Management Accounting Report: Analysis for Ecotricity (2024)

This report provides a comprehensive analysis of management accounting systems for Ecotricity, a UK-based manufacturing company. It explores the essential requirements of different management accounting systems, including cost accounting, inventory management, and job costing. The report details various methods of management accounting reporting, such as budget reports, performance reports, and cost accounting reports. Furthermore, it presents income statements using both marginal costing and absorption costing for May and June, followed by an interpretation of these statements to guide managerial decision-making. The report also covers different planning tools used in budgetary control systems and compares various management accounting systems in responding to financial problems. The content includes financial data analysis, costing techniques, and strategic recommendations for enhancing Ecotricity's financial performance and operational efficiency. The report concludes with a synthesis of the findings and provides relevant references.

Business Report

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P 1 management accounting system and the essential requirements of the different types of
management accounting system..................................................................................................1
P 2 Different method used for management accounting reporting..............................................3
LO 2.................................................................................................................................................4
Income statement using marginal costing and absorption costing for the month May and June.
......................................................................................................................................................4
Interpretation of the above income statements to the managers of the organization...................6
LO 3.................................................................................................................................................7
P 4 Explaining different planning tools used for budgetary control system................................7
.........................................................................................................................................................9
LO 4.................................................................................................................................................9
P5 Comparing the different management accounting systems and their response to the
financial problems. ......................................................................................................................9
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting system can be defined as process in each financial information
about the company are being provided to the managers so that they could take appropriate
decisions for the company and could develop the most effective strategies for the business and
enhance help the company in enhancing its financial condition of the overall business
organization. Ecotricity is the middle-sized manufacturing company of UK. It was founded in the
year 1996 and currently sales products relating to wind and solar energy. The present study
shows a report of junior management accountant that shows a brief explanation about the overall
management accounting system and requirement of various types of management accounting
system and different methods of management accounting reporting along with a critical
evaluation of management accounting system and its reporting.
Present study also shows difference between absorption and marginal costing techniques
by showing preparation of income statement using these systems. Furthermore, the assignment
provides information about different planning tools of budgetary control system and a
comparison of adoption of management accounting system for the purpose of responding to
numerous financial problems.
LO 1
P 1 management accounting system and the essential requirements of the different types of
management accounting system
Management accounting system is the internal system which an organization used to
measure and evaluate their process for effective management of the organization (Nielsen and
et.al., 2015). Financial information helps to communicate the financial information to its user
who requires the financial information for their use, purpose and decision making. it is basically
the process of preparing the management accounting reports which provide accurate, reliable and
appropriate financial information regarding the disorganization and which can finally
communicate to its users(Stakeholders).An effective management accounting system reaches
into the all departments of the organization and in addition using of financial data managerial
accounting can also include non-financial information such as cash in hand, current sale report,
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number of sales calls per day, current inventory level of raw materials and finished products As
all of these information acts as a basis for identifying the key performance indicator of different
parts of the business.
There are different types of management accounting system which are essential for the
organization to undertake according to the requirements of the organization and to take useful
information for its users which are used by them for their further purpose of decision making.
Ecotricity needs to evaluate their requirements and accordingly they have to adopt the different
management accounting systems. Different types of management accounting system are
classified as :
Cost accounting system
It is also called as product costing system or costing system which is the framework used
by the firms to estimate their costs of their products and services for analyzing the profitability,
inventory valuation and for effectively controlling the costs, the cost accounting is used for
estimating the cost the company needs to consider so that arrangement of the fund can be done
for smooth and effective operation of the business.
Inventory management system
Inventory management system is basically software system which is used for tracking the
inventory levels, orders, sale and deliveries, this is also used in the manufacturing industries for
creating a work order, bills of materials, other produced related activities and documents.
There are basically two types of inventory management system which is used in the Ecotricity
are Bar code systems and radio frequency identification systems which are used to support the
overall inventory control process effectively and effectively (George, 2016).
Job costing system
Job costing system is also called as Job order costing which is used for assigning and
accumulating the manufacturing costs of an individual unit of the output. This system is used
when the various items produced in the organization are sufficiently different from each other
ion some respect and each has as significant costs than this method is used to identify the
individual cost which helps origination to ascertain the cost, sales price and profit margin of the
business organization.
price optimizing system
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This method basically involves the use of the mathematical analysis by an Ecotricity so
that they can able to determine that how customers will respond for the different prices of the
products and services through different channels, it also helps in determining the process which
company used to determine and it will be best to meet their objectives and goals such as
maximizing the operating profit, etc.
P 2 Different method used for management accounting reporting.
There are different methods which is used for managing the accounting reports in the
organization and it helps ten organization in achieving their objective of ascertaining the
financial position and financial health appropriate, accurate and reliable so that they can
effectively Continue with their operations,
The different methods used for managing accounting report are:
Budget reports
Budget reports are very essential in the organization to prepare effective budgets which
helps them to manage the fund's optimally and to face the uncertainties which company might
face. Budgets are prepared on the basis of the past operation and through which estimation can
be done regarding the projected fund requirements in the future. Budgets for all the departments
re made individually so that company can operate effectively and efficiently (Kastberg and
Siverbo, 2016).
Performance reports
These reports are created foe reviewing and measuring the performance of the company
as whole as well for each individual, departmental performance reports are also measured in the
organization to ascertain the actual position so that other related department can wok accordingly
and objectives can be achieved. Performance reports helps the mangers to make the strategic
decisions for future of the company and it also helps in offering the deep insight into the working
of the company, performance reports will help mangers in evaluating the employee performance
so that appraisal and other decisions regarding this can be taken for smooth flowing of the
business (Uyar, and Kuzey, 2016).
Account receivable aging reports
Account receivable aging report is a timely report that differentiates a company’s
accounts receivables according to a length of a particular time period an invoice has been
outstanding. It is used as a measuring device to determine the financial health of a company’s
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customers. The accounts receivable aging indicates whether the company’s receivables are
collected slower or normal. If the collection is slower than the normal then it indicates the
warning sign that the business may be slowing down or that the company is taking greater risk in
credit sales practices. Also, Account receivable reports also let the business identify its
customers to whom it should deal and provide on credit basis or cash basis through showing the
timely payment of customers for their credit.
Cost managerial accounting reports
Cost accounting reports in managerial accounting computes all the cost of items that are
manufactured. It includes all the raw materials cost, overheads, labor cost and all other direct and
indirect costs that are being considered for the product manufacturing. This report helps the
company to have the clear picture and summary of all the costs being undertaken to make the
product and accordingly helps to frame the selling price as well as estimate the profit margin for
the products. These reports provide the exact understanding of all the expenses in order top
ensure the better optimization of resources in all the departments (Carlsson-Wall and et.al.,
2015).
LO 2
Part-1
Income statement using marginal costing and absorption costing for the month May and June.
Income statement under Marginal costing
for the month ended May
Particulars Details Amount (£)
Sales revenue 300000*13 3900000
Direct material 450000
Direct labor 600000
1050000 1050000
Contribution 2850000
Fixed overhead costs 400000 400000
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profit 2450000
Income statement under absorption costing
for the month ended May
Particulars Details Amount (£)
Sales revenue 300000*13 3900000
Direct material 450000
Direct labor 600000
Fixed overhead costs 400000
1450000 1450000
Gross profit 2450000
distribution and administration cost 0 0
Net profit 2450000
Income statement under Marginal costing
for the month ended in June
Particulars Details Amount (£)
Sales revenue 270000*13 3510000
Direct material 450000
Direct labor 600000
Closing Inventory (30000*13) -390000 660000
Contribution 2850000
Fixed overhead costs 400000 400000
profit 2450000
Income statement under absorption costing
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for the month ended June
Particulars Details Amount (£)
Sales revenue 270000*13 3510000
Direct material 450000
Direct labor 600000
Fixed overhead costs 400000
Closing Inventory (30000*13) -390000
1060000 2450000
Gross profit 2450000
distribution and administration cost 0 0
Net profit 2450000
# Working notes: -
Closing stock= Total production of units-Number of units sold
=300000-270000
=30000
Each unit is sold for £13
30000*13=£390000
hence, closing stock = £390000
Interpretation of the above income statements to the managers of the organization.
The above explained income statement is of two months May and June and consists of
two different methods- Marginal costing and Absorption costing which helps to interpret the
important information from the statements and accordingly will help for the decision-making
purpose for the managers.
Marginal costing is the accounting method in which the variable costs are being charged
to the cost units and the fixed costs for that period are written off in full against the aggregate
contribution to the total cost. This method helps the company in decision making according to
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the performance by ascertaining the net profit of the company. Marginal costing method also
explains the analysis of cost into fixed as well as variable costs separately and it also the
segregates the semi- variable costs into fixed and variable elements.
Absorption costing is the method which analyzes all the production related costs of the
company to ascertain the gross profit and deduct all the distribution and administration expenses
comprising fixed and variable costs, to ascertain the net profit of the company. This method does
not consider the raw materials' cost and Labor but includes variable and foxed overheads costs in
it(Van der Stede, 2015). In the income statement of may the company has produced 300000 units
and sold all of them at the price of £13 without comprising any units left in the closing stock.
Under the marginal costing method, the company has the total production cost of
£1450000 and the total contribution of £2850000. In this method the fixed cost of is further
deducted from the contribution which results in ascertaining the net profit of £2450000 in the
month of May. This in turn helps the company in making decisions by identifying the areas of
improvement in various costs control and to use the resources optimally by the firm to avoid the
wastage and reduce the costs.
As in case of absorption method the fixed and variable production costs is directly
deducted from the sales revenue which helps to ascertain the gross profit of £2450000 and
consisting the no fixed and variable overheads the net profit of the company is resulted to
£2450000.
In the income statement of June under the marginal costing method since there is no
opening stock as being all the units sold in the previous month the cost of goods sold is being
determined by deducting the cost of closing stock units that remained unsold, from all the direct
material and labour cost resulting in contribution of £2850000.
Similarly, in the absorption method the amount of closing stock is being deducted from
the sum of Direct material cost , Direct labor cost and Fixed overhead costs and resulting in the
gross profit of £2450000 in the month of May. In may there is no closing stock and fixed cost is
deducted after ascertaining the contribution under marginal costing whereas in June there is
closing stock which is deducted in additional fixed costs to ascertain the net profit under
absorption costing technique.
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LO 3
P 4 Explaining different planning tools used for budgetary control system.
Budgetary control system
Budgetary control system can be defined as a part of management accounting system that
concerns with predicting various business activities as to provide information to the managers
about requirements of various financial resources in the business within a specific time period. In
other words, it can be said that budgetary control system is a process of preparing plan for the
business in numerical terms(Shields, 2015).
Planning tools Budgetary control system
Planning tools of budgetary control system refers to those tools with the help of which
Ecotricity can develop the budgets can be developed in the most effective way. Further, these
tools are termed as a planning tool as with the help of these planning tools, managers can analyse
and measure the actual position of the business accurately through which they can perform their
managerial functions in the most effective ways.
Following are the major planning tools of budgetary control system that helps the
managers in their decision-making process:
Cash budget: Cash budget are those budgetary reports that provides detailed information
about the various sources through which company would gain cash and cash equivalents and
areas where the Ecotricity would be needed to spend cash within a specific time period.
Advantage: -
 Cash budget helps in manage cash and maintain in utilization of cash.
 Organization use cash budget for determine revenue and expenditure.
Disadvantage: -
 Cash budget are susceptible to manipulation.
 Organization make budget according to previous year budget in current year but it
wrongs but it not true.
Operating budgets: - this budget contain all revenue and expenditure that related to
operations of Ecotricity. Operations like labor and raw material. It is made according to function
and department that involve in operation work in organization. Sales budget is included in it and
that purpose is control on expenditure that is related to resources use in sales work. It also has
purpose increase sales and achieve target. Purchase budget include in operations budget and it is
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made by Ecotricity for maintain cost of purchase raw material and machinery and other assets for
organization and it main purpose is purchase quality product with low cost(Ax and Greve, 2017).
Advantage: -
 It helps in track performance of organization and helps in evaluate available cash and
spent cash.
 It beneficial in making budget for next months because through this manager prepare
monthly budget for keep all information.
Disadvantage: -
 It has disadvantage that it requires more and more time because for making budget
organization has to evaluate previous years budgets. So it consumes more time.
Master budget: - master budget is made by ecotricity for future that includes all things like
sales, purchase, production, investments and balance sheet as well. That helps in crate strategic
plan and make special and accurate budget for future. It is make on based on prediction and it
contains all types of budget. For expand of business that organization use these things and
evaluate present cost and rates of all things and make budget for future.
Advantage: -
 It is a bird's eye view of the business because this budget makes accurate strategy and
plan for spent and earn money in the future.
Disadvantage: -
 Master budget do not easily update and modify by anyone because many data are
mention in budget according to previous and then predict data notify.
Zero based budget: - this budget is use by ecotricity and this helps in justify all expenses for
every new period. It is start from zero base so for create this budget managers skills require at
high level. It consumes more time and cost because fort making organization has to evaluate and
analyse all things than make budget(Panchenko, 2018).
Advantage: -
 Managers justify all expenses so for this they also have to evaluate all area for know
about generate revenue.
 It makes strategy for future in effective and efficient manner.
Disadvantage: -
 It consumes more time and cost due to evaluate all things like market.
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 It is very lengthy process and too complex so many difficulties also create during make
budgets.
LO 4
P5 Comparing the different management accounting systems and their response to the financial
problems.
There are different management accounting systems that can be used by Ecotricity Ltd in their
management process. They are as follows
Key Performance Indicators- A Key performance indicator (KPI) is a core quantitative
measures used by the organization to monitor its activities and progress towards achieving the
key goals and financial outcomes. KPI varies as according to the type of departments and
industry the organization functions. Ecotricity Ltd company can use KPIs in relation to its
finance department that will include analysis of its gross margin, net profit, current ratio and debt
to equity ratio. In case of applying KPI in operations department for the Ecotricity Ltd company,
it can ensure and focus on the customer order fulfilment rate as well as the production rate of the
company in a prescribed time limit. The Human resource department can track the gender
diversity as well as measure the employee turnover rates for the company. Further on applying
KPI in marketing department the manager could monitor the acquisition cost of each incremental
customer gained. And in sales department the sales manager could measure and monitor the sales
volume changes and the customer base of the company. Lastly KPI can be useful in customer
service by measuring the number of customer complains being settled and the number of
customers are unsatisfied and hang up. Thus, Key Performance Indicator if being adopted by the
Ecotricity Ltd could help the company in all the areas of functioning by the organization as well
as contribute towards the growth and efficiency of the company(Malmi, 2016).
 Variance analysis- Variance analysis is the quantitative investigation of the difference
between the actual and planned behaviour. This analysis is used to maintain the control
over the business. For instance, the planned budget of sales of the company is £50000
and the actual sales is £45000, here the variance analysis finds out why this difference of
£2000 has been occurred. This could be explained further by following example-
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