Management Accounting Report: ABC Ltd Cost Analysis and Control

This report provides a comprehensive overview of management accounting practices within ABC Ltd, a medium-sized manufacturing company in the United Kingdom. It begins by defining management accounting and exploring different types of management accounting systems, including cost accounting, price optimization, inventory management, and job costing, highlighting their requirements and benefits. The report then details various methods used for preparing management accounting reports, such as budgets, performance reports, inventory and manufacturing reports, and job cost reports, emphasizing their role in performance measurement and control. Furthermore, it integrates the management accounting system with the reports to evaluate the company's performance and strategy. The core of the report focuses on calculating net profit or loss using marginal and absorption costing methods, providing practical examples for ABC Ltd. Finally, it discusses the advantages and disadvantages of different planning tools used for budgetary control and explores the application of management accounting systems in addressing financial problems, such as budget variances and changes in sales and profit, offering insights for developing the efficiency of the company. The report concludes by summarizing the key findings and providing relevant references.

Management Accounting

INTRODUCTION...........................................................................................................................3
LO 1.................................................................................................................................................3
P1 Explaining the meaning of management accounting and different kinds of management
accounting systems...................................................................................................................3
P2 various method used by the organization for preparation of management accounting
report.........................................................................................................................................6
Integration of management accounting system and management accounting report...............7
LO 2 ................................................................................................................................................8
P 3 Calculation of Net Profit or Loss under Marginal Costing and Absorption Costing for
ABC Ltd. ..................................................................................................................................8
LO 3 ..............................................................................................................................................12
P 4 Advantages and Disadvantages of different types of planning tools used for budgetary
control.....................................................................................................................................12
P5 Explaining range of management accounting systems for developing efficiency of
company in responding to various financial problems...........................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting is the process recording, analysing, measuring and evaluating
the financial data by using the various tools to get the information for making decision for the
organization. The aim of management accounting is to support the manager in decision-making
process and analyse the financial data. The report is about ABC Limited, which is a medium size
manufacturing company operating in United Kingdom. The aim of report is to explain the role of
management accounting and requirement of various accounting system to the organization to
evaluate the performance and control the cost of the company. It also explains the different
method used by the company to reporting the management accounting like the balance sheet,
profit and loss account and income statements. It highlights the use of marginal and absorption
cost to prepare the income statement and various advantages and disadvantages of the planning
tool like zero base budgeting, increment budget etc. The report also help to focus on the MA
system to resolve the financial problem like variances in budget, change in sales and profit etc.
LO 1
P1 Explaining the meaning of management accounting and different kinds of management
accounting systems
Managerial accounting is defined as a procedure of systematically recording, evaluating and
analyzing the cost and financial information of an entity for the purpose of preparing accurate
internal financial reports, statistical information which is needed by the business managers for
exercising their day to day functions. Tools and techniques of management accounting also
facilitates the managers with the required information regarding log term decisions such as
acquisition of capital assets, undertaking of a particular project etc. This is done by assessing
their feasibility and profitability. Such decisions are taken with the help of financial
modeling,capital budgeting etc. (Mouritsen and Kreiner, 2016).
Difference between financial and managerial accounting :
Basis Management accounting Financial accounting
focus managerial accounting’s aim to
provide the managers with needed
financial and cost related
financial accounting focuses on
preparing the financial reports for
all the interested parties or
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information that assists the in their
decision making process, strategy
and policy formulation, etc.
stakeholders of the business
Statutory requirement managerial accounting is practised
for the sake of assisting the
managers with meaningful
information to make qualify
decisions for the organization.
financial accounting is required by
the law and is mandatory
Different types of management accounting systems are as follows:
Cost accounting system:
It is referred to as a procedure of systematically recording, classifying, evaluating and
analyzing the costs. This system is applied by the business organization for anticipating the costs
of their products or services for the purpose of identifying the profitability, cost control, cost
reduction and inventory valuation. ABC Ltd applies this system of management accounting
within its operations for a motive of determining the costs and profitability of the products
manufactured by the company. This also helps them in exercising controlling function through
which cost-effectiveness is achieved.
Requirement and Benefits :
It is required in the business because it allows the managers in measuring and assessing the
cost efficiency within the operations. It further allows the management of ABC Ltd in
identifying the profitable and non profitable operations (Machado, 2016).
Price Optimization system :
Price optimization refers to a system employed by business organization for identifying the
retail value of the company’s products or services. In other words, it is a procedure of
determining the balance between profit and product’s value. The manager of business
organization evaluate and analyse different possible prices of the goods which consumer is
happy to pay. It also analyse and assess the lowest price which the business entity requires to fix
for preventing any possibility of losses(Borker, 2016).
Requirement and Benefits :
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Price optimization leads to better quality decisions that helps in improving the efficiency of
overall company. It allows management to set an optimum price which helps it in attracting the
attention of consumers. Further, it significantly helps the business in standing peacefully and
Strong the ultra competitive market.
Inventory management system:
It is a system of managing the non capital asset of the business organization which are stock
or inventory. It is basically a procedure of keeping and maintaining the sufficient levels of
inventory within the business so that flow in the production process does not get disturbed
(inventory management, 2019). There are different ways through which a company manages its
inventory such as:
 LIFO: It is last in first out method in which recently purchased goods are removed first
from the inventory and is matched with income generated through sales which is reported on
the income statement.
 Just in time purchase: This is one of the method of managing the inventory in which
organization purchase goods only when they are to be delivered to the customers for meeting
their demands. Economic reorder quantity: It is defined as such quantity that minimizes the carrying and
holding costs of materials in total. It is recognized as one of the best classical model of
scheduling production.
Requirement and Benefits :
This system is required within the business because it helps in optimally managing the
inventory which in turn reduces the unnecessary costs of handling and carrying excessive
inventory which is not required by the company. Further, it also keeps a balance between
production demand and stock of raw material that helps the business in avoiding excess
requirement of working capital. This significantly reduces the operation costs of the business
which eventually lead to higher profitability for the organization.
Job costing system:
It is such system in which costs of each product is assigned and allocated individually. Job
costing system acts as a supervising technique that assists the managers in keeping the track of
company’s expenses. ABC Ltd apply this job costing in its business through which it determines
the profitability and viability of a particular product of the company.
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Requirement and Benefits :
The major benefit of this accounting system is that it enables the management in
ascertaining the profitability of each order, job or product of the manufacturing unit. This in turn
facilitates the management with the crucial information that whether a particular product should
continue or it should be closed down.
P2 various method used by the organization for preparation of management accounting report
Managemnt accounting report prepare record the data for the internal user like managers,
employees and owner to produce the information for the external users such as creditors,
customer etc. Management accounting use the data from the financial accounting to measure and
control the performance of the company and provide the effective result through the efficient
decision-making process. The various method are used by the organization for reporting such as :
Budget : It is prepared to estimate the cost of the product and determine the various
activities in the production and manufacturing process. It controls the activity and cost of the
company by estimating the cost of various resource used by the organization during the
manufacturing and distributing process. Budget help the ABC company to prepare the
management accounting report. By comparing the standard budget to the actual cost ABC
company can easily manage the performance by finding the variances and manage them by
controlling the cost (Le Quéré, and et.al., 2015).
Performance report : It is prepared by the company to measure the performance of the
organization and its employees. To manage the performance of the company they also prepare
the report as department wise. It helps them to get the performance of individual department and
their impact on the whole organization. ABC company prepare the management accounting
report to evaluate the performance of each employee and department by comparing it to previous
year performance which increases the efficiency of the company (Management accounting
report, 2017). They also use the various tools in evaluating the performance such as key
performance indicators, budgetary control etc.
Inventory and manufacturing report : It is used to manage the inventory level in the
organization and make the efficient manufacturing report. It includes the various items such as
inventory wastes, overhead cost per hour or labour cost on hourly basis. ABC company use the
inventory and manufacturing report by comparing it with different assembly lines and found the
area of improvement to gain the higher profit. By managing the inventory level in the
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organization ABC manufacturing company can easily fulfil the demand of the customer and
order the quantity when they required.
Job cost report : It helps the company to focus on the specific project rather than to
invest time and money on different job which are less important for the company. It helps ABC
company to identify the area which provide higher earning and manage the tome and cost of the
firm. It also helps ABC company to analyse the expenses of the activities when project is
running, so they can manage the time and cost to address this problem and expenses after the
wastage become out of control.
Integration of management accounting system and management accounting report
Management accounting report and MA system is used by the ABC limited company to
formulate the policy, plan and strategy to evaluate the performance of the company via using
different reports such as budget report, inventory and manufacturing report etc. MA system help
the organization to manage the inventory level by providing different software to record the
inventory level and order quantity in the organization. It also helps them to reduce the inventory
maintenance cosy and improve the efficiency of the product and organization.
LO 2
P 3 Calculation of Net Profit or Loss under Marginal Costing and Absorption Costing for ABC
Ltd.
1. Production cost is the cost which is occurred at the time of converting raw material into
finished goods. These costs are generally direct costs for the company. Various types of
Production cost are real cost, opportunity cost, money costs etc.
The Production Cost per unit occurred in the company at the time of production
goods by ABC Ltd is -£ 46.67 per unit
The total production cost incurred by ABC Ltd at the time of production of goods is
£886730
The total cost of sales occurred in the month of January by ABC Ltd is £1026740.
2. Application of appropriate Budgeted Profit or Loss statement for January
Particulars
Budgeted Cost at 19000
unit
Budgeted Profit or Loss
for 19000 units
Material 19000 19000
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cost per unit 46.67 60
Total cost 886730 1140000
Particulars actual Cost at 19000 unit
Actual Profit or Loss for
19000 units
Material 19000 19000
cost per unit 46.67 60
Total cost 886730 1140000
3. Marginal Costing and Absorption Costing
Marginal Costing is the method of costing where for the calculation of closing inventory is
valued on marginal cost per unit (Collis, 2017). Marginal Cost per unit is calculated by charging
all the variable cost which occurred in the production of the goods. This costing cost accounts all
the variable cost for taking out contribution for ABC Ltd. All the fixed costs of the company are
deducted from contribution of the company to calculate the Net Profit of the company.
Absorption costing can be defined as the costing technique which calculates the total
absorption cost per unit by including all the fixed and variable costs for ABC Ltd. Calculation of
closing inventory is done on the basis of absorption cost per unit (Schmidt, 2015). It takes into
account all the production costs absorbed at the time of production of goods. All the fixed and
variable production costs are deducted to calculate the Gross Profit of ABC Ltd. Net Profit is
calculated by deducting all the fixed and variable selling costs from Gross Profit.
Calculation of Net Profit or (loss) under Marginal costing and Absorption costing
Assessment of cost per unit: Marginal costing
Particulars Figures (in £)
D. M. 10
D. L. 20
Variable costs 5
Total cost per unit (£) 35
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Cost per unit: Absorption costing
Particulars Figures (in £)
D. M. 10
D. L. 20
Variable costs 5
Fixed manufacturing costs (100000 / 20000)
= 5
Total Cost per unit (£) 40
Profitability statement as per marginal costing system
Particulars Figures (in £)
Net Figures
(in £)
Sales 800000
D. M. 180000
D. L. 360000
Variable overheads 90000
Total costs 630000
Less: Closing inventory 70000
Marginal cost of sales 560000
Add: Fixed production costs 100000
Total production cost 660000
Net profit (NP) (£) 140000
Income Statement under Absorption costing:
Particulars Figures (in £)
Net Figures (in
£)
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Sales 800000
D. M. 180000
D. L. 360000
Variable Costs 90000
Fixed costs 100000
Total costs 730000
Less: closing inventory 80000
Cost of sales (COS) 650000
NP (£) 150000
Income statements when production units are 19000 and closing stock is 3000 units
Under marginal costing
Particulars Figures (in £)
Net Figures
(in £)
D. M. 190000
D. L. 380000
Variable costs 95000
Total expenses 665000
Less: closing stock 105000
Marginal cost of sales 560000
Fixed production costs 100000
Total production cost 660000
NP (£) 140000
Absorption costing
Particulars Figures (in £)
Net Figures
(in £)
Sales 800000
D. M. 190000
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D. L. 380000
Variable costs 95000
Fixed costs 100000
Total costs 765000
Less: closing inventory 80000
Cost of Sales 685000
NP (£) 800000
ABC Ltd should select the absorption costing method because absorption costing is
giving better presentation of the net profits. Under absorption costing method there is more net
profit than the net profit under marginal costing. It is because under absorption costing fixed cost
per unit is calculated for closing inventory whereas under marginal costing calculation of closing
inventory is done on the basis of total fixed costs. It leads to the decrease in the profits under
marginal costing. Thus, ABC Ltd should go for presenting its net profit under absorption costing.
M 2 Applying the accounting techniques and appropriate financial reporting documents for
ABC Ltd.
ABC Ltd shareholders should use the absorption method for the presentation of net profit
or net loss because absorption costing is showing more profits than under marginal costing
method for the month of January (Lips, 2017). This will help better in presenting the financial
reports of the company.
D 2 Application of various financial reports for making interpretation and analysis for
complex business activities
Various financial reports are used by the managers of the company in order to certain
decisions for the company. They take the decisions on the basis of the reports prepared by the
Professional of the company and makes analysis of the reports for better presentation of financial
statements. ABC Ltd should present its net profit or loss of the company under absorption
costing method because it is giving better presentation of Profits than the profits under marginal
costing. Under absorption costing method only presents £200000 whereas under absorption
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costing it is showing £218000. So, company should go present its income statement under
absorption costing method.
LO 3
P 4 Advantages and Disadvantages of different types of planning tools used for budgetary
control
Budgetary Control is the process where the company will be comparing the actual
performance of the company by the budgeted prepared by the company (Mohamed, 2016). These
budgets are prepared in order to control the extra cost allocated by the company which does not
gives the benefits to the company. The company prepares the budgets for taking decisions for the
company and than they are compared with actual performance of the company. Company
compares both actual and budgeted reports and if any deviations are found than company takes
certain corrective actions in order to improve the performance of the ABC Ltd. These budgets
also help in increasing the profits of the company and also control the cost with proper planning.
Various types of tools used in budgetary control are as follows-
Zero Based Budgeting-
Zero based Budgeting is the method in which all the expenses are needed to be justified
by the manager of ABC Ltd that what is their need in the department. It generally starts with the
“Zero Base” to know the worth of each and every expense allocated in the department. Expenses
under Zero Based Budgeting are allocated on the basis of their needs in each department and
what will be the benefits if these are allocated in the particular department (O'Shea, 2018). Under
this method, all the budgets are prepared specific for that particular year.
Advantages of Zero Based Budgeting are-
 This method helps in better allocation of each and every expense in all departments of the
ABC Ltd.
 This method helps in the better communication within the departments through effective
decision making and budget prioritization.
Disadvantages of Zero Based Budgeting of ABC Ltd are-
 It takes lot of time in the justification of each and every expense for the allocation in
every department. It also needs professionals to justify each and every expense of ABC Ltd which may not
be economical for the company.
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