Management Accounting: Costing Techniques & Financial Statement Prep

This report provides a detailed analysis of management accounting, emphasizing its crucial role in organizational development through informed decision-making. It explores various management accounting systems, highlighting their merits and demerits as effective planning tools, particularly within the context of budgetary control processes. The report uses Tech UK Limited, a gadget manufacturing company, as a case study to demonstrate the application of these systems. It includes a critical evaluation of how organizations adapt management accounting systems to address financial challenges, and presents a practical solution involving the preparation of an income statement for Tech UK Limited using both absorption and marginal costing techniques, offering insights into cost control, profitability, and sales volume improvement.

Management Accounting
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Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Task 2...............................................................................................................................................8
Task 3.............................................................................................................................................12
Task 4.............................................................................................................................................14
Conclusion.....................................................................................................................................18
Reference List................................................................................................................................19
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Introduction
The following assignment is based on the management accounting. The management accounting
plays a very vital role in the smooth functioning and development of business operations of an
organization. Several systems of management accounting are required to be followed by
organizations. The management accountant is referred to as the individual who interprets the raw
data and processes it into the organized information that is to be represented to the management
of the company in order to facilitate healthy decision making for the development of the business
operations in the organization. There are various techniques of reporting of management
accounting. The assignment introduces various merits as well as demerits of several types of
budgets that act as an effective planning tool in the budgetary control process. Tech UK Limited
is been considered by the assignment for its preparation. The company is regarded as an elite
gadget manufacturing organization, which is currently manufacturing an exceptional mobile
charger in the gadget market. The assignment also introduces about the critical evaluation of the
ways several organisations are adapting management accounting systems to respond to financial
problems. The assignment comprises of a practical solution representing the preparation of
income statement of the Tech UK Limited using several techniques of costing namely absorption
as well as management accounting.
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Task 1
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems
Management accounting refers to the activity or an activity that is necessary for an organization
to take necessary by the help of both financial and non-financial data that is collected by the
management accountant in preparation of management accounting in order to assist the
management of the company in forming necessary decisions. There are several differences
between financial accounting and management accounting (Wheelen et al.,2017). It is concerned
with several methods that focus over several activities of organization such as the inventory
management, job costing and many more. The differences between management and financial
accounting are as follows:
Management Accounting Financial Accounting
The management accounting represents
both financial and non-financial
information to the organization’s
management.
The financial accounting represents financial
information to the company’s management.
It is concerned with monetary and non-
monetary activities of the company.
It is concerned with monetary of the company.
There is no compulsion to prepare the
management accounting as stated by the
accounting standards.
There is a compulsion to prepare the financial
accounting as stated by the accounting
standards.
There is no specific format required for
preparation of management accounting.
There is a specific format required for
preparation of financial accounting.
Management accounting can benefit the Tech UK Limited by various activities. There are
several management accounting systems that can assist the company to improve its business
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operations and control cost in its company as well. The significant management accounting
systems are laid down as follows:
Cost Accounting System
The cost accounting system is one of the most important systems of management accounting
since it enables the management of the company to evaluate the costs incurred in performance of
activities of the organization so that it can control the costs incurred and improve its business
operations. There are several methods of cost accounting such as marginal costing, standard
costing. The standard costing helps the Tech UK Limited’s management to improve business
operations by analyzing the variance between the standard and the actual performance of the
company. Tech UK Limited is required to adopt these systems improvement of their business
operations.
Job Costing System
The job costing system is a significant system of management accounting. Under this system, the
business activities including the production activities are separated in to different portions called
jobs and allocate the resources as per the needs. The job costing enables the management of the
company to analyze the non-profitable and profitable activities of the organization and eliminate
the activities those are non-profitable for the company. This helps the management to improve
the business operations and control cost. Tech UK Limited is required to adopt the system for
effective cost control.
Inventory Management System
Organizations can manage as well as improve the flow of the inventory level in and outside the
organization by the help of the system. There are several methods of managing the inventory
namely weighted average cost method, last in first out method as well as first in first out
method. These methods maintain complete records of the flow of stock of the organization
(Wager et al.,2017). Tech UK limited can enhance their sales as well as minimize the stock
defalcation risks by applying the system.
It is very important for Tech UK Limited to adopt the systems since they can benefit the
operations or activities of the company in many ways. The company can improve its business
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operations by analyzing the variance between the standard and the actual performance of the
company. The systems assist Tech UK Limited improve the business operations, manage and
control cost incurred in their business operations effectively. The company can eliminate
performance of non-profitable activities of the company in order to control cost. Tech UK
limited can improve their sales volume and minimize the risks of stock defalcation from these
systems.
P2 Explain different methods used for management accounting reporting
Management accounting is mainly concerned with arranging, organizing and preparing valuable
financial information for external partners like stakeholders, funding organizations, lenders, etc
(Werner, 2016). These reporting formats strictly follow certain ways and procedures keeping
within the boundaries set by accounting. These reports are developed so that internally a data
backup has been kept and they can further be used when managerial decision-making is in
process. Important features of these reports are budgets, graphs and charts, business forecasts and
product cost analysis.
Management accounting reports specifically provide vital statistical and financial data of an
organization to its various business managers for assisting them in daily decision-making
(Laudon and Laudon, 2016). The different kinds of management accounting reports are:
Inventory management system
Inventory management system, though small, is crucial. It is concerned with various business
inventory costs and finances. Tech UK being a business manufacturing company, has great use
of efficient inventory management. According to Christopher (2016), managers of the team can
avoid all sorts of scarcity in goods inside warehouses or at any level within the distribution
channel, with the help of inventory management system. This system is instrumental to earn
huge profitability for significantly improvising the business of the firm.
The inventory management system is of many kinds – FIFO, AVCO, and LIFO. Both LIFO and
FIFO are contrary to each other. Where FIFO is concerned, the stock coming initially in the
storage is sold primarily. In LIFO, stocks that come at the end of storage are sold at first. AVCO,
however, is entirely different from both the systems. The stocks in AVCO are distinguished by
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identifying the product cost. According to Camilleri and Camilleri (2017) presently, companies
mostly follow the AVCO method.
Job costing system
Job costing system is generally implemented within companies that are essentially
manufacturing in nature. Within the job costing system, companies classify the total activities
into smaller divisions known as ‘jobs’, making it easy for managers to handle smaller tasks
(Öker and Adıgüzel, 2016). Tech UK must start following this system to make production
activities be done with ease. This system is useful to outline both profitable and non-profitable
activities within the organization, and subsequently discontinue activities that do not serve any
profit (Weygandt, Kimmel, et al., 2015).
In the case of Tech UK, a huge quantity of materials is manufactured. So it must take measures
to introduce this system in its operational method for better controlling their administration.
Budget reporting system
One of the most significant system of managerial reporting, the annual organizational plan is
made in advance under the budget reporting system. Budgets are indicated in arithmetical terms
making them easier to comprehend. The system explains how managers in various departments
are required to distribute resources and exercise control over their daily business activities.
Variance analysis report
As the name suggest, variance analysis reports identify the gaps in business performance. The
degree of variation indicates the gap between the standardized performance and the actual
performance (Cools and Stouthuysen et al., 2017). If the variance measures a favourable degree,
it means progress in the business is ensured. This means that the market growth of the particular
business is admirable. Contrarily, if the variance is negative, it means that the company hasn’t
been living up to a standardized norm. Hence, the variance analysis report is integral to denoting
what the strategy of a business organization is and how it can be developed.
Demand report
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Demand report is one that is fully unprepared. They are projected and made ready only when the
managers have highlighted the requirements according to the particular reports. Demand reports
help the company managers to analyze problems in a larger aspect. These are usually risk
management or response methods to an event. Tech UK can prepare a list of management
demand reports to improvise on various sectors of its activities according to business
requirement.
Schedule report
As the name says it all, schedule reports are prepared timely in an organization. These are done
on a daily or weekly basis. Even monthly reports are prepared under the schedule system of
management reporting. According to Laudon and Laudon (2016) these reports include bulks of
important information that help executives to critically study the history, and identify valuable
perspectives in the past. These reports contain signs of chances and issues which can be best
understood with the help of proper data.
Effective management reporting is done in various institutions like Marketing, IT, Finance,
Operational Sales, etc. These help determine cash on hand, number of sales calls per day, sales
reports, inventory levels and so on. The reporting formats form a solid base for indicating the key
features of different departments in a business organization.
Task 2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
Absorption costing
The absorption costing also known as full costing combines the fixed as well as variable cost that
are linked to the overall production process of the company and allocates them to the goods
produced to verify its cost per unit. Under absorption costing, the product costs include direct
material direct labour, fixed manufacturing overhead and variable manufacturing overhead. The
period costs under the technique include fixed manufacturing overhead, selling and
administrative overhead. It is a very effective technique of costing but nowadays the concept of
costing has become obsolete and is replaced with the activity based costing. The activity based
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costing increases the cost control opportunities. By the help of this technique the organizations
can be able to eradicate, the activities that are loss making and can reduce risks of over spending.
Tech UK Limited can use the technique sin the production of its mobile charger in order to
control cost effectively, improve its profitability and increase sales volume, which results in
overall development of the business operations.
Marginal costing
The marginal costing is technique involves charging of variable cost to the units of cost. The
variable cost involves direct material, direct labour and variable overhead. The direct material
and direct labour are also known as the direct costs of the company. Under marginal costing, the
product cost include direct material, direct labour and variable manufacturing overhead and
period costs include the selling and administrative overhead. One of the demerits of marginal
costing is that it considers only the variable cost and not fixed cost. The profit under marginal
costing is calculated by subtracting the contribution amount from fixed cost. Total cost is divided
into the fixed and variable cost so that the company can easily compute its breakeven sales. This
technique assists Tech UK Limited in determination of its profitability and proper evaluation of
price of its goods and services. This leads to the proper verification of level of inventory in Tech
UK Limited for improvement in the sales volume, effective cost control and maximization of
profits.
Breakeven point
It is a neither profit nor loss situation. It is a technique of analysis of sale with reference to
breakeven point. Breakeven point means a level of quantity sold that generates sales equal to the
to the total cost i.e. total sale equals total cost.
CVP Analysis
It refers to the cost volume profit analysis. It is technique used in costing area to take managerial
decisions regarding make or buy commodities depending upon their cost, volume of sale and
profit earned. Under this technique, we divide the total cost into two parts namely fixed and
variable cost. A deep analysis is to be made in order to take the managerial decisions CVP
Analysis means the study of effect on future profits due to change in cost, sale price, quantity
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and mix. There are certain factors that are to be considered while making CVP Analysis: volume
of sale, selling price, variable cost per unit and total fixed cost (Chenhall, 2015).
Question
Tech (UK) Limited commenced business on 1 September 2010 producing special charger for
mobile telephone and other carry-on gadgets, the cost card of which is as follows:
Solution
Income statement under absorption costing method:
Particulars £ £
Sales (£35 * 1500 units) £52,500
Less - Cost of sales
Opening inventories Nil
Cost of production (2000 * £20) £40,000
Closing inventories (£20 * 500) £10,000 - £30,000
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Gross profit £22,500
Under/over absorption -
Actual overhead £15,000
Absorbed overhead (£5 * 2000) £10,000 - £5000
£17,500
Non-production overheads -
Variable (15% * £52,500) £7,875
Fixed £10,000 - £17,875
Net loss - £375
Income statement under marginal costing:
Particulars £ £
Revenue from operations (1500
x £ 35)
£52,500
Less – cost of sale
Opening Stock -
Cost of production (2000 * £15) £30,000
Closing stock(500 * £15) £7,500 - £22,500
Contribution £30,000
Fixed costs - £15,000
Selling and distribution-
Fixed £10,000
Variable (15% * £52,500) £7,875 -
£17,875
Net loss - £2,875
Statement of reconciliation
Absorption costing loss - £375
Fixed cost at closing stock (500*5) -£2,500
Loss under marginal costing -£2,875
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The above income statement is prepared under the marginal and absorption costing technique.
The income statement prepared under absorption costing represents a net loss of £375 and the
income statement prepared under marginal costing technique represents a net loss of £2,875.
There is a difference of £2500 in the loss amount under marginal and absorption costing. Thus, it
is recommended to Tech UK Limited by its Finance Director to carry out preparing its income
statement using absorption costing technique since the loss represented by using absorption
costing technique is comparatively less.
Task 3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Budgeting is one of the integral aspects in a business organization. The term budget indicates a
typical arithmetical figures sheet or data dealing with a specific period of time (Rubin, 2016).
The time period of financial budgets are generally one year, with each having both its advantages
and disadvantages.
Static budget
These are made for a specific period that is fixated throughout the year, regardless of any
variation happening in the organization.
Advantages:
 It can be easily understood by the company
 It assists the business in having administrative control over its expenses.
Disadvantages:
 It can have a negative influence on the potential income
 It is extremely rigid
Variable budget
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