Management Accounting: Cost Analysis, Reporting, and Adaptation

This report provides a comprehensive overview of management accounting, focusing on its essential requirements, reporting methods, and adaptation to financial challenges. It explains management accounting's role in organizational success, highlighting its principles of value creation, stakeholder trust, and performance encouragement. The report details various management accounting systems, including cost accounting, inventory management, job-costing, and price optimization. It further explores different reporting methods such as budgets, departmental reports (sales, production, inventory), and capital budgeting reports, emphasizing the importance of clear and understandable information presentation. Practical application of absorption and marginal costing is demonstrated through income statement preparation. Finally, the report examines how organizations adapt management accounting systems to address financial problems and the advantages and disadvantages of planning tools used in budgetary control. Desklib provides access to this document and other solved assignments.

MANAGEMENT ACCOUNTING

Table of contents
Introduction................................................................................................................................3
P1. Explain management accounting and give the essential requirements of different types of
management accounting.............................................................................................................4
P2. Explain different methods used for management accounting reporting..............................6
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing......................................................................7
P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.....................................................................................................................10
P5. Compare how organisations are adapting management accounting systems to respond to
financial problems....................................................................................................................12
Conclusion................................................................................................................................14
Reference list............................................................................................................................15
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Introduction
Management accounting is a wider organizational system that takes care of the entire
activities of the business. In one hand, management accounting controls the cost level of the
business; on the other hand, it takes care of the revenue flow in the business. The use of
management accounting system is increasing in the business world because of the large
contribution that it makes in business success.
In this study, the effectiveness of management accounting system in business growth will be
analyzed by considering the business scenario of Zylla Company. Zylla is a multinational
organization that is operating business in UK for several years. However, the management of
the company is recently focusing on the management accounting system. The aim of this
study is to help the managers at Zylla Company understanding usefulness of management
accounting system.
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P1. Explain management accounting and give the essential requirements of different
types of management accounting
Management accounting is a continuous process that aims to make the business successful.
Ahmad (2017) has defined management accounting as the key factor behind organizational
success in the current competitive scenario. The process of management accounting starts
with developing effective plans for the business activities and after that it guides the
managers until the objectives of the company are achieved (Ax and Greve, 2017).
The concept of management accounting was originated with the industrial revolution in
Western countries. At the initial period, the aim of management accounting was controlling
the cost level of the business (Taipaleenmaki and Ikaheimo, 2013). However, gradually the
use of management accounting technique expanded to other areas of business. Management
accounting follows certain key principles, which are mentioned below:
 Principle of value creation
 Principle of achieving stakeholders’ trust
 Principle of encouraging managers for better performance
 Principle of generating and providing relevant data and information to the users (Le et
al., 2017)
Considering the role of management accounting, the following can be identified:
 Management accounting is a major player in developing effective plans for the
business. It means if the managers at Zylla Company adopt the management
accounting technique or system, developing effective plans will be easier.
 Management accounting is also a major player in role of inventory management. This
particular system provides several techniques of inventory management that helps the
managers maintaining inventory at the standard level (Ahmad, 2017).
 Another important role management accounting plays is controlling organizational
activities. Adopting the management accounting system, the managers at Zylla
Company will be able to control the business activities efficiently.
In this context, it is important to mention that management accounting is not similar to
financial accounting. There are the following differences between the two:
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Management accounting Financial accounting
Management accounting helps the managers
improving financial and non-financial
activities of the business (Taipaleenmaki and
Ikaheimo, 2013).
Financial accounting helps the managers
improving only the financial activities of the
business.
Management accounting encourages the
managers in different departments for
preparing reports that are usable for internal
purposes.
Financial accounting encourages the
managers in the finance department to
prepare the financial reports that are usable to
the external stakeholders.
Activities under management accounting are
not mandatory.
Activities under financial accounting are
mandatory.
While discussing about management accounting, it is important to be mentioned that the
usefulness of this system highly depends on the effective application of different systems
under management accounting. These are discussed below:
Cost accounting system – The primary target of this particular management accounting
system is to take care of the cost level of the business. it means this particular system helps
the managers in controlling rather reducing the cost level of the business (Lanen, 2016). In
order to make the cost accounting system more effective, the management of Zylla Company
may adopt one of the cost accounting techniques that management accounting provides.
These techniques are – activity based costing, marginal costing and absorption costing.
Inventory management system – In the context of this particular management accounting
system, it can be stated that the primary goal of this system is to help the company
maintaining a standard level of inventory. Maintenance of standard inventory level helps the
organizations managing the sales flow efficiently (Booth, 2018). It means if the managers at
Zylla Company adopt the inventory management system, then can boost up the sales value
and volume. However, in order to achieve the best result, the company needs to follow one of
the available inventory management techniques, which are – FIFO, LIFO and AVCO.
Job-costing system – This management accounting system aims to make the entire
production and operations process easier for the managers. Following this system, the
management of Zylla Company can easily manage the large production unit of the company
because this system helps the organizations dividing the large production and operations units
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into small jobs, which are easy to handle (Parker and Fleischman, 2017). Hence, application
of this system will make the business process easier.
Price optimization system – This is the system of management accounting that aims to
develop the right pricing strategy for the business. Identifying the right strategy of pricing the
management of Zylla Company will be able to capture the market more effectively. However,
in order to enjoy the benefits of price optimization system, the company needs to analyze its
internal and external business environments properly (Ismail et al., 2018).
P2. Explain different methods used for management accounting reporting
Management accounting generates relevant reports that make the business operations easier
for the companies. These reports are discussed below:
Budgets – This is considered to be one of the most important reports that management
accounting helps to generate. Budget is nothing but the financial plan for the business. Using
budget, managers at Zylla Company will be able to allocate the resources efficiently, so that
the income of the company reaches to the highest level. At the time of developing budgets,
the managers need to analyze several factors like, business environments, resource capacity
and efficiency level of the business (Smith et al., 2017).
Departmental reports:
Sales report – This report is prepared under the management accounting system to keep track
on the sales level of the business. In the sales report of the company, the managers of Sales
department must include all detailed information regarding sales value, sales volume and cost
of sales in the particular financial year (Ahmad, 2017).
Production report – This report provides the information about the production level of the
company. In this report of management accounting, detailed information regarding quantity
of production, amount o raw materials used, cost of production and many other production
related information is available (Ax and Greve, 2017). Preparing the production report
management can understand, whether they need to improve the production system in the
coming years.
Inventory report – This is another most important management accounting report that
provides information regarding the inventory level of the business. using this particular
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report, the manages in the production and sales department can understand how many
quantity they need to produce and sale.
Capital budgeting report:
Investment appraisal report – This report is developed while making any capital investment
decision. This report helps to understand whether a particular investment option is suitable
for the company or the company needs to ignore the same. The investment appraisal report
indicates the suitability from different perspectives like, internal return, time span required to
return the initial investment and profitability of the project (Alkhamis et al., 2017).
While preparing different departmental and other reports, the management accountant at
Zylla Company must ensure that the information in the reports must be understandable. It
means presentation of information in the reports must be in proper format. The reports must
include complete information regarding the business. Fair, understandable and complete
representation of the report is important because these reports play major role in
organizational decision-making process (Ismail et al., 2018). If the reports or information in
the reports are not presented in the proper format, it will be difficult for the higher
management to understand the information rightly and due to that decision-making will be
delayed. Moreover, improper representation of information may lead to wrong business
decision. Hence, presenting the information in understandable manner is very important for
every company.
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing
Cost is the term that is used to indicate the amount of spending incurred by an organization in
a particular financial year. In an organization, cost can be of different types like, fixed costs,
variable costs and semi-variable costs (Parker and Fleischman, 2017). Considering the
behaviour, costs of an organization can be divided in to two parts – direct costs and indirect
costs.
Absorption and marginal costing are the two different costing techniques under management
accounting. The use of absorption costing and marginal costing can be better understood with
the help of following example:
Application of absorption costing technique in the context of Bailey Plc example:
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Workings:
Cost of sales = Sales units * total production cost per unit
Cost of sales in March = 1500 units * £20 = £30000
Cost of sales in April = 3000 units * £20 = £60000
Alternative calculation of cost of sales = [(Opening stock + Production – Closing stock) *
total production cost per unit]
Cost of sales in March = [0 + (2000 * 20) – (500 * 20)] = £30000
Cost of sales in April = [(500 * 20) + (3200 * 20) – (700 * 20)] = £60000
*March closing stock = April closing stock
Closing stock = Opening stock + Purchase – Sales
Closing stock March = 0 + 2000 – 1500 = 500
Closing stock April = 500 + 3200 – 3000 = 700
Under / over- allocated
March
Overheads allocated (2000 * £5) = £10000
Overhead incurred = £15000
Under-allocated overhead = £15000 - £10000 = £5000
April
Overheads allocated (3200 * £5) = £16000
Income statement under absorption costing:
March April
£ £ £ £
Sales revenues @ £35 per unit 52500 105000
Less cost of sales -30000 -60000
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22500 45000
(Under)/over-allocated (Working) -5000 +1000
Gross profit 17500 46000
Less selling and distribution costs (10000 +
15% of sales)
-17875 -25750
Profit / (loss) -375 20250
Application of marginal costing technique in the context of Bailey Plc example:
Workings:
Cost of sales = Sales units * variable production cost per unit
Cost of sales in March = 1500 units * £15 = £22500
Cost of sales in April = 3000 units * £15 = £45000
Alternative calculation of cost of sales = [(Opening stock + Production – Closing stock) *
total production cost per unit]
Cost of sales in March = [0 + (2000 * 15) – (500 * 15)] = £22500
Cost of sales in April = [(500 * 15) + (3200 * 15) – (700 * 15)] = £45000
*March closing stock = April closing stock
Closing stock = Opening stock + Purchase – Sales
Closing stock March = 0 + 2000 – 1500 = 500
Closing stock April = 500 + 3200 – 3000 = 700
Income statement under marginal costing:
March April
£ £ £ £
Sales revenues @ £35 per unit 52500 105000
Less cost of sales -22500 -45000
30000 60000
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Less selling and distribution costs (Variable
portion) (15% of sales)
-7875 -15750
Contribution 22150 44250
Less selling and distribution costs (fixed
portion)
-25000 -25000
Profit / (loss) -2875 19250
Therefore, considering the calculations under two different costing techniques, it can be
stated that following the absorption costing technique will be better for the company because
the income statement under this particular costing technique is showing lower level of loss in
the month of March and higher level of profit in the month of April. Hence, it can be stated
that the company will be at better position if it follows the absorption costing method.
P4. Explain the advantages and disadvantages of different types of planning tools used
in budgetary control
Budgetary control system within a company can be of two types – operating budgetary
control system and capital budgetary control system. These two types of budgetary control
systems are discussed below:
Operating budgetary control system:
Responsibility budgeting – This technique is applied by the companies to analyze and
control the performance of managers. The results from the application of this technique
indicate how far the managers have maintained their responsibilities towards the firm (Shin
and Yun, 2017). The advantages and disadvantages of this technique are as follows:
Advantages:
 This technique is useful for improving managerial efficiency
 This technique helps to enhance overall performance standard of the business.
Disadvantages:
 Sometimes, this technique de-motivates the managers (Deering and Lang, 2017)
 This technique is very critical in nature and so use of this tool is not easy.
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Standard costing – This technique or tool is also used by the companies for operating
budgetary control. Under this method, the cost level of the company can be planned in a
better way by identifying the performance gaps in the business. The advantages and
disadvantages of the tool are as follows:
Advantages:
 This tool is very useful in controlling the cost level of the business (Smith et al.,
2017)
 Standard costing tool can also be used for managing the inventory level in a better
way.
Disadvantages:
 The application of this tool is time consuming and critical
 This tool is mainly applicable to the financial activities. The non-financial
performance standards cannot be measured using this technique.
Capital budgetary control tools:
Net present value method – This method is considered to be the mostly used method or tool
for capital budgetary control. This method analyzes the capital investment option by
considering present value of future cash flows (Shaban et al., 2017). The advantages and
disadvantages of the method are as follows:
Advantages:
 This method considers the time value of money
 This method considers the profitability factor of the investment option (Abor, 2017)
Disadvantages:
 This method is time consuming and critical to understand
 The results from this method may differ due to sensitivity of discounting rates
Payback period – This method is considered to be the easiest capital budgetary control
method available to the companies. The advantages and disadvantages of this method are as
follows:
Advantages:
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 Payback period method is simple to understand (Hayward et al., 2017)
 This method provides the assurance of getting back the initial investment
Disadvantages:
 The time value of money is ignored under this method (Nawaiseh et al., 2017)
 This method does not consider the profitability factor of the capital investment option
P5. Compare how organisations are adapting management accounting systems to
respond to financial problems
Managing financial problems effectively is very important for the future growth of the
business. If Zylla Company faces financial trouble, the management needs to adopt some
effective techniques to deal with the situation. In this context, it can be stated that the
management of Zylla Company can easily handle the financial problem of the organization
efficiently. There are some techniques that can be used for handling the financial problem
within the company. These techniques are discussed below:
Benchmarking – This process is very effective for dealing with the financial problem at the
organization. In this technique, the organization needs to select a particular standard, which is
considered as the benchmark performance standard for the company. In order to identify the
perfect benchmark, the company may consider the performance level of the top performer in
the industry (ElMaraghy et al., 2017). After setting the benchmark, the higher authority
encourages the departmental heads for achieving the benchmarked performance standard
within the particular time span. This entire process takes some time, but this is very easy
method that Zylla Company may follow while dealing with any financial trouble.
Key performance indicators – There are certain financial factors considering which the
management can easily understand the performance trend of the business. These factors are
known as the key performance indicators of the business (Maté et al., 2017). The most useful
key performance indicators that can help the management of Zylla Company understanding
the financial performance standards and loopholes in the performance are – revenue, cost of
sales, net profit, cash flows and many others. These factors indicate the areas where the
company is lacking behind. Considering the key performance indicators management can
make decisions very easily and within the limited time span.
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