Management Accounting: Techniques, Reporting, and Cost Analysis

This report provides a detailed analysis of management accounting, emphasizing its techniques in financial reporting for companies. It explores how management accounting aids managers in making informed decisions to achieve both short-term and long-term business objectives. The report covers various aspects, including cost analysis, inventory valuation, investment analysis, cash flow analysis, constraint analysis, and financial leverage. It also discusses different methods used for management accounting reporting, such as budget reports, pro forma cash flow statements, sales reports, item cost reports, job costing, inventory valuation, order information reports, opportunity reports, and performance reports. Furthermore, the report includes a cost analysis comparing absorption and marginal costing, along with practical examples and inventory ledger using LIFO and average cost methods. The study highlights how organizations address financial challenges using management accounting techniques, making it a valuable resource for understanding financial planning and budgetary control. Desklib provides access to this and other solved assignments for students.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
P1 Management accounting and importance of its different types..............................................3
P2 Methods used for management accounting reporting............................................................6
P3 Cost analysis...........................................................................................................................8
P4 Planning tools used for budgetary control............................................................................13
P5 Comparison of companies of how they have responded to financial problems using
management accounting............................................................................................................15
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
This study discusses management accounting and its techniques in financial reports of a
company. Management accounting is the reports of accounting statements used by managers in
which process identifies, interprets and analyses information used to achieve business objectives.
The management accounting techniques help a business understand its finances and allocates
them in right proportion to help cost management. Several types of planning tools are discussed
which help understand financial planning and ways to achieve the goals with budgetary control.
Light has been thrown on comparisons of how organisations are dealing with financial problems
with management accounting techniques.
P1 Management accounting and importance of its different types
Management accounting is used by managers in a business to make reports about business
operations that help them in taking decisions of how to achieve short term and long-term
objectives of the company. The main purpose of using management accounting is to achieve
business goals for the company. Some functions of management accounting are as listed:
a) Forecasting: It helps in forecasting whether a decision to buy an equipment, to
venture in new markets or to go for acquisition would be benefiting to the company
or not thus doing the analysis on future possibilities (Ameen, Ahmed and Abd
Hafez, , 2018).
b) Management accounting has a know how of costs and production department and
thus helps in decision-making of whether to go with purchases of material or not.
c) Management accounting helps in knowing where the funds are going to come from
and what will be the expenses occurred in a project.
Types of Management Accounting
There are few types of managerial accounting involving different aspects. Some of them are:

Cost Analysis
The costs going in manufacturing products from the process of acquiring raw materials,
converting them in finished goods involve costs of fixed and variable expenses along with
overheads. All the costs are taken in consideration and added up to form the total production cost
of manufacturing products. After knowing the cost valuation the total amount of goods produced
is calculated. Then the total costs are divided by the total quantity produced to get the per unit
cost of goods. A profit margin is then set after doing market survey and thus the selling price of
products is determined. Apart from this inventory valuation is also done which is according to
per square foot cost of storing inventory (Abdusalomova, 2019).
Inventory Turnover Analysis
Calculation of the number of times inventory has been sold and replaced is done. The faster the
inventory is sold out the better it is for the company as sales are increased with utilisation of
current assets and storage costs are reduced. It also helps in knowing when to place the orders for
the next inventory batch.
Investment Analysis
A company is faced with decision-making between projects as to which project will be more
investment worthy. Management accounting helps in assessing the rate of return on projects with
discounted cash flows estimated to accommodate the time value of money concept. These
financial calculations help in zeroing on the project which can maximize returns (Ameen,
Ahmed and Abd Hafez, 2018).
Cash flow Analysis
Management accounting helps know the cash impact on the business and follow accrual
accounting in which the income and expense are recorded together to give a clear picture of
company’s liquidity. It helps in balancing net working capital required for managing business
operations. It ensures the cash flow is there to fulfil the short-term obligations of the business. In
investment projects, it lays down cash flow estimates which will be received apart from the cash
outflow. In purchasing equipment it lays down options of whether to use company’s equity or a
loan at interest and gauging which will be a better option.

Constraint Analysis
Management accounting helps in realising constraints in the line of production and sales. An
optimum utilisation of assets is good but sometimes it may happen that goods are manufactured
according to the set rhythm but sales is not up to the mark. This will result in piling up of
inventory and storage costs increase but no increase in revenues. Management accounting sees to
it which constraints can come in between company’s set goal and makes aware of measures to
remove constraints timely.
Financial Leverage
Company has to rely both on equity and debt in order to successfully accomplish its operations.
Management accounting sees that company makes use of equity and debt in a balanced way
which helps in managing company’s net working capital and at the same time not piling only
debts on the company. The leverage taken has to be put to optimal use to generate returns for the
company and also it can be paid back on time (Abdusalomova, 2019).
Accounts Receivables
Management accounting keeps a track of pending payments from debtors known as account
receivables in a time range order for e.g. 30 days or 30-60 days credit period etc. If a debtor is
seen extending the term many times or defaulting sometimes, company can take a decision to
review its credit policy and business policy with them. It helps in tracking payments to reach on
time and thus increase cash in hand to improve liquidity of the company.
Budget Analysis
Management accounting helps in forming of budget with financial planning for various
departments considering the previous year statements and current demand of a particular section.
A financial analysis of various departments help the accountants in allotment of finance to a
particular section. It also sees for the deviations in the actual performance from the standard
norms while preparing budget for a particular section. This can be done by variance analysis
along with other methods. This has also helped where excess costs are taking up place and apt

measures to be taken. Market trends are also taken in consideration of product demand while
forming the budget.
P2 Methods used for management accounting reporting
The methods for reporting of management accounting are as follows:
Budget Reports
It helps in distributing finance allocation while assessing the performance of a department in a
year or quarter as per the requirement. The budget estimates are according to the previous year
financials. Budgets are increased or decreased as per the need, performance and market trends
regarding a section. Employees can also be provided bonuses for doing well by managers by
budgeting funds. Further a company has to achieve its goals within the budget for the next
financial year (Rikhardsson and Yigitbasioglu, 2018).
Pro forma cash flow
This method states how much money or cash flow can be expected in short term and medium-
term accounting periods and how much spending can be done. It helps to know when surpluses
can be expected and when cash shortage can be expected. Accordingly, the management can be
prepared beforehand to deal with the situation.
Sales Reports
Sales reports show which segment of products is performing well and which are under
performing thus indicating the sources of revenue as well as where company is suffering losses.
Simultaneously it also helps management know which sales person are doing well and achieving
goals and who are lacking and need motivation (Burritt and et.al., 2019).
Item cost reports
It breaks down costs gone in products category wise and shows expenses incurred in categories
like labour, raw material, purchasing licenses for products etc. It is then subtracted from sales of

that category and net profit is known for the particular segments. This report helps management
know in detail which category product is generating revenues for the company.
Job costing
This breaks a project in segments known as jobs. It can be seen from the revenues earned
whether a job is profitable or not. It indicates whether a project will generate returns and is worth
continuing or not.
Inventory Valuation
The report helps in calculating overheads per unit, labour cost, inventory storage cost, damaged
inventories cost and thus knowing the value of inventory. Managers are able to prepare budget
for inventory separately and also think of measures where cost control can be done and how
much inventory turnover should be to manage the inventory costs.
Order Information Report
It depicts all the costs associated with an order placed and shows management the ways to
achieve low cost on placing of orders and managing them (Rikhardsson and Yigitbasioglu,
2018).
Opportunity Reports
The reports show the area of opportunities to the managers to convert it into business for the
company and achieve profits.
Performance Reports
These reports are generally made at the year’s end which evaluates company’s performance to its
business goals. It also makes report of every department within the organisation as to how it has
set the parameters in its functions and compare with the previous year performance. Performance
of employees is also measured through set parameters or in general. The departments which have

done well are appreciated along with the employees being rewarded for their contribution. The
areas where business has not performed well are considered for taking measures to improve in
future.
P3 Cost analysis
Absorption costing distributes the costs whether variable or fixed overheads be distributed
evenly on all units while marginal costing sees fixed overheads expenses as a one line expense.
Absorption costing reports higher profits in income statements although a decrease in working
capital cash flow can be seen.
Marginal Cost
Number of units produced in May 100
Selling price per unit 250
Total sales 100*250=25000
Direct materials per unit 60
Total cost of direct materials 60*100=6000
Direct labour per unit 40
Total cost of direct labour 40*100=4000
Variable overheads per unit 20
Total variable overheads 20*100=2000
Variable Commission 2/100*25000=500
Variable costs 6000+4000+2000+500=12500

Fixed selling 1000
Fixed administration 2000
Fixed production overheads 3000
Fixed costs 1000+3000+2000=6000
Revenue=Sales-(VC+FC) 25000-(12500+6000)=6500
Number of units produced in June 80
Sales 250*75=18750
Total cost of Direct Materials 60*80=4800
Total cost of Direct Labour 40*80=3200
Total variable overheads 20*80=1600
Variable Commission 2/100*18750=375
Variable costs 4800+3200+1600+375=9975
Fixed costs 6000
Revenue=Sales-(VC+FC) 18750-(9975+6000)=2775
Marginal cost=Change in cost/Change in quantity=2525/(100-80)=2525/20=126.25
Absorption Cost
fixed overheads 2000
No. of units 100
Additional cost per unit 2000/100=20
Absorption cost per unit 60+40+20=120
Total cost of production 120*100=12000
Revenue for May 25000-12000=13000

No. of units in June 80
Additional cost per unit 2000/80=25
Absorption cost per unit 60+40+20=120
Total cost of production 120*75=9000
Revenue for June 18750-9000=9750
Income statement for May
Sales 25000
-Expenses
Materials 6000
Labour 4000
Variable Overheads 2000
Fixed Overheads 2000
Gross margin 11000
Operating expenses
Selling 1000
Administrative 3000
Commission 500
Net Income 6500
Cost Variances
Budgeted cost= 12 per kg
Total material purchased=2400kg
Total budgeted cost of material purchased=6*2400=14400
Actual cost=22400
Cost Variance=22400-14400=8000
Price Variance=(Standard Price-Actual Price)*Actual Quantity
Actual price=22400/2400=9.33

Standard price=6
Price Variance=(6-9.33)*1000=3330(A)
Here (A) signifies adverse as standard price is lower than actual price.
Inventory Ledger using LIFO Method
Date Particulars Account
Name
Dr Cr
June 1 Opening
Inventory of
10 units
@£35 each
Inventory A/c 350
To Cash A/c 350
June 9 Bought
inventory of
15 units at 38
each
Inventory A/c 570
To Purchase
A/c
570
June 15 Issued 12
units
Production
A/c
456
To Inventory
A/c
456
June 20 Bought 20
units @32
each
Inventory A/c 640
To Purchase
A/c
640
June 23 Issued 10
units
Production
A/c
320
To Inventory
A/c
320

June 27 Issued 3 units Production
A/c
114
To Inventory
A/c
114
June 30 Issued 2 units Production
A/c
70
To Inventory
A/c
70
Total Amount 2520 2520
LIFO Method
Total cost of goods sold=70+114+320+456=960
Cost of Ending Inventory=(35-27)*10=8*10=80
Average Cost Method
Purchase Date No. of units Cost per unit Total cost
June 1 10 35 350
June 9 15 38 570
June 20 10 32 320
Total 35 1240
Weighted Average Cost= 1240/35=35.42
Total goods sold=12+10+3+2=27 units
Total cost of goods sold=27*35.42=956.34
Ending Inventory=35-27=8
Cost of Ending Inventory=8*35.42=283.36