Managerial Accounting Concepts and Applications

This document contains a solved managerial accounting assignment that delves into several key concepts within the field. It examines topics such as cost accounting methods, capital budgeting techniques, revenue management perspectives in small businesses, and the role of environmental management accounting. The assignment also touches upon the evolving nature of management accounting research and its application in diverse sectors like the public sector and hospitality.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
P1 Explain management accounting and different types of management accounting system.....1
P2 Explaining different methods used for managerial accounting reporting...............................4
P3 Calculation of costs by applying marginal & absorption costing techniques.........................6
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................9
P5 Compare how organizations are adapting management accounting systems to respond to
financial problems......................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
The process under which financial information of the business assists top management in
business planning, policy formulation, executive control over the daily operations and
appreciation of the effectiveness. In the management accounting, higher business authority
gather accounting related information from purchase, sales, marketing, finance and other
departments through reporting and analyze the same to frame better growth plans and informed
organizational decisions. It not only considers important for the large sized entities, but also
gains equal importance for the small and medium sized corporations who significantly
contributes in the economic growth & success. British retail industry is one of the fastly growing
sector in the corporate world, therefore, the report has taken into consideration a small sized
retail firm, Nisa Retail Stores. It aims at supporting the community all across the UK by
rendering them high quality of food items at competitive prices. The report presents a deeply
evaluation of distinguish reporting and systems of management accounting that assist managers
with regards to policy creation & business decisions. Besides this, cost calculation is an
important operational aspect, henceforth, the report will undertake the practical use of two
costing techniques, full as well as variable costing. Later, traditional as well as contemporary
techniques of budgeting formulation i.e. incremental, zero based and others will be discussed in
context to Nisa’s success.
P1 Explain management accounting and different types of management accounting system
Nisa retail store is selected for the current project report which is small scale retail store
who started their business at small level. This entity currently deals in grocery and food products
which are essential requirement of an individual. This is located in the United Kingdom in order
to satisfy the higher expectations of various customers as they want variety of products or
services offered by an enterprise. This retail store is exists in the external market which has
expanded their overall business (Kotas, 2014). The scope of retail industry is gradually
increasing as this has attracted wide tuber of businesses in the current sector which is generating
higher business revenues. An entity exists in the retail sector need to implement various business
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policies and practices in order to maintain their existence for long tie in the business to generate
higher revenue and income in the business environment.
Several problems faced by an entity that started their business on a small scale level as
they initially require enough amount of finance to uplift their current working conditions of their
overall business. Quality of all the products should be enough to retain all the consumers with
the business for long time as external market competition will decrease the market share by
offering affordable products to attract wide number of customers. Customer’s satisfaction level
will be increases by an entity to beat all their rivals as primary aim of the business in the current
business environment is to satisfy all the customers located in the external market.
Management accounting principles are emphasized on reducing current costs incurred in
the business which needs to be identified first in reducing with the passage time. Cost sheets are
thee to analyze the current figure of costs to be incurred in the business as management
accountants are appointed for the betterment of an entity as they held responsible for analyzing
of the current business performance of the business in order to gain competitive advantage over
its variety of customers (Lukka, 2014). It is regarded as that important process in which sources
of costs are analyzed in order to reduce all costs along with the proper management systems used
by an entity in order to improve the singular efficiency of all the business activities included in
an entity. Some management accounting systems which hips Nisa retailer is given as below:
Inventory management system- Inventories are important source of an entity that needs to be
procured in the business till it gets all the customers as this will not remain in the business for the
long time (Rossi, 2014). The inventories will not store in the business for long time as it
increases the overall warehousing costs in the organization which in turn decreases the overall
income earned by the business in a particular financial year. The management of inventory gets
possible by adopting appropriate system of managing inventory. The management of inventory
gets possible by evaluating the stock values as this helps in taking important business actions in
the favor of the current business performance. The proper valuation of inventory will help in
increasing the overall profitability of the business within a given time period as this would help
an entity in order to grab higher market share in the external market.
FIFO- It is an acronym that stands for first in first out method which is important method
managing overall inventories takes places in the business which requires proper management of
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all the stock procured in the business enterprise. The inventories included in the business have
various forms such as raw materials, manufacturing goods, work in progress inventories. All thee
inventories play an important role in the business as this helps in enhancing overall performance
of an entity (Kotas, 2014). In this approach old inventories are sold first in the organization as
physical inventories can be tracked by an individual in a particular financial year. The cost
valuation shown in the balance sheet at the actual value of inventory whose valuation is done on
the basis of FIFO method will directly show in the balance sheet under the head current assets as
inventories. Thee inventories shown in the balance sheet are regarded as the final and closing
balance of all the inventories.
Date Particulars Number of units Per unit cost Total value
1 April 2017 Beginning
inventory
100 20 2000
5 Purchase 250 50 12500
6 Purchase 300 80 24000
650 29500
10 Sale 500 (100*20)+(250*5
0)+(150*80)
26500
10 Closing inventory (150*80) 12000
LIFO- Last in first out method is another important method used in valuation of all the stocks
held n the business for generating higher business returns in the near future. It is an acronym that
stands for last in first out method which helps in managing overall inventory in the business to
generate optimum return by selling all the existing inventories held in the business for long
period by the business enterprise. Under this particular method the value of sales will be based
on the lastly purchase items included in the business long time period in order to meet the
desired needs and the expectations of the business enterprise.
Date Particulars Number of units Per unit cost Total value
1 April 2017 Purchase 300 60 18000
6 Purchase 450 20 9000
750 27000
11 Sale 450 (450*20) 9000
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10 Closing inventory (300*60) 18000
Cost accounting systems- Cost is the primary concern of the business as this is essential factor
in improving the overall business of an entity (Kokubu and Kitada, 2015). Costs accounting
systems will consider all kinds of costs incurred in an entity such as fixed as well as variable
costs incurred in the business. All kinds of costs includes in the business to recognizes the
current capability of the firm in order to capture higher market share by reducing its all the
current business costs. Current business costs incurred in the business involves utility bills,
marketing costs, staff salary, kitchen equipment, maintenance, website designing and web
domain costs. All the costs are identified by the management in order to analyses its caliber so
that the focus of an entity ca shifted towards the higher market opportunities.
Cost can be reduced by using various voluntary services in order to organize web
designing contests in which various freelancers take part so that the website will be easily
designed by the business. Accounting of daily routine costs is essential in order to know the
regular as well as potential customers of the business. Hidden aspects of the business are
identified in the cost accounting systems in which major criteria of costs will be selected which
helps in classifying overall costs in the business organizations (Chenhall, 2012). Costs are
majorly classified into two main categories such as fixed as well as variable costs incurred in the
business. Cost of the business will be identified in order to adopt the best suitable system which
will be implemented by an entity in order to enhance the overall efficiency of the business. Cost
is regarded as important obligations imposed on an entity that needs to be reduced with the
passage of time in order to improve the current business conditions of an entity. Ascertainment
of costs can also be compared with the pilot study conducted by an entity in which firstly the
costs is identified and then an entity will make business action in order to enhance their overall
performance.
P2 Explaining different methods used for managerial accounting reporting
To: Nisa’s General Manager
From: MAO (Management Accounting officer)
Date: 13th April 2017
Subject: Various methods of managerial accounting reporting
In the field of management accounting, executives, board of directors and other
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decision-making authority of the Nisa retailer will make an in-depth evaluation & assessment of
their performance. This process requires information collection which managers gathers from
various reports designed and prepared for distinctive purpose. Several essential & important
reports which managers can utilize are presented here as under:
Job cost report: This report provide essential information to the managerial team and
top authority for the expenditures incurred on a specific kind of job (Faÿ, Introna and Puyou,
2010). It comprises various set of material information about material purchase, wages paid &
overheads incurred, so that, total cost and profitability on the job work can be founded.
Inventory Management report: Inventory management is a crucial or important area of
operational management, in which, authority aims at maintaing adequate quantum of goods &
services in the stock, so that, risk of sudden inrease in market demand can be meet out
efficiently. This report presents information about physical inventories, hourly cost of labor,
overhead/unit and wastage as well. With this, Nisa’s managers can compare various assembly
lines in the production process and make better decisions to bring substantial improvement in
the actual results.
Debtors/accounts receivable report: Nisa store offer goods & services on cash & credit
basis. For the effective management of cash sources, managers must look towards their trade
receivables, also called debtors. This reports aware the credit collection departments about the
outstanding balances of the customer accounts, time of delay and others, which in turn,
manager can set right decisions to promtply recieve the payments from users by tightening the
cash collection policy (Sullivan, 2012). Moreover, effective decisions can be carried for assessing
and evaluating the consumer creditworthiness before granting them services on credit.
Segmental/Departmental stores: It gives information regarding th performance of each
& every division, segment or departmental stores of Nisa retailer. With the help of such report,
policy makers can determine the segment which lacks behind the targeted results and assists in
strategies creation for bringing out significant level of improvement in the actual results by
driving milennial audience base, better use of resources, appropriate marketing plan, cutting of
cost, boosting saving & others growth strategies.
Performance reports: This reports can be used by the Nisa’s Board of directors (BOD), in
which, detailed information is provided to measure the operational activities results and its
success over the given time (Fullerton, Kennedy and Widener, 2013). It presents various key
performance indicators (KPIs) i.e. profitability, resource utilization, cost-cutting plans, sales
trend, control over wastage, stock management & others and assist the team in phenomenal
business growth planning.
Operating budget report: Under this reports, set targets income & payments are
communicated to the top managerial authority which facilitates the team to analyze the
divisional’s performance i.e. production efficiency, sales performance, suppliers charges,
marketing operations etc. and provide better control over the costs (Ionescu, 2016). Nisa’s
owner as well as top decision-making authority can also use it as incentive scheme for the
workers to carry out their work with great level of efficiency to meet the decided goals.
Product/service profitability report: As the given name, it gives information about the
return on each and every product offered by the Nisa retail store which is measured by the
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excess of revenues over costs made and assist the managers in making a right planning to
maximize net yield by maximizing sales & cutting cost.
P3 Calculation of costs by applying marginal & absorption costing techniques
Finding the right cost of production and goods sold is very important decisions for the
Nisa retail store, and also affect other aspects like profitability determination, pricing fixation
and others. There are two most often utilized techniques which business entities can use that are
marginal & absorption costing, enumerated here below:
Marginal/variable costing: In simple words, marginal cost refers to the cost of
manufacturing a single unit of item or service. With context to Nisa, if production department
produce one more unit, then, business entity will only the variable cost such as material, labor
and others. Thus, this costing method believes that only the variable prodcution cost should be
considered for finding out the production cost and avoid fixed production overheads (Saladrigues
and Tena, 2017).
Absorption/full-costing:In contrast to marginal, this method favors the accumulation of
all the production overheads i.e. fixed & variable while figuring out the cost of production, this is
the reason why it is also called full costing.
Difference between marginal & absorption costing
 MC considers variable costs for inventory valuation, unlike it, under absorption, both
fixed & variable production expenses are considered.
 Under MC, fixed overheads are treated differently because they are considered as
periodic costs through the profit-volume-ratio (Banerjee and Das, 2017). However, on the
other hand, under absorption costing, fixed costs is charged to the production costs.
 MC, production cost per unit is not affected with the difference of opening and closing
inventories. However, under absorption costing, it afffects the production cost each unit.
Computation of cost of production/unit
Items Absorption/full costing
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Material purchased 6
Direct labor's wages 5
Variable production overheads 2
Fixed production expense 3
Production cost/per unit 16
Fixed production overhead absorption rate (OAR)
= Total budgeted fixed production overheads/Number of units
= 1800GBP/600units
= 3GBP/unit
Calculation of cost of goods sold Actual
Material purchase 4200.00
Labor’s wages 3500.00
Variable manufacturing/productionoverheads 1400.00
Fixed production overheads 2100.00
Costs of production 11200.00
Add: Opening/beginning inventory
less: ending/closing inventory 1600.00
Cost of goods sold (COGS) 9600.00
COGS/unit 16.00
Profitability statement under absorption costing
Particulars /items Amount
Total sales /tunover (600*35GBP) 21000
less: Cost of sales 9600.00
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Under absorption of fixed manufacturing expenses 100.00
Gross profit(Turnover-cost of sale) 11300.00
Less: otheroverheads
Variable selling expensee 600
Administration/office expense 700
Fixed Selling expense 600
Total 1900
Net profitability (GP-other expense) 9400.00
Marginal costing
Calculation of cost of production under marginal costing Actual
Material purchase 4200.00
Labor’s wages 3500.00
Variable manufacturing/production overheads 1400.00
Cost of production 9100.00
Add: Initial/beginninginventory
less: Ending/closing inventory 1300.00
Cost of goods sold (COGS) 7800.00
COGS/unit 13
Computing the net profitability using marginal/variable costing method
ActualParticulars/Items
Turnover (600*35) 21000
less: Cost of goods sold (COGS) 7800.00
Variable selling overheads 600
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Total variable cost (TVC) 8400.00
Total contribution (sales –TVC) 12600.00
Less: Fixed expenses
Administrative overheads 700
Selling expense 600
Total fixed cost (TFC) 1300
Net profitability/return (Contribution – TFC) 11300.00
Interpretation: Findings the outcome of the above results, it is founded that cost of
production under absorption and marginal costing founded to 16 & 13 per unit. Further, profit
under the full costing method is derived to 9400 whilst in marginal, contribution was figured to
12,600 & net profit identified to 11,300.
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Cash flow statements- Cash flow statement's is used by an entity in order to determine
the current movement of cash in the overall business (Kokubu and Kitada, 2015). It includes
three important activities such as operating, investing and financing activities in order to
determine the final balance of cash by comparing it with the closing balance of cash in the
business enterprise. The benefit of using cash flow statement's to know the current position of
cash in the organization as it is important to have cash in the firm to meet all kinds of short term
obligations in the business enterprise. Limitation of cash flow statement's is that higher deficits
incurred in the business will affect the overall performance of an entity.
Budgetary control- Budgets are important written statement's that includes all the
financial resources incurred in the business in order to grab higher market share by improving
existing business performance of an entity. Budgets are prepared for various components in the
business such as all the expenses, sales budget, purchase budget. It is essential to prepare
different kinds of budgets in enhancing overall business performance of an entity with the
passage of time that helps in creating higher position of the business in the external market
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(Kokubu and Kitada, 2015). In the preparation of budget it is important to record all the business
incomes and expenditures in the appropriate proportion to gain higher market share.
Standard costing- Standard costing is used by an entity in order to improve the current
performance of an entity in order to eliminate all the existing deficiency of the business which is
restricting the business performance of an entity in order to grab higher market advantage in the
near future. The major objectives of the standard costing is to compare actual output of the
business as compared to all he standards prepared by an entity in order to regulate the current
tasks and duties allocated to all the employees working in the business for the betterment of an
enterprise. It has various aspects such as material variance, labor variance and overhead variance.
Overhead variance has classified into two types such as fixed as well as variable overhead that
enhances overall business performance of an enterprise.
Financial statement's analysis- Financial statement's prepared by an entity is to reflect
the financial performance of an entity after consider all kinds of financial resources included in
various financial statements included in the business enterprise of Hungry house (Ng, Harrison
andAkroyd, 2013). Financial statement's has standard formats such as income statement's,
balance sheet and cash flow statements which are fund in every businesses wants to determine
their financial performance after analyzing all the financial resources kept in an entity. The
performance of an entity will be classified into two types such as qualitative and quantitative
kinds of information interpreted by variety of business in order to make important decisions
about the current business entity as enterprise held responsible for the business actions of their
enterprise owner.
Incremental Budgeting: This budget is prepared after analyzing previous year budgets
because in this budget previous year figures are increased with certain number.
Advantages
1. Incremental budgeting is very easy method to implement and calculate
2. It is continuous process of budgeting which includes funding of every department
without detailed analysis.
3. This method of budgeting is used by many businesses to eliminate competition from
the market.
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4. It is instant process which shows its result immediately. It is basically useful for the
companies who have fixed funding demand.
Disadvantages:
1. It causes high spending so that the budget is continued next year.
2. Incremental budgeting cause ever lasting resource allocation in certain departments.
3. This process sometimes disconnects from reality. Budgets are different when
compared to actual budgeted budget.
Zero based Budgeting: This type of budgeting start from zero as a base and budget is
prepared after analyzing needs and cost of every functions for future.
Advantages:
1. Zero based budgeting process clarifies every spending of the business.
2. It helps in reducing the wastage of resources and time
3. Comparison is done between old and new projects of the company.
Disadvantages:
1. Zero based budgeting process is very complex and costly also requires specialized
training.
2. This budgeting process is short term and also not useful in manufacturing department.
3. Risky process and also prohibited in some organization who have limited funding.
4. It is basically useful for the companies who have fixed funding demand
P5 Compare how organizations are adapting management accounting systems to respond to
financial problems
Financial problems are important for an entity that needs to be removed with the passage
of time that will be eliminated from the current business in order to strengthen the business of an
enterprise (Jacobs and Cuganesan, 2014). The major aim of an entity is to enhance the skills and
the capabilities of an individual in order to grab higher market share the business. Hungry house
is required to analyses its current resources in order to ascertain all the financial problems faced
by an entity that needs to be eliminated using various ways which is given as below:
Bench-marking- In this particular approach the current performance of an entity will be
compared with the best practices of the overall industry that helps in increasing the current
performance of an individual in order to reach the higher records by improving their current
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skills and the capabilities in the overall business tenure. This is regarded as one of the important
tools of performance metrics in order to improve overall quality of the business processes
includes in an entity that requires amendment wit the time to ensure overall productivity of the
business enterprise (Ball, 2013). The targets are prepared by an enterprise in relation with the
industry benchmarks as an individual will enhance its overall performance of an enterprise in
order to grab higher market opportunities in the near future. For example, if Nisa’s net profit is
reported below the average industrial return then in such case, managers have to make policies in
relation to control their spending so as to derive increased return over sales income. In addition
to this, retail industry considers 2:1 current ratio as an idle ratio. Thus, in such case, managerial
team can manage a right balance between their debtors, inventory and closing stock with the
creditors, accounts payable, overdraft and other current liabilities so as to manage sound liquidity
position. However, solvency position means debt to equity ratio needs to be maintaining at the
proportion of 0.50:1 means debt must be half of the total capital invested in the business. It
enables the organization to pay off their long-term obligations on right time with sound solvency
position.
KPI- The current market performance of an entity can be easily tracked in order to
ensure the higher productivity of the business as this approach is highly used for enhancing the
current performance of an enterprise. Various business factors will be improved by identifying
all the factors which is important for an entity in order to grab higher market share in the near
future. Aims and the objectives are developed by an entity is to accomplish all of them within a
given time frame. Key performance indicators can be of two types which includes quantitative as
well as qualitative KPI's developed by an entity to overcome all the current issues included in the
business. It plays a significant role in the business enterprise like Nisa retail store in enhancing
overall business performance of the organist in order to grab higher market advantage by stealing
attention of most of the users towards the business of Nisa retail store which meets higher
expectations of the business in the near future (Kanellou and Spathis, 2013). The KPI are
developed in the preset in order to ensure higher performance of the organization in the near
future. It is also regarded as the important tool in improving the current business of the business.
Business priorities will be easily set using different functions of the key performance indicators
in generating business results in the near future by aligning its overall business goals. This helps
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in enhancing the overall goals prepared by an entity for the betterment of their business as their
primary aim is to accomplish all desired aims and the objectives in a given time frame. An entity
execute all the strategies in the best possible manner by using various functions of KPI. Example
lack of knowledge of companies culture, services, availability of critical resources etc. For
instance, it can compute gross profit ratio and net profit ratio to determine their profit earning
capacity on total sales and compare its fluctuation over the period. Rising ratio is considered as a
good indicator of the business performance whereas on the other hand, in case of decrease in
return, it encourage manager to take initiatives for controlling overrunning cost such as
marketing, sales and admin expenditures and maximize sales through standard quality offerings
and discounting offers. Likewise, other ratios like liquidity, solvency and efficiency ratio can be
measured to analyze business financial position and make decisions to bring improvement in
their financial status.
CONCLUSION
It can be summarized from the above project that finance is regarded as the common
factors in inducing the existing business performance of an entity. Management of all the
financial resources s essential as without management an entity may incur higher costs in the
business for no reason which in turn decreases the overall profit of the firm. The current case
situation profit generated by Nisa retailer is higher by preparing income statements using
absorption costing as fixed costs is taken as period costs in the absorption costing which are not
found in the income statements prepared under the marginal costing. This project reports is all
about explaining different management accounting systems and accounting reports in order to
enhance their overall business performance with the passage of time. This report alps stars bench
marking and KPI used y the business can eliminate all the financial problems currently faced by
an enterprise like Nisa retail store. Planning tools is essential for the current business which is
small scale enterprise that requires essential source in order to improve their overall performance
by nurturing their current skills. The overall image of the business has increases by managing all
the financial resources in an enterprise in order to grab higher market opportunities by enhancing
its exist skills and the capabilities to benefit the business in the near future.
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