Unit 5 - Management Accounting Assignment

UNIT 5 –
MANAGEMENT
ACCOUNTING L-4

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Various Management Accounting Systems and their essential requirements .................1
P2. Different Methodologies utilised in Management Accounting Reporting ......................3
M1. Evaluating benefits of Management Accounting Systems and their application in
organisational context.............................................................................................................5
TASK 2............................................................................................................................................5
P3. Computing Costs through Marginal and Absorption Costing to prepare financial income
statements...............................................................................................................................5
M2. Application of management accounting techniques to produce appropriate financial
reporting documents...............................................................................................................7
TASK 3............................................................................................................................................8
P4. Advantages and Disadvantages of various planning tools utilised to exercise budgetary
control.....................................................................................................................................8
M3. Analysing use of different planning tools and their application for developing and
forecasting budgets...............................................................................................................10
TASK 4..........................................................................................................................................10
P5. Examining how companies adapt to management systems in the face of financial issues10
M4. Analysing how management accounting systems contribute towards sustainable
organisational success..........................................................................................................12
D3. Evaluating how accounting planning tools help in resolving financial problems.........12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
The concept of 'Management Accounting' is related to the processes and systems adopted
by the organisations in order to ensure smooth functioning of their internal operations. Hence, it
includes the procedures that recognise, measure, evaluate, interpret and convey important
information regarding the business activities to the managers across all levels. This helps them to
undertake informed decisions as well as facilitate the successful fulfilment of organisational
goals within a stipulated time-frame (Achleitner and others, 2014) .
This project report aims to provide an insight into how the management accounting
systems and techniques contribute towards the successful and smooth operation of a business
entity. For this purpose, Oshodi PLC has been taken into account which is a manufacturing
enterprise that produces JOJO fruit juice across all age bracket. Using this information, an
income statement has been produced under Marginal and Absorption Costing. Additionally, this
report also explains the merits and demerits of different planning tools that are utilised for
budgetary control as well as compares how different organisations adopt such systems to respond
to financial problems.
TASK 1
P1. Various Management Accounting Systems and their essential requirements
Management Accounting can be defined as a system that facilitates the analysis of
various business activities so as to enable the business managers to make better decisions from a
short-term and long-term perspective. Due to this reason, it is essential for a manager to analyse
their internal as well as external business environment in order to translate raw data into
meaningful information. This, then, helps the enterprise in achieving a comparative advantage
for the company as a whole. In the context of given case scenario, Oshodi PLC is a
manufacturing business which produces JOJO fruit juice that is consumed across all
demographics. In order to ensure that the business is able to perform well and control its costs in
an effective manner, the following management accounting systems can be employed by it:
 Price Optimisation System: This can be referred to as a method that facilitates the
determination of optimum price levels for a company's products or services under
alternative scenarios (Zvezdov and Schaltegger, 2015). Thus, enabling the management
to better achieve their goals in a sustainable manner as well as meet customer acquisition
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targets within stipulated time periods. As price is a driving factor in determining the
bottom-line sales for any organisation, it is important for the management to know its
ideal level of price, strategies and structure (Aouni, McGillis and Abdulkarim, 2017) .
This would not only help in maintaining competitiveness within the market but also
create comparative advantage for the company, thus, enhancing their overall market
share. For its implementation, it is required by Osholdi Plc to consider its current pricing
strategy as well as value of the product to both buyer and itself. Based on this, the most
suitable pricing optimisation system can be identified and utilised by the business.
 Inventory management System: Stock-keeping is one of the crucial practices of any
organisation. Each and every manufacturing business enterprise holds inventory in the
form of finished goods, work-in-progress and raw material. Thus, it becomes paramount
for the management to know that the inventory management system implemented by it is
suitable for the organisation to full extent. For Osholdi, most of the inventory is in the
form of fruit-juice bottles or packs. In order to ensure that no abnormal wastage or
shortage of material takes place, its inventory systems must be fully suitable to its
operational requirements. Thus, the essential requirements of an ideal inventory
management system include location, storage needs, types of the products included in the
inventory are some of the key factors that determine what policies and systems related to
inventory management need to be adopted by the business.
 Cost Accounting System: Another important accounting system of management, Cost
Accounting Systems include different activities which facilitate the business manager to
determine whether or not the available resources are being utilised optimally. Being a
manufacturing company, Osholdi's cost-based system is of paramount importance as it
helps in deciding the overall pricing strategies for the company (Waters, 2015) . Thus,
one can say that the essential requirements of this management system is to be
informative, simple, accurate, authentic, uniform, adaptive and flexible enough to be
integrated with other managerial functions such as finance, taxation, operations and
marketing among others.
 Job Costing System: This involves the process of accumulating information regarding
costs that are specific to the production and deliverance of a particular job. For Osholdi
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PLC, this type of management accounting system requires three types of information viz.
Direct Materials, Direct Labour and Overheads. These have been discussed as under:
▪ Direct Material: For an optimal job costing system, traceability of direct material
must be easy, especially those that are used or scrapped during the course of the
job. Thus, enabling the business manager to match costs efficiently with their
relevant jobs (Datar and Rajan, 2014) .
▪ Direct Labour: Typically, this may be identified through the time-cards allotted
to the workers and linked to the software. Thus, facilitating the identification of
job in an easier manner as well as implementation of costs to the jobs correctly.
▪ Overheads: Another important piece of information required for this system is
Overheads. These may be either assigned to one or more cost pools in the form of
depreciation or any other cost which may be bifurcated among various jobs at the
end of an accounting period.
Thus, for the job costing system to be efficient enough, it is crucial for the business managers to
be aware of the needs and requirements of their products.
P2. Different Methodologies utilised in Management Accounting Reporting
Management Accounting Reporting can be defined as a business practice which
includes a comprehensive process of planning, controlling, decision-making and measuring
corporate performance using a variety of customized reports. Two characteristics of a good
management accounting report is their reliability and accuracy in communicating important
financial information to the internal management in a concise and unambiguous manner. One of
the main features of this practice is that the preparation of such reports is not a static but a
dynamic process. Thus, they are continuously being prepared by the organisations, including
Osholdi, to serve different purpose all around the world. Mainly, these reports can be classified
on the basis of different methodologies that have been described as under:
 Performance Report: It is important to determine overall corporate as well as internal
performance across all organisational levels. This is due to the fact that regular review of
this component helps in the identification of any deviations or shortcomings occurring in
a given department or group of employees. For Osholdi, this report holds an important
status, mainly because manufacturing processes as well as employee activities are
required to be in synchronization (Ge and Kim, 2014) . Otherwise, the company can incur
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huge amount of losses so much so that its current level of economies of scale is
diminished. On the other hand, inclusion of such reports can also enable the management
to recognise and reward those who have been performing excellently within their
respective departments or field. Thus, acting as a motivator for others to follow suit.
 Budget Report: Similar to Performance Report, this type of management accounting
report enables the business manager to ascertain the performance of various cost centres
as well as overall corporate performance. Usually, a master budget is prepared by the
companies so as to know the overall allocation of available resources in an effective
manner. Based on the level of complexity and nature of business, the number of budget
reports prepared across all organisational levels can vary. In the context of given case
scenario, Osholdi prepares this report to understand variances among actual and standard
costing figures. This enables the business managers to know weak as well as
opportunistic areas that can be improved and utilised to expand their overall profits and
performance.
 Account Receivable Ageing Report: This report includes a detailed break-down of
account receivables based on the time and limits agreed upon between the company and
such parties. Thus, enabling the management to know about outstanding amounts,
upcoming deadlines to recover money as well as potential bad-debts for each provisions
can be made well in advance. As Osholdi is a manufacturing business, its sensible for it
to have a large amount of accounts payable as well as receivables. Thus, formulation of
such reports is crucial for the company to ensure that their current credit policies are
strong enough to be adhered to by the lending parties or not.
 Inventory Management Report: Inventory Management is an important practice which
helps in the determination of economic quantity for the company, re-order or safety stock
levels as well as ensure their easy traceability. For Osholdi, this report helps in
maintaining record of materials utilised and overheads incurred in relation to them in a
comprehensive manner. It is helpful for the organisation as this report facilitates the
determination of current status of the warehouse, transit or delivered to clients in an
efficient manner (Guragai and others, 2015).
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M1. Evaluating benefits of Management Accounting Systems and their application in
organisational context
Different accounting systems Advantages Disadvantages
Price optimisation system Maximum customer
satisfaction can be
achieved.
People are getting unemployed
due to automation in this
system.
Inventory Management
System
It helps in avoiding shortage of
stock situations.
The method fixes reorder point
of time which is not
practically possible.
Cost accounting system It also helps in improving the
performance and skills of
employees.
If sources are not utilized at
fullest, estimations are
useless.
Job Costing System It assists the firm in rewarding
employees accordingly.
It allocates overheads on
consumption basis which may
cause conflicts.
TASK 2
P3. Computing Costs through Marginal and Absorption Costing to prepare financial income
statements
Costing Techniques can be defined as those methodologies which help in the
identification, forecasting, evaluation and controlling of different expenditures that are incurred
by a given business enterprise during the production and deliverance of a service or good. In the
context of given case scenario, Marginal and Absorption Costing Techniques have been
discussed as under:
 Marginal Costing:
As per this technique, contribution per unit is ascertained by taking into account only the
variable costs incurred on the production of an additional unit of output (Hiebl and Mayrleitner,
2017) .
Income Statements under Marginal Costing Method:
Profit and Loss Account of Oshodi PLC for two months
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Particulars November (£) December (£)
Sales 500000 600000
Less: Direct Material Costs -180000 -216000
Less: Direct Labour costs -40000 -48000
Less: Variable Production
Overheads -30000 -36000
Less: Variable Selling
Overhead 50000 60000
300000 360000
Less: Opening Inventory 0 -50000
Add: Closing Inventory 50000 0
Gross Profit 350000 310000
Less: Fixed Production
Overhead -99000 -99000
Less: Fixed Selling Overhead -14000 -14000
Less: Fixed Administration
Overhead -26000 -26000
Net Profit 211000 171000
 Absorption Costing:
Under this costing technique, both fixed and variable costs are taken into account that
facilitate the determination of net profit earned per unit on an output by a business.
Income Statements under Marginal Costing Method:
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Particulars November (£) December (£)
Sales 500000 600000
Less: Direct Material Costs -180000 -216000
Less: Direct Labour costs -40000 -48000
Less: Variable Production Overheads -30000 -36000
Less: Fixed Production Overhead -99000 -99000
151000 201000
Less: Opening Inventory 0 -66500
Add: Closing Inventory 66500 0
Gross Profit 217500 134500
Less: Variable Selling Overhead -50000 -60000
Less: Fixed Selling Overhead -14000 -14000
Less: Fixed Administration Overhead -26000 -26000
Net Profit 127500 34500
Over/Under Absorption of Fixed Production Overheads:
Particulars November (£) December (£)
Actual Production Expenses 99000 99000
Standard Production Overheads 90750 108900
Over/Under Absorption 8250 -9900
M2. Application of management accounting techniques to produce appropriate financial
reporting documents
Under Marginal and Absorption Costing techniques, there is a variation in the Net profit
figures. One can observe that the Marginal Costing method generates a higher profit of £211,000
and £171,000 for November and December respectively in comparison to Absorption costing
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profit of £127,500 and £34,500 for the same time-period. Apart from this, there is an over-
absorption of fixed production overheads in November by £8,250 whereas there is an under-
absorption of such overheads in December by £9,900.
TASK 3
P4. Advantages and Disadvantages of various planning tools utilised to exercise budgetary
control
Budget and budgetary control: The paper prepared by business entities to maintain an
estimate of a particular time period's income and expenditures is referred as budget. A budget is
used to determine the income and expenditure potential of a firm for the future. The budget is a
very formal document which needs to be prepared with precision and reasonable quantitative
aptitude. Using it, executives analyse that all the funds allocated to various functional
departments are used appropriately or not. In Oshodi PLC, managers formulate budgets to
maintain track of all scheduled and estimated revenue and expenditure over a given period of
time. It enables them handle all of the organization's activities by guiding them to analyse the
appropriate use of financial resources (Hrasky and Jones, 2016) . A process is pursued by the
business known as budgetary control for the purpose of monitoring budget use. Pre-estimated
expenditures and incomes of current year is being monitored and controlled by managers in
Company to analyse whether excessive amount has been spent on any process. Comparison
through budget between budgeted and actual figures help to set performance and financial
budget.
Different types of planning tools: There are different kinds of planning instruments or
tools used in budgetary control in Oshodi PLC. Following is complete analysis of advantages
and disadvantages of planning tools:
Zero based budget: Zero-based budget (ZBB) is a budget in which items included must
be rationalised for every new period. No past references are used by accountants while preparing
a zero based budget. Past results are avoided by accountant and only present circumstances are
used by them to forecast figures. Simple approach is used in zero based budget which
emphasises on current results and begin with taking base as zero. There are several merits and
demerits for company in context of Zero based budget, as follows:
Advantages Disadvantages
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Due to zero base budget approach it provides
more effectiveness in assigning monetary and
fiscal resources.
Sometimes unrealistic facts and assumption
used in zero based budgets which affects
decision-making (Hu and others, 2015) .
It is very quick task for managers to prepare
zero based budget as no previous year data is
analysed.
It doest not provide comparative analysis using
previous performance and outcomes.
Master budget: It is consolidated statements which merge different co-budgets prepared
by company over a period. It is complete description of business enterprise's performance. This
budget help to evaluate company's profitability, solvency, operational efficiency and
effectiveness. This budget in practical world is very similar to financial statement. Projection in
this budget normally made by higher management to formulate strategies and prepare action
plans. Following are several major merits and demerits of a master budget in context of
respective company, as follows:
Advantages Disadvantages
It help in evaluating and assessing entire
organisation's performance at place.
Excessive time is consumed in preparation of a
master budget along with financial statements .
Analysis of a mater budget help to develop and
create a master plan for achievement of
predefined targets.
There may be conflict between information and
assumption applied in financial statement and
master budget. Also its can create confusion
for stakeholders and other users.
Capital budget: It most sensitive budget for a business entity as results of capital budget
can affect long term capital and investment decisions (Khalil and Simon, 2014) . This budget
exhibits investment appraisals and need of additional capital if any in business. It ensures that
short term liabilities are paid by company only though its current assets. At the moment of
making new investment company conduct analysis of capital budget to determine the viability of
investment decision. Following are demerits and merits of capital budget in context of respective
company:
Advantages Disadvantages
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It provide guidance to management in selecting
effective investment or project.
Some time a wrong prediction in capital budget
can even affect the organisation's survival and
performance in long run.
It identifies risks involved in any new project
and determine the effect on capital structure.
A capital budget prepared by unskilled and less
experienced employee can provide inaccurate
and unreliable data and results.
M3. Analysing use of different planning tools and their application for developing and
forecasting budgets
Various types of planning tools provide help in preparing budget which helps in planning
and decision making. These budgets also helps in providing standards for improving and
maintaining the performance of personnels as well as entire firm. The Oshodi Plc also includes
different budgets to forecast its costs and profitability. The administration prepares zero based
budget which helps in justifying each and every increment in cost where as generation of capital
budget assists in planning for investment in revenue generating assets and liabilities. At the end,
management creates master budget which provide an overall view of key objectives and
performance of the organization (Oler and others, 2015) .
TASK 4
P5. Examining how companies adapt to management systems in the face of financial issues
In present time ever firm face different types of financial problem which become reason
of mentally stress. It is required to be address in best possible way on the basis of accounting
principle or concepts. Every organisation wants to financial stability to conduct business
activities to run business for long time. They may face financial hurdles in opponent market.
Misuse of cash and credit may occur financial problems in business. At the present moment
Osholdi Plc is facing financial challenges that effects their production level and services of the
firm. There are discussed some financial problem of company -
Poor cash management – Management of Osholdi Plc has recognised problem of the
failure system of the organization. To conduct various business operations it is important to
understand the need of money in an organisation. The firm is not capable to arrange properly the
monetary resources so its financial business activities may influenced from it. The manager of
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Osholdi Plc face problem of poor cash management due to does not apply accounting techniques
and do not prepare of different types of reports like cash flow management, budget, planning to
handle these problems (Ponisciakova, Gogolova, and Ivankova, 2015) .
Late payments by debtors - Many customers take products and services but can not
payment on time. In Osholdi plc customers are not paying the outstanding money within credit
period. This problem arise due to clients are not paying their money after completed credit period
of time. It may occur inconvenience of money or short money. Osholdi plc based on the money
in order to repay their suppliers and survive business. This problem can be sorted out through
tighten the credit time of period and their customers.
The manager of Osholdi Plc are need to uses of accounting techniques to identify of
financial problems and sort out with systems, they are as follows -
KPI (Key performance indicator) – This tool based on the factors of the business such
as financial performance, business situation and standard is determined. An organisation set
certain parameters to measure components. These are using to monitor periodical performance of
business. In Osholdi plc applied particular tool to identify the problem of late payments by
debtors due to credit policy. It direct to managers to analysis the unexpected expenditure that
may take place at present business situation (Rampini, Sufi and Viswanathan, 2014) .
Benchmarking – The particular method apply by any organisation to achieve minimum
expected result. Through this method measure performance of organization and compare with
same level company to identify problems and remove it. It is depended on the quality parameters
that will set as per the standard practices by best business in the industry that are maintaining
high level performance. With the help of this tool in Osholdi plc identify financial problem of
poor cash management. As company set the higher limit for the credit policy to customer.
Financial Governance – It is defined as ethical shield and handling of financial data,
documents and processes in an organization. The particular tool use by Osholdi Plc to handle the
financial problems and find out their solution in effective manner. This tool may resolve the
problem of business such as improper money management and late payments by debtors after
determine several method of financial management. It direct to company to apply various
accounting principles in systematic way. The problem of improper money management is
resolved by using and applying basic accounting principles and record every transaction in the
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accounting books. To solve financial problem of late payments set tighten credit policy for the
customers.
Comparison between Osholdi Plc and Airdri limited
Osholdi Plc Airdri limited
The manager of Osholdi plc search out the
financial problem of late payments by
customers. It can affect to performance of
company and can not easily survive of business
activities for long time. The particular problem
sort out through cost accounting system to set
cost and maintain records of all income and
expenses within organisation.
There are identified problem of sudden
expenses which is arising any time in
accounting period of time. It can affect to
performance of company and influence to
budget. To sort out particular problem
company has been applied Job costing system.
It is manufacturing company where manager
does not focus on daily transaction as a result
create financial problem of improper money
management. To sort out of this problem apply
price optimization system to set price structure
and focus on prices by maintaining the records
of cash (Seal and Mattimoe, 2016) .
In the company identify financial problem of
stock that time apply inventory management
system and track record of production process.
M4. Analysing how management accounting systems contribute towards sustainable
organisational success
Management accounting provides a very effective tool to fight with the financial
problems which is financial governance. Under the financial governance process, respective firm
is capable to recognize the loop holes of the firm which are evaporating funds of the
organization. With the help of KPI and benchmarking techniques, the firm can set measurements
ans standards for its employees and external aspects that aids in identify financial issues before
they arise. With the analysis and controlling process, the managers are capable to achieve the
previously set standards and sustainable success by practising financial governance regularly.
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D3. Evaluating how accounting planning tools help in resolving financial problems
Planning tools used by managerial accounting are the optimum methods to make
effective planning and decisions which alternatively helps in reducing and finally eliminating
fund related problems. The planning tools adopted by management of Oshodi Plc in form of
budgetary control, provides appropriate estimations for upcoming accounting period which is
essential for directors to arranging the funds. Management makes their policies, procedures,
process and strategies in such a way that maximum output can be attain with the help of
available resources so that success can be achieve impressively and can be sustain for long time
(Voulgaris, Stathopoulos and Walker, 2014) .
CONCLUSION
From the above report it can be concluded that Management Accounting is crucial for the
success of an organisation irrespective of its size, nature or type. Absorption Costing Techniques
are much more suitable for those businesses which have been in operation for a longer period of
time in comparison to Marginal Costing. Also, implementation of various planning tools for the
purpose of exercising better budgetary control is highly dependent on the size, purpose, nature
and accounting policies of the firm. The more synchronized planning tools and policies are, the
better budgetary control is prevalent in the business. Financial Problems can be identified
through the implementation of Benchmarking and Key Performance Indicator techniques
whereas they can be effectively resolved through Financial Governance.
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