Management Accounting Report: Cost Analysis and Systems at Alpha Ltd

This report examines management accounting principles and their application within Alpha Ltd, a medium-sized pizza company. The report begins by defining management accounting and its benefits, including planning, controlling, and decision-making. It then explores various management accounting systems, such as cost accounting and inventory management, and their relevance to Alpha Ltd. The report also covers different types of management accounting reports like job cost reports and performance reports, alongside a comparison of financial and management accounting. Task 2 delves into cost analysis techniques like marginal and absorption costing and break-even analysis, providing calculations and interpretations for Alpha Ltd's financial data. The report further assesses the impact of installing a new machine. Finally, the report discusses budgetary control, planning tools, and the need for management accounting systems in resolving financial conflicts. The report concludes by illustrating the importance of management accounting in resolving financial issues.

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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