Management Accounting Techniques: Connect Catering Services Report

This report delves into the application of management accounting principles within Connect Catering Services, a family-owned catering business. It explores various aspects of management accounting, including identifying, measuring, analyzing, and communicating financial information. The report examines the requirements of different types of management accounting, such as inventory management, job costing analysis, investment analysis, and leverage. It details the methods used for management accounting reporting, including costing analysis, budgeting, and variance analysis, supported by income statements using absorption and marginal costing. The report also presents techniques of cost analysis, calculation of break-even points, and the impact of cost changes. Finally, it discusses the advantages and disadvantages of planning tools, like budgetary control, and the adaptation of accounting systems to overcome financial problems, offering a comparative analysis of different approaches.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
P1 Management accounting and requirements of different types of management accounting3
P2 Methods used for management accounting reporting.......................................................5
P3 Techniques of Cost Analysis.............................................................................................6
P4 Advantages and Disadvantages of Planning tools of Budgetary Control.......................10
P5 Management Accounting System to overcome Financial problems..............................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
The study is on management accounting and techniques prevalent in corporate sector.
Management accounting is the accounting methodology used by managers to interpret, analyse
and make decisions regarding growth of organisation. The organisation taken for case study is
Connect catering services which is a family-owned and runs catering service based in
Oxfordshire. The study speaks about different types of management accounting requirements for
application in organisation. The different methods for reporting in management accounting are
emphasised. The costs using appropriate techniques of costing have been illustrated with income
statements. The advantages and disadvantages of different type of planning tools used for
budgetary control have been explained. The ways in which organisations have adapted
accounting system to respond to financial problems have been emphasised with a comparison
done.
P1 Management accounting and requirements of different types of management accounting
The process of management accounting is followed by steps like identification, measuring,
analysing and then communicating information to managers is called managerial accounting.
This is basically focused on accounting which aims at informing management about operational
metrics. It takes in account cost of production comprising all direct and indirect costs. The
budget is then prepared using the operational costs in production (Pedroso and Gomes, 2020).
There are many aspects related to production process and its costing in an organisation.
The procurement till goods finished have costs to be accounted at different stages of the process
or a project. The requirements can be listed as follows:
Inventory management

Through use of accounting methods, inventory which is an important aspect in an organisation is
managed and ordered right through assessing of current demand product or category wise and
then ordering and making optimal use of the inventory. This can also be known as economical
ordering of goods. The right inventory makes it easy for the organisation to control costs on
storage or damage occurring. Connect catering services being a food company is able to order in
right quantity economically without having to store food materials for a long period of time and
able to utilise those first with limited perishable period.
Job costing analysis
This refers to a project being undertaken by the company being segregated in jobs. The
accounting refers to all the costs involved in tasks of job. The material procurement to the
operations going on in the job is assessed and it is seen that the job is going in a favourable
direction for the project. If the costs are exceeding the revenue, then it may be considered to stop
the project. Thus, early on, company is able to realise whether their investment can yield profits
or not (Usenko and et.al., 2018). Connect catering services use this technique by launching a
prototype or sample of the product they are going to launch new. This way they are able to
register customer feedback for the product and only on popularity of the sample do they invest in
the new food product.
Investment analysis
The organisation has to go for new projects or say, new investment in machinery. This requires
forecasting of costs which will go in and estimates of cash inflows which can come through the
project. Considering the time value of money approach, methods like Net present value are used
by accountants to gauge the profitability of the project. This also takes in factor discount method
to calculate the future cash inflows. There can be two projects at the same time and company has
to choose between two projects which can be a greater opportunity.
Sometimes on purchase of new equipment, Connect catering services has options to
either use capital or go for debt like a bank loan. The accounting assesses both aspects and
calculates which option will be more viable to go for considering interest rates if option of debt
is exercised. Connect catering Services thus is able to make correct decision which can bring
profit as future cash flows.

Leverage
Company's operations are vital to go on as they are the backbone of the business. For this,
company needs apt working capital. It may happen that account receivables are pending and
company is not having sufficient cash to carry on its operations. In this need of the hour, the
company has to exercise use of debt as option. This will help finance company's operations.
However, management accounting emphasises on the fact that equity to debt ratio of the
company is not disturbed. More of debt may get the work done but with piling of interests, the
company's finances can get burdened and solvency may be at risk. Thus, accounting concepts
help realize the company proportion of financial leverage to be taken. Connect catering services
is able to manage its financial leverage to have enough liquidity through use of this management
accounting technique.
P2 Methods used for management accounting reporting
The accountants of Connect catering services make use of the performance reports then to
analyse the variances. Thus, it is a chain process affecting many tasks. The methods of
management accounting is thus according to the chain process as follows:
a) Costing Analysis: The technique is used in Connect catering services to calculate all the costs
involved in production comprising of direct costs like material, labour, wages etc. and indirect
costs like rent and utilities and department costs. All these costs are added up to know the total
cost of production. The number of units produced are also calculated. The total cost is divided by
the number of units to know the cost per unit. This then helps to set the profit margin on the costs
and thus helps in pricing of the product. There are other factors also taken in account like
competitive pricing which helps in setting the price range. Connect catering services takes in
account both costs of production and market competitive strategies to price the product finally.

b) Budgeting: All the operational costs being calculated its time to consider all the departmental
costs used in indirect costing to make the budget. The budget is a forecasting tool used to
calculate the estimates of costs to occur in the future using previous year statement basis. It is
assumed that the costs will remain same in next financial year for all product categories. The
amount allotted to departments is the money to be used by them for operational expenses in the
next financial year. Connect catering services uses the forecasting technique of budgeting to
allocate amount to its departments like pantry, sales division, operations and other departments
of maintaining accessories and furniture for the company. This has helped pre-plan expenses and
save costs in future. Budgeting is also of different types like incremental budget and zero-based
budgeting. Incremental budget is the traditional approach of budget to be followed using
previous year statements and incrementing previous budget amount to suit the next financial
year. Zero-based budgeting is taking line to line expense of each item by category of products of
every department and then accordingly preparing the budget. It also assumes that revenue of
previous year has equalled all expenses and starts budgeting from scratch (Pedroso and Gomes,
2020).
c) Variance analysis: The variances are the deviations from actual budget and is assessed to see
which department has been able to achieve the objectives remaining within the budget. It may
happen that due to unseen market factors, the expenditure may exceed the limit sanctioned.
There are a number of techniques used to calculate variances which may lead to department not
being able to contain costs like price and quantity of materials, labour and variable overhead.
The managers at Connect catering services would then like to find and assess those factors due to
which the costs increased and how they can reduce the operational expenses (Jansen, 2018).
Connect catering services uses techniques like standard deviation to find out varinces in
departments and assesses factors which could have led to the same. Also these variances come
handy to the company in preparation of the next budget.
P3 Techniques of Cost Analysis

Income statement using Absorption Costing
Particulars April May
Sales Revenue (8*2000) 16000 (8*2000) 16000
Less: Variable manufacturing
costs
(4*2500) 10000 (4*3000) 12000
Fixed Manufacturing
Overhead
15000 15000
Cost of Goods available for
sales
25000 27000
Add: Opening Stock - (500*10)5000
Less: Closing Stock (500*10)5000 (1000*9)9000
COGS 25000-5000=20000 27000+5000-9000=23000
Gross Profit -4000 -7000
Less: Fixed non-
manufacturing cost
4000 4000
Net Profit -8000 -11000
Income Statement using Marginal Costing
Particulars April May
Sales Revenue (8*2000) 16000 (8*2000) 16000
Less: Variable costs (4*2500) 10000 (4*3000) 12000
Add: Opening Stock - (500*4)2000
Less: Closing Stock (500*4) 2000 (1000*4)4000
COGS (10000-2000)8000 (14000-4000)10000
Contribution (16000-8000)8000 (16000-10000)6000

Less: Fixed non-
manufacturing costs
4000 4000
Fixed overheads 15000 15000
Net Profit -11000 -13000
Reconciliation of Profits
Particulars April May
Absorption cost profit -8000 -11000
add: Opening Stock 0 (500*6)3000
-8000
Less: Fixed overhead included
in closing stock
(500*6) 3000 (1000*5)5000
Marginal cost profit -11000 -13000
It is generally seen that absorption costing reports higher profits than marginal costing.
Absorption costing takes in consideration fixed overheads per unit while variable costing takes it
as a one-line expense. Variable costs are used for internal reporting purposes and management
takes decisions can be taken on them (Drobyazko and et.al., 2019).
2 a)
1. Identification of fixed and variable cost
Fixed costs £ Variable costs £
Manager’s salary 5000 Direct material cost 3.50 / unit
Rent 5000 Direct labour cost 1.50 / unit
Insurance 500 Direct overhead cost 0.50 / unit
Advertising 1000
Utilities 500
Total fixed cost 12000 Total variable cost 5.50 / unit

2. Determination of margin of safety
Margin of safety = Actual sales – breakeven sales
Margin of safety % = Actual Sales – Breakeven Sales / Actual sales * 100
Breakeven sales = Total fixed Cost / Contribution margin per unit
Total fixed cost = 12000
Contribution margin / unit = Selling price / unit – Variable cost / unit = 9.50 – 5.50 = £4 per unit
Breakeven point = 12000 / 4 = 3000 units.
MOS = 2500 – 3000 = (500).
Note: In the current scenario, Margin of safety is negative, which indicate that, Connect Catering
organization need to reach the level of breakeven point first, which is 3000 units, and then any
sales above that point will be called as margin of safety. This organization is not even able to
made sales to the level of breakeven which is necessary for covering costs associated with the
product.
3. Effect on BEP in units and sales in case of increase in manager’s salary from 5000 to
6000
BEP in units = Fixed cost / per unit contribution margin = 12000 + 1000 / 4 = 3250 units.
Contribution = 2500 * 4 = 10000
Sales = 2500* 9.5 = £23750
BEP in Sales = fixed cost / Contribution * Sales = 13000 / 10000 * 23750 = £30875.
Interpretation: Hence, both BEP in units and sales has been increased with the increase
in fixed cost due to rise in manager’s salary. This indicates that in order to cover higher costs,
now Connect Catering needs to achieve higher sales figure.
2 b)

Variance Analysis
Particulars Actual
results
Flexible
variances
Flexible
Budget
Sales –
volume
variances
Static
Budget
Units Sold 12000 12000 10000
Sales 12000 * 10
= 120000
6000 F 12000 * 9.5
= 114000
19000 F 10000 * 9.5
= 95000
Variable cost 12000 * 5
= 60000
6000 F 12000 * 5.5
= 66000
11000 U 10000 * 5.5
= 55000
Contribution
Margin
60000 12000 F 48000 8000 F 40000
Fixed Costs 15000 3000 U 12000 0 12000
Profit 45000 9000 F 36000 8000 F 28000
Flexible Budget variance = 9000 Favourable.
Sales Volume Variance = 8000 Favourable.
BEP

P4 Advantages and Disadvantages of Planning tools of Budgetary Control
Budgetary Control means that the actual income and expenditure is going as per the planned
budget or not and whether any corrective measures are required. It is a tool for managing income
and expenditure.
The budget deviations are then discussed by management accountants ,speaking of the
factors where the operational expenses may have gone high. The budgetary control methods are
as follows:
a) Variance analysis: Budget prepared for each department in the analysis has a comparison
being done between actual and estimated accounting numbers. The technique helps provide the
variances. The variances are then divided into Favourable and Unfavourable variances
(Bulgakova and et.al., 2018). The favourable variance are those that in which a department has
been able to achieve organisation targets within allotted budget. The unfavourable are those in
which department has exceeded the budget (Usenko and et.al., 2018).
Merits:
a) It helps to know of the departments who have done well remaining in budget constraints and
which need attention to perform within the budget.
b) It helps to know of the factors which caused the deviation.
c) It thus helps in reducing costs by working on the factors.
Demerits:
a) The demerits can be that it is released only after release of financial statements which induces
a time gap and delays the remedial action which may be taken for rectification.
b) If budget making does not meet due standards it may lead to the variances being ineffective as
that is the medium on which they are based.
b) Responsibility accounting: This means collecting the data in reports for individual managers.
Here, the process is divided into Cost Centre, Profit Centre and Investment Centre. These centres

classify the employees of the organisation and work as centres for various departments
(Bulgakova and et.al., 2018).
Merits:
a) This helps to record performance of departments and their prominent role in organisation.
b) The performance of employees can be manually recorded here and their performance is
measured both in terms of qualitative and quantitative.
Demerits:
a) This is an expensive method for the company to follow.
b) It requires highly skilled managers who may not be always available.
c) There has to be a highly effective system of reporting without which accurate results may not
be received.
c) Adjustment of funds: This technique helps in decisions regarding adjustment of funds from
one project to another. It may happen that an ongoing project requires more funds than allotted.
In such a situation, a previous project which had achieved the targets in less amount can be used
by managers to adjust the funds from that project to ongoing one. This helps in saving use from
capital and helps in budgetary control (Mack and Goretzki, 2017).
Merits:
a) It is a flexible method for making adjustment without influencing the capital.
Demerits:
a) It may happen that accounting entries if not recorded while adjusting funds may cause
problems in balancing financial statements.
d)Zero based Budgeting: This technique is of age one. It assumes that the previous year revenue
has equalled the expenses. Line by line expense of each product category and department is done
with assessing of present demand of that product. This budgeting helps in having control over
every money spent and allocated.
Merits:
a) The system is accurate in calculating estimations most of the time.