Analysis of Management Accounting at Caunton Engineering Limited

This report delves into the realm of management accounting, exploring its systems, techniques, and planning tools within the context of Caunton Engineering Limited, a prominent UK steelwork engineering firm. The report commences with an introduction to management accounting, emphasizing its role in decision-making through the provision of relevant financial and non-financial information. It then examines various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, highlighting their applications within Caunton Engineering. Furthermore, the report analyzes management accounting reports such as accounts receivable reports, budget reports, inventory management reports, and performance reports, assessing their advantages and disadvantages. The evaluation of integration of the system and reporting of management accounting with the process of the company is also included. The report explores the application of planning tools for effective budgetary control and their role in preparing budgets. It compares how organizations use management accounting systems to address financial problems and emphasizes the importance of responding to organizational and financial issues for achieving sustainable success. The report concludes with an evaluation of planning tools for responding to financial problems.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
FIRST ACTIVITY...........................................................................................................................1
Management accounting systems:...................................................................................................1
Management Accounting Reports:.........................................................................................3
Evaluation of integration of system and reporting of management accounting with process of
company:................................................................................................................................5
Costs calculated using appropriate techniques of cost analysis to frame income statement:.6
Applicability of range of management accounting techniques:.............................................9
Interpretation of Income statement:........................................................................................9
SECOND ACTIVITY....................................................................................................................10
Description of application of planning tool used to establish effective budgetary control:. 10
Uses of planning tools in preparation of budgets:................................................................14
Comparison of manner by which organisations are using management accounting systems to
respond financial problems:.................................................................................................14
Responding to organisational and financial problems leads to sustainability in success:....16
Evaluating planning tools for responding to financial problems:........................................16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting term is combination of accounting and management.
Accounting implies to systematic classification and recording of quantitative aspects, whereas
management combines planning, control, organising things and making decisions. Management
accounting covers all aspects whether quantitative or qualitative with aim to provide reliable and
relevant results and information for taking momentous decisions (Lavia López and Hiebl, 2014).
Managers are responsible for effective implementation and adoption of systems of management
accounting. This report helps to enhance the understanding of management accounting and its
different aspects. This report explains management accounting systems, techniques and planning
tools to respond financial problems in context of engineering company named “Caunton
Engineering Limited”. It is leading steelwork engineering company of UK. Company is famous
for its fabrication quality, best designs and structural steelwork. It has approx. more than 41
years’ experience in this industry and providing services and support to real estate and
construction companies.
FIRST ACTIVITY
Management accounting systems:
Management accounting: It is process that consisted elaborated planning regarding the
crucial financial business action and overall management performance in state to analyse,
monitor, control the business affairs so that productivity and profitability can be increased. It is
basically a simple process that facilitates to the management of the company in decision making
process by providing the general business records and financial transaction (Hopper and Bui,
2016). Management accounting is combination of two aspect accounting and management, as it
considers business systems that combines all the financial and non monetary components.
Management accounting system: Management accounting systems mentioned that
systematic usage of the business accounting transaction and information in order to generate the
financial statement with accuracy so that they can make the decision regarding long term objects
and defined organisational policies or regulation. These system of the management accounting
are the elementary business exercise that is significant for the development of the goods and
service providing industry. These sort of management accounting system that are prepared by the
head of the individual business section and suggested to the management of the company so that
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they can make daily business decision to run the business. Caunton Engineering Limited
formulate the business strategies in the short run to betterment of the organisation. Different type
of management accounting system are followed by the company in order to collect the business
information measure the business decision and financial growth. Some of them are described as
under:
Cost accounting system: It is detailed framework that is used in business to identify the
absolute cost of goods and services that are produced and provided to its respective customer.
This system is totally focused on the analysis and determines the cost and its techniques
(Wickramasinghe and Alawattage, 2012). In context to Caunton Engineering Limited,
management of the company use this system to assist the function and process of the production
cost to evaluating the cost like finishing, developing, designing and other process. This system
comprises of cost accounting techniques that are used by the company to determine the actual
cost of the designed goods and services with ascertaining the profit along with cost at assorted
degree of manufacture. With the help of this system, management can understand the cost
structure and cost process of the organisation so that they can make the business decision by
considering goals and objectives. This system also helpful in making the cost related strategies,
cost sheet structure and annual budget of the business.
Inventory management system: It is a process that consolidate application with
structure of production to assure the availability of stocked goods that comprises at different
level of processing raw material, work in progress and complete goods to further ensure their
availability at exact needs with predefined standard quality. It plays a pivotal role in deciding the
price tag of goods and services by assessing value of closing stock. Management of Caunton
Engineering Limited handles the broad range of its material and finished production of the steel
by influencing the amount of material. Company uses this method to control the cost of stores
material and better flow of the goods to help them in provide the standard goods and services.
There are different concepts to determines the value of goods such as FIFO, LIFO and weighted
average. For company this system is essential to manage its stocks and minimise excessive costs.
Job costing system: This system directed on allocating costs to categorized task and
batches. It assists to measure different activities and processes of business to improve the
efficiency and productivity. It describes as assigning total manufacturing cost over the particular
unit of output. It is cost accounting method that related to the manufacturing unit where
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production is normally estimating on number of completed process and projects (Plumb and
et.al., 2017). Caunton Engineering Limited use this system to evaluate the total production costs
in a pre-arranged manner by dividing it under direct material, direct labour and expenses costs by
individually estimating its actual cost. Company can use this system to assess cost of its specific
products by considering it a specific job. Company can use some other techniques of the cost to
evaluate the production like process costing, batch costing.
Price optimisation system: It is practical approaches where an administrator can
ascertain that how costumers will respond to different costs of product and services by definite
channels. Companies can shape their prices and markets of goods and services by applying this
method. This system focus on the measuring the goods prices by shrinking the price in order to
control the current profit ratio. Caunton Engineering Limited is analysing the different price
strategies in order to decide the price tag of the goods and services so that they can dwindle the
competitor in the market. This system measures the factor which leads to increase in price of
goods. With the help of this system modification in price of product and services must match the
requirement of the business organisation objects.
Management Accounting Reports:
Management accounting reporting: It is process that concern about aggregation of
business information and structured data by management of an organisation in order to make
operational decisions. These are periodic reports that consider different types of business
decision taken by head of units and furnish the all basic detail to enterprise management. In the
Caunton Engineering Limited, management reporting is key activity where a numerous kind of
information is transmitted to top management for taking enterprise related decisions. Following
are the reports that are yield by the management, as described below:
Account receivable reports: This is a collection report that is generated by those
industries which are commercially dealing with the customer on credit basis. This report shows
how much amount yet to be received from the debtors and provides the detail summary
regarding the due amount from the customers. Caunton Engineering Limited's management
prepares this report to track the sum of outstanding amount from its clients, interest on overdue
payment, expected amount receivable, provisions for bad debts and other basic detail about the
customers. It is beneficial for the company as it may help to tighten up the credit policy by
examine outstanding amount from debtors.
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Budget report: This report is the fundamental report of a company that created to
compare projected standard data with actual performance of the enterprises. It is an internal
representation that is mainly used by the managers in order to assess that business is able to meet
its objectives and goal (Hilton and Platt, 2013). In Caunton Engineering Limited, internal
shareholder of the company determines the particular reports to analyses deviation in the
budgeted data and actual result in order to make proper decision in the firm. If the result displays
more difference, it requires to take fast action against those business activities that are not
fulfilling the need of managers regarding to make some suitable decision. So that they can able
to cover the difference the result for the betterment of the organization.
Inventory management Report: This report discloses that real time inward and outward
of the inventory during the financial year in a manufacturing unit. This report leads the actual
output of the production, inward material at stores, inventory details and its level. This report
alleviates in tracking and supervising various type of stocks to assess the stock movement from
the center of the warehouse and its requirement to make product. Caunton Engineering Limited
created this report on monthly basis to track the real time assessment of movement of the goods
at the manufacturing stores. This management report helps in decision making process regarding
to valuation of stock at the end of the year. There are the several methods for valuation of the
inventory like weighted average method, LIFO and FIFO to determination the value of the
closing inventory.
Performance Report: The key concept for producing this report is assessment of
individual performance of labours or employees together with overall performance of the
organisation. Management can use this report to setup crucial regulation, standard, measurements
and targets and make a comparison with actual and previous performance of organisation by
improving efficiency of employees. In this report, manager of the Caunton Engineering Limited
targets to financial goals that required to be complete in the financial year. Employee skill
development programs are conducted by managers in order to develop the skill and abilities of
inefficient employees and efficient employees are honoured. Company can measure the Market
acknowledgment by maintaining report. It beneficial for the organization in order to provide the
guidance to the managers to analyzing that enterprises are performing well or not in the
engineering sector.
Analysis of advantages and disadvantages of management accounting systems and applications:
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Companies tries to establishes a complete control over its tasks and take most perfect
decisions for company, for this they require a complete structure. Systems of managerial
accounting help to create such kind of structure (Stein and et.al., 2015). Caunton Engineering
Limited has implemented systems of management accounting while covering all processes,
functions and activities of organisation. As company applying system of inventory organising in
reducing stock expenses and increase profitability. Whereas cost accounting system leads to
management of expenses and costs to attain long and small term objectives.
Different accounting systems Advantages Disadvantages
Price optimisation system It provides maximum client
satisfaction.
Increases unemployment due
to mechanization and
automation of price-
optimisation system.
Inventory Management
System
It provide assistance in
controlling storage and
inventory handling costs.
Assumption used in fixing
reorder period is
practically not possible
sometimes.
Cost accounting system It enhances the performance
and efficiencies of
labours, employees and
workers.
Sometimes results of this
system can hurt
employee's sentiments.
Job Costing System It provide assistance in
rewarding employees as per
their tasks or jobs.
It assigns overheads on task
and process which sometime
can lead to conflicts.
Evaluation of integration of system and reporting of management accounting with process of
company:
Company's different process provide a structural basis for formulation of reporting
process and management accounting systems. In engineering corporate like Caunton Engineering
Limited there are large no. of processes and tasks so interrelation of these processes is vital for
attainment of pre-established targets. For example, basic accounting process conducted by
accountants in company provides numerical and fiscal information which is further applied by
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higher management for reporting and in systems of management accounting (Turban, Volonino
and Wood, 2015).
Costs calculated using appropriate techniques of cost analysis to frame income statement:
Marginal Costing: Under marginal costing marginal cost is computed by companies
which simply refers to cost involved in production of any additional unit of product. This
concept is applied by companies to fix a minimum quantity to be produced by company to gain
maximum profits. Under this method marginal cost is assessed by classifying cost as fixed or
variable.
Absorption Costing: It is a method in which cost are calculated by aggregating all
production cost and assigning this cost to individual product cost. Absorption cost is calculated
by adding all the production expenses (Absorption costing. 2018).
ANNEX (A)
Income statement by marginal costing method:
Particulars Quarter 1
Product A
Product
B
Sales 2566500 1440000
less: unit variable costs
Direct materials 935250 320000
Direct labour 391500 480000
Prime cost 1239750 640000
less: Variable production overheads 108750 80000
Contribution 1131000 560000
less: Fixed costs 410000 410000
Total profit/loss 721000 150000
Particulars Quarter 2
Product A Product B
Sales 1003000 1719000
less: unit variable costs
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Direct materials 365500 382000
Direct labour 153000 573000
Prime cost 484500 764000
less: Variable production overheads 42500 95500
Contribution 442000 668500
less: Fixed costs 482000 482000
Total profit/loss -40000 186500
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method
Particulars Quarter 1
Product A Product B
Sales 2566500 1440000
less: Cost of sales
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Opening inventory - -
Direct materials 935250 320000
Direct labour 391500 480000
Variable overheads 108750 80000
Fixed costs 410000 410000
less: Closing inventory -650 1844850 -4000 1286000
Gross profit/loss 721650 154000
Particulars Quarter 2
Product A Product B
Sales 1003000 1719000
less: Cost of sales
Opening inventory 650 4000
Direct materials 365500 382000
Direct labour 153000 573000
Variable overheads 42500 95500
Fixed costs 482000 482000
less: Closing inventory -3500 1040150 -2900 1533600
Gross profit/loss -37150 185400
Working notes:
1.
Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
2.
Per quarter standard 5500
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production
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
ANNEX (B) (Question 1)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
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Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Applicability of range of management accounting techniques:
Techniques are also used by Caunton Engineering to increase the efficiency of different
kind of functions. Mostly in order to produce income statement, costing techniques are used by
company. Absorption and marginal are two techniques used by company's accountant to
calculate net income and assess per unit margin profit (Leitner, 2013). These both method
emphasises on different-different approaches and theories which leads to difference in results.
Interpretation of Income statement:
According to the above practical sums it has been evaluated that results from absorption
and marginal is different because of differentiation in approaches applied in both methods.
Above results shows that in respect of product A, net income in Q1 is 721000 and Q2 is -40000
under marginal costing whereas for product B it is 150000 and 186500 respectively in Q1 and
Q2. On other hand under absorption method for product A, net profit in Q1 is 721650 and Q2 is -
37150 whereas for product B net profit is 154000 and 185400 respectively in both quarters.
SECOND ACTIVITY
Description of application of planning tool used to establish effective budgetary control:
Budget and budgetary control: A formal document that is prepared and used by trade
enterprises to maintain and hold record of projection incomes or gains and costs incurred over a
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