Management Accounting and Budgetary Control in Alpha Ltd

This assignment report discusses the concept of management accounting and the use of management systems and reporting in the business context. It explores cost analysis techniques, benefits and drawbacks of planning tools in budget control, and the need for management accounting systems in resolving financial conflicts in Alpha Ltd. The report also covers different types of management accounting reports and the differences between management and financial accounting. Additionally, it delves into the concepts of marginal costing, absorption costing, and break-even analysis in Alpha Ltd.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting is referred as presentment of in-depth information related with
accounts so that management of a company can formulate advantageous policies (Anessi-Pessina
and et. al., 2016). In order to work on this project, selected organisation is Alpha Ltd. This
company operates at medium level and achieve turn over of £500,000 on annual basis. This
company offers local prepared pizza to their customers and employees around 50 employees.
This assignment report will discuss about the concept of management accounting and use of
management systems and reporting in business context. Other than this, cost analysis techniques
are discussed to formulate financial statements. Benefits and drawbacks associated with usage of
planning tools in budget control are carried out along with need of MA systems in resolving
financial conflicts in an organisation. At last, comparison in two manufacturing companies will
be discussed to show how they use accounting systems to resolve their financial issues.
TASK 1
P1
Management accounting is utilised to define accounting methods, techniques and systems
so that a business firm can maximise their profit margins and minimise their expenses. Role of
management accounting to include those financial information which helps in taking right
business decision so that all the expected activities can be performed under limited capital. There
exist some benefits of management accounting to Alpha Ltd which are listed below:
 Planning: It helps an organisational management to plan and prepare right business
policies related to inflow and outflow of capital, production, selling etc. These planning
helps in proper utilisation of capital so that maximised profits can be achieved (Carlon
and et. al., 2015).
 Controlling: Management accounting helps an organisation in comparing their
efficiency with standard performance. By this, productivity and performance of Alpha
Ltd can be controlled in a proper manner.
 Decision making: By using management accounting techniques, in-depth view of
finance and accounts is achieved. This assists the manager of company to take right
decision related with finance so that desired outcomes can be achieved (Coad, Jack and
Kholeif, 2015).
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There exist different kind of management accounting systems which allows a company to
perform time consuming work within limited time. Information about these systems in context
with Alpha Ltd is stated below:
Cost accounting system: It is defined as a product costing system that helps in
estimating profitable operations and outcomes of an organisation in detailed manner. This
framework allows a company to acknowledge the estimated costs of their offerings so that
activities like inventory valuation, profitability analysis, cost control etc. can be carried out
efficiently. This system will allow Alpha Ltd to estimate the closing value of finished good,
work in progress and inventory material so that accurate financial statement can be prepared
(Collis and Hussey, 2017).
Inventory management system: This is referred as aggregation of technology,
procedures and process so that maintenance of inventory and stocked product can be carried out
effectively. In order to implement inventory management system effectively, manager in Alpha
Ltd is need to focus on their storage and warehouses to identify the actual number of inventory.
FIFO and LIFO are the two methods which is used by management to identify the actual cost of
their inventory. In LIFO, last purchased inventory is used first and in case of FIFO, materials
which are buy earlier are given priority while manufacturing.
Price optimisation system: It is stated as a procedure to find a pricing sweet spot or the
best price at which customers are willing to purchase the product of company in maximised
quantity. In both B2B and B2C settings, Alpha Ltd downs and up their supply chain to achieve
maximised sales. This system will help the company if their products is charged high,
appropriate or low. By this, needed modifications in pricing policy of a company can be carried
out properly.
P2
Various kind of management accounting report which can be used by the management of
Alpha Ltd is discussed below:
 Job cost report: It is refereed as a general report which helps an organisation in tracking
the on going cost of an business activity or operation. There exist some job costing
reports which additions the total costs when a job is fulfilled so that future operations will
not be impacted in negative manner. In case of Alpha Ltd, job costing can benefits the
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employees in identification of cost related problem while performing job activities so that
profits and revenues of firm can be maintained (Fullerton, Kennedy and Widener, 2014).
 Inventory management report: In this kind of report, manager of a firm is able to
acknowledge the in depth information about a quantity of stocked material in warehouses
and storage channels. Appropriate report of inventory will benefits Alpha Ltd in
identifying which resources and materials are present in abundant and which are present
in scarce amount. By tracking the quantity of stock, Alpha Ltd can assure that their
manufacturing of pizza can be carried out without any hindrance.
 Performance report: It is referred as a report that helps in comparing the estimated
incomes and expenditures with actual outcomes. Main aim behind using this report is to
acknowledge actual financial position of company in comparison with the expected
results. By using this report, manager in Alpha Ltd can analyse the differences between
actual and estimated expenditures or income. This will helps them in identifying their
accurate business performance in proper manner (Hilorme and et. al., 2019).
Differences among management and financial accounting
Financial accounting Management accounting
 It is related with formulation of income
and financial statements for external
users such as investors, government
agencies, bankers etc (Huynh, 2015).
 It involves preparation of financial data
and information for internal users like
managers, employees etc. so that policy
making for business can be performed
efficiently.
 Balance sheets and income statements
are part of financial accounting which
shows financial position of a firm in
given time frame.
 It focuses in future operations and
activities so that organisational goals of
firm can be attained prosperously.
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TASK 2
P3
Marginal costing: It is defined as the additional cost that is incurred on the
manufacturing of additional unit of an output. It specifies the rate through which total cost
enhances as production in raised by one unit.
Absorption costing: It benefits in including all kind of costs which are related with
manufacturing of a specific product. In case of Alpha limited, cost related with rent, labour,
insurance etc. are involved in this method of income statement preparation(Isaev, 2016).
Break even analysis: This is a financial tool that benefits an organisation in determining
the stage at which introducing a new service or product is beneficial. It will help Alpha Ltd in
deciding if they should install new machine for manufacturing or not.
Problem 1 (1) Calculation of net profit under absorption costing method
Period 04/19 05/19 06/19 07/19 08/19 09/19
Sales 75 60 90 75 70 80
Productions 75 75 75 75 85 70
Opening Inventory 0 0 15 0 0 10
Closing Inventory 0 15 0 0 15 0
Period 04/19 05/19 06/19 07/19 08/19 09/19
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Sales 600 480 720 600 560 640
Opening Inventory 0 0 45 0 0 30
Add. Variable Cost 225 225 225 225 255 210
Less Variable Cost 0 45 0 0 45 0
Marginal Cost of Sales 225 180 270 225 210 240
Contribution Margin 375 300 450 375 350 400
less fixed Man Cost 150 150 150 150 150 150
Less Non Man. Cost 50 50 50 50 50 50
Net Profit 175 100 250 175 150 200
Calculation of net profit under marginal costing method:
Unit Selling Price 8
Unit Cost 5
Fixed Man. Expenses 150
Non Manufacturing Exp 50
Budget activity £75,000.00
Period 04/19 05/19 06/19 07/19 08/19 09/19
Sales 75 60 90 75 70 80
Productions 75 75 75 75 85 70
Opening Inventory 0 0 15 0 0 10
Closing Inventory 0 15 0 0 15 0
Period 04/19 05/19 06/19 07/19 08/19 09/19
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Sales 600 480 720 600 560 640
Opening Inventory 0 0 75 0 0 50
Add. Cost 375 375 375 375 425 350
Less Closing Inventory 0 75 0 0 75 0
Marginal Cost of Sales 375 300 450 375 350 400
Adjustment for Overheads 0 0 0 0 -20 10
Contribution Margin 225 180 270 225 210 240
Less fixed Man. Cost 0 0 0 0 0 0
Less Non Man. Cost 50 50 50 50 50 50
Net Profit 175 130 220 175 160 190
After preparing financial report from both methods, it has been stated that more profits
are earned in case of marginal costing technique rather than absorption costing. This is because
absorption costing includes both fixed and variable cost as their product cost but in case of
marginal costing, fixed cost is not considered due to which a company is able to achieve high
profits.
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As per the achieved results, it can be stated that installing machine is beneficial for
company as it will help them in earning more profits. This means that the more units, company
will sell the greater profit they will achieve. Due to this, overall revenues of company will faces
a considerable hike.
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As per the above given table, this has been interpreted that Alpha Ltd is needed to install
a new machine as they will earn £1,04,000. Also, BEP is £0.00 if organisation will sell around
16,000 units. Hence, on further increment of selling unit, profits of company will further
increase. If company will not install the new machine, they will have to encounter a loss of
approx -£18,000. This amount will multiply in upcoming years and limits the overall profits of
company.
TASK 3
P4
Budgetary control is defined as the system of processes to assure that present
expenditures and revenues of a company are adhering with the financial plan. Its relevance to
the organisation can be acknowledge with the fact that managers use this process to formulate
different budgets so that business activities can be proceed efficiently (Janke, Mahlendorf and
Weber, 2014). Budget is basically an estimation of expenses and revenues for a particular future
time period. It is an internal tool which assures appropriate utilisation of financial resources.
There exist various kind of planning tools for budgetary control that are stated below:
Master budget: This budget sums up all the smaller budgets of a company and arranges
them as a single overarching budget. This budget incorporates marketing, customer services and
other department's budget so that overall situation of finances can be acknowledged.
 Advantage: By using master budget, it became easier for the manager of a firm to gain
holistic view of the total finances of business. This budget will help Alpha Ltd in
identifying their actual spending and earning in detailed manner (Kabalski and Zarzycka,
2018).
 Disadvantage: This budget highly lacks in specificity. Digits and amounts which are
included in master budget are total sum of all the departments of a company. If marketing
team in Alpha Ltd is spending more this will impact the budget of other departments too.
Zero based budget: It is an accounting practice which forces the management of a
company to consider about how each pound of budget will be spent by the firm during budgeting
period (Lasyoud and Alsharari, 2017). This Budget will help Alpha Ltd in justifying their all
operational expenses in appropriate manner.
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 Advantage: This budget will assure that all the operating expense of Alpha Ltd will be
justified properly so that no confusion related to finance will be prevailed. This budget
will help the organisation in keeping a check on their legacy expenses.
 Disadvantage: This budgets helps in offering short term results due to which if Alpha
Ltd is thinking about long term investments, using this budget is of no use. In this budget,
resources of firm are easily manipulated by the savvy managers.
Flexible budget: This is a variable kind of budget which predicts the output or
manufacturing in accordance with the changed business procedures. This budget is very useful
for both control and planning procedures. This budget will help Alpha Ltd in estimating their
operating and factory costs (Luft, Shields and Thomas, 2016).
 Advantage: This budget assists in costs, profit and sales calculation in district levels of
operational capacity. This budget benefits in determining the output quantity which is
needed to be produced to attain desired profits.
 Disadvantage: Only skilled employees can formulate and manage this budget. If
employees in Alpha Ltd are not skilled, it will be difficult for them to use this budget.
This budget can be easily modified due to which financial transactions can be easily
altered by employees to hide their cheating (Napitupulu and Situngkir, 2016).
Break even analysis: It is defined as a relation among profits and the cost volume at
different stages of a business activity. In this kind of planning tool, main emphasis is on the
break even point. In this point, a business do not gain any kind of profit or loss. This is because,
it is a situation in which the entire money which is received from sales is equal to the total capital
which is spend to manufacture those items.
 Advantage: With the help of this planning tool, losses and profits in a business can be
acknowledged at different level of sales & production. Also, this tool helps a company in
predicting the impact of change on the sales price. Other than this, manager of a company
can identify the relation in variable and fixed cost by break even analysis.
 Disadvantage: This planning tool have an assumption that sales prices will be constant at
all output levels. Also, it assumes that sales and production are equal to one another. This
is not a correct assumption. Also, preparing break even chart is complex and time
consuming.
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Variance analysis: This is a technical term which is used in business firms to define the
situations in which accurate outcome or result for a particular event differs on materially and
significantly basis. In case of management accounting, materiality and significant are situations
in which addition and subtraction of an item will impacts decision making.
 Advantage: Sub division in the case of variance helps in defining the actual relation
prevailing in difference variances. Due to which it is very useful in fixing the
responsibilities of an organisation or a department in a productive manner. Also, it
benefits in cost control.
 Disadvantage: This analysis is difficult to applied in context with service sector firms as
most of their cost is associated with the overhead expenditures other than the production
expenses. Also, variance analysis is a part of annual budgeting exercise but this
usefulness reduce the duration of reporting period.
TASK 4
P5
With the use of management accounting systems, day to day activities of a firm can be
managed in a systematic way. Also, these systems helps a company in resolving their financial
issues. In case of Alpha limited, company faces below mentioned financial issues:
 Sudden expenses: As company is planning to install new machine, there are some
situations in which overall expenses of firm are increased. This impacts the overall
budget of Alpha Ltd and shortage of money is faced (Oluwamayowa Olalekan, Ogunleye
and Okpala, 2017).
 Late payment by customers: As Alpha Ltd is operating at small level, to retain their
customers, firm has provided them the facility to pay later own. But, this has led to the
situation in which customers are not paying company in timely manner.
In order to overcome these financial issues, manager in Alpha Ltd can adopt financial
tools like benchmarking, KPI, financial governance etc. which are discussed below:
 Key performance indicators: It is the term which is used to analyse and evaluate the
performance of an organisation and the required efforts in order to meet the expected
results in an efficient manner (Otley, 2016). This tool cover two aspects of which the
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first is related to financial aspect which solves issues such as miscellaneous expenses and
second is non financial in nature which solves organisational problems and issues.
 Benchmarking: The following technique makes use of the results of an organisation who
is market leader and comparison is made with those results so as to know about their own
position in the market (Piontkewicz and et. al., 2016). With the help of this technique,
strategies and policies are developed in order to achieve the goals and objectives of that
organisation as well.
COMPARISON
Alpha Ltd New London cafe
 The issue is related to miscellaneous
expenses dude to which overall budget
of company gets disrupts and financial
problems are faced considerably. So as
to deal with this situation, the company
is adopting cost accounting system.
 Due to wrong credit policy of the
organisation, the issue has been faced
by company is inventory management.
Due to this, the financial position of the
company is being impacted in a
negative manner.
 With the help of cost accounting
system, an organisation can record the
production and manufacturing activities
along with cost of total material and
accounting system with the help of
perpetual inventory system. By this
tracking the flow of inventory and other
processes will be easy and issue of
miscellaneous expense will be sorted
out properly (Renz and Herman,
2016).
 The company could make use of
inventory management system. This
system will help the concerned
company in identifying the right status
about their inventory. By this, it will be
easier for concerned firm to
acknowledge if they have all the
required resources or not. Due to this,
those resources which will be not
available can be ordered on time and
inventory can be managed properly.
 In this context, Alpha Ltd has adopted
job costing system, which helps in
understanding manufacturing costs for
each activity in a separate manner. Due
 In order to solve their problem,
company has adopted First In First Out
inventory management system. Due to
which, resources which are purchased
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to which, possibility of sudden
expenses will be minimised. This will
help the company in reducing their
overall expenses due to which earning
of high profits and revenues will
became an easier task.
first are used first. Due to this,
maintaining actual status of inventory is
very easy. This has also reduced the
wastage of materials due to which more
revenues and profits are earned in a
proper manner.
 With the help of KPI, financial issues
of unexpected expenses are easily
resolved. This is because KPI assures
that all the important indicators of a
project must be involved while
preparing project activities. Due to this,
chances of sudden expense is low.
 By using Benchmarking the following
issues related to inventory could be
resolved (Stacchezzini, Melloni and
Lai, 2016). benchmarking will help the
firm to compare their inventory
management policies with market
leaders so that required modifications
can be carried out properly.
CONCLUSION
This discussed report concludes that management accounting benefits an organisation in
planning, directing and controlling their financial activities in a proper manner. By using, reports
and systems of management accounting, business operations of a firm can be carried out
efficiently. To prepare income statements in accurate manner, costing techniques like marginal
and absorption are mainly used by an organisation. To plan about budgetary controls, basic
planning tools are sales budget, flexible budget, master budget etc. Lack of cash flow,
unexpected expenses and some other are the financial issues which are faced by a company.
These issues can be resolved by using tools like Benchmarking, KPI.
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Online
Budget. 2019. [Online]. Available through:
<https://www.mymoneycoach.ca/budgeting/what-is-a-budget-planning-forecasting>
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