Analysis of Management Accounting Practices at Assael Architecture

This report delves into the realm of management accounting, focusing on its application within Assael Architecture Ltd. It commences with an introduction to management accounting, its core concepts, and the necessity of its diverse systems, emphasizing decision-making and financial planning. The report then scrutinizes various methods used for management accounting reporting, including trading and profit/loss accounts, income statements, and balance sheets. A significant portion is dedicated to cost analysis, exploring techniques like standard, normal, marginal, and absorption costing, with illustrative case studies. Furthermore, the report examines the advantages and disadvantages of planning tools used in budgetary control, and assesses how businesses adapt management accounting systems to address financial challenges. The analysis covers various types of accounting systems like cost accounting, inventory management, job costing and price optimization systems. The report concludes with a comprehensive overview of management accounting practices, offering valuable insights into financial management and strategic planning within the context of Assael Architecture Ltd.

MANAGEMENT AND
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Concept of Management Accounting and requirement of its different systems...................1
P2. Various Methods used for Management Accounting Reporting...........................................3
TASK 2............................................................................................................................................5
P3. Ascertainment of Costs using appropriate cost analysis techniques.....................................5
.........................................................................................................................................................8
TASK 3............................................................................................................................................8
P4. Advantages and Disadvantages of different planning tools used in Budgetary Control.......8
TASK 4..........................................................................................................................................13
P5. Assessing how businesses are adapting MAS to respond to financial problems................13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management Accounting helps in the analysis of accounting information in order to
communicate important results to both internal as well as external stakeholders of a business
(Bracci and Maran, 2012). For the successful completion of this report, Assael Architecture Ltd.
has been chosen in order to analyse the practices of management accounting in a critical manner.
Assael is a medium-sized manufacturing firm which was established by John Assael in 1994 and
is based out of Putney, UK. In addition to this, the given report also aims to provide a detailed
account of various types of management accounting systems as well as reports. It also
emphasizes on the various types of budgets, budgetary control as well as preparation of such
budgets using a wide variety of cases.
TASK 1
P1. Concept of Management Accounting and requirement of its different systems
Management accounting is a procedure of controlling , managing and evaluating the
organisational performance that helps to measure the internal control system of an organisation.
Assael Architecture Ltd uses management accounting process to betterment of the business
strategies related to decision making and financial planning .
Key functions of management accounting system:
Function of the management accounting system includes present the modified data to
evaluate the result through various techniques. It includes analysis and interpretation of relevant
data as ratio analysis or trend analysis to reckon the company growth and market valuation
(DRURY, 2013). Assael Architects Ltd is prepared the accounting statements such as fund flow
statements, cash flow statement, capital budgeting to facilitates the better control of the integral
parts of management. Modified and interpreted information are useful to management for taking
quality decision and strategic planning in management accounting. Assael company uses the
qualitative information for recognise the policy formulation, employees efficiency, detailed
business strategies.
 Financial accounting system:
Financial accounting is a branch of accounting that records the business transaction over a
specific time period. It is the process of recording, summarizing of the business operations. This
system aims to prepare a financial report or financial statement such as an income statement or
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balance sheet from the business operation. Accounting information system is a process of
retrieving,storing, collecting, reporting the financial data by accountant, consultant and business
analysts. These financial reports can be used by the internal management or external parties such
as investors, creditors, suppliers. For example investor uses the financial statement to know
profit of the company or its market valuation. Also, Internal control is a process in auditing to
affirm the operational effectiveness of the financial reporting. Internal control system of auditing
is scrutinization the relevant data checking whether it follow rules and regulation or compliance
the laws or not (Hilton and Platt, 2013). Auditing is a systematic or independent examination of
books of accounting and auditor conduct the official inspection of financial statement which are
made during the accounting period .Auditor examined the document and vouchers of the
business activities to determined that financial information are true or not.
 Cost accounting system: It is the framework that helps in estimating cost of products for
evaluation of inventory, profitability analysis and cost control. The main requirement of
this system is to estimating accurate cost for make the business operations profitable.
Product-based costing is all about allocating direct and indirect expenses to individual
units of finished product. Productivity-based costing is a more complex system that
assigns costs to activity centres rather than the products 's cost. It assigns costs to
particular overhead activities then assigns costs to products. An activity-based costing
(ABC) system ascertains the relationship between overhead activities and manufactured
products. It specifies that allocating the cost through cost driver and add on value to its
product indirectly. For example – indirect expenses of a business , rent of the office is
allocating or distributing on the basis of the floor area space (Kaplan and Atkinson,
2015).
 Management accounting system: Management accounting is a process that involves
decision making, business planning and performance management of the internal
stakeholders of an organisation. Decision support system is an information system that
supports to management in decision making activities. Profit management is business
activity that shows the income ahead of expenses and cost.
 Tax accounting System: Tax accounting is a process of accounting methods that focused
on taxes. Tax accounting is governed by the Internal Revenue Code that represent the
specific rules of companies and individuals must follow when filing the tax returns. But
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the corporate tax is charge on profit of the firms or registered company. GST accounting
is concludes all the records and accounts that maintain at the head of business as well as
all its branch (Lopez-Valeiras, Gomez-Conde and Naranjo-Gil, 2015).
P2. Various Methods used for Management Accounting Reporting
Different types of Managerial Accounting Reports:
 Trading and Profit and Loss Account: Its main purpose is to ascertain the gross as well
as net profit that an organisation such as Assael Architecture Ltd. earns in a given year. It
is used to determine costs in a consolidated manner, in relation to total sales of a given
year. Net profit is calculated by reducing indirect expenses from the given the gross
profit.
 Cost of Goods Sold: This is used to ascertain the cost of sales that is incurred by a
business in a particular year. The main use of this report is to check whether or not there
is substantial margin earned on every unit sold by a business.
 Income Statement: It helps in calculating the net profit by analysing incomes against
expenditures for a definite time period. Its main use is to keep in check the administrative
overheads that may impact the overall profitability of a company.
 Balance Sheet: One of the most important managerial reports that discloses the image as
well as the position of a business at a particular point of time. Its main purpose is to
present the assets and liabilities of the enterprise in a competent manner so as to
communicate worth of the business to different stakeholders.
 Cash Flow Statement: Another important report, Cash Flow Statements' main purpose is
to facilitate the communication of the overall liquidity of cash by indicating sources of
funds and their application in a comprehensible manner (Nixon and Burns, 2012).
Types of Accounting Systems:
 Cost accounting system:
It is a structure that is normally used by organisations to forecast their estimated total cost of
product in relation to profitability index, inventory valuation and cost control. This system also
performs cost analysis of product by taking into account different profit elements. It is suitable
for a company that aims to consider total cost of production at each step of production. Assael
Architecture Ltd. uses cost accounting system in order to calculate costs using appropriate
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techniques. Additionally, it also facilitates the verification of the operational cost and direct cost
on a regular basis.
 Inventory management system :
This system includes techniques of stock management wherein an organisation is enabled to
track their inventory level, economic order quantity and Re-order level among others (Odar,
Kavčič and Jerman, 2012). In the context of given case scenario, Assael Architecture Ltd. makes
this inventory report on a monthly basis so as to know the closing balance of a particular
completed projected that needs to be handed over to a customer. It also facilitates in valuation of
the proposed projects or opportunities that may be undertaken by Assael in near future.
 Job costing system:
It is a tracking system of cost wherein necessary information is accumulated regarding a specific
job whether the business deals is a manufacturing entity or a service provider. Job costing system
also includes the overhead cost like Depreciation or Rent. Through this system, a business is able
to prevent duplication of work. All these costs that are applicable to production or services are
mostly included in cost of good sold. Assael Architecture Ltd. is using the concepts for
reckoning the total cost on the job of a project that are labour cost, overhead expenses. As per
this system, Assael can track their cost of material, labour cost and overheads for an ongoing or
completed project.
 Price optimisation system:
When an organisation wants to maximize their operating profits while minimizing their costs
simultaneously, a business may use a Price Optimisation system as it employs mathematical
analysis and helps an organisation in achieving complete optimisation of their prices for a given
product or service at various levels of costs. It is worthy to note that the product demand is
usually dependent on the product price as well as its quality. It is also helps in the determination
of that price level which will bring about excellent quality deliverance as well as maximum
number of sales for the company meeting customers' objective at the same time. Assael
Architecture Ltd. optimizes their pricing strategies at varying project costs by analysing different
pricing projects according to their targetted demand.
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TASK 2
P3. Ascertainment of Costs using appropriate cost analysis techniques
The term 'cost' can be defined as the monetary value that is expended by a business while
engaging producing of goods and services. A cost may be analysed using different techniques
that have been enumerated as under:
 Standard Costing:
It is a method in which a standards has been set for the production. These standard has been set
on the basis of estimates. Since Assael Architecture Ltd is a huge company and recording all
the actual cost is not practically possible, company uses standard costing. It plays a role of
budget for the company.
 Normal Costing:
It is a method of costing which includes actual costs of production. It uses actual direct costs
which have been incurred during the production. Assael Architecture Ltd also prepare records
using normal accounting methods. Company derives its cost of production to show in the
financial statements.
 Marginal Costing:
Marginal costing is a method of calculating the cost of making an extra unit of product in respect
of variable cost only. Marginal costing is also known as variable costing. In process of
calculating marginal cost, fixed cost is always written off against contribution. The management
of Assael Architecture Ltd is using marginal costing for better understanding of profit. A clear
bifurcation into fixed and variable costs helps the lower management to reduce and control
variable cost and upper management to balanced fixed cost.
 Absorption Costing:
Absorption costing is a method of costing which assigned all the manufacturing cost to the units
produced weather it is fixed or variable (Otley and Emmanuel, 2013). Assael Architecture Ltd
uses absorption costing for reporting to the Internal Revenue Services (IRS). Company using this
costing method because it shows a clear picture of efficient use of valuable resources of the
organization. It also indicate under absorption or over absorption of the factory overheads.
Case 1: Marginal Costing Technique
a. Cost Card:
Cost Card under Marginal Costing
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Particulars Cost per unit
Wood (Direst Material) 35
Direst Labor 32
Variable Production overhead 5
Marginal cost per unit 72
Selling price 100
Less: Marginal cost per unit -72
Less: Variable selling cost -4
Contribution per unit 24
b. Income Statement:
Particulars January February March
Production (in units) 12000 10500 9500
Sales (in units) 10000 12500 11500
Sales (A) 1000000 1250000 1150000
Cost of sales:
Opening inventory 0 144000 0
Material @ 35 350000 437500 402500
Labor @ 32 320000 400000 368000
Variable o/h @ 5 50000 62500 57500
Less: Closing inventory @ 72 144000 144000 144000
424000 350000 466000
-Variable selling cost -40000 -50000 -46000
Contribution 384000 300000 420000
Less: Fixed costs -24000 -24000 -24000
Less: Fixed selling expenses -3000 -3000 -3000
Actual Net profit/(Net Loss) 357000 273000 393000
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Case 2: Absorption Costing Technique
a. Cost Card:
Cost Card under Absorption Costing
Particulars Cost per unit
Wood (Direst Material) 35
Direst Labor 32
Variable Production overhead 5
Fixed Production Overhead 2
Absorption Cost per unit 74
Selling price 100
Less: Absorption Cost per unit -74
Less: Variable selling cost -4
Contribution per unit 22
b. Income Statement:
Particulars January February March
Production (in units) 12000 10500 9500
Sales (in units) 10000 12500 11500
Sales (A) 1000000 1250000 1150000
Cost of sales:
Opening inventory 0 148000 0
Material @ 35 350000 437500 402500
Labor @ 32 320000 400000 368000
Variable Overhead @ 5 50000 62500 57500
Fixed Overhead 24000 24000 24000
Less: Closing inventory @ 74 148000 148000 148000
Contribution 404000 326000 446000
Less: Variable selling cost -40000 -50000 -46000
Less: Fixed selling expenses -3000 -3000 -3000
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Actual Net profit/(Net Loss) 361000 273000 397000
c. Reconciliation of Profits:
TASK 3
P4. Advantages and Disadvantages of different planning tools used in Budgetary Control
Budget:
Budget is Financial statement or estimation of revenue and expenses that is executed for a
definite time period. A budget may be developed by an individual, business, government or an
organisation. There are various types of budgets which are used in organisation that help in
ascertaining the future earning and expenditure. These may be in the form of fix budget, variable
budget, sales budget, cost budget and operating budget.
Budgetary control:
Budgetary control is the process of premeditate the various actual results with budgeted
estimation for the enterprise for future. These are the standard set by an organisation for
comparing the budgeted data with actual performance and calculating the variances between
them if any found. It is defined as evaluating day to day activity according to the business goal
(Otley, 2016). Assael architects Ltd is a leading firms of architects which established in London
and founded by John Assael in 1994. Firm is used budgetary control that helps in coordinate
between uses of cost budget and budgetary reports throughout the period.
Process of budgeting:
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Every organisation needs a budget in order to carry out planning activities of its
operational activities. A formal budget process makes a strong foundation for business
management, growth and development. Budgeting process helps a business manager to identify
different business needs by obtaining necessary information regarding sales, production levels
and budgeted cost among others. A Budget committee assesses different plan of functional
department and determines the potentiality of plan and resource available to company. Once they
approve the budget, the budget committee communicates the same with all the department heads
in order to gain consensus. Also, each departmental head can check budget and implement
according to the requirement of their department. Once all the changes are incorporated, the head
of the department finalises the budget and presents the same to the top management level for
final approval. Different organisations use different budgets based on their needs and suitability.
In order to showcase this, the following budgets have been prepared and discussed:
Cash budget:
A Company such as Assael needs to estimate the required amount which can help in
meeting the short-term obligations of the business. If Assael is having excess cash then it can go
for credit sales. This can boost their profitability ratio. Hence, cash budget shows how an
organisation such as Assael can use their cash funds in an optimal manner. Advantage: It is used to determine whether or not the cash balance is sufficient for
carrying out day to day activities.
 Disadvantage: Cash budget does not show the profit earned by an organisation. In
addition to this, the estimated cash balance using this budget does not depict a true
image.
Operating budget:
An operating budget is one which helps the organisation such as Assael in planning its
day to day activities. Through this budget the company is able to ascertain the manner in which
debt obligations can be met in an effective manner (Sánchez-Rodríguez and Spraakman, 2012). Advantage: This budget helps in evaluating the current actual as well as past expenses.
Thus, facilitating in the identification of any variation occurring in the expenditure.
 Disadvantage: It is time consuming and may not be suitable for a small business
especially from taxation perspective.
Case 3
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Sales Budget
Products Sales (Units) Selling Price/ Unit Value
EC1 2000 100 200000
EC2 4000 130 520000
EC3 3000 150 450000
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