Management Accounting Report: Financial Analysis of CWM Ltd

This report delves into the realm of management accounting, focusing on its application within Capricorn Wealth Management Limited (CWM Ltd), a UK-based financial consultancy. The report explores various management accounting systems, including job costing, cost accounting, inventory management, and price optimization, highlighting their benefits for CWM Ltd. It examines different management accounting reporting methods such as cost reports, budget reports, and performance reports, alongside techniques like financial planning, financial statement analysis, and marginal costing. The core of the report compares and contrasts marginal costing and absorption costing, providing income statements using both methods and analyzing their impact on profit calculation. The report also covers the advantages and disadvantages of different planning tools used for budgetary control and explores how management accounting systems can address financial problems, ultimately contributing to sustainable growth and success for organizations like CWM Ltd. The analysis includes detailed calculations and interpretations of financial data.

Management
Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and different types of system.........................................................1
M1 Benefits of accounting system in organisation-....................................................................2
P2 Methods of management accounting reporting-....................................................................3
M2 Management accounting techniques.....................................................................................3
TASK 2............................................................................................................................................4
P3 COST & MARGINAL COST vs ABSORPTION COST- ..................................................4
M3 USE OF PLANNING TOOLS IN PREPARING & FORECASTING BUDGET- .............8
TASK 3 ...........................................................................................................................................9
P4 The advantages and disadvantages of different planning tools used for budgetary control.. 9
TASK 4..........................................................................................................................................11
P5 Management accounting system to respond the financial problems...................................11
M4 Management accounting lead to sustainable growth and success of the organisations. ...14
CONCLUSION .............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting is preparation of financial information for the internal people of
the company so that they can take day to day short term decisions with its help.
Company called CAPRICORN WEALTH MANAGEMENT LIMITED is taken to understand
the accounting management in an organisations. It is an UK's small scale financial consultancy
company which was incorporated on 23rd January 2008. it is a private limited company with less
than 50 client base.
Further this report include discussion of management accounting and planning & measurement
tools in context of the CWM Ltd. It also includes the preparation of income statement with the
help of marginal costing and absorption costing and a small comparison has also done to help
the user to understand which one of them is perfect for the organisation. Impact of planning tools
on budget forecasting has also discussed in this report .
TASK 1
P1 Management accounting and different types of system.
Management accounting is a process that Capricorn Wealth Management Limited uses to
prepare its financial reports and accounts it help them to analyse information required to take
their day to day decisions on the basis of amount of available cash with them, amount of orders
in their hand, sales revenue generated by them , state of account payable & receivable,
outstanding debts, raw material, inventory etc. CWM Ltd generate their monthly reports for
department managers and chief executive officer (Agrawal and Cooper, 2017).
Different type of management accounting system: job costing system- Company require this accounting system because it help them to get
the information about association of cost with product or services. They do it by
combining these three costs i.e. direct material, direct labour & overhead cost.
Combination of these three result into complete cost of their services which they can
reduce by taking corrective actions in future. Cost accounting system- This is the framework for the companies to estimate the cost of
their products. Capricorn Wealth Management Limited should use this because it help
them to analyse their profitability, inventory valuation and cost control through the
estimation of cost of their product with the help of the participation of executive.
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 Inventory management system- CWM Ltd can able to check their present inventory,
how much orders they have, sales and deliveries done. This help them to supervise and
manage their stock which in return bring the effective & efficient flow of inventory. It is
a small scale company because of which it may not have sufficient inventory so for
managing it they are require to follow this system (Ahmad and Mohamed Zabri, 2015).
 Price optimising system- It is beneficial to the Capricorn Wealth Management Limited
because it help them to optimise the price of their product by deciding the price of
multiple products at a time. This help company in segmenting the price according to the
customers responses. Other benefits for company using this system is that they can
determine price structure for initial, discount and promotional prising.
M1 Benefits of accounting system in organisation-
There are some benefits in context of Capricorn wealth management limited-:
System Benefits
Cost accounting  It is beneficial for CWM Ltd because it
help them to estimate cost which in
future they can reduce by appropriate
methods.
 It is beneficial for them because it helps
ion analysing the profit and how they
can increase it in future.
Inventory management system  It is beneficial for the Capricorn Wealth
Management Ltd because it gives them
an estimate about the stock they have
and what is the future requirement.
 Other benefit to the company is
efficient & effective flow of inventory
from the organisation.
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P2 Methods of management accounting reporting-
 Cost reports- This report help the Capricorn Wealth Management Company in
determining the price of the item which is calculated by them on the basis of labour cost
and overhead cost. This cost report help the manager of the company to compare the
price of their services vs selling cost which help them to understand what is required to
reduce their selling costs and increase the price of their services so that company get
more profit and can compete with their competitors (Ali and Zhang, 2015).
 Budget report- In this report CWM Ltd make their spending plan according to which
they create a budget for every activity which help them in estimating the requirement of
funds and resources. This is done by listing all the sources of expenses & income which
make a complete budget report. Company use their earlier financial plan and future
projection for making the budget report. Organisation do this because it provide them
with a limit for every task to perform so that every resource get utilised properly.
 Account receivable aging reports- This is the report that help company in listing all the
unpaid customers invoices it help in analysing the financial health of the company.
Capricorn Wealth Management limited use this because it help them in keeping a regular
contact with their customers and helping them to decide to cut the tie with late payers.
 Performance report- Company go for this report because it help them to analyse the
performance. CWM Ltd make this report for comparing the actual performance with the
budgeted performance which help them to understand the reason for this deviations and
what steps to be taken to remove it. Company make it quarterly or even monthly.
 Order information report- This report is made by the company to know their per day
transactions and success & failure about it. Capricorn Wealth Management Limited using
this to see the trend in their business and to achieve low cost on placing orders & their
management (Alsharari, Dixon and Youssef, 2015).
M2 Management accounting techniques
 Financial planning- The objective behind this technique is to make a proper financial
planning. Capricorn Wealth Management Limited go for this technique for the same
reason it help them to maximise their profit by achieving business objectives.
 Financial statement analysis- CWM Ltd analyse profit & loss account and financial
statement of different period which help the company in comparing the growth rate of
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business in different period it gives them an idea of financial position of the company in
comparison to other companies. They do it through comparative financial statement,
ratio analysis and common size statements (Boiral, 2016).
 Fund flow analysis- Capricorn Wealth Management Limited use this technique to
analyse the movement of funds in different years. It is important for the company because
it is a small scale organisation and proper utilisation of resources & fund is must to grow
in the competitive environment.
 Marginal Costing- CWM Ltd use this technique because it help them to decide selling
price for their services i.e. how much will they charge for rendering a service to their
customer. Other reasons for opting this technique by the company is that it help the
organisation in properly utilising the scare raw material & taking decisions (Management
accounting, 2018).
TASK 2
P3 COST & MARGINAL COST vs ABSORPTION COST-
COST
Cost is a term used to explain the the expenditure occurred on production of goods and
services but this cost does not include markup. This is the money spend by company on raw
material, equipments, supplies, services,labour, production etc. there are different type of costs in
there like manufacturing cost, opportunity costs, sunk costs, variable costs, direct costs, marginal
costs and absorption costs.
MARGINAL COSTING vs ABSORPTION COSTING
Marginal costing is when variable cost are considered as product cost and fixed cost are
considered as costs of the period on the other hand absorption cost is when fixed cost and
variable costs are considered as cost of period. Nature of overheads of marginal costing is fixed
and variable while overhead of absorption costing is production, distribution , selling and
administration (Chiarini and Vagnoni, 2015). In marginal costing profit is calculated by using
profit volume ratio but in case of absorption costing fixed cost are considered as product cost
because of which profit get reduced. Marginal costing determines cost of the next unit and on the
other hand absorption costing determines the cost of each unit. In marginal costing change in
opening /closing stocks does not affect the cost per unit and in absorption costing changes affect
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the cost per unit. Now the most important aspect of marginal cost is contribution per unit and
absorption costing is net profit per unit.
Benefits of absorption costing-:
 Benefit of absorption costing to the CWM Ltd is that it consider all the production cost
including company's fixed cost of operation like salaries, facility rental and utility bills. Another reason why Capricorn Wealth management Limited should opt absorption
costing is that it track profits more accurately. This will help the company in evaluating
profitability and determining price for products (Cleary, 2015).
Benefit of marginal costing-:
 Benefit of marginal costing to CWM Ltd is that it make cost comparison more
meaningful for the company by not carrying forward the fixed cost of current year to the
next year. Company should go for it as it reduces the chances of confusion.
 Capricorn Wealth Management limited have more benefits from marginal costing as it
provide them reliable measure for decision making which increases its accuracy.
 Other benefit for company is that it shows a clear impact of sales fluctuations on profit.
Company should go for it because there is complete transparency.
Income statement by absorption costing method:
Particular Amount
Sales (25*10000)
Less- Cost of good sold
Gross profit
Less- Selling and manufacturing overhead
Net profit
250000
140000
110000
60000
50000
Working Notes*
Calculation of sales(25*10000) - 250000
Calculation of cost of good sold - 140000
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(Direct material+ Direct labour+ Variable manufacturing overhead+ Fixed manufacturing
overhead: 50000+30000+20000+40000)
Calculation of selling and manufacturing expenses - 60000
(Variable selling and manufacturing overhead+ Fixed selling and manufacturing overhead :
30000+30000)
Income statement by marginal costing method:
Particular Amount
Sales
Less: Marginal cost of sales
Contribution
Less: Fixed cost
Net income
250000
130000
120000
70000
50000
Working Notes*-
Calculation of marginal cost of sales - 130000
(Direct material+ Direct labour+ Variable manufacturing overhead+ Variable selling and
administration expenses: 50000+30000+20000+30000)
Calculation of fixed cost - 70000
(Fixed manufacturing overhead+ Fixed selling and administration expenses: 40000+30000)
Interpretation- From above solved numerical, it has been analysed that in both the
method of costing, company is getting net income equally. In the absorption method net income
is of 50000 and in marginal costing method too.
Income statement by absorption costing method (When 5000 units sold)
Particular Amount
Sales (5000*25)
Less- Cost of good sold:
Direct material- 50000
Direct labour- 30000
125000
140000
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Variable manufacturing overhead- 20000
Fixed manufacturing overhead- 40000
Gross loss
Less- Selling and manufacturing overhead
Fixed selling and manufacturing overhead- 30000
Variable selling and manufacturing overhead-30000
Net loss
(15000)
60000
(75000)
Income statement by marginal costing method( When 5000 units sold)
Particular Amount
Sales(25*5000)
Less- Marginal cost of sales:
Direct material- 50000
Direct labour- 30000
Variable manufacturing overhead- 20000
Variable selling and administration expenses- 30000
Contribution
Less- Fixed cost:
Fixed manufacturing overhead- 40000
Fixed selling and administration expenses- 30000
Net loss
125000
130000
(5000)
70000
(75000)
Interpretation- From above solved numerical, it has been analysed that company is
getting loss from both costing method. In absorption method, net loss is of (75000) as well as in
marginal costing method company is getting same loss of (75000)
Financial reporting document with labour and material variances:
Budgeted Actual Variance
Units 1000 1100 100(F)
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Hours 3000 3400 400(A)
Units per hour 3 3.09 0.09(F)
Labour 15000 17680 2680(A)
Labour rate per unit 15 16.07 1.07(A)
Labour rate per hour 5 5.2 0.2(A)
Actual
Units 1000
Material used Kg 2200
Actual Material cost 20900
Material cost per kg 9.5
Material cost per unit 20.9
Budgeted material cost per unit of the product 2kg at £10/kg
Budgeted material cost per kg ( £ 10/2) 5
Budgeted Material cost 11000
Variance (Actual- budgeted) 9900(A)
M3 USE OF PLANNING TOOLS IN PREPARING & FORECASTING BUDGET- FORECASTING TOOL- It is a tool that Capricorn Wealth Management Limited should
use for forecasting budget because it is an excel based application that help in getting the
valuable forecast by using data set of different nature. Forecasting tool also take help of
historical data i.e. data of previous year for preparing & forecasting budget.
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 FLEXIBLE BUDGET- This planning tool help in preparing & forecasting budget
because it is a budget that adjust itself with he change in level of actual revenue. For
making a budget company has to follow this step of identifying fixed costs and segment
the in budget model then determine the change in variable cost with the change in activity
measures and after completion of accounting period enter actual activity measures into
model. Now the flexible budget of the completed year should be entered into accounting
system so that comparison can be done (Ismail and King, 2014).
 CONTINGENCY PLANNING- This tool of planning also help in preparing and
forecasting budget because it is a plan which is designed for the future course of action if
happens. With a good contingency plan Capricorn Wealth Management Limited can
eliminate unforeseen financial issues.
TASK 3
P4 The advantages and disadvantages of different planning tools used for budgetary control.
Budget- It is a financial plan for a specific period of time. This plan includes the sale,
profit, revenue, expenses, cash flows and other various activities done in the accounting period
of time. It is a internal tool which is used by the organisations for effective management and also
for analysing the external factors which can affect the planned budgets (Lavia López and Hiebl,
2014). There are various types of budgets which can be used by Capricorn wealth management
Ltd. some among them are discussed below:
 Operating budget- These budgets are generally used to analyse and predict the income
and expenses of the organisation within a specific period of time. Capricorn wealth
management can use this budget to manage the sale, production and various other cost
incurred by the company.
 Static budget- These are the budgets which does not changes which other factors.
Capricorn wealth management Ltd can use this budget to achieve the log term goals of
the company. As these budgets are mainly planned keeping in mind the sale and revenue
of the organisation.
Budgetary control- Budgetary control is a tool used to manage and control the cost and budgets
of the company. This method is used by the managers plan the financial goals, compare the
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desired performance with the actual performance and plan the future course of action. It is the
continuous process of comparing the actual figures with the budgeted figures. It is also useful in
recording and planning the future course of action of the organisations and achieving the goals in
a effective and efficient manner (Maas, Schaltegger and Crutzen, 2016).
The various budgetary control tools which can be used Capricorn wealth management are
discussed below:
Forecasting tool- This method is used to analyse and forecast various aspects of a
budget. It involves planning, controlling and analysing all aspects of the budgets. Capricorn
wealth management can plan the future course of action using this budget. As this will help the
organisation in achieving the long term and short term goals in a desirable manner. The
managers of Capricorn wealth management Ltd can use this tool in estimating the needs and
requirements for the future.
Advantages of forecasting tool
 It is helping Capricorn wealth management Ltd. in satisfying the needs of the customers
by providing them what they actually want.
 Better plans can be made by the company because it will cover all information related to
the financial transactions of the organisation.
Disadvantages of forecasting tool:
 As the future is uncertain so the manager of Capricorn Wealth management Ltd will not
be able to predict the exact future of the organisation. Due to this the set plans will also
be affected.
 The strategies and policies made for the future might not work well because the
information used in making those strategies may not be accurate and reliable.
Flexible budget: It is a tool which can be used to make desirable changes in the planned
budget. With the help of this budget the manager of Capricorn Wealth management Ltd can
estimate the expenses and profitability of the organisation. These budgets can be prepared for
those activities which are not constant in nature. So by using this budget the manager of
Capricorn Wealth management Ltd can easily make necessary changes if required (Modell,
2015).
Advantages of flexible budget :
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