Management Accounting and Reporting Techniques

This study discusses the concepts of management accounting and its different forms used in organizations. It also explores the various methods of reporting in management accounting and explains the calculation of cost and preparation of income statement using marginal and absorption costing.

Unit 5-Management
Accounting

INTRODUCTION
This study speaks about MA and its concepts used in organisations. MA is the branch of
accounting utilised by accountants to report entries, transactions happening within a fixed period
of time say quarterly or annually. This is for the referral of managers who use it to make short-
term and long-term decisions. It helps business managers to identify, measure, analyse
information and pursue business goals. The company on which study is based is Unilever.
Unilever is a UK based FMCG company catering to home care, beauty care, personal care and
foods and refreshment category products. The study also summarizes the benefits of different
management accounting systems and different methods of reporting used in organisation. The
range of management accounting techniques with reference to different types of costing have
been explained. The forecasting tools used in MA have been explained and the methods in which
organisation uses MA techniques to respond to financial issues have emphasised.
MAIN BODY
MA and its different forms
Management accounting is framework of identifying, to analyse, to interpret and
communication of information to mangers in which entries of transactions is recorded for a
period. The system helps managers make investment decisions regarding short-term and long-
term basis. It informs business about cost of goods and services purchased during a period,
financial planning to be made and performance of various sections according to the budget
allotted. The different types and benefits of management accounting are as follows:
a) Product Costing: This technique involves calculation of product's cost per unit and then
fixing the price at a profit margin. In manufacturing, many different costs like procurement of
raw material, fixed costs, its overheads, variable costs and its overheads are taken in account till
the production has ended. The total units produced is divided by summation for all cost to reach
out cost / unit of the units produced (Ameen, Ahmed and Abd Hafez, 2018).
Clift Joinery calculates its overall production cost as its operations are widely
distributed and the process involves a number of costs to be computed. The company is then able

to ascertain the price of products by setting a profit margin which is in consideration with market
prices.
This technique thus helps in accurate determining of the products and cost computing.
b) Cash flow analysis: Business decisions and their implementation involve cash inflow and
outflow on investment in a project. The manager will require the information of the financial
impact of the transactions taking place. For e.g. company planning to buy an equipment can do it
either by purchasing through company capital or by using debt in form of a bank loan. The
outcomes in form of cash flows regarding purchase using both options will be weighed and the
more profitable investment will be given nod (Abdusalomova, 2019).
Clift joinery uses the method to make investments while diversifying wooden products
as to the costs involved and the optimization of cash flow to be achieved and maintain the
working capital.
c) Constraint Analysis: Management accounting here helps in identifying the constraints which
may be coming in production or sales process. This helps in identifying the bottlenecks which
may be occurring in the process and the impact they are having on revenue and cash flow.
Managers thus think of suitable measures to help in eradication of bottlenecks and improve
efficiencies in the process (Ameen, Ahmed and Abd Hafez, 2018).
Clift Joinery uses constraint analysis to overcome constraints in production process. For
e.g. company taking key widgets in production from only one supplier who may be operating at
its full operational capacity can be a bottleneck as it may happen due to circumstances supplier is
not able to reach company's increasing order. Hence, management will have to increase suppliers
in this group and consider its additional cost for future returns.
d) Accounts Receivable Management: The company categorizes its account receivables i.e.
money pending from its debtors according to time length such as 30 days, 30+ days, more than
60 days etc. Management accounting categorises these by the period of time they are
outstanding. The faster the company is able to receive the credit, the better it is for the
company's working capital. It can also help in realising whether the company requires to do a
change in credit policy if there are many defaulters.

Clift Joinery records its account receivables according to length period of time and has
been able to speed up its recovery process for smooth functioning of its operations.
e) Trend analysis and Forecasting: This type of management accounting helps in making
decisions about future faring of the organisation. The upcoming market trends which affect the
organisation are considered and accordingly, financial planning is done for investment in general
and administrative expenses, operational expenses and capital expenditure in various
departments and forecasts are done for the company's future sales to occur.
Clift Joinery has benefited by doing financial planning for its upcoming expenses in
advance and channelising its investments according to trend analysis and forecast methods
estimations (Abdusalomova, 2019).
f) Inventory Turnover Analysis: This approach of management accounting focuses on how
efficiently a company is able to manage its inventory and how fast the inventory is sold and
replaced. This helps company to plan its order in advance for its next purchase of inventory.
Optimum utilisation of inventory is when the storage cost of inventory does not start affecting
the cash flow and does not bind capital for long. This method also helps in defining Economic
Order quantity for the company and reduce excessive storage costs (Alborov and et.al., 2017).
Clift Joinery has been able to do its Economic Order Quantity and has been able to
maintain the storage costs under control. This has ensured optimal utilisation of inventory as
well as the free up of cash for company's operations.
Different methods of management accounting reporting
The methods used for reporting management accounting are:
Budgeting: Every company has its own list of income and expenses in various departments. A
channelised statement which can record money going in these transactions and the amount of
money required in excess to complete the operations comes in the form of budgeting.
Management accounting takes in consideration the financial statements of previous years and
accordingly judges the expenditure department wise. This leads to categorisation of the budget
and is easy to administer. The requirements of the department in future considering time period
of one year is taken in consideration and accordingly finance is allotted under which the
department has to achi MA has supported eve its goals without exceeding the budget. Similarly,

draft is prepared for other departments and company is able to know its investment of capital
over one year on an estimation basis.
Performance Analysis: At the end of the financial year, it is seen how well each department has
performed. This is generally done by a technique known as variance analysis. It is seen whether
the budget allotted to the department has been sufficient to it for reaching the goals set or
whether the budget has been exceeded. A favourable result is declared for the department if it is
able to achieve the results within the budget and unfavourable if it has exceeded the budget. The
degree of variance is also examined as to how much company needs to spend more finance on
meeting operational goals (Suprunova,2018).
Job costing: A project a company is currently pursuing although has its own investment analysis
using methods like NPV but to check whether the project is going on profitability bench mark at
present, it is divided in fragments known as job. Job incurs the expenditures and cash flows of
the company and the management is able to decide whether it has been able to cover expenses
and moving towards rate of return or not. If job is experiencing losses, then company may
rethink to continue with the project or not. Various costs involved like procurement of raw
material, fixed expenses, overhead expenses, variable expenses, variable overheads are
calculated and accordingly cash inflow of funds regarding expected revenue is compared to
check the profitability value of the job (Alborov, R.A. and et.al., 2017).
Capital Budgeting: The investment of the company to acquire new machinery or equipment or
to invest in a new project is done by an investment analysis approach. The capital expenditure to
be done in the project and the cash flows which can be expected to come as a return are
estimated. Generally, this is done by using methods like calculating NPV and IRR. Speaking of
NPV, it uses a discount rate for estimation of future cash flows as it takes time value in
consideration. Cash flows arriving in future holds what amount of present value today is gauged
and their total sum is taken minus the expenditure to take out net profitability. IRR, that is
internal rate of return is yet another tool to gauge the profitability of a project which can also be
stated as compounded annual rate of return (Lasyoud, and Alsharari, 2017).
MA has supported

Inventory and manufacturing reports: The inventory costs comprising of storage and
handling inventory, labour cost, overhead costs and wastages which can occur due to damaged
inventory apart from other administrative expenses are all prepared in a report. Also costs
involving direct and indirect expenses in manufacturing are all summarized in form of a report.
This helps to check how much extra expenditure is there and where the company needs to take
measures to reduce operational expenses.
Pro forma cash flow: The money projected to come in short term and medium term accounting
periods and expenditure forecasted is reflected in pro forma cash flow. It shows month by month
summary of cash inflow and outflow, and gives an indication to company when to expect
shortages and when to expect surpluses. As it is usually done on a short-term basis, the chance of
inaccuracies are less (Suprunova, 2018).
Sales Reports: These reports depict the company's performance in its diversified product
range and the method of selling which is more profitable. This lays light on the sources which
are generating higher revenues for the company and which sections need to be improved. The
report also helps in realising which employees are performing well up to the expectations and
which employees need to be motiv This ated to perform better.
Item cost reports: This method reflects the category wise distribution of expenses
involving each type of product. The costs involved such as labour, materials and expenses such
as licenses etc. are shown category wise. Also the sales achieved in that product category is also
calculated. Then the expenditure is reduced from the sales to calculate profit achieved from
category. This break down of costs will help company to realise its operational expenses and
where they can be reduced. Also, it will be able to know the category of products which are
under-performing and need a boost. It can also add on new features to the range of products
which are doing well (Lasyoud and Alsharari, 2017).
Calculation of cost and preparation of income statement from marginal and absorption costing
Meaning of cost: Cost refers to the amount of cash which is spend for getting something
in return. In every business cost is the main matter to be concerned because it must be always as
minimum as possible in order to maximise profits. Companies incur various costs for the
purpose of accomplishment of the end goals. Costs of the any company may include production

cost, cost of acquiring various assets, employment cost, etc. These costs are shown as expenses
or expenditure in the final accounts of the company.
There are many types of costing techniques used by companies for its different purposes such as:
Marginal costing: Marginal costing cab be defined as a tool for evaluating costs which
is concerned about how much cost has increased with the change in volume of output (Drury,
2018). This cost is calculated in terms of increase in variable costs including both prime and
overheads. Marginal cost has major consideration for variable cost changes due to increase in
one unit of output. Under this costing technique, the overall cost of production is divided into
basically two categories, variable and fixed cost. Fixed cost has nothing to do with the level of
production and incurred even at zero level of production but the variable cost remain changing
with the change in unit output.
Absorption costing: Absorption costing as the name suggests that the total costs are
absorbed by the products produced and takes into consideration both fixed and variable cost for
valuing inventories (Collis and Hussey, 2017). Both direct and indirect costs such material costs,
labour costs, rent and insurance related expenses are accounted for determining unit cost. As the
entered in the product costs, so to the closing inventory, the profit figures under this costing is
higher than other costing techniques.
Income Statement (Marginal costing)
Particulars September October
Sales revenue 500 units @100
=50000
450 units @100
=45000
Less: Variable costs of
production
Less: Closing Stock
Direct material- 500*30=15000
Direct labour - 500* 20=10000
Variable overheads-
500*10=5000
-
Direct material- 460*30=13800
Direct labour- 460*20=9200
Variable overheads-
460*10=4600
60*10=(600)
Cost of goods sold (30000) (27000)
Variable 5% sales
commission
(2500) (2250)
Contribution 17500 15750

Less: Fixed costs
Production overhead 5000 5000
Selling cost 2000 2000
Administration cost 2000 2000
Profit 8500 6750
Income Statement (Absorption costing)
Particular September October
Sales revenue 500*100
50000
450*100
=45000
Less: Variable cost
Direct Material 500*30= 15000 460*30= 13800
Direct Labour 500*20= 10000 460*20= 9200
Variable Overheads 500*10= 5000 460*10= 4600
Fixed Production Overhead 500*10= 5000 460*10= 4600
Cost of goods before sales 35000 32200
(-)Closing stk. - 10*70=700
COGS 35000 31500
Contribution 15000 13500
(-) Fixed cost of selling 2000 2000
Administration Cost 2000 2000
5% sales commission 2500 2250
Profit 8500 7250

Reconciled profit
Particulars September October
Profit through MC 8500 6750
(+): variation in output level* production overhead / unit - 40*10= 400
(+): Fixed production overhead cost included in closing stock - 10*10=100
Profit through AC 8500 7250
Material Variances (MV)
Standard
quantity(SQ)
Standard price
(SP)
Standard cost
(SC)
Actual
quantity (AQ)
Actual MA
has supported
price(AP)
Actual
Cost(AC)
5000 10 50000 5500 9 49500
MCV = SC – AC
SC AC 500(Favourable)
50000 49500
MPV = (SP – AP)*AQ
SP AP AQ 5500(favourable)
10 9 5500
MUV = (SQ – AQ)* SP
SQ AQ SP -5000(Adverse)
5000 5500 10
MMV = (RSQ – AQ)*SP
Revised standard qty. or RSQ=(AC) /(SP)
= 49500 / 10 = 4950

RSQ AQ SP -5500(adverse)
4950 5500 10
MYV = (SQ- RSQ)*SP
SQ RSQ SP 500(Favourable)
5000 4950 10
Inventory costing through FIFO method
Dated Inventory bought Inventory issued Inventory balance
Rate Quantity Value Rate Quantity Value Rate quantity Value
October 1
(opening
inventory
)
20 10 200
Octo MA
has
supported
ber 10
21 20 420 20
21
10
20
200
420
October
16
20 10 200 21 20 420
October
21
22 10 220 21
22
20
10
420
220
October
22
21 10 210 21
22
10
10
210
220
October
28
21
22
10
5
210
110 22 5 110

October
31
22 5 110
Inventory costing by LIFO method
Dated Inventory bought Inventory issued Inventory Balance
Rate Quantity Amou
nt
Rate Quantity Amou
nt
Price Quantity Total
October 1
(opening
inventory
)
20 10 200
October
10
21 20 420 20
21
10
20
200
420
October
16
21 10 210 20
21
10
10
200
210
October
21
22 10 220 20
21
22
10
10
10
200
210
220
October
22
22 10 220 20
21
10
10
200
210
October
28
21
20
10
5
210
100 20 5 100
October
31
20 5 100
Different kinds of planning tools
Budgetary control means to the act of preparing various budgets for different purposes in
order to control various activities in the organisation, so the cost controlling can be effected
properly. It includes comparison of actual performance with that of planned one so the

deviations can be made known to the management for making decision regarding corrective
actions required. It helps the management accountant of Clift joinery to establish control systems
in the organisation, coordination between various resources, clear guidelines throughout the
organisation related to organisational expectations and goals and performance evaluation. Three
main objectives of budgetary control include planning, controlling and coordination in the
organisation. There are different planning tools of budgetary control which can be used by the
management accountant of Clift joinery for the improvement of its overall performance both in
terms of financial performance and better profitability with lower costs (Drury, 2018).
Operating budgets: This budget takes into consideration all the operating activities of
the company where daily operations of business are taken into account. Under this budget there
are three different budgets that is being prepared such as sales budget, expense budget and
project budget (Collis and Hussey, 2017). The sales budget is prepared to forecast future
financial position of the company by considering the income from regular or routine operations
of the org MA has supported anisation. It is important because it helps in forecasting future
demand of the company's products or services, so that the company can prepare themselves for
the demand to be met effectively. The second one is expense budget which involves the
anticipation of future expenses of the company so that the manager can make possible
arrangements for such expenses in advance to avoid any hindrances in the operations of the
company (Kostyukova and et. al., 2018). The last one is project budget which is nothing but the
indication of differencing figure between the above two budgets, that is it indicates the profit
figures that is nothing but the difference between the sales and expense budget and if the same
is not satisfactory then accordingly necessary steps are taken by increasing sales or cutting
expenses. The biggest advantage of this planning tool is that it helps in managing current and
future expenses of the company along with profit maximising through cutting costs and
increasing sales targets (Masters, 2019). The disadvantage of this technique may be the time
requirement and expertise required to accurately define the budget figures failing which may
account for losses to the company.
Financial budget: Financial budgets are prepared with the main motive to see the future
financial health or position of the company which may help the management accountant of Clift
joinery to make possible and effective plans for better financial performance in the future. There
is again 3 types of financial budgets such as cash, balance sheet and capital expenditure budget

wherein the cash budget depicts the flows of cash of the company. Such budgets are important
because it helps in maintaining solvency by meeting short term obligations. This ensures that the
MA has supported surpluses must be invested in the profitable short term avenues (Kostyukova
and et. al., 2018). The second one is the capital expenditure budget which involves planning and
sourcing finance for long term assets of the company such as plants, machinery, land and
building. The last one is the balance sheet budget which indicates the financial position of the
company which is made to ensure the interest of shareholders must be fulfilled.
Activity Based Budgeting: Under this planning tool the main purpose of the company is
to identify the drivers of costs and associated activities performed (Masters, 2019). Such cost
assessment of each and every activity allows for determining the profitability of these activities
so that those activities which not profitable or become less attractive can be avoided and the
resources can be directed towards the profitable activities of the company. Such planning tools
are helpful for those companies who are in their early years of operations and start ups with no
historical data are usually resort to such activity based budgeting tool. The advantage of this tool
MA has supported is that it allows the management accountant of Clift joinery to concentrate on
its profitable activity rather than wasting resources on less profitable one (Ammar, 2017). The
disadvantage of this planning tool can be the time involved and the managerial efficiency to
track costs of all activities and also if the production styles are complex then this tools is not
suitable for budgetary control.
Zero based budgeting: ZBB refers to that budgetary control where the company
prepares and make budget without giving any importance to previous year's budget, that is the
budgets are prepared with zero base. Under this tool the items are taken in the budget only when
these are justified in terms of its necessity and costs associated with it. There is no concern for
whether the budgets are higher or lower than the previous year if the items are successfully
qualified to be included in the budget (Ammar, 2017). The advantages of this tool are it provides
efficiency in operations, avoiding redundant activities and incremental budgeting. The
disadvantages of this tool are time element required, requirement of high manpower, expensive
affair and lack of expertise in management.
Standard costing: Clift joinery can use planning tool such as standard costing which can
be helpful in defining standards for various costs of the company so the overall real cost can be
compared with the planned one (Hariyati, Tjahjadi & Soewarno, 2019). This comparison is

helpful in controlling costs of the company because if the actuals are higher, then the necessary
steps to avoid higher costs and increasing profitability can be taken without any delay.
Cash flow analysis: Clift joinery' s management accountant must use this planning tool
which ensures the solvency of the company along with parking of surpluses of the company in
profitable investment avenues, in order to establish trade off between profitability and liquidity
both. All the inflows and outflows are forecasted that is going to be occur in future to balance
the liquidity position of the company.
MAS to respond to various financial issues
MAS are made even for responding to various problems of financial nature such as
unsatisfactory financial performance, poor cash flows, lack of proper accounting practices, huge
costs, mispricing of various products and services and poor profitability. There are many
systems in management accounting which can help Clift joinery in responding to its various
financial problems such as benchmarking, KPIs both non financial and financial, balance
scorecard, Activity Based Costing, financial governance and variance analysis. All this problem
solving systems has been discussed in detail below:
Benchmarking: The system of benchmarking involves defining some other organisation
who is known to be the best in the industry as the benchmark for performance evaluation.
Benchmark means setting standard for measuring performance so that the areas of weakness can
be found out without delay (Hariyati, Tjahjadi. and Soewarno, 2019). It also allows for making
correction in policies and taking steps for removing deviations between the benchmark and the
company's actual performance.
Key Performance Indicators: Key indicators of performance refers to the system which
allows for looking at the performance of the organisation and measuring the same for evaluation
and comparison with other companies on the basis of these KPIs. These indicators can be of both
financial and non financial nature. KPIs such as profitability, solvency ratios, cash management,
customer base and customer satisfaction, net profit and sales revenue are helpful for Clift joinery
and its management for measuring their own performance through these indicators. Choosing
KPIs depends upon organisation to organisation, a KPI which is best for one company may not
be applied in the same way to another company.
Balance Scorecard: A balance scorecard can be referred as a performance metrics which
allows for identification and improvement in the MA has supported internal functions of the

company. This ensures improvement in the resulting outcomes (Saukkonen, Laine and Suomala,
2018). The system has an advantage for the management and the whole organisation due to its
ability to provide feedback. Under it various data has been collected for deriving quantitative
results. The result so derived helps management in making decisions much better.
Activity Based costing or ABC: This technique has quite different way of assigning
cost in the organisation. This involves identifying all the activities and their associated costs, so
that the cost can be assigned to that particular activity from which it actually has arisen. This
helps in framing pricing strategy for various products and services, profitability and product
costing.
Financial governance: The system of financial governance includes the way of
collecting, managing and controlling financial information by the company. This system ensures
the avoidance of any manipulative act by anyone either intentionally or unintentionally. The
avoidance is necessary because the act may not always results in favourable situation as there are
equal chances of unfavourable situations. Under this Clift joinery has to keep on tracking all its
transactions along with managing and controlling the same (Saukkonen, Laine and Suomala,
2018). They must abide by various compliances expected from them in terms of disclosing
information related to its financials.
Variance Analysis: Variance analysis refer MA has supported s to the examination of
deviations MA has supported arising between what has been expected to occur in the budgets
and what actually has occurred. After determining the deviation management decide on various
alternative steps which must be taken to avoid these deviations (Hariyati, Tjahjadi. and
Soewarno, 2019). Clift joinery MA has supported management can also apply this system in
analysing its variations in performance as against its budgeted one. MA has supported
Comparison between two organisation of the same industry on the basis of management
accounting systems.
Clift joinery Howden Joinery
Clift Joinery' s management accountant has
adopted systems such as benchmarking and
balance scorecard. These systems used by
them for evaluating their performance in terms
of their competitor's performance. This would
Howden joinery on the other hand, who is also
in the same industry as Clift joinery.
Management of Howden has adopted KPIs and
variance analysis in order to reach at the level
of its competitor's performance. By doing so

be quite helpful for them in leading on the path
of sustainable success.
they have ensured their path of sustainable
success.
CONCLUSION
It can be derived that the management accounting is a very useful tool for managers to
make short-term and long- term decisions regarding investment. It helps the managers to identify
the areas which have growth potential, which are generating revenues for the firm and which are
the sectors company needs to improve upon. It also helps company to do its financial planning
accordingly to increase its share of revenues and also specifies measures for budgetary control.
Budgetary control nowadays, uses modern of age techniques to control over the inaccuracies like
zero based budgeting method. The advantages and disadvantages of planning control helps
organisations to realise which tool should suit them the best. The description of the way
companies have used management accounting to respond to financial issues aptly justify how
MA has supported companies reduce operational costs while focusing on sectors of revenue with
tools such as marginal costing and thus helping in achieve the organisational goals. Companies
are able to do justifications with their capital expenditure and this serves as a pathway for safety
of business with reduced risks.
REFERENCE
Books & Journals
Abdusalomova, N. B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT
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Alborov, R. A. and et.al., 2017. The development of management and strategic management
accounting in agriculture. Journal of engineering and applied sciences. 12(19).
pp.4979-4984.
Ameen, A. M., Ahmed, M. F. and Abd Hafez, M. A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management. 2(1). p.02.

Ammar, S., 2017. Enterprise systems, business process management and UK-management
accounting practices. Qualitative Research in Accounting & Management.
Bulgakova, S. V. and et.al., 2018. Management accounting in effective structures of an
organization. Research Journal of Pharmaceutical, Biological and Chemical
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Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
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management accounting information systems, internal process performance, and
customer performance. International Journal of Productivity and Performance
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What is cost and management accounting?. 2020. [online] Available
through<https://www.costmanagement.eu/blog-article/what-is-cost-and-management-
accounting>
What Is the Meaning of Managerial Accounting System?. 2018. [online] Available
through<https://smallbusiness.chron.com/meaning-managerial-accounting-system-
75599.html>
Appendix
The following budgeted/ actual information has been provided by Clift Joinery in
relation to the production of the product: All costs are in GBP.
Selling price per unit
100
Direct materials per unit
30
Direct labour per unit
20
Variable production overheads per unit 10
Following information for the months of September and October 2020 are as follows:
September October

Production of Product A
500 460
Sales of Product A (units)
500 450
Fixed production overheads are £5,000 per month absorbed on the basis of units produced. The
normal level of
production is budgeted at 500 units per month.
Other costs
Fixed selling £2,000 per month
Fixed Administration £2,000 per month
Variable sales commission 5% of sales revenue
There was no opening inventory of Product on September 1.
Based on the above information income statements on the basis of marginal and absorption
costing has been prepared and the profits has been reconciled.
Raw materials- wood and glass used by Clift Joinery in producing the product and the company
is interested in knowing cost variances of the same. The budgeted and actual figures are given as
follows and calculation of material variances has been done in its reference.
Budgeted and actual cost of wood used in producing Product
Budgeted material cost per unit of the product 1 kg @ 10/ kg
Actual output 5000
Actual material purchased and used 5500
Actual material cost 49,500

The information related to purchases and issues of the raw material (glass) were made during the
month of October are as folows and to know the closing value of the raw material inventory at
the end of the month, FIFO and LIFO method has been used.
October 1 Opening inventory of 10 units @ 20 each
October 10 Bought 20 units @ 21
October 16 Issued 10 units
October 21 Bought 10 units @ 22
October 22 Issued 10 units
October 28 Issued 15 units