UNIT 5 Management Accounting Systems Sample Assignment

UNIT 5 - MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................2
LO1..................................................................................................................................................2
P1 Management accounting and the essential requirements of different types of management
accounting systems......................................................................................................................2
P2 different methods used for management accounting reporting..............................................5
LO 2.................................................................................................................................................7
P3 preparation of income statements by using marginal cost and absorption cost......................7
LO 3...............................................................................................................................................11
P4 advantages and limitation of planning tools which are used for the budgetary control.......11
LO4................................................................................................................................................15
P5 Compare ways in which organisations are adapting management accounting systems to
respond to financial problems. ..................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
1

INTRODUCTION
The process of Management accounting is providing an aid to internal management of an
organization in order to analyse the various financial statement to undertake necessary strategic
decisions for sustainability and growth of business (Peterson, Schmar - debeck, and Wilks,
2015). The management accounting is an effective process for presenting and analysing financial
information to the managers on interval for decision-making strategically. Super toughened glass
will be chosen for this report. The super toughened glass company is the best among the
construction industry, fire resistant, supply of shatter-proof and self-cleaning glass for the
building projects in UK. This company is a family firm and employs staff of 145 employees
working for their company.
The report will lay emphasis on management accounting and the essential requirements
of different types of system of management accounting. The report will also cover different
method for the management accounting. Along with it, the report will calculate the cost of
appropriate technique in order to analyse the cost and also income statement will be prepared for
further analysis of the company. The report will highlight the different types of planning tools
and their advantages and disadvantages for budgetary control. This report will lay study for a
brief comparison of organization for adapting management accounting system for responding in
financial problems.
LO1
P1 Management accounting and the essential requirements of different types of management
accounting systems
Management accounting
The management accounting is a process which provide aid to internal management of
organization in order to analyse financial statement for necessary decision-making for a long
period of sustainability in business (Abdel - Maksoud, Cheffi, and Ghoudi, 2016). This concept
of management accounting includes the planning in effective manner and to select the best
alternative action of an organization. Also, the control is executed by interpretation and
performance evaluation.
Financial accounting
The financial accounting is a specialized branch of accounting which tracks financial
transaction of a business (Davila, Foster, and Jia, 2015). The transactions in financial accounting
2

at first record in Journals then summarize in Ledger accounts and lastly presented in financial
statements that is income statement and balance sheet.
Basis MANAGEMENT
ACCOUNTING
FINANCIAL ACCOUNTING
Legal requirement Reports under this accounting
is used within an organization.
It is prepared for the use of
internal activities of a business
(Richins, Stapleton, and Strat
opoulos - Wong, 2017). They
did not need any legal
requirement.
This accounting type follows
rules which is prescribed under
General accepted accounting
principles (GAAP) and
International financial
reporting Standards (IFRS).
The legal requirements are
there for company such as
Super toughened glass need to
follow all these requirements
for their smooth functioning.
Area of coverage within an
organisation
The management accounting is
wholly concerned with specific
area for the analysis. This area
vary from product line,
manufacturing unit,
geographical boundaries, etc.
Financial accounting is only
concerned with the business.
The accounting standards
bounds an organization such as
Super toughened glass to
report in an area by pre-set
format.
Format of presentation There is no presentation
format of management
accounting is available
(Banker, Byzalov - Fang and
Liang, 2017). Company can
choose any format according
to their preference and choice.
On the other hand, the
financial accounting follows a
specific format under which
the company need to record
and present all the information.
Type of data used The management accounting While, financial accounting as
3

uses both data that is
qualitative data and
quantitative data.
the name suggest uses only
quantitative data (Cassell,
Myers, and Seidel, 2015). The
company Super toughened
glass uses this accounting by
taking only quantitative data
into consideration.
Different types of management accounting systems are as follows :
Cost accounting system - This accounting system is used by various firms to estimate the
cost of product to analyse profitability, control and inventory valuation. The cost accounting
system work by tracking of raw material by passing through various stage of production and turn
into finish goods (Apostolou, Dorminey, and Hickey - Hassell, 2019). The accounting entry in
Super toughened glass company execute accounts when the raw material put into production. In
cost accounting, it is recorded immediately for the use of material by crediting account of raw
material and debit the account of goods in progress.
The direct cost is a type of cost which is related with production of good and services.
The distribution and labour cost are included as this is associated with products. On the other
hand, the production cost of material are used in direct expenses. The cost gets easily tracked by
project department (Peterson, Schmar - debeck, and Wilks, 2015). Also, derive value of
inventory is not allowed in International financial reporting standard (IFRS) and Generally
accepted accounting principles (GAAP). This did not provide view in which the cost is incurred
to create products and promoting activities of Super toughened glass.
The accounting standard is another cost which is occurred by evaluating difference
between budgeted and actual cost. The accounting executed a brief comparison between actual
expenditure of goods and estimating expenditure of goods used in production. The cost of goods
sold and ledger accounts contain standard one (Abdel - Maksoud, Cheffi, and Ghoudi, 2016).
The actual and estimated cost is identified by variance under the accounting standard cost which
uses the variance for generating outcomes.
Inventory management system – The system of inventory management tracks inventories
by supply chain or business portion in which they operate. The inventory management system
4

include shipping to warehousing, production to retail, etc. The inventory management includes
supervision of stock items and inventories.
The FIFO, LIFO and Weighted average are the different method of inventory
management. The First in first out (FIFO) is method of accounting which rely on cash flow
assumption in which cost of account of inventory is removed from the time it is purchased
(Davila, Foster, and Jia, 2015). The Last in first out method (LIFO) is utilization which is
matches with recent cost in income statement with the sales. While the Weighted average is
utilized under assignment of average cost of production. The inventory management assumes
selling all their inventories simultaneously.
Job costing systems – The job costing method involves process of accumulation of
information. This is associated with cost of production and service. There are three kinds of
information which is needed under this system (Richins, Stapleton, and Strat opoulos - Wong,
2017). They are direct material. Overhead and direct labour. The usefulness of this system is the
determination of accuracy in company's estimation system.
P2 different methods used for management accounting reporting.
The managerial reports are those report which provide aid to the internal users of the
company. This help enables effective decision-making in business. The reports generally
emphasizes on internal information that is received by financial accounting through auditors.
Also, this report is useful for effective planning, regulation, organizing, decision-making of the
company (Banker, Byzalov - Fang and Liang, 2017). This also helps in measuring performance
of internal staff of the business. This report is prepared under managerial accounting that is
focuses on providing information to all the internal users. The different types of managerial
report are prepared by businesses are as follows :
Budget reports - The budget reports are considered as very important report as it helps
the business in measuring performance and budgets of report which is generally prepared on
basis of different department to manage the operational activities and also the functions of
particular department effectively.
Budget report provides an aid to the organization in comparing actual performance with
projected. The corrective actions are taken in order to eliminate the deviation (Cassell, Myers,
and Seidel, 2015) . The income as well as expense are managed in according to budget. The
report informs internal users about inflow and outflow of cash and the performance deviations.
5

Advantages
 The budget report is an effective tool to measure the performance.
 Budget report provide help in taking corrective measures.
 The budget report lead the organization and helps them in ascertaining the risk. It also helps investors in order to decide further investment based on the performance.
Account receivables Ageing reports - This report is made by company if there is any
involvement of extending to credit in their business. The amount in which the credit is given to
customer for specific time period. This helps the managers in identification of defaulters which
would not pay money and this also helps them in finding the issue in collection process
(Apostolou, Dorminey, and Hickey - Hassell, 2019). This report will help the businesses to
ascertain number of defaulters which they transfer to credit policies of the business. The
accounts receivable ageing report helps mangers for altering & changing their credit policies and
related strategies.
Advantages
 This helps the managers of Super toughened glass in deciding the credit policies and also
restructuring of it.
 The report leads an organization in ascertaining collection period of the Super toughened
glass (Peterson, Schmar - debeck, and Wilks, 2015). Also, the internal users make effective decisions in regarding extending the credit.
Performance Reports - The performance report is prepared for analysing and reviewing
performance of the business. The staff members take decisions regard to their appraisals and
other need of the organization. The different performance report is prepared under large
organization for each department to analyse their performance in the direction of the projected
performance and goal (Abdel - Maksoud, Cheffi, and Ghoudi, 2016). This will aid the
organization in executing right decision and taking different corrective measures for eliminating
difference between projected and actual performance.
Advantages
 The performance reports helps in executing comparison between actual and budgeted
performance.
 This also provide guidance for executing decision-making in the company regarding
promotion or termination of an employee.
6

 The report in company Super toughened glass is also helpful in conducting training and
development program on basis of analysing of performance.
Cost report - The cost report is helpful in identification of cost related with the financial
activity of an organization. This report determine cost of each product, services, activities,
processes and projects (Richins, Stapleton, and Strat opoulos - Wong, 2017). This also provide
an aid to control cost in efficient manner. The cost report evaluates income and expense of
particular action or an activity that lead to higher efficiency as well as growth of business.
LO 2
P3 preparation of income statements by using marginal cost and absorption cost
Calculation of production cost as per the
marginal cost
particulars amount
material 8
labour 5
Production overheads 3
Total production cost per unit 16
Preparation of income statement by marginal cost for May month
Basis Amount
Sales (300*50) 15000
Cost of sales:
Opening inventory 0
Material (500*8) 4000
Labour (500*5) 2500
Variable o/h (500*3) 1500
8000
-Closing inventory (200*16) -3200.00
-4800
10200
-Variable selling cost -750
Contribution 9450
-Fixed costs -10000
Actual Net profit/(Net Loss) -550
7

Preparation of income statement by marginal cost for June month.
Basis Amount
Sales (500*50) 25000
Cost of sales:
Opening inventory (200*16) 3200
Material (380*8) 3040
Labour (380*5) 1900
Variable o/h (380*3) 1140
9280
-Closing inventory (80*16) -1280
-8000
17000
-Variable selling cost -1250
Contribution 15750
-Fixed costs -10000
Actual Net profit/(Net Loss) 5750
Under Absorption Costing
Cost per unit
Direct Material 8
Direct Labour 5
Variable O/H 3
Fixed O/H 10
Total absorption cost per unit 26
Preparation of income statement by absorption cost for May month.
Particulars Net amount
sales (300*50) 15000
Cost of sales:
Opening inventory 0
Material (500*8) 4000
Labour (500*5) 2500
Fixed O/H 10000
Variable O/H (500*3) 1500
18000
-Closing inventory (200*26) -5200
8

-12800
Gross Profit/Loss 2200
-Variable selling cost -750
Actual Net profit/(Net Loss) 1450
Preparation of income statement by absorption cost for June month.
Particulars Net amount
Sales (500*50) 25000
Cost of sales:
Opening inventory (200*26) 5200
Material (380*8) 3040
Labour (380*5) 1900
Fixed o/h 10000
Variable o/h (380*3) 1140
21280
-Closing inventory (80*26) -2080
-19200
Gross Profit/Loss 5800
-Variable selling cost -1250
Actual Net profit/(Net Loss) 4550
Calculation for material variance analysis
Material variance analysis
(Budgeted price- actual
price)*Actual Quantity
(10-9.5)*2200
1100 Favourable variances
Material usage analysis
(Budgeted quantity – actual
quantity)* budgeted price
(1000-2200)*10
-2000 Adverse variances
Calculation of held stock by the weighted average method
9

Date Reference Purchase Issues Balance (Inventory)
Units £/
Units
£
Total
Uni
ts
£/
Units
£
Total Units
£/
Unit
s
£
Total
May
-01
Previous balance
(inventory) 50 3.00
00
150.00
00
May
-12
Bought 25 units at
£3.60 each 25 3.600
0
90.00
00 75 3.20
00
240.00
00
May
-15 Issued 36 units 36 3.2000 115.20
00 39 3.20
00
124.80
00
May
-20
Bought 20 units at
£3.75 each 20 3.750
0
75.00
00 59 3.38
64
199.80
00
May
-23 Issued 10 units 10 3.3864 33.864
4 49 3.38
64
165.93
56
May
-27 Issued 25 units 25 3.3864 84.661
0 24 3.38
64
81.274
6
May
-30 Issued 5 units 5 3.39 16.932
2 19 3.38
64
64.342
4
Inventory
calculations
Opening
inventory 150.0000
Purchase 1 90.0000
Purchase 2 75.0000
Issue 1 115.2000
Issue 2 33.8644
Issue 3 84.6610
Issue 4 16.9322
Balance 64.3424
Calculation of held stock by using LIFO method in the organization
Date Reference Purchase Issues Balance
(Inventory)
Units £/
Units
£
Total Units £/
Units
£
Total Units £/
Units
£
Total
May-
01
Previous balance
(inventory) 50 3.00 150.0
0
May- 50 3.00 150.0
10

12 0
Bought 25 units at £3.60
each 25 3.60 90.00 25 3.60 90.00
May-
15 25 3.60 90.00
Issued 36 units 11 3.00 33.00 39 3.00 117.0
0
May-
20 39 3.00 117.0
0
Bought 20 units at £3.75
each 20 3.75 75.00 20 3.75 75.00
May-
23 Issued 10 units 10 3.75 37.50 39 3.00 117.0
0
10 3.75 37.50
May-
27 10 3.75 37.50 24 3.00 72.00
Issued 25 units 15 3.00 45.00
May-
30 Issued 5 units 5 3.00 15.00 19 3.00 57.00
Inventory
calculations
Opening
inventory 150.00
Purchase 1 90.00
Purchase 2 75.00
Issue 1 123.00
Issue 2 37.50
Issue 3 82.50
Issue 4 15.00
Balance 57.00
LO 3
P4 advantages and limitation of planning tools which are used for the budgetary control
Financial budget : Financial budget are prepared to get the information about the
upcoming cask inflow and outflow to manage the expenses and prepare the plan for the spending
the amount different organization activity such as purchasing the raw material, wages and salary,
operating expenses etc. in the business organization (Financial Budget Benefits in Business,
11

2017). There are different types of financial budget such as cash budget, balance sheet budget,
capital expenditure budget etc.
Cash budget are used to forecast the cash transaction such as inflow and outflow of the
cash in the company. Super toughened glass company used to prepare the cash budget to
determine there cash transaction for the particular period. Capital expenditure budget help the
organization to focus on the major assets like plant and machinery, land and building etc. of the
firm. Balance sheet budget is used to control the balance in the organization by evaluating the
total assets and liability and concentrates on the debtor and creditor of the Super toughened glass
company.
Advantages :
 Cash budget provide the information to the management regarding the total cash of the
organization and manage the activity according the available cash.
 Balance sheet budget help to get the total debt of the organization and provide different
measures to pay and collect the debt from the debtor.
 It helps to control the cost of the organization by evaluating each activity, cash inflow
and total capital expenditure of the firm.
 It manages and control the cash flow to maintain the cash in company and fulfil the day
to day requirement. It also helps top management for the financial planning and support
the decision of top management. Financial budget communicate the position of the organization to its stakeholders for
motivating them and involve them in business activity to get their full potential.
Disadvantages :
 The manipulation of the data is quite common in financial budget preparation. Budgetary
slack increases the expenses of the organization and reduces the profit to earn for
themselves and gain the favourable variances to the budget.
 The huge interference of stakeholders may create problem in taking the decisions for the
organization and delay the process which ultimately affect the growth of the business and
employee performance.
Operational budgeting : It represents the company's planned operation like the expected
sales for the accounting period (Pros & Cons of an Operational Budget, 2019). It includes the
various budget like revenue or sales budget, expenses budget and project budget.
12

Advantages :
 It helps the manager to find and measure the financial position of Super toughened glass
company in future and prepare themselves according to the requirement by estimating the
expected expenses.
 By estimating the expenses of the company they are able to control the activities to
minimize their expenses and increase the wealth of the organization.
 It manages the current and future expenses by the sales budget and expenses budget. In
expenses budget they compare the actual expenses with the estimate expenses and find
the area in which they increase their expenses and control the activity to get the
favourable variances (Funderburg, 2019).
 Operating budget increases the accountability of the manager and employees and force
them to provide the accurate data to understand the true position of Super toughened
glass company. The calculation of variances in the expected and actual expenses help them to control the
budget of the company.
Disadvantages :
 In operational budget manager has to measure and control the slack in the data which
ultimately delay the process and increases the unnecessary cost for the Super toughened
glass company.
 The adverse variances in the expense budget and project budget increases the cost of firm
and also affect the control of the managers.
Increment budget : Increment budget prepare on the basis of the actual performance or
previous year budget (Asogwa, and Etim, 2017). In the previous year budget the incremental
amount is added to prepare to new budget for the Super Toughened glass company.
Advantages :
 The increment budget is easy to prepare and calculate the variances in the expected and
actual budget. Budget is based on the financial result which provide the effective base to
calculate the variances and manage them via proper methods.
 It helps the organization to prepare the budget on time and evaluate the various
alternative to control the cost like the wages, raw material cost, production activity cost
etc.
13

 Increment budget also help the company to compare the budget with the last year
performance and analysis the difference in their performance, so they can rectify them on
time and take effective decision to control the cost.
Disadvantages :
 The estimate increment in the base year budget is not accurate or bases on some real fact
which increases the variances in the budget. The adverse variances increase the cost of
the Super toughened glass company (Godwin, 2018).
 Manipulation of data is high in increment cost which increases the expenses to reduce the
profit. Interference of employees in decisions also sometime mismanaged the control
process.
 It does not encourage the creativity and innovation of employees in setting the budget
because the budget is based on the previous year data so it restricts the creativity of the
employees.
Variance analysis: It is used to identify the variation or differences in the income and
expenses of budgeted cost to the actual cost. It can be calculated by subtracting the budgeted cost
from the actual cost. It helps the business organization to identify the fluctuation and reduce it by
taking effective measures.
Advantages:
 It helps the company to identify the reason behind the variation in the actual and
budgeted cost.
 Variance analysis is used to identify the methods of reducing adverse variances. It helps to achieve the goal and objectives of the organization by accomplishing the task
within the cost.
Disadvantages:
 Variance analysis is mainly applicable in manufacturing and production industry. But in
service industry it is difficult to apply and find the variances in their performance.
 The variance in the performance may be arisen due to different reasons. So, it's difficult
to set standard to measure the performance.
 It is used for controlling the budget but delay in the presentation reduces it relevancy for
taking effective decisions.
Forecasting: It is the process of identifying the future trend and growth by analysing the
14

past and present performance of the company. It is mainly used for planning and preparing
strategies to improve the performance of company in market.
Advantages:
 It helps the manager to plan the strategies for the future growth and prepare to deal with
the unexpected circumstances or losses.
 It helps to deal with upcoming environmental and market changes. It is used to identify the weaknesses of company and its employees. It helps to take
effective measures to minimize the weaknesses.
Disadvantages:
 It is based on the estimation and assumptions. It did not provide accurate information
regarding the future changes.
 To collect data and interpret the information consume lots of time that's why forecasting
is time and cost consuming activities.
LO4
P5 Compare ways in which organizations are adapting management accounting systems to
respond to financial problems.
There are different techniques of management accounting which different organization
use dealing with financial problems. This will be discussing below as :
Super toughed glass ABX construction company
 The company Super toughened glass
applies benchmarking as well as KPI to
deal with their financial problems. It
helps them to identify the different
financial problem in the organization
such as decrease in demand, sales and
profit, increase in expenses supplier
demand etc.
 ABX company use the variance
analysis and balance scorecard tool for
identifying the financial problems of
the company. It also helps to measure
the performance of the employees in
the organization.
 Key performance indicator tool helps to
measure the performance of company
by comparing it to the pre setted
 Variance analysis tool helps to identify
the difference in the actual and
budgeted performance of the company
15

standards. For example: The decrease in
sales may be because of the less
attention of sales department on quality
of product. KPI tool helps them to
measure the performance of employees.
but there are so many reasons of the
variances so its difficult for ABX to
identify the particular reason and take
effective measure to resolve them.
 The benchmarking system helps the
Super toughed glass company to
evaluate and measure company
performance in terms of process,
employee, products, etc. (Davila,
Foster, and Jia, 2015).
 Balance score card system helps the
ABX company to balance the
performance of employees via the
usage of score card But it only provides
non monetary benefits to the employees
so some time employees feel frustrated
because they want tangible benefits.
 Key performance indicator and
benchmarking system helps to identify
bot financial and non financial
problems in the company. They also
provide the effective measures to
resolve the problems and get effective
results.
 The balance scorecard and variance
analysis also helps to identify the
difference in their output and
performance of employees but at the
same time it does not give the clear
reason for the variances in performance
and decrease in the profit of company.
Therefore, the company Super toughened glass applies benchmarking as well as KPI to
deal with their financial problems. It has been found that Key performance indicators (KPI) and
benchmarking accounting technique is best to be followed by Super toughed glass in order to
measure and evaluate the performance by which the development of effective strategies can be
optimized. It can be suggested that ABX company has to adopt the additional management
accounting system to measure the performance of the employees and resolve the financial
problems such as decrease in profit, sales, increase in cost etc.
CONCLUSION
This report was all about management accounting. This report focuses on the company
Super toughened glass. This company is medium-sized company operating in UK. The report
16

was started with brief introduction of management accounting and their essential requirement of
various types of management accounting system. The report then highlighted about the different
method for management accounting. This includes Budget reports, Account receivables Ageing
reports and Performance Reports as different management accounting methods.
After this, the report then covers calculates the appropriate technique cost to analyse cost
and income statement were also prepared for the company Super toughened glass. Then comes
different types of tools of planning and their pros and cons for budgetary control. At last, the
report then lay focuses on comparison of organizational adaptation of management accounting
system for responding with financial problems by the company.
17

REFERENCES
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involvement on relations between advanced management accounting practices and
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pp.169-184.
Apostolou, B., Dorminey, J. W., and Hickey - Hassell, A., 2019. Accounting education literature
review (2018). Journal of Accounting Education.
Asogwa, I.E. and Etim, O.E., 2017. Traditional Budgeting in Today's Business
Environment. Journal of Applied Finance and Banking, 7(3). p.111.
Banker, R. D., Byzalov - Fang D. and Liang, Y., 2017. Cost management research. Journal of
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Cassell, C. A., Myers, L. A. and Seidel, T. A., 2015. Disclosure transparency about activity in
valuation allowance and reserve accounts and accruals-based earnings
management. Accounting, Organizations and Society. 46. pp.23-38.
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companies: international field-based evidence. European Accounting Review. 24(2).
pp.207-239.
Funderburg, R., 2019. Regional employment and housing impacts of tax increment financing
districts. Regional Studies, 53(6). pp.874-886.
Godwin, M. L., 2018. Studying Participatory Budgeting: Democratic Innovation or Budgeting
Tool?. State and Local Government Review, 50(2). pp.132-144.
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processing effects of accounting consistency. The accounting review. 90(6). pp.2483-
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Richins, G., Stapleton, A., and Stratopoulos - Wong, C., 2017. Big Data analytics: Opportunity
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Financial Budget Benefits in Business. 2017. [Online]. Available through :
<https://bizfluent.com/info-8014791-financial-budget-benefits-business.html>.
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Pros & Cons of an Operational Budget. 2019. [Online]. Available through :
<https://smallbusiness.chron.com/pros-cons-operational-budget-35123.html>.
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