Phenomena of Cost Accounting and Management Accounting Systems

This article discusses the phenomena of cost accounting and the essential necessities of diverse types of management accounting systems. It also explores the advantages of price optimization, job costing system, and cost accounting system.

Management Accounting

INTRODUCTION
Management Accounting can be explained as the procedure of accumulating, measuring,
preparing, identifying financial data and information within enterprise so that manager can
control, plan and evaluate to take better decision. Management accounting is used only for
internal purposes and within department’s performance such as project, processes and
departments. This is widely implemented in the small and big scale firm because it aids in
accomplishing group objectives (Abernethy and Wallis, 2018). Along with this it arranges and
organize resources, accumulate factors of production and integrates available resources in
effective manner to meet the desire set standards. The assignment is concerned with Ovation
Systems Ltd which is a client company who provide high quality video surveillance products
to police, military and other governmental agencies. In the year 2009 firm was awarded The
Queen's Award for innovation. The goods range includes rugged and small audio and video
recorders. This report includes phenomena of cost accounting and focus on essential
requirements of several types of management accounting systems. Moreover, calculate costs by
using appropriate tools and techniques. Along with this design income statement by using
marginal and absorption costs. Additionally, comparison is dome on executing management
accounting system in different company to handle financial problems (Agrawal and Cooper,
2017).
LO 1
P1) Discuss the phenomena of cost accounting along with this study the essential necessities of
diverse sort of management accounting systems.
According to American Accounting Association, management accounting refers to as
application of suitable methods in processing economic data of an enterprise in order to frame
plans to achieve deserving objectives (About Management Accounting, 2018).
Management accounting is also well known by other names like, cost accounting and
managerial accounting. Cost accounting is stated as involving all those activities which provide
financial information to the top level management to guide them to formulate tactics in order to
function business operations smoothly. Management uses gathered financial knowledge and
numerical data for ascertaining product and cost of various job. By effectively implementing
managerial accounting in Ovation Systems Ltd. they will be able to deliver fast and immediate
1

information to the mangers regarding product and services and day to day budgeting assist firm
to take best decision in order to rise company’s operational effectiveness and efficiency.
There are distinguished kinds of management accounting system and are mandatory
needs for the administration. Price optimization, job costing system and cost accounting system
are types of accounting system in the global market (Agrawal, 2018).
Price optimization: Business associates by adopting this kind of management
accounting system in the working environment is able to measure the suitable prices for their
innovative product that is offered. It is a mathematical evaluation in order to examine how
targeted consumers will react to several prices for product and services through various channels.
Price optimizing helps administration to determine the best prices so that Ovation Systems Ltd is
able to maximize operating profit. By this act huge customer base can be raised for the high
quality video surveillance products designed for departments of police, military and other
governmental agencies. Price optimization helps business administration to meet the set goals
and objectives in the set time duration. This is more useful for business dealing in retail sector.
Advantages of price optimizing:
 Price optimization in an organization provide consistency to the business (Ax and Greve,
2017).
 It aids in gathering authentic and reliable data which reduces the chances of error in the
working premises.
 Firm by effectively implementing this in business administration assist in automating the
entire process. That results in positive results.
Job costing system: Ovation Systems Ltd adopts job costing system effectively and
efficiently in their working environment as it assigns and collect manufacturing costs of a single
unit of output. It is used in any industry because it is usefull in checking cost of production
exceeds the overhead price. in order to gain profit for complete process (Weetman, 2019). This
aspect is more worthful when it is adopted to produce sufficiently varied goods and services
from one another and has significant cost. By systematically executing this in the business it
leads in accumulating huge revenue, management decisions, financial reporting and project
estimating. In order to get satisfactory results, it is very important to choose the most suitable
costing system as per their business type and product in the cut throat competitive world.
Advantages of Job costing system:
2

 Job costing system assist the firm to calculate the revenue gained on single jobs.
 This directly aid the company to better understand weather specific jobs are desirable to
pursue in the near future.
 It prevents duplication of work as it aids in measuring of similar job. By doing so firm
quoting the price of a job always depends upon the previous job pricing.
Cost accounting system: This system is used by Ovation Systems Ltd because cost
accounting system assist in determining cost of the goods for profitability investigation, cost
control and inventory valuation (Azudin and Mansor, 2018). In the era of neck to neck
competitive world all medium and large scale businesses rely on cost accounting in order to
render data which financial accounting provides. By performing this system appropriately
business function will run smoothly in the global market. Along with this emerging needs of the
customers for video surveillance products and other rugged and small audio and video recorders
will be full-filled accordingly.
Advantages of cost accounting system:
 Cost accounting system helps in fixation of prices for the goods and services.
 In an organization this directly assist in expansion in production.
 Firm is given proper information for planning and framing unique tactics to increase sales
volume.
 It guides business administration how to reduce prices of the product and services in the
cut throat competitive world (Turner and Witteman, 2017).
Inventory management system:
P2) Discuss several methods used for management accounting reporting.
This is termed as process of providing information to distinguished stages of management
so that corrective measures can be taken for improvements. By effectively executing
management accounting reporting in the Ovation Systems Ltd distinguished benefits can be
garbed such as, it helps in setting price for the goods and services, guide in formation of budget,
aid in planning, assist in controlling business activities etc.
Budgeting report: Organization adopts this in the working premises as it helps them to
measure overall performance of enterprise (Beyer and Marinovic, 2018). By designing budgeting
report company manage cash amount of every single activity. It aids report to do comparison
between estimated and actual budget in order to keep proper control on various outcomes. Better
3

incentives and benefits are given to the staff members in order to reduce the cost which provides
complete satisfaction to workers.
Performance reports: Ovation System Ltd is executing performance report so as to
examine the performance of the business administration and their staff members. This directly or
indirectly aid enterprise to take the quick and smart decisions in order to upgrade workforce
productivity and profitability ratio. By appropriately scanning this report Ovation Systems
determine the efficiency of their tactics towards stated aims and objectives. The effectiveness
motivates workers to work day and night in order to attain the companies set standards.
Job costs reports: Organization by taking job costs report within the enterprise is able to
investigate the cost of each individual project (Booth, 2018). It leads in providing benefit to
Ovation Systems Ltd as they are capable enough to find higher earning areas. Moreover, by
using this progression and succession of the project areas can be determined. This helps in
measuring and monitoring the wastage of precious time and money in the low margin areas in
the global market
Therefore, for Ovation Systems Ltd all the reports discussed above are beneficial for
them in the intense competitive world. All the reports discussed above has helped business
administration to operate the business function smoothly. As well as timely guide them to take
appropriate decisions for the betterment of employees and employer
LO 2
P3) Compute costs using appropriate techniques of cost analysis to prepare an income statement
Computation of costs by using appropriate techniques of cost analysis to design an
income statements are explained as follows:
Cost: It is considered as the backbone of Ovation Systems Ltd. Without sufficient
amount of funds business cannot be functioned properly in neck to neck competitive world.
Marginal costing and absorption costing are two methods that are studied so as to figure out the
approximation cost. By doing so accordingly the unique tactics are designed to over the
deficiency of funds in the global market. To create tough competition for rivalry in the
competitive market place business associates need to be financially stable in nature (Bui and De
Villiers, 2017). Here, the brief discussion about marginal and absorption cost are done as under:
4

Absorption costing: In the competitive world absorption costing refers to as all the
manufacturing costs are allotted to the units produced. Here, finished product costs involves
costs related to direct labor and direct materials. This costing takes into consideration all cost of
production which are, factory rent, fixed costs of operation and cost utilities in the factory
(chaltegger, 2018). Also, it covers costs such as, direct materials and direct costs like, property
taxes and manager's salary.
Marginal costing: It is very important aspects of Ovation Systems Ltd as this is a change
in total costs which increases when quantity produced is raised by one unit. It is calculated by
taking total change in the costs of producing more products and dividing by change in quantity of
products produced. By carrying out marginal costing numerous benefits are given to the working
environment such as, useful data is provided for marginal decision making process, cost
comparisons become more meaningful, cost and profits are not vitiated (Cooper, and Qu, 2017).
Calculation of cost per unit
Absorption Cost per unit May (in £) June (in £)
Direct labour cost 5 5
Direct material cost 8 8
Variable expenses 3 3
Fixed indirect production 8 10.53
Total Absorption Cost per unit 24 26.53
Assessment of stock
Particulars May June
Opening stock - 200
Units produced 500 380
Sold units 300 500
Closing stock 200 80
Preparation of income statement by Absorption costing:
Particulars May June
5

(in £) (in £)
Sales 50 15000 25000
Less: Cost of Goods sold (COGS)
Opening inventory
Direct labour (DL) 5 2500 1900
Direct material (DM) 8 4000 3040
Variable cost of production 3 1500 1140
Fixed indirect expenditure related to production 4000 4000
Ending inventory -4800 2122.4
Total cost of goods sold 7200 7957.6
Gross profit (GP) 7800 17042.4
Selling & Distribution expenditure 4000 4000
Administrative cost 2000 2000
Sales commission expenditure 750 1250
Net profit (NP) 1050 9792.4
Per unit cost evaluation under marginal costing
Particulars May (in £) June (in £)
Direct Labour cost per unit 5 5
Direct Material cost per unit 8 8
Variable cost per unit 3 3
Marginal Cost per unit 16 16
Inventory assessment
Particulars May June
Inventory at the beginning of period - 200
6

Production (in units) 500 380
Sales (in units) 300 500
Stock at the end of period 200 80
Preparation of income statement under marginal costing:
Particular May June
(in £) (in £)
Sales revenue 50 15000 25000
Less: Marginal COGS
Opening stock - 3200
DL 5 2500 1900
DM 8 4000 3040
Variable Cost 3 1500 1140
Less: Closing stock -3200 -1280
Total Variable cost 4800 8000
Contribution 10200 17000
Fixed indirect production cost 4000 4000
S & D expenses 4000 4000
7

Adm. Expenditure 2000 2000
Sales commission cost 750 1250
N.P. -550 5750
Material cost variances:
Particulars Formula Figures
Material price variance (MPV) (SP-AP) * AQ (10 - 9.5) * 2200
= £1100 F
Material usage variance
(MUV)
(SQ-AQ)*SP (1000-2200)*10
= £12000 A
Valuation of closing stock using LIFO
Mentioned in appendix 1.
Valuation of closing stock by using weighted average method:
Mentioned in appendix 2.
Interpretation: From the mentioned statement it can be concluded that £5750 is of
marginal costing and £9700 is of net profit in an administration. From this it can be summarized
that absorption costing is much effective and better than marginal costing in the neck to neck
competitive world. Ovation System Ltd is implementing both according to the needs and
demands prevailing in the dynamic environment. However, in this case business activities are
conducted according to the budget allotted in order to decrease the charges of cost. This act make
business financially strong and stable in nature that aid in raising market value in the global
market (Di Vaio and Varriale, 2018).
8

LO 3
P4) Discuss advantages and disadvantages of various kind of planning tools which are utilized
for budgetary control
Master budget: Ovation System Ltd uses this budget in the working environment as it
involves all kinds of small fund within. Large companies mostly adopt this in order to keep
confidential data and information in a one single document. Master budget is associated with all
the activities which are, sales, operating expense, income, expenses, and assets. Additionally,
master budget represents financial plans, cash forecasting and financial statement and assist
company to frame strategies accordingly. Here, are some benefits and drawbacks which are
discussed as:
Advantages Disadvantages
 All the budgeted information is
accumulated in one report this is one
of the biggest advantages which is
given by master budget (Englund and
Gerdin, 2018).
 Expenses related to all the budgets is
determined so that additional cost can
be get rid of from any of the budget.
This helps in getting productive results
in the cut throat competitive world.
 Numerous budgets are covered under
master budget which creates huge
confusion. This directly reduces overall
workforce performance of the
employee's.
 Master budget does not specify all the
activities clearly such as, if the
administration want to know how much
marketing department is growing and
expanding then clear picture is not
provided.
Flexible budget: Ovation System Ltd adopts flexible budget in the working environment
because this assist them to change their budget according to their demand and preferences.
Flexible budget showcase incomes, expenses and cost at numerous stages of level. This is more
appropriate for administration as it compare to Static budget, in this particular budget all the
necessary modification can be render according to the business condition. However, this budget
stands for the changes in the expenses and income with the changes in output. The advantages
and disadvantage of flexible budget are discussed as follow:
9

Advantages Disadvantages
 Budget fluctuate according to the
business situations and conditions in
the global market.
 Flexible budget is understood as a tool
that is implemented to cost control in
adverse conditions.
 The unfavourable situation of the
budget is shown which is a biggest
drawback for the company as well as
create bad impact on the customers and
investors.
 Budget is formulated on half-yearly,
quarterly an yearly basis for a specific
time period (Hiebl and Richter, 2018).
Standard costing and variance analysis
Advantages Disadvantages
 This help the organization in
improving the standard of the
business. As standard costing help
company in reducing cost of company.
 This also help in finding out the
shortcoming and working over them
to get desired result.
 Sometime it get difficult for the
organization to gather adequate
information regarding current costing
in the organization.
 This also used to increase the cost of
the company in the market.
Investment appraisal tools and techniques
Advantages Disadvantages
 This help the organization to
understand the current viability of the
resources of an organization.
 Help organization in forecasting
different future of the investment.
 This are based upon some of the
assumption in the organization.
 Get difficult in comparing the project
of different nature and size.
10

For example: business unit has two investment options such as project A and B with
similar initial investment.
Assessment of payback period
Years
Project
A (cash
inflows)
Cumulativ
e cash
inflows
Project
B (cash
inflows)
Cumulative
cash
inflows
1 20000 20000 22000 22000
2 28000 48000 30000 52000
3 22000 70000 26000 78000
4 31000 101000 34000 112000
5 36000 137000 41000 153000
Project A: 3 + 10000 / 31000
= 3.3 years
Project B: 3 + 2000 / 34000
= 3.1 years
Computation of NPV
Years
Project A
(cash
inflows)
PV
factor @
10%
Discounted cash
inflows
Project B
(cash
inflows)
Discounted cash
inflows
1 20000 0.909 18182 22000 20000
2 28000 0.826 23140 30000 24793.4
3 22000 0.751 16529 26000 19534.2
4 31000 0.683 21173 34000 23222.5
5 36000 0.621 22353 41000 25457.8
Total
discounted cash
inflows 101378 113008
Less: initial
investment 80000 80000
NPV 21378 33008
Internal rate of return
11

Years
Project
A (cash
inflows)
Project
B (cash
inflows)
0 -80000 -80000
1 20000 22000
2 28000 30000
3 22000 26000
4 31000 34000
5 36000 41000
IRR 19% 24%
The above depicted table shows that Ovation System Ltd should invest funds in project B as
compared to A. Moreover, in the case of project B, company would become able to recover
initial investment early within the period of 3 years and one month. Along with this, return which
will be generated by the firm after the period of 5 years is higher in project B. Thus, by investing
money in project B firm would become able to get desired level of outcome or success.
TASK 4
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems
Management accounting system is useful in rendering financial data and information to
the administration. Along with this management accounting system is adopted by business
associates in order to solve all the difficulty concerned with financial terminology. Moreover,
Ovation System Ltd is a manufacturing company and is specialised in supplying high quality
video surveillance products to police, military and other governmental agencies. In order to
overcome monetary issues in the production video surveillance products various strategies are
designed (Schaltegger and Burritt, 2015). Some of the problems are explained as under:
Financial problems: In an organization these particular issues generate due to the
deficiency of capital and funds in the administration. In the neck to neck competitive world
monetary amount is a core element and backbone of firms. However, the success of the
enterprise totally depends on the accessibility of funds and cash amount in proper manner.
However, Ovation System Ltd wants to grow the expand the business in other nation as well then
they require to maintain sufficient monetary amount in reserve within business administration
12

(Hiebl, 2018). Below are mentioned some of the financial obstacles which are discussed as
under:
 Deficiency of budget and money management skills: In cut throat competitive world
this issue occurs in the business because the top level management does not carry
sufficient and proper knowledge regarding budget implementation in productive way.
Along with this holding inappropriate money management skills is another issues which
results in unproductive outcomes for investments. This directly leads in mismanagement
of funds due to which company are able to ascertain where to invest and where not to. All
this aspect affects the set goals and objective of the administration.
 Improper cash flow management: The difference between inflow and outflow of the
cash is one of the reason for financial crisis. Increasing the number of creditors,
unexpected changes occurring in the environment and so on are some of issues which is
faced by the administration (Hoque, 2018).
Therefore, the mentioned issues needed to be resolved by Ovation System Ltd so as to
operate and function their business smoothly in the global market. Additionally, there are
numerous techniques that is used by firm in order to solve financial issues. They are discussed as
follows:
Benchmarking: Administration adopts this tools and techniques to measure its
services, processes and products. It is directly beneficial for organization as it aids to find out
deviation among anticipated and actual results. Ovation System Ltd effectively implement this in
the working premises as it resolves the issue associated with improper cash flow. Benchmarking
is useful in the determining the internal opportunities prevailing in the administration. Along
with this ascertain the others successful firm's tactics so as to modify their strategies and
operations activities respectively. Benchmarking assist the organization to cut down problems
related to improper cash flow. By doing so set objectives can be achieved in the set time duration
(Qian and Schaltegger, 2018).
KPI (key performance indicator): In the modern world company adopts this
technique to refer the success and failure rate of the company. This is helpful for enterprise as it
aids to better understand the success level at each and every stage. By doing so organization is
running its activities in a correct path or not is measured in effective manner. Financial and non-
financial are two types of KPI tools which is studied by the firm. Moreover, Ovation System Ltd
13

is using financial KPI by this they are able to better understand about the proper management
and utilization of capital resources. KPI directly assist to overcome problem related to deficiency
of budgeting and money management skills.
The difference between application of management accounting system in different
organisations are discussed as follows:
Particular Ovation System Ltd Oxalis group's
Tools to resolve the above
mentioned issues.
Benchmarking is a tool used for
solving problems of finance crises
in an organization. By using this
tools effectively in the working
premises competitive advantages
can be gained.
Oxalis group's adopt financial
governance tools in order to
handle and mange capital
transactions in proper manner
(Quinn and Craig, 2018).
Financial issue Ovation System Ltd come across
the problems related with unequal
cash flow and money management
skills which results in decreasing
market value gradually.
To resolve the issue related to
mis-handling of capital in a
organisation they can
implement financial
governance tool in order to
control monetary
transactions. This help in
providing productive
outcomes.
Management accounting
methods
Financial governance technique is
used by administration as it helps
to monitor their operational
activities performed in the day to
day business.
To overcome financial issues
MAS is used by Oxalis
group’s. Moreover, cost
accounting system is the most
suitable method for managing
budgetary control
(Rikhardsson and
Yigitbasioglu,2018).
14

CONCLUSION
From the discussion it come to an end that cost accounting is the essential element which
need to be conducted in an organization. Functioning of inappropriate management accounting
gives unproductive results in the international market. Business concern need to frame strategies
by scanning the external environment so that set management can take best decision for the
betterment of the employees and employer both. This assist in meeting the deserving goals and
objectives in the specific time period. Distinguished administration ways of adopting
management accounting system is different in their working premises. Comparison is done
among several firm's on executing accounting systems so that further improvements can be done
accordingly. It directly or indirectly helps the business administration to work day and night to
full-fill the dynamic needs, demands and preferences of the consumers respectively. By
discussing numerous methods of management accounting reporting the best and the most
suitable is adopted in the company. The deeply scanning the organization methods related to
accounting reporting should be performed. By doing so employees can be motivated to increase
their workforce efficiency in the intense competitive world. Also, tough competition is
formulated for the business dealing in the same field in the open market place.
15

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APPENDIX
1. Valuation of closing stock using LIFO
Date Reference Purchase Issues Balance (Inventory)
Units £/
Units
£
Total Units £/
Units
£
Total Units £/
Units
£
Total
05/01
Previous
balance
(inventory)
40 3.00 120.00
05/12 40 3.00 120.00
Bought 25
units at £ 3.60
each
20 3.60 72. 20 3.60 72.00
05/15 20 3.60 72.
Issued 36 units 16 3.00 48. 24 3.00 72.00
05/20 24 3.00 72.00
Bought 20
units at £ 3.75
each
20 3.75 75. 20 3.75 75.00
05/23 Issued 10 units 10 3.75 37.5 24 3.00 72.00
10 3.75 37.50
05/27 9 3.75 33.75
Issued 25 units 25 3.00 75.00

05/30 Issued 5 units 5 3.00 15.00 4 3.75 15.00
2. Valuation of closing stock by using weighted average method:
05/01 Previous balance
(inventory) 40 3.0000 120.000
0
05/12 Bought 25 units
at £ 3.60 each 25 3.60 90. 65 3.2308 210.000
0
05/15 Issued 36 units 36 3.2308 116.30
77 29 3.2308 93.6923
05/20 Bought 20 units
at £ 3.75 each 20 3.75 75. 49 3.4427 168.692
3
05/23 Issued 10 units 10 3.4427 34.427
0 39 3.4427 134.265
3
05/27 Issued 25 units 25 3.4427 86.067
5 14 3.4427 48.1978
05/30 Issued 5 units 5 3.44 17.213
5 9 3.4427 30.9843