Management Accounting Report: Costing, Planning, and Reporting

This report provides a comprehensive overview of management accounting, exploring various concepts and methods used in financial analysis and decision-making. It begins by defining management accounting and explaining the rationale behind different accounting systems, including cost accounting, job order costing, process costing, and throughput accounting. The report then delves into the methods used for preparing reports, such as financial planning, financial statement analysis, cost accounting, standard costing, marginal costing, and budgetary reports. Furthermore, it includes detailed calculations and interpretations of income statements under both absorption and marginal costing methods, highlighting the differences in profit calculation. Finally, the report discusses the merits and demerits of various planning tools used in management accounting and identifies financial problems in management accounting systems, providing a holistic view of the subject.

MANAGEMENT ACCOUNTING

TABLE OF CONTENTS
MANAGEMENT ACCOUNTING.................................................................................................1
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Explain management accounting and the reasons for usage of various management
accounting systems......................................................................................................................3
P2: Explain the methods that are practiced for preparing reports................................................5
P3 Calculation of cost by using absorption and marginal costing methods................................7
P4 Merits and demerits of various planning tools that are used in the management accounting
......................................................................................................................................................9
P5Financial Problems in Management accounting System:......................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is the domain that help business firms in identifying the areas
where firm is not performing well and need to make improvement. There are number of tools
and techniques of the management accounting that are used to measure the firm performance. In
the current report, management accounting systems are explained in detail and along with this by
using absorption and marginal costing method income statement is prepared. In middle part of
the report, different planning tools of management accounting are explained in detail. Along with
this, different method of management accounting reporting are also explained in the report. In
this way, entire research work is done in the present study.
TASK 1
P1 Explain management accounting and the reasons for usage of various management
accounting systems
Management accounting is known as provision from which varied sort of decisions are
made by the managers that are financial or non-financial in nature. The scope of management
accounting is very vast because it encompass number of areas like decision making, preparation
of plan and developing performance management system. Apart from this, management
accounting ensured that financial reporting will be better in the business firm and there will be
effective control in the business which helps managers in devising proper organization strategy.
It can be said that there are number of areas in which management accounting help managers in
making decisions that are related to business (Zimmerman and Yahya-Zadeh, 2011). In respect
to the above mentioned areas there are different tools and methods that are used by the managers
to make decisions. Some of the important tools of management accounting are variance analysis
and budgeting etc. It is very important to keep track record of the business performance. In this
regard variance analysis is used by the managers. By using variance analysis method time to time
deviation that comes in the firm performance is identified. It can be observed that performance
may be good or bad and same is identified by using variance analysis method. Budget is the one
of the important method that is used to measure performance. It is very important for the firms to
make strategic use of resources. This can be done in the business by preparing and implementing
proper plan in the business. If there will be plan then in planned manner resources can be
allocated among different business activities and by doing so cost can be minimized in the

business. Thus, it can be said that there is huge importance of the management accounting for the
managers because by using same on the multiple areas in single time period managers can focus
to improve performance
Accounting system refers to the process or procedure that is followed to record varied
items in the accounting records. There are different sort of operations that are performed by the
firms on different levels. There are some firms that are producing single product or multiple
product. Accordingly, one need to use appropriate accounting system in order to ensure that
costing will be done in the systematic way (Macintosh and Quattrone, 2010). Apart from this, in
some firms small procedure is followed to produce goods. Contrary to this, in case of some firms
long procedure is followed to manufacture product at the workplace. Thus, it can be said that in
the cases of small process costing and recording of expenses is easy task. Apart from this, in case
of long procedure costing is very different task. Thus, same management accounting system
cannot be prepared by all sort of firms. . There are different sort of management accounting
systems that are used to record expenses in the business. Requirements of these management
accounting systems are as follows. Cost accounting system: This is system that is used by the large size business firms for
computing cost of the product. Under the cost accounting system all expenses are clubbed
together to find its overall value. For example, during manufacturing process all variable
expenses elements costing is done separately and value of same is added to find out
overall value of the variable expenses in the business. Similarly, in case of fixed cost all
fixed expenses variables values are recorded separately and added to find overall value of
fixed expenses in the business. It can be said that in cost accounting system separate
classification of all sort of expenses is done and this help managers in identifying the
extent to which variable expenses increased at rapid rate in the business. Job order costing: It is a system that is used by most of business firms. This is because
in the job order costing system different product lines that are manufactured are taken in
to consideration (Ward, 2012). Moreover, there are some firms that manufacture products
according to the amount of order received from the clients. Different clients give different
specifications for product manufacturing. Thus, cost of these different orders will also be
different because specification provided by the client are not same. In such kind of cases
job order costing system is used and under this for each product line separate calculation

is done. Separate employees are given responsibility to record expenses in respect to
specific product line. All fixed and variable expenses in respect to product are added to
compute overall value of the product. Process costing system: It is a system that have great significance for the managers.
Under process costing system, cost of each phase of the product manufacturing is
computed separately (Sharma, Lawrence and Lowe, 2010). Means that if there are 5
different stages of production then in that case for each of these 5 stages expenses will be
recorded separately. It can be assumed that process costing is the systematic procedure
of costing because every stage of the process is not same and cost of all of them is
different from each other. If cost of all these procedures will be added then in that case
cost of product is accurately computed. This is the reason due to which most of the
business firms prefer to follow process costing system in the business.
 Throughput accounting system: Throughput accounting system is another accounting
system that is used by the most of business firms. It is also known as modern accounting
system and under this main focus is given on the cost control (Gray, Coenenberg and
Gordon, 2013). Number of ways that can be adopted to control cost are identified under
this throughput accounting system. It is the process which was developed by the Israel
businessman and is very effective due to which it become very popular among the
people.
P2: Explain the methods that are practiced for preparing reports
Meaning of Management Accounting: Management accounting is the presentation of accounting
information in order to formulate the policies to be adopted by management and assist its day to
day activities. In other words, to helps the management to perform all its function including
planning, organisation, staffing, directing and controlling.
Important Methods used for management accounting Reporting:
1. Financial Planning: Financial planning focuses on earning the profits in thorough the sale of
products and services. Iceland food Ltd. which is British supermarket Chain Company can make
its financial planning as per its goal and objective.
2. Financial Statement Analysis: The financial analysis refers the evaluation of the financial
statements of the company. (Angelakis, Theriou and Floropoulos, 2010). The analysis reveals

the financial position of company. Income statement, balance sheet, cash flow statement are the
primary statements. So for Iceland food Ltd. they needs to regular check their financial statement
and financial results and if result found if not as per expected then they have to take important
measures.
3. Cost Accounting: Under this accounting the cost is recorded under several heads which
enable the management to compare the cost. The basic purpose of cost accounting is to
determine the cost of product or services to be sold and after determining cost, profit is added as
per need and objectives and final sales value is determined. So in keeping short cost accounting
is total cost incurred from purchase of raw material to final stocks ready to be sold in market. So
for Iceland food company Ltd. cost is important to calculate they should consider cost
accounting because they further have to sale goods and food product from manufacturing to
supplying (Burritt and Schaltegger, 2010). So these tool can prevent unnecessary wastage of raw
material to finished goods which can reduce cost of sales.
4. Standard costing: Under this method of costing, the expected cost are recorded in the books
instead of the actual costs. In a regular interval variance between the two is recorded. This
system of costing. So companies like Iceland food Ltd. maintain standard costing to periodically
review variance in actual and standard costing.
5. Marginal Costing: Marginal costing the way of costing in which only variable cost is
considered when recording the cost of product and service. The fixed cost is absent in the cost
accounting and is left to be written off by the profits in the year. So, Iceland Food Ltd. Company
maintain marginal costing to optimise marginal costing as contribution against fixed cost and
profit
6. Budgetary report: Under this technique a budget is prepared by the company. This budget
report is the forecast of expected cost to be incurred in the future.
 Accounts receivable aging: In management accounting reporting accounts receivable
aging report is prepared under which track record of accounts receivable is maintained. In
the report duration for which accounts receivable given is determined and default in
receipt of payment is identified. By taking action on time cash flows are received from
accounts receivables.

 Job cost reports: Job cost report is one under which for each job under which specific
product will be produced cost is calculated and on same report is prepared. Job cost
report is one important report that is used at large scale by the firms. Managers through
job cost report get an overview of entire cost of specific job.
 Inventory and manufacturing report: In inventory and manufacturing report details
related to inventory that is in stock is available. Apart from this, number of units
produced at workplace is also determined in these reports. It can be said that inventory
and manufacturing report provide a lot of details to managers.
P3 Calculation of cost by using absorption and marginal costing methods
Table 1: Income statement under absorption costing
Interpretations

Absorption costing is the one of the most important method of costing and under this all sort
of expenses that are fixed and variable are taken in to account in order to compute overall cost of
production in the business (Guthrie, Ricceri and Dumay, 2012). It can be observed that in the
table given above varied expenses are taken in to account namely variable production and sales
overhead. Apart from this, fixed expenses are also taken in to account in order to compute net
profit in the business. It can be observed that first of all cost of goods sold is deducted from the
sales value and then from same first of all variables expenses are subtracted and then fixed
expenses are deducted to compute the net profit. In case of absorption costing method net income
is £9300. It must be noted that in the absorption costing method both sort of expenses are taken
in to account and due to this reason less amount of profit is computed in case of absorption
costing method.
Table 2: Income statement under Marginal costing
Interpretation
In the marginal costing method only specific sort of expenses are taken in to account
which are variable in nature. This means that fixed cost that is incurred in the business is not
considered to compute overall cost of product. This indicate that there is a huge difference
between the marginal and absorption costing method. Profit of £12600 is calculated by marginal
costing. Whereas, the absorption costing shows a profit of £9300 (Kuipers and Van der Voet,
2014). This happened because in the marginal costing method as explained above only variable

expenses are used to calculate the profit amount. In the calculation give above fixed
expenditures, cost of production overhead, administrative expenses and cost of selling and
distribution are not included and due to this reason higher amount of profit comes in existence
which is £12600.
P4 Merits and demerits of various planning tools that are used in the management accounting
Linear programing: Linear programing is the one of the most important method that is used to
take resource allocation related decisions. Resource allocation is the one of the tough task that
managers have to perform in their day to day operations. Management accountant perform
computation and they have an idea the way in which resources like raw material can be allocated
among different products. However, situation get changed consistently and every time it is not
possible for one to make accurate prediction about resource allocation.
Advantages
 The main advantage of using linear programing method is that best use of resources is
done in the business (Cadez and Guilding, 2012). Thus, it is ensured that productivity can
be maximized which lead to enhancement of revenue in the business. The other main advantage of linear programing method is that wise decisions are taken
by the managers in terms of use of resources in the business.
Disadvantages
 The limitation of linear programing method is that it can be used only when there is a
specific resource that need to be used in the multiple product lines. Thus, there is limited
use of the linear programing method in terms of resource allocation. The other main disadvantage of linear programing is that it is very difficult task to
develop LPP model. In case model will be developed in wrong manner then in that case
wrong results can be produced which will ultimately lead to making wrong decisions.
Simulation: Simulation is the one of the most important method that is used to make prediction
about the extent to which cost can be increase or decrease in the business. There are varied sort
of models that can be developed in the simulation. Development of model depends on the
condition that one wants to simulate. Advantages and disadvantages of simulation are explained
below.
Advantages

 Main advantage of the simulation is that by using relevant model prediction is made
about the cost and accordingly plan is prepared to ensure that cost will remain in control
and resources will be used in best way in the business (Christ and Burritt, 2013). The other main advantage of simulation is that probable outcome of specific estimation
can be accessed. Thus, one can estimate up to any limit and can identify expected results.
Thus, it can be said that simulation model help one in doing reliable forecast for the
business.
Disadvantage
 There are some limitations of the simulation method like one need to prepare a specific
model. Model building is always a very difficult task. There is no specific format that one
can follow to build a simulation model. Thus, there is a probability that one can prepare
wrong or incomplete model to handle the situation. The other main limitation is that management accountant have to estimate the probability
percentage of happening of certain event (Englund and Gerdin, 2011). For example if
management accountant is developing simulation model for costing then in that case one
have to estimate the likelihood that in future demand of raw material will enhanced. The
determined probability may be inaccurate or wrong. If same will happened then in that
case wrong results will be produced by the model and on that basis wrong planning will
be prepared by the managers.
Budget
Budget is the one of the important tool that is used by the management accountants. In
the current time period business conditions are unpredictable and even business like Iceland
retail are operating at small scale performance is greatly affected. Thus, it become very important
to prepare proper plan so that effective use of fund can be ensured in the business. There are
different sort of budgets that are prepared by the managers like fixed, flexible and zero based
budgeting (Haiza Muhammad Zawawi and Hoque, 2010). Fixed budget is used by the firm and
under this values of all components of the budget remain stable and remain unchanged. Flexible
budget is totally opposite of the fixed budget and under this values of the budget keeps on
changing consistently. It depends on the firm that which sort of the budget they use in their
business. Zero based budget is another approach under which departments first of all prepare
budget and then same is considered to prepare budget for entire organization.

Figure 1Cash budget for firms
Advantage and disadvantage of the budgets as planning tool of management accounting are
explained below.
Advantage
 Main advantage of budget is that by using same funds are allocated among varied sort of
activities and business operations in the systematic way. This ensured that fund that is in
the business will be used effectively used in the business. The other main advantage of the budget is that proper planning is prepared by the
managers in order to ensure that prepared budget will be implemented in the business in
proper manner.
Disadvantage
 The main disadvantage of budget is that one have to make prediction in respect to
changes that can be observed in the business environment in the upcoming time period.
Prediction may be wrong and in that situation budget can be prepared in wrong way. If
same will happened then in that case entire planning will be done in the wrong direction
in the business.
 The other main disadvantage of the budget is that lots of time is spend on brainstorming.
Thus it can be said that huge part of time is spend on single business task due to which
other activities performance in the business get delayed.

There are many alternative methods of budgeting apart from cash budget. Some of these
methods are zero based budget and capital expenditure budget. It depend on which that which of
these budget firm prepared. Usually, budget preparation depends on firm requirements.
There are some behavioral implications of budget as it can be noted that it is a statement
under which estimations are made. These estimations may be different from reality and in that
case firm may need to change its strategy. In case strategy does not change company may face
heavy loss in its business.
Statistical technique: Statistical techniques are the new methods that are used to planning in
respect to management accounting (Lee, 2011). It must be noted that in the management
accounting huge sort of data is gathered. Such data is analyzed by using statistical methods like
regression and one way ANNOVA etc. Some advantages and disadvantages of the statistical
method are explained below.
Advantages The main merit of statistical method is that it reflects the extent to which change comes in
the one variable due to change in another variable. One can identify the relationship
between variable expenses and production. The percentage change that comes in the
dependent variable like variable expense with production of each unit of item can be
identified by using regression model. These tools and methods help one in evaluating
variables in many ways. Thus, better decisions can be made by the managers by using
statistical tools.
Disadvantages Main limitation of the statistical tools is that there are some assumptions of the statistical
methods and on fulfillment of that conditions specific tool can be applied on the data set
(Li and et.al., 2012). If one have wrong knowledge of the statistics then in that case it
may choose wrong method and can take decisions on the basis of unreliable or wrong
output.
Pricing strategies
There are different sort of pricing strategies that are available to the business firms. These
pricing approaches have merits and demerits both. It depend on firm that which of these options
it think is better. Competitor pricing strategy is one under which by considering competitor price,