Management Accounting: Cost Analysis & Financial Reporting Methods

This report provides a comprehensive overview of management accounting principles and techniques, focusing on cost analysis, financial reporting, and budgeting. It begins by explaining management accounting and its essential requirements, detailing various reporting methods. The report then delves into cost calculation using different techniques, including marginal and absorption costing, and applies management accounting techniques to produce financial reporting documents. It also defines the purpose of budgeting and prepares different budgets, comparing how organizations adapt management accounting systems to respond to financial problems. Finally, it analyzes how management accounting can improve financial performance and evaluates planning tools used to reduce financial problems, offering insights into achieving sustainable success. Desklib provides access to similar solved assignments and past papers for students.

MANAGEMENT
ACCOUNTING
1

Contents
INTRODUCTION..................................................................................................................3
PART 1...................................................................................................................................3
Section 1.................................................................................................................................3
1.1) Explain management accounting and various essential requirements of different
types of management accounting systems...................................................................................3
1.2) Explain different methods used for management accounting reporting.....................4
Section 2.................................................................................................................................5
2.1) Calculate costs using appropriate techniques of cost analysis....................................5
2.2) Apply a range of management accounting techniques and produce a financial
reporting document......................................................................................................................8
2.3) Produce financial reports by accurately applying methods and interpret data.........10
PART 2.................................................................................................................................12
Section 3...............................................................................................................................12
3.1) Define and explain the purpose of budget and prepare different budget..................12
Section 4...............................................................................................................................17
4.1) Compare how organisations are adapting management accounting systems to
respond to financial problems....................................................................................................17
4.2) Analyse how management accounting can help to improve the financial
performance of companies to achieve the sustainable success..................................................18
4.3) Evaluate the tools of planning used in management accounting to reduce financial
problems to achieve success......................................................................................................19
CONCLUSION....................................................................................................................19
REFERENCES.....................................................................................................................20
2

INTRODUCTION
Management accounting is an accounting system with the help of which the managers of
the organisation identify, analyse various financial information about the organisation that helps
the financial department to take various decisions (Otley, 2016). Various managerial accounting
reports are formulated by the managers which enable them to supervise all the internal matters
within the organisation and to identify key areas. This report is based on UK based Furniture
Company, UCK furniture. This reports aims to develop an understanding of various aspects of
management accounting, its system and various reporting framework. Apart from this various
methods of estimating the cost are discussed along with their application. It also includes the use
of various planning tools that facilitate an organisation in responding to various financial
problem so faced by the company.
PART 1
Section 1
1.1) Explain management accounting and various essential requirements of different types of
management accounting systems
Management accounting is the process with the help of which the companies analyses and
manages their cost of operations and business. With the help of this various reports are
formulated that facilitate internal management in the decision making process (Renz, 2016).
According to institute of cost and management accounting, it is related with the application of
professional skills for managing various accounting information in such a manner that the
organisation can formulate various policies and strategies so that they can achieve their
objectives. UCK furniture can use different management accounting system that can help them in
improving their productivity and profitability:
Cost management system: This accounting system is considered to be one of the most
important system as with the help of this the UCK determines the total of their final products i.e.,
their furniture. The valuation of inventory is done; the cost of labour is estimated with the help of
the profitability is estimated. It enables the managers of UCK in identifying the area from where
they can reduce the cost for the company, also this enables them to ensure the efficient utilisation
of the resources (Akbar, 2010).
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Price optimisation system: With the help of this system the best price for the product can
be determined by the organisation as per the willingness to pay of the customer. The UCK
furniture can set prices for the furniture as per the reactions of the customers so that they can be
satisfied. With the help of this they can identify the scope for the promotional activities,
discounts that they can provide to the clients and many more as they has to be adjusted within the
cost of the furniture.
Inventory management system: Management of the inventory is important for each and
every organisation as with this they can efficient manage their cost. For UCK furniture it
includes the management of the flow of the material in the organisation and flow of the finished
goods, also in this the production of the furniture must be scheduled efficiently so that the stock
can be made available all the time. They can use various methods such as LIFO, FIFO method
which ensures the flow of the inventory. With LIFO method, the material which is purchased in
the last must be sold first as they believed that the last item is priced more than the previous
material. While in FIFO method the material first purchase must be sold first as with this they
can manage their cost which is recorded first against sales. For UCK furniture FIFO method is
suitable as with this they can manage their records efficiently and their designs of furniture will
also not become outdated (Senftlechner and Hiebl, 2015).
All these methods will enable UCK furniture to utilise all their financial information so
that they can make efficient decisions related to the reduction of the overall cost of the company.
Also with the help of this they can formulate various strategies that can help UCK furniture in
achieving their goals by improving their profitability and productivity.
1.2) Explain different methods used for management accounting reporting
The organisations need to use various management accounting reporting so that they can
let their management know about the exact situation prevailing in the organisation. These reports
are formulated by the managers on the basis of information received by the cost accountant
managers from other departments (Hopper and Bui, 2016). The reports that UCK furniture need
to prepare are:
Cost accounting managerial report: With the help of this report the prices of the
product so produced by the company can be estimated as it includes cost of all the items such as
raw material, labour, other indirect cost etc. The cost sheet is prepared with which per unit cost is
estimated by dividing the total cost with the number of units produced by the company. This cost
4

report will make the managers of UCK capable of understanding the impact of various factors on
the total cost so that they can be managed efficiently.
Performance report: The performance report will enable the managers of UCK furniture
in analysing the performance of the company. This report can be prepared on the basis of the
reports of different departments. On the basis of this the managers take the necessary decisions
so that they can improve the performances and can achieve the objectives. The departments
which are not performing well must be identified and various strategies must be formulated for
them so that their performances can be improved (Honggowati and et.al., 2017).
Critically evaluate how management accounting system and management accounting is
integrated in the organisational processes
It is analysed that for each and every organisation it is very important to adopt various
management accounting system and reporting methods so that they can take necessary decisions
and improve their performances. The reports such as performances reports enable the investors
and other stakeholders of the company in analysing their profitability according to which they
take their decisions regarding investments. Along with this the internal management can be
efficient enough to manage their costs and expenses by analysing them.
Section 2
2.1) Calculate costs using appropriate techniques of cost analysis
a) Prepare a cost card by marginal or absorption method of costing:
Cost card using marginal costing:
January February
Particulars A
mount
Particulars A
mount
a
a)
Units Produced
(11000)
Units Produced
(9500)
b
b)
Sales Price Per Desk 3
5
Sales Price Per Desk 3
5
c
c)
Variable cost per desk:
5

Direct Material
(4kg X 3 pounds/desk)
Direct Labour
(4 hrs X 2 pounds/hr)
Variable Overhead
Variable Sales Overhead
1
2
8
5
1
Direct Material
(4kg X 3 pounds/desk)
Direct Labour
(4 hrs X 2 pounds/hr)
Variable Overhead
Variable Sales Overhead
1
2
8
5
1
d
d)
Contribution 9 Contribution 9
Total Contribution 9
9,000
Total Contribution 8
5,500
e
e)
Fixed Costs:
Production Overhead
(NOTE 1)
Sales Overhead
2
2,000
2,
000
Production Overhead
(NOTE 1)
Sales Overhead
1
9,000
2,
000
f
f)
Profit (d-e) 7
5,000
Profit (d-e) 6
4,500
Cost card using absorption costing:
Particulars January February
Sales (A) 315000 (9000*35) 402500 (11500*35)
Cost of Goods Sold:
Direct Material 132000 (12 * 11000) 114000 (12 * 9500)
Direct Labour 88000 (8 * 11000) 76000 (8 * 9500)
Variable Production cost 55000 (5 * 11000) 47500 (5 * 9500)
Fixed production cost 22000 (2 * 11000) 19000 ( 2* 9500)
Over absorption (2000) (2000)
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Loosing stock (27 *
2000)
(54000) (54000)
Total (B) 241000 200500
Profit (A-B) 74,000 202,000
NOTE1
Production overhead is considered taking into account average production each month, i.e.
10000 units.
Hence, for January overhead amount = (20,000 / 10,000) * 11000
Hence, for February, the overhead amount = (20,000 / 10,000) * 9500
b) Potential merits and demerits of absorption costing and marginal costing
Merits and Demerits of Absorption costing:
Merits: With the help of absorption costing all the cost related to the production can be taken
into consideration as while making calculation all the fixed cost are considered. This will enable
the management of UCK furniture in getting the true picture of the total cost of the company.
Along with this accurate picture of the profitability of the company can be drawn as all the cost
will be deducted. The managers can be held responsible for the cost and services of different
departments as correct allocation is facilitated by this method of costing.
Demerits: As in this both fixed and variable cost is included it cannot be used by the managers
for the decision making and planning as in this the current situation needs to be analysed which
require assessment of the variable cost. Also it does not reflect the appropriate performance of
the organisation (Chenhall and Moers, 2015).
Merits and Demerits of Marginal costing:
Merits: With the help of this costing method the cost can be classified into variable and fixed
cost and this enable the management to focus upon the variable cost so that they can control the
total cost of the company. Along with this the performance of each department can be evaluated
as in this with additional cost the performance can be compared. In addition to this the decision
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making with this method of costing becomes easier as on the basis of additional cost selling price
decisions, selection of suitable product mix can be taken easily.
Demerits: The exclusion of the fixed cost from the total cost affects the fair picture of the
performance. The relation of the variable expenses with the output may not be linear at different
operating level due to which it may affect the decisions. Also the separation of the cost among
fixed and variable is considered difficult as per marginal costing method (Modell, 2014).
2.2) Apply a range of management accounting techniques and produce a financial reporting
document
For the period ending February
Revenue
Sales for January 385000
Sales for February 332500
Total revenue (A) 717500
Cost of goods sold
Cost for January 308000
Cost for February 269000
Total Cost of goods sold (B) 577000
Net income(C= A-B) 140500
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Working Notes-
Cost of Goods sold
January February
Particulars Particulars A
mount
(£)
Particulars A
mount
(£)
Units
produced
11000 9500
a
a)
Direct
Material
(4kg*3pound/
kg*11000)
1
32000
(4kg*3pound/
kg*9500)
1
14000
b
b)
Direct
Labor
(4 hrs*
2pound/hr*11000)
8
8000
(4 hrs*
2pound/hr*9500)
7
6000
c
c)
Variable
Overhead
(5£/desk*11000) 5
5000
(5£/desk*9500) 4
7500
d
d)
Prime
Cost
2
75000
2
37500
e
e)
Productio
n overhead
2
0000
2
0000
f
f)
Cost of
goods produced
2
95000
2
57500
g
g)
Variable
sales cost
(1pound/
desk*11000)
1
1000
(1pound/
desk*9500)
9
500
h
h)
fixed
selling cost
2
000
2
000
i
i)
Cost of
Goods sold
3
08000
2
69000
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Here, absorption method of costing is used as with the help of this method of costing all
the cost incurred to the company in making the product a finial good are included. All such
cost are merged in one cost i.e, cost of producing the good.
2.3) Produce financial reports by accurately applying methods and interpret data
On the basis of the above prepared cost card and the income statement with the help of
marginal and absorption method of costing, it is analysed that the net profit on the basis of
absorption costing is £ 77000 and £ 63500 for the month of January and February respectively.
While from marginal costing the profit amounted to £ 75000 and £ 64500 for the month of
January and February respectively. The difference among the profits from the two methods is
because of the element of fixed cost in the absorption costing method.
(A)
Month
H
ours
Spent
Ex
penses
January 630 7960
February 505 7410
Mar 705 8285
April 555 7535
May 780 9110
June 795 9820
Highest number of hours = June =
795
Lowest number of hours = February
= 505
Variable cost= (9820-7410)/(795-
505)
Variable cost= 8.310345 £ per unit
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fixed cost= 9820 - (795*8.31)
fixed cost= 3213.55 £
expenses for july= 3213.55 +
(650*8.31)
expenses for july= 8615.05 £
expenses for august= 3213.55
+ (750*8.31)
expenses for august= 9446.05 £
(B)
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PART 2
Section 3
3.1) Define and explain the purpose of budget and prepare different budget
1) schedule of
expected cash
collections for
September
Particulars Sept
ember (£)
12

Cash Sale 39000
Collection for sales
on account:
July 392
August 4416
September 840
Total collections 44648
2) Schedule of expended cash disbursements for merchandise inventory purchases in
September
Particulars September
(£)
13

Payment for
inventory
purchased in
September
4800
(24000*.2)
Payment for
inventory
purchased in
August
15000
Total
disbursement for
inventory
purchase
19800
3) Cash Budget
Particulars September (£)
opening balance (A) 20000
Collections
Cash Sale 39000
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Collection for sales
on account:
July 392
August 4416
September 840
Total collections (B) 44648 64648
Disbursements
Payment for
inventory
purchased in
September
4800
(24000*.2)
Payment for
inventory
purchased in
August
15000
Selling and
administration
expenses
9000
15

(excluding
depreciation of
4000)
Purchase of
equipment
18000
Dividend to be
paid
3000
Total
disbursements
(C) 49800
Balance (A+B-C) 14848
Financing
Activity:
Loan Taken 1152
Closing Balance 16000
Purpose of Budget: The preparation of budget has three main purposes which motive an
organisation to formulate budgets and some of such purposes are given below:
 For monitoring performance of business: With the help of budget the performance can easily
be monitored as profits and the losses are projected and accordingly businesses formulate
various strategies and policies (Soin and Collier, 2013).
 For estimating the income and expenses: With this the expenses can be estimated in
comparison to the incomes and this enables them to plan for managing which will cut down
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the total cost for the company. UCK furniture can determine the requirement of the funds for
meeting up with their expenses so that they can procure such funds well in advance.
 For decision making process: As all the revenues and expenditure are already estimated that
enable them to take various decision regarding the product mix, the lot sizes so that they can
manage the total cost, the reorder level etc.
By formulating budget UCK furniture will have an opportunity of having all these
advantages which will facilitate their management to ensure the accomplishment of their
objectives effectively.
Types of budgets:
Flexible budget: A flexible budget is a budget with which adjustments can be made on
the basis of estimated revenue and expenses, changes in the volume of the activity, etc. Such a
budget can be prepared by UCK furniture for determining the changes in the revenue and
expenses due to the change in output in comparison to the current production for the upcoming
accounting period (Davila and Ditillo, 2017).
Cash flow budget: With the help of this budget UCK furniture can determine the area of
investment with the help of which they can plan for expansion. It will enable them to manage the
flow of cash specific periods of time.
Section 4
4.1) Compare how organisations are adapting management accounting systems to respond to
financial problems
Financial problems are the problems which are faced by the company due to lack of
financial resources and shortage of capital. Such problems have a direct influence on the
operations and the activities of the business. Various financial problems data faced by UCK
furniture are given below:
Inefficient management of cash flow: Due to lack of proper financial planning an
organisation faces an issue of the flow of funds. Inefficiency in the allocation of funds to
different activities leads to mismanagement of cash that directly affects the operations of the
business.
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More expenses and income: This is the problem in which expenses in relation to the
income are more and due to which the company faces a shortage of funds for executing their
crucial activity.
Techniques: The techniques that can be used for dealing with the financial problems by the
company include:
Financial governance: This is the technique with the help of which an organisation can
process and track their financial transactions. It also enables an organisation to evaluate the
financial issues and due to this financial governance is recognized as a tool for controlling
financial performance (Badolato, Donelson and Ege, 2014).
Benchmarking: This is a technique in which the organisation compares its performance
with that of other organisation considered to be best in the industry. It enables an organisation to
formulate various strategies by considering their internal abilities and organisational objectives.
Key performance indicator: It is a technique with the help of which the management
evaluate their success at different levels. The high-level KPI focuses on the overall performance
of the business while the low-level KPI focuses on the process of the organisation.
All three techniques can effectively be used by UCK furniture for dealing with various
financial issues as all of them will help the management in identifying the reason for the issue
and in formulating various strategies to resolve such issues.
4.2) Analyse how management accounting can help to improve the financial performance of
companies to achieve the sustainable success
Basis UCK Furniture UCK Woodwork
Financial
problem
The UCK furniture of the
UCK group is facing various
financial issues because their
expenses are more in relation to
their revenues.
The UCK woodwork of
UCK group is facing an issue
related with the mismanagement
of the cash flow of the
organisation.
Management
accounting system
To resolve this issue, they
can adopt cost accounting system
as with the help of this they can
determine cost of each unit which
will enable them to formulate
For dealing with this issue
they can adopt inventory
management system as with the
help of this they can ensure timely
delivery with which their payment
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various strategies such as selling
price, promotional activities etc.
system will improve thus their
cash flow will also improve.
Technique They can adopt the
technique of benchmarking for
analysing this financial
performance (Ward, 2012).
The techniques that can be
adopted by them in key
performance indicator technique
as with this they can determine
the area where they need to focus
upon to manage their cash flow.
4.3) Evaluate the tools of planning used in management accounting to reduce financial problems
to achieve success
Various planning tools are used by the organisation so that they can minimise financial
problems such as budgetary control. This facilitates them to estimate various expenses and
incomes for a period of time. With the help of this the management can determine its impact on
the performance of the business for a period. This enables them to formulate strategies with
which they can manage their expenses over incomes. Along with this, financial ratios are also
used as a planning tool. It enables the management to identify repayment capacity, turnover rates
and many more that the need to consider while making a decision and formulating strategies.
Apart from this, the businesses adopt management accounting systems and reporting frameworks
so that they can manage their operations efficiently.
CONCLUSION
It is concluded from the above report that for an organisation it is important to consider
management accounting system and reports as with the help of this internal management of the
organisation can take necessary decisions by analysing the performance of the organisation.
Apart from this it is concluded that management need to analyse various financial problem that
are faced by the company along with various techniques to resolve them so that they can
accomplish your objectives efficiently.
19

REFERENCES
Books and Journals
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earnings management: The role of status. Journal of Accounting and Economics. 58(2-
3), pp.208-230.
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Davila, A. and Ditillo, A., 2017. Management control systems for creative teams: Managing
stylistic creativity in fashion companies. Journal of Management Accounting
Research. 29(3). pp.27-47.
Honggowati, S. and et.al., 2017. Corporate governance and strategic management accounting
disclosure. Indonesian Journal of Sustainability Accounting and Management. 1(1).
pp.23-30.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research. 31. pp.10-30.
Modell, S., 2014. The societal relevance of management accounting: an introduction to the
special issue. Accounting and Business Research. 44(2). pp.83-103.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Senftlechner, D. and Hiebl, M. R., 2015. Management accounting and management control in
family businesses: Past accomplishments and future opportunities. Journal of
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Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and
control.
Ward, K., 2012. Strategic management accounting. Routledge.
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