Management Accounting Report: Excite Entertainment's Financials

This report provides a comprehensive analysis of management accounting practices applied to Excite Entertainment, a UK-based leisure industry company. The report begins with an introduction to management accounting (MA) and financial accounting (FA), highlighting their differences and the im...Read More

Management Accounting

Table of Content
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
P1. Explaining MA and importance of its systems .....................................................................3
M1. Evaluating advantages of MA systems ...............................................................................5
P2. Presenting different MA reports ...........................................................................................6
M2. Explaining reason for presenting the information in an accurate manner............................7
D1. Evaluating the ways in which MA systems and reporting are integrated within the
operational process of firm .........................................................................................................7
LO2..................................................................................................................................................7
P3 Determining income statements using the marginal and absorption costing ........................7
M2. Use of varied of management accounting approaches and developing suitable financial
reporting documents...................................................................................................................11
LO3................................................................................................................................................12
Planning tools in management accounting................................................................................12
LO4................................................................................................................................................14
P5. comparing ways within which application of MA deals with the financial problems and
prevents financial problems ......................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting is the provision of financial data which advice to the company
to use in its business. The present report is based on Excite Entertainment, a leisure based
industry in UK. Its main activity is to promote festivals and concerts at different locations. The
objective of this firm is to the organize entertainment programs within an overall UK.
Furthermore, it involves the difference between the MA and FA along with essentials of MA
systems. Different reports will also be highlighted which are prepared by the managers with
accuracy. Moreover the study highlights computation of profits by absorption and marginal
costing and application of different planning tools and MA systems in resolving financial
problems.
LO1.
P1. Explaining MA and importance of its systems
a. difference between MA and financial accounting
Financial accounting deals with disclosure of financial information to stakeholders in
order to help them in making suitable or informed decisions (Maas, Schaltegger and Crutzen,
2016). However management accounting is been seen as confidential and limited to disclosing
information only to an internal management of an organization for the purpose of bringing
effectiveness and an efficiency in the functioning of the company.
FA MA
It is considered as mandatory requirement for
the each and every firm in accordance to
government.
It seems to be at discretion of the management
and there is no any compulsion for doing this
accounting.
Financial accounting is governed by the
principles that is GAAP.
There does not exist any standard in
preparation of MA. Thus, it is framed on the
basis of the need of management team.
Under FA, the reports are comprised of income
statement, cash flow statement and the balance
sheet.
Under MA, reports are based on monthly,
weekly and yearly analysis of the functions,
products and the geographies.
Auditing of the financial statements under FA There does not exist any specific need relating

is mandatory in majority of the countries
(Difference between MA and FA, 2018).
to independent audit of MA reports.
The statements under FA are been published
for public at large so there is no confidentiality.
On the other state, MA are meant only for the
management and confidentiality of such reports
is counted as key concern.
b. Cost accounting system
It is the framework that is been used by Excite Entertainment for estimating its product
cost for the purpose of valuing its inventory, ensuring cost control and analysing profits. It is
critical for an enterprise to anticipate an accurate cost for attaining profitable operations. The two
main methods of the costing are as follows-
Direct cost- It means the method in which only the variable cost of manufacturing are
been assigned to an inventory and the cost of sales (Quattrone, 2016). The fixed cost of
manufacturing are been viewed as an expenses for a particular period within which they are been
incurred. It includes cost relating to direct labour, direct material and direct expenses.
Standard costing- It is referred as an accounting system that is been used by the
producers in determining differences or the variances present between actual cost of goods which
were produced and a cost that has been occurred for production of an actual goods. This method
helps in measuring deviation in the performance so that corrective measures can be taken in
order to overcome the deviations. It also ensures effective controlling for Excite Entertainment
on its business operations.
c. Inventory management system
It is the system of MA that refers to the combination of the technology, procedures and
the processes which oversee maintenance and monitoring of the stocked products. It is the tool
that allows Excite Entertainment in tracking the flow of its inventory within an supply chain
(Mirzaey, Jamshidi and Hojatpour, 2017). It helps the firm in optimising an entire spectrum
from an order placement with the vendor to an order delivery to the ultimate consumers by
mapping an overall journey of a product.
Some of the main feature of inventory management system are as follows-
 This system maintains right quantity and an amount of an inventory for each of the
product without over and under stocking any of the item.

 It easily determines and traces the products as barcode are integrated for an instant
labelling and identification of the product.
 Strategies and the process in certification, classifying and reporting under inventory
management such as Just-in-time, FIFO, ABC analysis etc.
An inventory system is said to be effective and efficient when it results better cash flows, lower
carrying cost, better supply, low dead stock etc.
Just in time- It is reflected as an inventory strategy where only the materials are ordered
and received as they are required in process of production (Panchenko, 2018). The main aim of
this technique is reducing the cost by seeking for saving money on the inventory overhead
expenses. It helps in minimizing an inventory and in increasing efficiency. It is also called as the
system of Toyota Production as the car manufacturer that is Toyota has opted for this system in
1970s.
ABC analysis- It means the method that categorises into three parts where A represented
as most valuable and the demanded product by the customers. It involves the products which
heavily contributes to overall profit without consuming too much of the resources. Category B
presents the moderate products which do not have high or low demand and lies in the middle of
the road. Lastly, Category C is seen as tiny transactions which are essential for earning profits
and the does not contributes to value of an entity (Uyar and Kuzey, 2016). This technique is used
for segmenting the customers into three major segments as per their value and specification.
d. Job costing system
It is the method which is defined as the technique of recording a cost in manufacturing
the job instead of the processes. With this system, manager could keep a track on cost of each
and every job by maintaining the data that is more relevant to business operations. It is proved to
be an efficient costing method in allocation of distinct cost of the product and in monitoring an
order expenses at the time when the products are seen as non-identical.
M1. Evaluating advantages of MA systems
Systems Benefits
Cost accounting system It helps in ascertaining accurate cost that is
incurred in producing the product. This also
helps in ensuring control over the cost which in

turn leads to higher profitability.
Inventory management system This system helps in maintaining adequate
level of inventory for an Excite Entertainment
so that it could be able to supply its product
within a time frame. Moreover, it ensure timely
delivery of the products to customers.
Job costing system It is the most useful method of MA as it helps
in knowing the cost of each job in
manufacturing the product. It provides for
optimum use of the resources so that less
wastage is resulted with high level of the
production.
P2. Presenting different MA reports
a. Describing several MA reports
The MA reports are generated by the managers on continuous basis and thereafter they
assesses such reports for highlighting certain patterns and in converting them into an useful
information for an enterprise (Shevelev, Sheveleva and Gvozdev, 2017). The different reports
that are prepared by managers are as follows-
Budget report- This report relates with creation of the overall budget that involves
anticipation of the expenses and an income. The budget report is been made on the basis of the
previous experiences in order to cater any uncertainty that may arise in future. Excite
Entertainment could achieve its mission and the goals by staying with a budgeted amount. It
helps in guiding the managers to offer for better incentives, renegotiating the terms with
suppliers and reducing costs.
Accounts receivable report- Under this report, details regarding remaining balances of
the customers are broken into particular time periods which allows the managers in determining
issues and the default if any in the collection process of Excite Entertainment (MA reports,
2018). It enables the managers in tightening its credit policies because cash flow is counted as
crucial for the business.

Cost accounting reports-It presents the summary information of all the cost that includes
material cost, labour cost and overhead. It offers a capacity to the managers in realizing the cost
prices against its selling price. It provides an exact understanding relating to all the expenses that
are important for optimum use of the resources within all the departments.
Performance report- This report is created for reviewing the performance of Excite
Entertainment as well its employees. This report is used by the managers in making important
strategic decisions regarding future prospects of the business. It acts as vital for the company in
keeping an accurate measure of its strategy towards its mission.
Inventory report- It is the report that involves information of hourly cost of employment,
per unit overhead that are incurred in manufacturing. Through this report, comparison can be
drawn across the multiple lines in order to detect and emphasize on promising and the
prospective areas and also helps in rewarding employees who are performing best.
M2. Explaining reason for presenting the information in an accurate manner
It is crucial for the managers in to prepare the reports that is reliable, updated and
accurate because it helps an external users and internal users within the business in making the
decisions regarding the investment made by them in the securities of the firm and deciding for
day-to-day operational activity. It helps in managing internal control in order to improve the
departmental functioning. In case there exist an errors in the information that in turn would
hamper the final reports in terms of its accuracy and reliability.
D1. Evaluating the ways in which MA systems and reporting are integrated within the
operational process of firm
It is critical for Excite Entertainment to remain conversant with a management
accounting concept in order to make appropriate decisions for its multiple departments. Well
application of the MA concepts would translate into an efficient practices of financial accounting
for an entity. With better knowledge of the MA principles and methods, the company could be
able to equipped better budget that results in minimum wastage and attaining maximum profits.
Without the framing of the report, systems cannot be implemented in an effective manner both
reports and the systems are integrated.

LO2.
P3 Determining income statements using the marginal and absorption costing
There are different costing techniques which are used by the organisations to record their
transactions and getting the results from profits. Two of the commonly used ,management
accounting techniques are marginal costing and absorption costing.
Marginal Costing
Marginal costing can be defined as principle where variable cost are charged to unit costs
and fixed costs which are attributable to relevant periods are written off against contribution for
the period. Marginal costing is concerned with ascertaining marginal costs and its effect over
profits due to change in volumes or output through differentiation between variable and fixed
costs. Costs are defined into two classes that are fixed and variables. Concept of this technique is
based over behaviour of the cost with output volumes. The approach is also known as variable
costing where only variable costs are aggregated and per unit cost is ascertained on variable
costs. Marginal costing covers only cost expenses that are variable in nature and where fixed
costs are charged as periodical costs. Excite ltd uses marginal costing for computing total costs
and net profit from manufacturing each product it is planning to manufacture.
Advantages and Disadvantages of Marginal Costing
Advantages
 Marginal costing helps Excite ltd in comparing its costs with budgeted and actual and
taking the corrective steps for cost control.
 This helps the business enterprise in short term planning and in defraying the break
evens.
 This helps the business to calculate per unit profit of the product. Its assists the management of Excite ltd in planning the productions by disclosing change
in profit levels with the change in output.
Disadvantages
 It is difficult for the enterprise to segregate cost between fixed and variable.
 This technique do not account for the fixed costs associated with the production of
products.

 It becomes difficult for company to fix selling price under the cost plus contract systems
as it depends over distributions.
Absorption Costing
Absorption costing is also known as full costing system and is recommended by the
accounting frameworks. In absorption costing all the manufacturing costs are treated by
company including both variable and fixed as the cost of product. Variable costs changes with
the changes in activity levels, where the fixed costs do not change with the change in output or
activity level. Variable costs are usually cost of materials, labour manufacturing overhead. The
costing technique considers fixed costs that are incurred in production of goods in measuring the
over all cost of product. The technique is used by the organisation to calculate the profitability
from the product. The accounting techniques is used by the Excite ltd to calculate the cost of
product including both variable and fixed costs. The accounting techniques provides more
reliable and accurate results. The technique provides the company with contribution per unit
from production of products.
Advantages and Disadvantages of Absorption Costing.
Advantages
 Absorption costing helps organisation in tracking the profitability from the product in
more appropriate manner.
 It provides the business organisations with the realistic product cost.
 The technique consider both variable and fixed in calculating the cost of product.
 Absorption is more suitable for the organisations having constant demand of their
products. Unlike variable costs it do not consider fixed as variable costs.
Disadvantages
 The costing technique is not suitable when the business wants to make comparisons
between the product ranges.
 The technique is not suitable when the operational efficiency is to be improved.
 The accounting technique fails to take challenges associated with under and over
absorption of the variable costs.

Marginal Costing
Calculation of cost per unit
Particulars Figures (in £)
Prime expense for each product 4
Variable manufacturing costs each product 2
Total marginal cost per unit 6
Particulars units
Per unit
price
Figures
(in £)
Sales 8000 15 120000
Less cost of goods sold
Opening stock 500 6 3000
Production 10000 6 60000
Total units 63000
Less closing Inventory 2000 12000
cost of goods sold
63000-
12000 51000
Contribution 69000
Fixed Cost 40000
Net Profit
69000-
40000 29000
Working Notes
Sales = (15*8000) = 120000
Prime Cost = (4*10000) = 40000
Variable cost = (2*10000) = 20000
Cost per unit for opening and closing inventory =(4+2) = 6
Opening stock = (6*500) = 3000
Production = (6*10000) = 60000
Closing inventory = (6*2000) = 12000
COGS = (63000-12000) = 51000
Contributions = (120000-51000) = 69000

Profit = (69000-40000) = 29000
Interpretation
Profits using the technique of marginal costing is 29000. Total sales are calculated using
the selling price of 15 for 8000 units. The variables costs are calculated using the production
units 10000. The value of closing inventors is calculated without considering the fixed costs.
Net profit from the production is 29000.
Absorption Costing
Assessment of cost per unit
Particulars Figures (in £)
Prime Cost for each product 4
Non-static manufacturing costs each product 2
Budgeted static manufacturing expenses 4
Total absorption expense each product 10
Particulars units
Per unit
price
Figures
(in £)
Sales 8000 15 120000
Less cost of goods sold
Opening stock ( 500 10 5000
Production 10000 10 100000
Total units 105000
Less closing Inventory 2000 20000
cost of goods sold
105000-
20000 85000
Gross Profit 35000
Working Notes
Sales = (15*8000) = 120000
Prime Cost = (4*10000) = 40000
Production cost = (10*10000) = 100000
Fixed cost = (4*10000) = 40000
Cost per unit for opening and closing inventory =(4+2+4) = 10

Opening stock = (10*500) = 5000
Closing inventory = (10*2000) = 20000
COGS = (105000-20000) = 85000
Profit = (120000-85000) = 35000
Interpretation
Profits under the absorption costing is 35000 that is higher than the marginal profits. The
cost of goods sold have been calculated using the fixed cost in calculation of inventory. The
absorption costing is including the fixed costs for its production.
Reason behind higher profits in absorption costing.
There is a difference between both the accounting techniques. Marginal costing provides
lower profits where the absorption costing provides for more higher profits. The difference
between the profits is due to distribution of fixed costs to the production of units. In the
absorption costing fixed costs costs are considered while calculating the cost of closing
inventory. This results in reducing the cost of goods sold that is lower, as closing stock is valued
more in absorption costing. The lower cost of goods sold results in higher profits in absorption
costing.
M2. Use of varied of management accounting approaches and developing suitable financial
reporting documents.
Techniques of MA is beneficial for the company as same help manager to formulate
documents of the financial reports as well as maintain the products and services cost within
business concern. Techniques like marginal and absorption states whole cost of company and
then ascertain net profits into company. It is the accountability to accomplish many data
connected to accounting as well as maximise productivity. Both techniques are useful for Excite
Ltd. Like their accountant can prepare appropriate management reports through evaluating
revenues as well as expenditures which aids in making decisions. Also, this assists in enhancing
production and sales in respective organisation.

LO3.
Planning tools in management accounting
The planning tools are the one which are used by the companies in order to plan for the
things which need to be achieved (Armitage, Webb and Glynn, 2016). In management
accounting there are many different types of tools which can be used by the accountant for
proper planning of all the requirements and for making good decision. The different types of
planning tools used by the Excite Entertainment are discussed in the following points connected
below-
Cashflow budget- the cashflow budget is a type of budget which outlines all the
estimation relating to the different sources of income and the various areas of application of
money. This type of budget outlines all the inflow and outflow of the cash which is expected to
take place at time of doing the business. This budget help Excite Entertainment in properly plan
for the optimum utilisation of the cash in such a way that the company is able to manage the
work in proper manner. This budget will also help the company in analysing and deciding that
which sources to go for arrangement of money whether to go for equity or for debt or a
combination.
Advantages- there are a wide range of advantages which are experienced by the company
at time of using the cash budget which are explained in the following points connected below-
 The major advantage of this tool is that this help the company in beforehand planning for
all the sources of income and the areas where the expenses can incur. Thus, this help the
company in properly manage the work as the company knows in advance that how much
money is available to the company and they have to manage their work in that amount
only. Another advantage is that if there are any deficit then it can be found out with help of this
budget. This is because of there is shortage of money in the budget then the company can
think for sources from where it can arrange for the money (Samuel, 2018). Thus, this will
save the time of the company in arranging for the money as they know in advance what
all deficit they can face.
Disadvantages- the disadvantages faced by the company of cashflow budget are as follows-

 The major disadvantage is that this is very time consuming as the planner has to first
analyse all the sources and application of money and then only the budget can be
prepared. Also, another disadvantage is that the planner needs to have a high knowledge relating to
the preparation of the cash budget. As a small mistake can also result in high losses.
Sales budget- this is a type of plan which outlines the estimation of the sales which need
to be produced by the company in order to earn profits (Rizza and Ruggeri, 2018). Under this a
target sale are set that the company has to do in any condition. Then in the sales budget the
company plan and implements the resources within the activities which are necessary for the
completion of the sales. The reason for preparing this sales budget is to effectively plan and
control the resources which are required to attain the desired and planned sales objective.
Advantages- the major advantages enjoyed by the company are as follows- The major advantage is that this help the company in optimally allocate all the resources
to all the activities of the manufacturing process. This is necessary because of the reason
that this will outline all the additional resources which need to be allocated if there is any
emergency or contingent situation.
Disadvantages- the drawbacks of using this type of planning tool is discussed in the following
points connected below-
 This budget cannot be accurate as it is not possible for any person to predict the future.
Thus, there are chances that the set target for the sales does not meet up to the
expectations. Another drawback is that there are some contingent risk and expenses for which the
person cannot predict the future trends.
Operational budget- this is a type of budget which is used as a planning tool wherein all
the income and the expenses for a given period of time are estimated. This is a plan which is
made in advance by analysing the past trends within the income and expenses. This plan is
treated as a goal or objective which the company need to achieve at time of operating and
manufacturing.
Advantages- the major advantages enjoyed by the company because of use of operational budget
are discussed in the following points-

 The major advantage of this is that this helps the company in projecting the future
expanses (Borker, 2016). This will help the company in projecting the all possible
expenses which the company may incur and to make arrangement for dealing with those
expenses.
Disadvantages- the major disadvantages faced by the company are as follows- There are many changes taking place in the business environment and this can also lead
to changes in the price of the different materials used by the company. Thus, these
changes cannot be predicted and if they happen then it impacts to the profitability of the
company to a great extent.
Comparison of the planning tools
In comparison among all the three it was outlined that cash flow budget is being used by
the company for calculating the cash flow from all the three activities that is operating, financing
and investing activities. But in contrast to this the sales budget is used by the company to
maintain and monitor that whether the set target for the sales will be able to achieve with the
given resources. In the end of the comparison it was outlined that the operating budget is used in
order to plan for the future by estimating the income and the expenses which may be accrued by
the company (Zeng, 2018). But all the three budgets need to be prepared by the company
because all the three budgets are different form one another and has their own utility and
importance in attaining the objectives of the business.
LO4.
P5. comparing ways within which application of MA deals with the financial problems and
prevents financial problems
There are various financial problems which are faced by the company such as deviation
in actual and the standard performance, lack of financial resources, high production cost, non-
fulfilment of targets etc. In order to overcome such financial issues the following techniques are
followed-
Variance analysis- It is the tool which determines the difference between the planned
and the actual behaviour. It is used for identifying the degree and the cause of difference between
the actual performance and the baseline to maintain effective control over project (Tenhunen,
2018). This technique helps in resolving the financial problems relating to financial and
performance gap in the business.

CVP Analysis – It helps the business enterprise in determining the changes of costs and
volumes that affect the operating and net income of business. This analysis is based over several
assumptions. In this analysis sales price and variable cost per unit is constant and fixed costs of
company are constant. This helps the businesses to identify the effects of changes on the
operations of company.
Financial governance- It refers to the method in which the an entity collects, reviews,
manages and control the financial information. It helps in tracking the financial transaction,
managing and controlling the data, complying with disclosures and seeking for efficient
operations. It prevents an organization from financial issues in relation to lack of funds, material
errors etc.
Benchmarking- It is the process that is adopted by the firm in measuring the performance
of its own products, processes and strategies with that of competitors products (Christ and
Burritt, 2017). This helps the company in attaining competitive edge over its rivalry and
overcome the financial problems with respect to high cost, low production, ineffective quality.
Key performance indicators- It is the method that indicates the ways in which an entity
could achieve its business goals and objectively. It prevents the financial issues in terms of non-
achievement of targets and goals.
Excite Entertainment ABC Ltd.
It uses variance analysis and the benchmarking
for achieving competitive edge against
competitors.
On the other hand, it adopts financial
governance and key performance indicator for
making its processes more effective.
Particulars Formula Amount
Fixed cost 120000
Contribution per unit 30
Break even analysis
Fixed cost/ contribution per
unit 4000
Working note :

Selling price per unit 40
Less: Variable cost per unit 10
Contribution per unit 30
In case of earning £90000 of profits
Fixed cost 120000
Desired profit 90000
Sales units
Fixed cost+Desired profit/
Contribution per unit 7000
Interpretation- The above results shows that for gaining the profits amounting to
£90000, Excite Entertainment need to sold 7000 units. At 4000 units, the company will attain
break even point where it incurs no profit and loss.
CONCLUSION
By summing up the above report it has been stated that MA plays a crucial role in
running smooth working of Excite Entertainment. It helps the firm in gaining a leading position
and success in the overall market. The MA reports and systems helps in reviewing the
performance of the company and resolving any issue occurs in future relating to financial
measures.

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