B12645 Management Accounting: Cost Analysis and Budgeting

This report, focusing on management accounting, explores key concepts and techniques essential for financial analysis and decision-making within organizations. The report is divided into two main parts: Part 1 delves into the fundamentals of management accounting, outlining its definition, essential requirements of different management accounting systems, and various reporting methods. It evaluates the benefits of management accounting systems and their integration within organizational processes. Part 2 focuses on practical applications, including cost analysis techniques to prepare income statements using marginal and absorption costing. The report also covers the application of management accounting techniques in financial reporting, producing financial reports, and interpreting data for a range of business activities. Furthermore, the report addresses budgeting, analyzing how organizations adapt management accounting systems to respond to financial problems, and evaluating planning tools used to improve financial performance and achieve sustainable success. The report utilizes cost cards to illustrate the differences between absorption and marginal costing, providing a clear understanding of their merits and demerits. It also includes calculations for cost of goods sold, cost of ending inventory, and profit using LIFO, FIFO, and AVCO methods. The report culminates with an analysis of how management accounting can help improve financial performance, offering valuable insights for students and professionals alike.

B12645
MANAGEMENT
ACCONTING

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
SECTION 1.....................................................................................................................................3
1.1 Explain management accounting and give the essential requirements of different types
of management accounting systems............................................................................................3
1.2 Explain different methods used for management accounting reporting...........................5
1.3 Evaluate the benefits of management accounting systems and their application within
an organizational context.............................................................................................................6
1.4 Critically evaluate how management accounting system and management accounting is
integrated within organizational process.....................................................................................7
SECTION 2.....................................................................................................................................7
2.1 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................7
(a) Prepare a cost card using absorption costing and marginal costing..............................8
(b) Explain the potential merits and demerits of the both methods....................................9
2.2 Accurately apply a range of management accounting techniques and produce a financial
reporting document....................................................................................................................11
2.3 Produce financial reports that accurately apply and interpret data for a range of business
activities.....................................................................................................................................16
(a) High-low method calculate fixed cost and variable cost and estimate the expenses...........16
(c) Calculation of cost of goods sold, cost of ending inventory and profit using LIFO, FIFO
AND AVCO..............................................................................................................................17
PROJECT 2...................................................................................................................................19
Section 3........................................................................................................................................19
3.1 Define and explain the purpose of budget and prepare different budget.............................19

3.1.1 Prepare a schedule of expected cash collections for September...................................20
3.1.2 Prepare a schedule of expected cash disbursements for merchandise inventory
purchases in September.........................................................................................................20
3.1.3 Prepare a cash budget for September............................................................................20
Section 4........................................................................................................................................21
4.1 Compare how organizations are adapting management accounting systems to respond to
financial problems.....................................................................................................................21
4.2 Analyze how management accounting can help to improve the financial performance of
both companies to achieve sustainable success.........................................................................22
4.3 Evaluate the planning tools used in management accounting to reduce the financial
problems to achieve success..........................................................................................................22
CONCLUSION..............................................................................................................................23
REFERENCES..............................................................................................................................24

INTRODUCTION
Management accounting is a method to help company achieve objective and restrict cost over the
business. Management accounting involves presenting accounting data to management to make
their decisions. It helps in improving efficiency and achieving organizational goals.
This project report consists of two parts; part1 and 2. First part focuses on understanding of
management accounting system; essential requirement of different types of management
accounting systems and methods for preparing management accounting report. Second part;
critically evaluate advantages and disadvantages of planning tools; use of different planning tools
and methods adopted by organizations to respond financial problems for attaining sustainable
success.
PART 1
SECTION 1
1.1 Explain management accounting and give the essential requirements of
different types of management accounting systems
Management Accounting: The field of managerial accounting is very wide. In this, future
trends are estimated by studying the past and present accounts of a business organization.
Thus, real-time and current study and analysis of accounts and accurate forecast of future
trends comes only in the field of managerial accounting (Malina, 2017).
Essential requirements of different types of management accounting systems:
Management accounting is the efficient tool for managers to analyze performance of the
company. Some of the essential requirements are discussed below:

Management Style: Management accounting system affects by the way manager follows
management styles. It is essentially required that accountants or managers should follow
certain management principal by defining how the information will be processed to get
desired outcome. There are two types of management styles; Autocratic and democratic.
Organization structure: This factor essentially required to know what type of
information is required to solve particular issue. It mainly depends on level of
organizational structure that what is the risk associated with particular level and what will
be the impact of solution on entire company. Organization structure can be two types:
 Functional structure: Decision making is limited to only manager’s functional
level.
 Flat structured: Critical decisions taken by managers on the basis of wide range
of data and information’s shown in report.
Information: There is a huge competition for acquiring precious information’s first by
all big organizations. It is the information which makes company responsive and alert for
future expectations of the customer and stakeholders. Information can be classified in
various ways according to essential requirement of the firm:
 Sources: Accuracy and durability of information depends on the source from
where it acquired. Genuine source should be preferred to make decisions.
 Relevancy: All information’s are not relevant for particular decisions. Hence
relevancy should be tested through sort listing process (Singhvi and
BODHANWALA, 2018).
 Accuracy: Accuracy of information is important for error free planning and
decision making.
 Reliability: Source is the main factor on which reliability of any information
exists. So authentic source is essentially required to get genuine information.
1.2 Explain different methods used for management accounting reporting
Methods used for management accounting reporting are discussed below:

Cost Accounting System: Cost accounting is a special branch of general accounting
under which various expenses related to the production of a commodity or service are
accounted for in such a way that the total and per unit cost of the product or service to be
produced is known and the control and management The information and data required
for guidance can be obtained systematically by the information provided by the cost
accounting analysis and control is possible (Nørreklit, 2017).
Job Order Costing: Job costing refers to a specific costing method where various cost
accounting techniques are used to measure the cost of the product. When goods are
produced only against special orders, job costs are used by firms.
Process Costing: Process costing is a process by which we determine the cost of each
process at each stage of operation. If the product goes through several processes or steps,
the output of one process becomes the input of the next process, and to determine the cost
of each process, the process cost method is applied. It is generally used when units are to
be built, that too in a continuous flow.
Inventory management systems: One of the most important aspects of any business
model is inventory. A close tab on inventory movement can make or break your business
and that is why entrepreneurs always insist on effective inventory management. While
some business owners understand the importance and importance of tracking inventory
regularly, some fail to realize its importance, leaving their business with unseen cracks.
Price optimizing system: Pricing is the process of determining what a company will get
in return for its products. Pricing components are manufacturing cost, market,
competition, market position and product quality. Pricing is also an important influencing
factor in micro-economics price allocation theory. Pricing refers to setting monetary
value in a commodity or service. But in the broadest sense, pricing is the function and
process. Which is determined prior to the sale of the commodity and under which the
pricing objectives, price influencing factors, monetary value of the commodity, price
policies and anecdotes are determined.

1.3 Evaluate the benefits of management accounting systems and their
application within an organizational context
Management accounting system is essential for organizations development and decision
making. No organization could achieve its organizational objectives without applying
management accounting planning tools and methods. Some of the benefits and
application of management accounting systems are discussed below:
Relevance: Management accounting system provides relevant reports based on available
information. It makes possible for organizational manager to have judgment and make
decisions based on relevance of reports (Srithongrung, Ermasova and Yusuf, 2019).
Updated Information: Judgment on the basis of outdated information could impact
company negatively for long time. It is very dangerous for the company to analyze
market based on old information and data’s. Hence, management accounting provides
updated information which helps management to more responsive towards upcoming
events.
Reliability: Management accountings produces reliable result and make reports based on
accurate information. Reliability is essential to achieve business goals and objectives
without any failure.
Understandable: It is management accounting system which makes it possible to
understand report by non accounting background managers.
Accuracy: Accuracy of report is based on sources of extracting information.
Management accounting through its effective helps management to extract relevant
information for producing accurate report for top management.
1.4 Critically evaluate how management accounting system and
management accounting is integrated within organizational process
Effectiveness of any management accounting system is depends on its tools and methods.
Outdated tools fail to give desired outcome and needs to be updated with the changes in

industry. Some of the importance of different methods of reporting for the success of
organization is discussed below:
Clarity: Doubt should not have a place in the report, and the reader of the sentiment
should understand it in the same sense in which it is written. The one who writes the
report must be clear.
Accuracy of facts: Accuracy of facts is very important for a good report. All facts and
information should be included in the report, because decisions are taken on the basis of
these facts, if the facts given in the report will be inaccurate, then the management and
organization face a lot of trouble.
Precision: In a good report, the author's objectives of writing the report should be
completely clear i.e. manager should know why he is writing the report. Its research,
analysis and recommendations are directed towards this purpose (Quinn and Oliveira,
2018).
Clear recommendations: If a recommendation is to be made at the end of the report, it
should be objective as well. The recommendation should be made only after thorough
research and analysis. There should be no personal interest of the author in the report. All
the recommendations proposed by him should be complete and clear so that he can reach
his objectives.
SECTION 2
2.1 Calculate costs using appropriate techniques of cost analysis to prepare
an income statement using marginal and absorption costs
(a) Prepare a cost card using absorption costing and marginal costing
Cost card absorption costing
Costs Total units
Uni
t Cost/unit (£) Total cost(£)

Raw material (Budgeted) 10,000 4 3 120,000
Raw material (January) 11,000 4 3 132,000
Raw material (February) 9,500 4 3 114,000
Direct Labor (Budgeted) 10,000 4 2 80,000
Direct Labor (January) 11,000 4 2 88,000
Direct Labor (February) 9,500 4 2 76,000
Variable Prod. (Budgeted) 10,000 5 50,000
Variable Prod. (January) 11,000 5 55,000
Variable Prod. (February) 9,500 5 47,500
Fixed Production overheads (B)
10,000 2 20,000
Fixed Production overheads (J) 11,000 1.82 20,000
Fixed Production overheads (F) 9,500 2.11 20,000
Total (Budgeted) 10,000 270,000
Total (Jan) 11,000 295,000
Total (Feb) 9,500 257,500
Cost card Marginal costing
Costs Total units
Uni
t Cost/unit (£) Total cost(£)
Raw material (Budgeted) 10,000 4 3 120,000

Raw material (January) 9,000 4 3 108,000
Raw material (February) 11,500 4 3 138,000
Direct Labor (Budgeted) 10,000 4 2 80,000
Direct Labor (January) 9,000 4 2 72,000
Direct Labor (February) 11,500 4 2 92,000
Variable Prod. (Budgeted) 10,000 5 50,000
Variable Prod. (January) 9,000 5 45,000
Variable Prod. (February) 11,500 5 57,500
Fixed Production overheads (B) 20,000
Fixed Production overheads (J) 20,000
Fixed Production overheads (F) 20,000
Total (Budgeted) 10,000 270,000
Total (Jan) 9,000 245,000
Total (Feb) 11,500 307,500
(b) Explain the potential merits and demerits of the both methods
Marginal Costing:
To find the profit under the marginal cost method, the total cost is divided into fixed
cost and variable cost. The marginal cost is then subtracted from the selling price. The
remaining amount is called Contribution. In this contribution, profit is determined by
deducting fixed costs (Srithongrung, 2019). Wings of manufactured goods and ongoing
work are evaluated at marginal cost only which does not include any kind of fixed
expenditure.

Merits of marginal costing:
1. Easy to understand - The marginal cost method is simple to understand. Its process is
easy because it does not include permanent costs, which does not pose a problem of
their exploitation. This can be combined with proof cost.
2. Cost Comparison - In this method, the stock is evaluated at the marginal cost.
Therefore, a part of the permanent costs are not carried over to the next period in the
form of a stock. Hence the costs and benefits are not neutralized and the comparison
of costs is made meaningful (Schaltegger and Burritt, 2017).
3. Study the effects of changes on cost - production or sales volume or sales mix and
how changes in production or sales methods will have an impact on costs and
benefits, can be studied by this method. And help in decision making.
4. Profit planning - Through this method, the study of the relationship between profit
and the components affecting it can be understood well by techniques like break-
even point, profit volume ratio etc. This makes the managers easy in budgeting and
profit planning. Due to this, future profit-plans can be made and they can be
evaluated.
Demerits:
 There is a possibility of wrong decisions with Marginal Cost.
 Low Evaluation of Wing
 Marginal Cost is ignored by Managers.
 This is the short term (Alawattage and Wickramasinghe, 2018).
 It is used in limited industries.
 Some of these assumptions are wrong.
Absorption costing
In this costing system; only production related costs are preferred. All costs incurred at
the time of production are absorbed on the basis of per unit price bases (Adler, 2018).
Merits:

 It is compliant with GAAP and has an advantage of only requirement of Internal
Revenue Service reporting (Jones, and et.al., 2018).
 It considers all costs of productions both variable and fixed expenses.
 Calculation of net profit gives more accurate value as compared to marginal
costing method.
Demerits:
 It can devalue actual profit through over absorption of cost.
 Operational efficiency of an organization cannot improve by this costing
method.
 It is not useful method for performance appraisal of different product line.
2.2 Accurately apply a range of management accounting techniques and
produce a financial reporting document
Income statement Budgeted (Marginal Costing)
Total units unit price/unit (£) total(£)
Sales 10,000 35 350,000
Less: Variable cost
Raw materials 10,000 4 3 120,000
Direct labor 10,000 4 2 80,000
Variable production overhead 10,000 5 50,000
Variable selling cost 10,000 1 10,000
Contribution 90,000
Less: Periodic cost
Fixed selling cost 2,000

Fixed Production overhead 20,000
Net profit 68,000
Income statement January (Marginal Costing)
Total units unit price/unit (£) total(£)
Sales 9,000 35 315,000
Less: Variable cost
Raw materials 9,000 4 3 108,000
Direct labor 9,000 4 2 72,000
Variable production overhead 9,000 5 45,000
Variable selling cost 9,000 1 9,000
Contribution 81,000
Less: Periodic cost
Fixed selling cost 2,000
Fixed Production overhead 20,000
Net profit 59,000
Income statement February (Marginal Costing)
Total units unit price/unit (£) total(£)
Sales 11,500 35 402,500

Less: Variable cost
Raw materials 11,500 4 3 138,000
Direct labor 11,500 4 2 92,000
Variable production overhead 11,500 5 57,500
Variable selling cost 11,500 1 11,500
Contribution 103,500
Less: Periodic cost
Fixed selling cost 2,000
Fixed Production overhead 20,000
Net profit 81,500
Income statement Budgeted (Absorption Costing)
Total units unit price/unit (£) total(£)
Sales 10,000 35 350,000
Less: Cost of Sales
Raw materials 10,000 4 3 120,000
Direct labor 10,000 4 2 80,000
Variable production overhead 10,000 5 50,000
Fixed Production overhead 20,000

Gross profit 80,000
Less: Periodic cost
Fixed selling cost 2,000
Variable selling cost 10,000 1 10,000
Net Profit 68,000
Income statement January (Absorption Costing)
Total units unit price/unit (£) total(£)
Sales 9,000 35 315,000
Less: Cost of Sales
Raw materials 11,000 4 3 132,000
Direct labor 11,000 4 2 88,000
Variable production overhead 11,000 5 55,000
Fixed Production overhead 20,000
Less: Closing Stock 2,000 53,636
Gross profit 93,636
Less: Periodic cost
Fixed selling cost 2,000
Variable selling cost 9,000 1 9,000
Net Profit 82,636

Working note:
Production cost per unit:
= Fixed production overhead/ total production
= 20,000 / 11,000
= 1.82
Calculation of closing stock:
Total units unit price/unit (£) total(£)
Raw materials 2,000 4 3 24,000
Direct labor 2,000 4 2 16,000
Variable production overhead
2,000 5 10,000
Fixed Production overhead 2,000 1.82 3,636
Total closing stock 53,636
Income statement February (Absorption Costing)
Total units unit price/unit (£) total(£)
Sales 11,500 35 402,500
Less: Cost of Sales
Opening Stock 2,000 53,636
Raw materials 9,500 4 3 114,000
Direct labor 9,500 4 2 76,000

Variable production overhead 9,500 5 47,500
Fixed Production overhead 20,000
Less: Closing Stock 0
Gross profit 91,364
Less: Periodic cost
Fixed selling cost 2,000
Variable selling cost 11,500 1 11,500
Net Profit 77,864
2.3 Produce financial reports that accurately apply and interpret data for a
range of business activities
(a) High-low method calculate fixed cost and variable cost and estimate the
expenses
Variable cost per unit = (9840 – 7410)/ (800 - 505)
= £8.24/ unit
Fixed cost = Highest activity cost – (Variable cost per unit * Highest activity units)
= 9840 – (8.24 * 800)
= £3,248

Cost Model (July) = Fixed cost + variable cost * unit activity
= £3,248 + (£8.24 * 650)
= £8,604
Cost Model (August) = Fixed cost + variable cost * unit activity
= £3,248 + (£8.24 * 750)
= £9,428
(c)Calculation of cost of goods sold, cost of ending inventory and profit
using LIFO, FIFO AND AVCO
1. LIFO
Cost of goods sold:
Date Purchases (Units) Purchase cost Total cost
Sep-19 130 £1,800 £234,000
Aug-18 200 £2,200 £440,000
May-15 70 £1,000 £70,000
Cost of goods sold £744,000
Cost of ending inventory
Units left Purchase cost Total cost
30 £1,000 £30,000
Profit
Units Price/Unit Total amount
Sales 400 £6,000 £2,400,000
Less: COGS
Purchases:
Sep-19 130 £1,800 £234,000
Aug-18 200 £2,200 £440,000
May-15 100 £1,000 £100,000
Less: closing stock
30 £1,000 £30,000
Gross profit £1,656,000
2. FIFO
Cost of goods sold:

Date Purchases (Units) Purchase cost Total cost
May-15 100 £1,000 £100,000
Aug-18 200 £2,200 £440,000
Sep-19 100 £1,800 £180,000
Cost of goods sold £720,000
Cost of ending inventory
Units left Purchase cost Total cost
30 £1,800 £54,000
Profit
Units Price/Unit Total amount
Sales 400 £6,000 £2,400,000
Less: COGS
Purchases:
May-15 130 £1,000 £130,000
Aug-18 200 £2,200 £440,000
Sep-19 100 £1,800 £180,000
Less: closing stock
30 £1,800 £54,000
Gross profit £1,704,000
3.Average cost
Date Purchases (Units) Purchase cost Total cost Weighted average
May-15 130 £1,000 £130,000
Aug-18 200 £2,200 £440,000
Sep-19 100 £1,800 £180,000
Total cost 430 £750,000 £1,744.19
Cost of goods sold = 400 * 1744.19
= £697,674.42
Cost of ending inventory
= 30 * 1744.19
= £52,325.58
Profit
Units Price/Unit Total amount
Sales 400 £6,000 £2,400,000
Less: COGS

Purchases 430 £1,744.19 £750,000.00
Less: Closing
stock 30 £1,744.19 £52,325.58
Gross profit
£1,702,325.5
8
PROJECT 2
Section 3
3.1 Define and explain the purpose of budget and prepare different budget
Budget: The budget statement is an estimate of predefined revenue and expenditure for a
given period. It reflects future financial conditions and helps in achieving financial goals
(Garvey, Book and Covert, 2016).
Purpose:
The main purpose of budget is to make a plan for the future, which is made by estimating
the revenue and other income and expenses for the whole year. In which the Finance
department, after estimating company’s expenditure before the top management, makes
several plans for the coming year, and presents it to the stakeholders during every financial
year (Muennig and Bounthavong, 2016).
3.1.1 Prepare a schedule of expected cash collections for September
1. Schedule of expected cash collections for September
September October November Total collected
10% £840
80% £6,720
7% £588
97 £8,148

%
3.1.2 Prepare a schedule of expected cash disbursements for merchandise inventory
purchases in September
September October November
Total
collected
20% £4,800
£4,800
3.1.3 Prepare a cash budget for September
Cash Budget
For the Year Ending
September
Amount Amount
Beginning Cash Balance £20,000
Add: Budgeted cash receipts
Cash sales £39,000
Sales on account £840 £39,840
Total cash available for use £59,840
Less: Cash Disbursements
Purchases £4,800
Purchases (July) £15,000
Selling and Admin. Expenses £13,000
Depreciation £4,000
Equipment £18,000
Dividend paid £3,000 £57,800
Surplus £2,040
Financing:
Borrowings £2,960
Minimum Cash
Balance £5,000

Section 4
4.1 Compare how organizations are adapting management accounting systems
to respond to financial problems
Here two organizations UCk furniture and UCK woodwork are taken for comparison.
Management accountings systems show financial performance of the company and identify
the problems responsible become hurdle in achieving desired goal. Comparison of both
organizations based on different financial documents done below:
i. Return on capital employed (ROCE)
UCK FURNITURE UCK WOODWORKS
Design
Gear
Box
Operating profit (A) £5,890 £3,600 £6,955
Capital Employed (B)
£23,10
0 £31,930 £81,230
ROCE (A/B) 25% 11% 9%
ii. Asset Turnover
UCK FURNITURE UCK WOODWORKS
Design
Gear
Box
Net Sales (A)
£13,00
0 £24,900 £15,580
Average Assets(B)
£23,10
0 £31,930 £81,230
Asset Turnover (A/B) 56% 78% 19%
iii. Operating profit margin
UCK FURNITURE UCK WOODWORKS
Design
Gear
Box
Operating profit (A) £5,890 £3,600 £6,955
Capital Employed (B)
£23,10
0 £31,930 £81,230
Operating profit
Margin (A/B) 25% 11% 9%

Interpretation: It is clear from above calculations that; UCK Furniture’s return on capital
employed, asset turnover and operating profit margin is more than UCK woodworks. This
shows UCK Furniture has good financial performance and this underperformance by UCK
Woodworks is a financial problem for the company (Collis and Hussey, 2017).
4.2 Analyze how management accounting can help to improve the financial
performance of both companies to achieve sustainable success.
Management accounting can help improving financial performance of both companies by
following ways:
4.3 Evaluate the planning tools used in management accounting to
reduce the financial problems to achieve success
Some of the techniques which used to reduce financial problems to achieve success are
discussed below:
Budgeting: Budget helps in identifying financial problems such as requirement of fund,
application of cash and analyzing any future threats in advance (Blischke, 2019).
Budgetary control: It control variations occur between actual performance and estimated
outcomes; through controlling costs and efficient marketing to increase demand.

Project Appraisal: This technique helps in identifying best alternatives among various
project option to solve financial problem of the company.
Standard costing: This tool best utilized to find optimized price for given product. In this
method all costs standardized based on per unit cost basis.
Analysis of cost variances: This technique helps in analyzing reason for variances in
variable costs and also suggests methods to minimize these variances between actual and
estimated.
Ratio analysis: It is powerful tool; which in simple terms shows how efficiently company is
performing.
CONCLUSION
On the basis of project analyses it can be concluded that; the main aim of this information system
of accounting is to identify internal and external sources of management accounting
information’s; these information supports managerial accountant to take critical decisions. It
presents data and information in such a simple manner that any ordinary person could get what
the actual position and performance of the firm is; it also supports managers through taking
decisions to solve any critical issue found the report.

REFERENCES
Books and Journals