed by Connect Cater Services, the business will collect money from debtors in an
effective way with minimum bad debts.
 Cost Reports: Purchase of inventory, cost incurred on labours and overheads are the
manufacturing costs for an organisation. Total manufacturing costs and other significant
costs are divided by the number of units produced or the monetary value of the services
produced. Cost reports contain information regarding the cost incurred on producing a
single unit along with its selling price and profit earned (Shariati, Talebnia and Royaee,
2020). This report assist the companies decide profit margins it should keep for their
products. It also helps the management to measure areas of significant expenditure,

along with exercising systematic analysis of total costs involved in specific projects.
Department of management of Connect Caters formulates documents to distinguishing
the explanation regarding extravagant cash outflow or costs which are not advantageous
for the company.
 Performance Reports: To review the performance of a business at its workplace these
reports are formulated. In large-scale organisations performance reports of departments
are also developed. These reports are made to make decisions for the future of the
company. Exceptional workers who achieve targets on time and even exceed their goals
are appreciated for their performance in the organisation and under performers are given
warning and also motivation to work effectively. Connect Caters form performance
report to identify departments which are not working effectively and efficiently.
TASK 2 Calculate cost using appropriate techniques of cost analysis to
prepare an Income Statement using Marginal and Absorption Costs.
Connect Catering Services Marginal Cost Statement Of Profit for the month of April 2020
Workings(£) Amount for April
2020(£)
Sales 2000*8 16000
Cost of Sales
Opening Inventory - - -
Variable
Manufacturing Cost
2500*4 10000
________
10000
Less: Closing
Inventory
500*4 -2000
________
-8000
________

Contribution 8000
Less: Fixed
Manufacturing Cost
-15000
Less: Fixed Non-
Manufacturing Cost
-4000
________
Actual Net Loss -11000
Connect Catering Services Marginal Cost Statement Of Profit for the month of May 2020
Workings(£) Amount for May
2020(£)
Sales 2000*8 16000
Cost of Sales
Opening Inventory 500*4 2000 -
Variable
Manufacturing Cost
3000*4 12000
________
14000
Less: Closing
Inventory
1000*4 -4000
________
-10000
________
Contribution 6000
Less: Fixed
Manufacturing Cost
-15000
Less: Fixed Non-
Manufacturing Cost
-4000

________
Actual Net Loss -13000

Connect Catering Services Absorption Cost Statement of Profit for the month of April
2020
Workings(£) Amount for April
2020(£)
Sales 2000*8 16000
Cost of Sales
Opening Inventory - - -
Finished Goods 2500*10 25000
Less: Closing
Inventory
500*10 -5000
________
-20000
________
Actual Gross Loss -4000
Less: Fixed Non-
Manufacturing Cost
-4000
________
Actual Net Loss -8000
Connect Catering Services Absorption Cost Statement of Profit for the month of May 2020
Workings(£) Amount for May
2020(£)
Sales 2000*8 16000
Cost of Sales
Opening Inventory 500*9 4500 -
Finished Goods 3000*9 27000

Less: Closing
Inventory
1000*9 -9000
________
-22500
________
Actual Gross Loss -6500
Less: Fixed Non-
Manufacturing Cost
-4000
________
Actual Net Loss -10500
Connect Catering Services Absorption Cost and Marginal Cost Reconciliation
April 2020(£) May 2020(£)
Loss using Absorption Costing -8000 -10500
Less: Closing Inventory*Fixed Overhead Rate -3000 -5000
Add: Opening Inventory*Fixed Overhead Rate - 2500
________ ________
Loss using marginal costing -11000 -13000
Break-even point Analysis of Home made pizza.
We'll need Total Variable Cost, Total Fixed Cost and PV Ratio to find out break-even
point and margin of safety.
Total Variable Cost (when 2500 units are sold) = Variable Material + Variable Labour
+ Variable Manufacturing Overhead
= £ 8750 + £ 3750 + £ 1250
= £ 13750
Total Fixed Cost (when 2500 units are sold) = Manager's salary + Rent + Insurance +
Advertising + Utilities

= £ 5000 + £ 5000 + £ 500 + £ 1000 + £ 500
= £ 12000
PV Ratio (when 2500 units are sold) = [(Sales – Total Variable Cost)/Sales]*100
= [(23750 – 13750)/23750]*100
= 42.105263158 % or 42.12 %
Actual Amount (£) Break-even Amount(£)
Sales 23750 28500
Less: Total Variable
Cost
13750 16500
__________ __________
Contribution 10000 12000
Less: Total Fixed
Cost
12000 12000
__________ __________
Net Loss -2000 0
Break-even point Sales = Total Fixed Cost/ PV Ratio
= 12000/42.12%
= £ 28500
Break-even point Units = Break-even point sales/ Price per unit
= 28500/9.50
= 3000 units
Margin of safety = (Current Sales – break-even point sales)/ Current
Sales*100
In this current scenario Connect Catering Services sold 2500 units less than BEP
units of home made pizza so it has incurred a loss, there will be no margin of safety.
If Manager's salary is increased to £ 6000;

Total Fixed Cost will also increase to £ 13000, this change will affect the BEP in
following way:
Break-even point Sales = Total Fixed Cost/ PV Ratio
= 13000/42.12%
= £ 30875
Break-even point Units = Break-even point sales/ Price per unit
= 30875/9.50
= 3250 units
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) * Budgeted
price per unit
= (12000-10000) *9.50
= 2000*9.50
= 19000 Favourable
Flexible budget
Items Actual Budgeted Variance
Sales price 10 9.50 .50 Favourable
Sales units 12000 10000 2000 Favourable
Revenues 120000 95000 25000 Favourable
Fixed cost 15000 12000 3000 Adverse
Variable cost 5 5.50 .50 Favourable

0 1000 2000 3000 4000 5000 6000
-20000
-10000
0
10000
20000
30000
40000
50000
60000
Total Variable Cost
Total Fixed Cost
Total Cost
Sales
Loss/Profit
Break-Even Graph
TASK 3 Evaluate how planning tools for accounting respond appropriately to
solving financial problems to lead organisations to sustainable success.
Advantages and disadvantages of different types of planning tools used for
budgetary control:
Budget refers to a tool of management accounting system which assists in evaluating the
expenditures and incomes which will occur in future. Budgets are made at different levels in
today's world, at corporate level, even in households. Mainly there are three types of budget –
Surplus, Balance and Deficit (Fadjar and Sardjudin, 2020).
Budgetary Control is a technique in which the management compares the expected
budget and the current figures of the business. It assist the management to make amendments in
the policies suitable to the company which helps in carrying out its activities efficiently while
making effective use of finance. It also shows how well the management has used the budget
tool.
There are multiple types of budgets, some of them are:
1. Cash Flow Budget: Cash Flow Budget compares the budgeted cash inflow and
outflow to actual cash inflow and outflow, this helps in formulating a term plan.

Advantage: Cash budgets helps the management in minimising unnecessary
expenditure, so the business is able to manage its finances and use it effectively.
Cash flow budget helps predicting seasonal fluctuations where shortage and
surplus cash can be avoided (Schuster, Heinemann and Cleary, 2021).
Disadvantage: While creating cash flow budget non-financial and non-cash
factors are excluded. When the business has to choose from one of the two
financial institution from where it can incur debt; where one institution may offer
low interest rate and other may offer better services. In cash flow budget non-
financial perks are not recorded.
2. Flexible Budget: It is a budget which is flexible and dynamic as per the volume
and activity. In this budget, the budgeted amount changes and varies according to
the situation. This budget is also known as variable budget because it includes
variable factors like variable factor cost rather than static ones. Advantage: It
helps in assessing the efficiency of the departmental head. It control overheads
and help in revaluation of the budget at every level. Disadvantage: This budget
requires skilled workers, therefore it becomes a challenge for the business to find
skilled human resource and it requires a lot of resources. It also depends on the
accounts of the company, if the accounts went wrong the budgets will
automatically be faulty.
3. Variance Analysis Report: Variance analysis report shows the difference
between actual and planned budget. Advantage: It draws attention to areas where
actual performance is different from planned performance so that management
can take necessary decisions to amend that. Furthermore it is helpful in assessing
areas where assets are not effectively utilized and areas where adjustments are
necessary. Disadvantage: It has a major drawback; it takes a long time to
examine the effect of the variance and therefore corrective decisions and actions
are delayed.
Comparing how organisations are adapting management accounting systems to
respond to financial problems and how does these tools lead to organisational success.
Financial Problems: Adequate finance is required by any organisation to function
smoothly. When there are inadequate finance in an organisation financial problems may arise.

These problems arise because of non competent decisions made by the management. Commonly
this is faced by small and medium-sized businesses and organisations, because they are not able
to take efficient management decisions as management accounting system is not followed by
them (Hariadi and Alsawayeh, 2020). If Connect Cater Services borrows more financial
resources management accounting systems will be needed to manage them.
Unavailability of performance measurement system: Connect Caters is a medium-
sized enterprise with best in class services. With a strong local market the company is doing
well. But it is not using any performance measurement technique or system which does not allow
identification of any shortfall or shortcoming in the performance. This further creates problems
in departments and to the employees.
Problems in recognising core competencies: Connect Caters is suffering from this
problem because they are not able to recognise and identify competencies of various
departments. It face issues related to finance and is unable to identify the weaknesses and flaws
of departments. That's why the company suffers from finance related problems.
Financial Governance: Financial governance is a feature of management accounting
system. This helps the business to run effectively and efficiently with proper ethical workings
and abiding by the law. With this corruption and illegal activities in businesses has been reduced.
Financial governance helps the business to work in a systematic manner and follow the rules of
accounting and its standards.
Below cited techniques can help Connect Cater Services to overcome financial problems
and obtain organisational success:
Management accounting
techniques
Reverting to the financial problems by using management
accounting system
Connect Caters Ace Caters
Benchmarking Connect Caters face problems
in financial resource segment
because it is unable to measure
department's performance and
its sales are also decreasing.
Management of the company
The company faces financial
problem due to their inability
to identify weaknesses and
strengths of their departments.
With the usage of key
performance indicator method,

can use benchmarking, this
tool helps to set bars, standards
and benchmarks. With these
standards management can
identify performance and
measure efforts and
performance of each
department (Oyewo and
AJIBOLADE, 2019). With the
help of benchmarking they can
form policies to solve
problems.
management with the help of
indicator can identify the
department which is providing
strength to the company.
Advising to Connect Cater
Services to use technique of
benchmarking:
With the application of Key
performance indicator,
Connect Cater Services will be
able to form a plan for the
future to solve and control
problems related to finance.
By setting KPI they will be
able to control cash outflows
of business activities.
Balanced scorecard This is a technique which
helps to analyse performance
by measuring scorecard.
Connect Caters use this for
recognition of balances in
finance department.
With the use of balanced
scorecard department of
management of Ace Caters
gives attention on departments
that do not complete target in
allotted period of time. And on
the basis of this they form
policies for future.

CONCLUSION
The above report concludes that management accounting system is of great essence for
any business organisation. Application of Management Accounting System will help Connect
Cater Services in coming out of the financial crises which has critically affected the growth of
the company. This will further help the company in identifying the number of units to be sold in
order to be profitable. It helps in determination of price, that must be kept per unit. Furthermore
benchmarking and balanced scorecard are two different tools which will help the business to set
standards and increase efficiency which can further help the business to get a competitive
advantage and an opportunity for growth.

REFERENCES
Books and Journals
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Fadjar, A. and Sardjudin, K. N., 2020. Factors that Influence Decision Making through the
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Le, T. and Dang, L., 2020. Factors affecting the environmental management accounting
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Schuster, P., Heinemann, M. and Cleary, P., 2021. Introduction to Management Accounting.
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