Financial Analysis and Management Accounting Report: Unit 5

This report provides a comprehensive analysis of management accounting, focusing on its crucial role in decision-making for Vectair Holdings Ltd, a manufacturing company. It delves into the essential requirements of various types of management accounting, including cost accounting, price optimization, job costing, and inventory management, highlighting their benefits in strengthening internal control and fostering growth. The report enumerates various methods for management accounting reporting, such as segmental reports, performance reports, inventory management reports, accounts receivables ageing reports, job cost reports, and operational budget reports. Furthermore, the report includes a practical application of marginal and absorption costing through income statements and provides insights into planning tools and management accounting systems to respond to financial problems. The report emphasizes the significance of management accounting in achieving organizational goals and responding effectively to financial challenges. It is a detailed exploration of management accounting principles and their practical application in a business context.

UNIT 5 MAN ACC

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and essential requirement of various kinds of management
accounting...............................................................................................................................1
P2 Enumerating various methods for management accounting reporting..............................3
TASK 2............................................................................................................................................6
P 3 Computation of marginal and absorption costing............................................................6
TASK 3............................................................................................................................................9
P4 Discuss kinds of planning tools.........................................................................................9
P 5 Management accounting system to respond to financial problems................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is crucial branch of accounting helping management to take
better and effective decisions for strengthening organisation internally. The present report deals
with Vectair Holdings Ltd which is engaged in the manufacturing sector. The report highlights
importance of management accounting information which are used by the management to arrive
at concrete results. Moreover, various types of such accounting is discussed and managerial
reports are discussed as well. Various planning tools are discussed which help company to make
decision whether to invest in new project or not and helpful to check its viability. In relation to
this, marginal and absorption costing is also enumerated in the report. Furthermore, management
accounting system help in responding to financial problems and thus, it plays significant role in
the company to achieve common targets in the best possible way.
TASK 1
P1 Management accounting and essential requirement of various kinds of management
accounting
Management accounting is an effective decision making tool which helps management to
take enhanced decisions for the betterment of the company. It is quite useful tool which adds
value to organisation. The management takes this information for making effective internal
decisions for the betterment of the firm. The management accounting information is provided to
managers only and as such, it is not imparted to various stakeholders'. By analysing information,
management comes to know the progress of the company and as a result, if any deviations exist
then in consideration of the same, decisions are taken so that overall productivity may be
enhanced quite effectively. Vectair Holdings also uses management accounting information for
strengthening internal control and initiating healthy growth of the company (Chenhall and
Moers, 2015).
Management accounting is also termed as cost accounting as it controls various expenses
which help to achieve production in the best possible way. Timely reports are prepared and
which is handover to the management to analyse situation and then take decision thereon. The
main essence of management accounting information is that it blends or combines financial
information with non-financial one and then produce picture of the company. This helps Vectair
Holdings to take effective decisions for the betterment of it. Thus, it can be said that management
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accounting is required in the organisation to take enhanced decisions with much ease. In addition
to this, various types of management accounting and essential requirements of them are
described below-
Cost accounting:
Cost accounting is the main type of management accounting as it imparts effective
information to the manager for better decisions. Vectair Holdings Company is quite enhanced by
implementing cost accounting system to control costs in effectual way (Renz and Herman,
2016). As the name suggests, cost accounting helps to reduce and control various expenses in the
organisation so that production can be achieved with much ease. Various costs such as direct,
indirect, fixed and variable costs are analysed and consecutively reduced so that expenditures
may not exceed profit in any way. Thus, this branch of management accounting is essentially
required in the organisation so that costs can be effectively controlled in the best possible
manner.
Price optimisation:
Customer's behaviour should be analysed by the company so that prices can be easily set
by the organisation. To overcome this problem, management accounting type i.e. price
optimisation is used to generate effective results. This technique is a termed as a mathematical
analysis which is carried out to determine how consumer reacts to price quoted by the company.
In simple words, management analyses how customers respond to price set by the organisation
of a particular product. This helps Vectair Holdings Ltd to take effective decisions regarding
price of the product and thus, it quotes that price on which consumers are ready to purchase it
without any hesitation. It is quite essentially required in the company so that decisions regarding
prices of the products can be easily achieved with much ease (Otley, 2016).
Job costing:
Job costing is effective tool basically for small organisation. As such, it is quite useful for
Vectair Holdings to control costs on various jobs performed in the production site. Job costing is
quite helpful in firm so that expenses incurred on various jobs can be easily controlled and
reduced to get results in terms of more profits. It is combination of various costs such as
materials, labour and overhead which are incurred on a particular job. Thus, job costing is
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essentially required in small organisation and large one as well so that effective results can be
drawn and expenditures on jobs can be reduced with much ease. Cost accountant manages and
keeps track of each costs and as such, it is provided to management for better and effectual
decisions in the best possible way.
Inventory management:
Inventory management is quite effective technique so that stock can be effectually
managed in the organisation. Stocks are required for the production purpose and as such,
adequate quantity is required to be maintained so that overall production may be met with much
ease. As such, inventory management helps to control inventory in respect to placing order,
storage of the same, holding costs (Cooper, Ezzamel and Qu, 2017). These aspects are important
in managing inventory so that goods can be easily produced and as such, company can meet
demand of customers in the best possible way. Managing inventory is required so that adequate
quantity can be purchased and provided to customers. If more quantity is ordered then it leads to
unnecessary spoilage of the inventory which should not be done by the company as it results into
incurring of additional cost for handling such inventory. As such, Vectair Holdings should
effectively manage inventory so that orders can be easily fulfilled and costs can be reduced as
well.
Providing benefits of management accounting system in the company
The management accounting system is quite useful for the top management to take
effective and better decisions which are suitable for strengthening internal control in the
organisation. The managerial reports also provide effective information to the management and
as such, management accounting is quite beneficial to firm. Costs are controlled in a better way
and as such, revenue is generated by the company. Moreover, efficient handling of inventory is
also observed and as a result, proper control is initiated quite effectually. Thus, it can be said that
management accounting system is crucial tool for organisation (Tappura and et.al, 2015).
P2 Enumerating various methods for management accounting reporting
1. Segmental report:
Segmental reporting is quite essential tool in the organisation as it provides information
related to operational segments of the company. As such, it is presented with the financial
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statements of the business entity. Segmental reports are also prepared by Vectair Holdings as it
helps to provide effective information to various stakeholders' to take enhanced decisions with
much ease. This is quite useful piece of information which is provided to creditors and investors
to take effective information with regards to imparting funds to organisation. Thus, they may be
able to assess solvency and profitability of organisation and as such, decisions may be made
whether to provide funds to firm or not. Thus, segmental reports are quite effective method of
management accountant reporting and are available to public companies and not to private firms
(Chiarini and Vagnoni, 2015).
2. Performance report:
Performance report is prepared for measuring performance of something. Mainly report is
prepared to determine performance of employees so that there productivity can be easily
checked. The main essence of this report is that workers' performance is analysed and as such,
decisions are taken by the management if performance is not adequate and how it can be
enhanced so that overall productivity can be enhanced in the best possible way. This is an
effectual method to assess performance and productivity of employees can be attained by taking
effective steps to overcome weaknesses if any. Thus, performance report helps to attain desired
level of production by Vectair Holdings so that profits may be achieved with much ease.
3. Inventory management report:
Inventory management report is another effective tool for purchasing adequate quantity
of stocks in the best possible way. This report help to management about the quantum of
inventory required by the production department so that goods may be easily produced. Vectair
Holdings manages various orders which are received from customers on daily basis and as such,
inventory is required for achieving production with much ease (Hopper and Bui, 2016). Thus,
management is imparted with inventory management report which lists down amount of
inventory held by the production department and how much more is needed to accomplish
production as well. This helps management to analyse report and thus, places order for meeting
demand of the production department. This helps to reduce wastage of the stocks as management
place orders only which is required by the department. This eventually helps to minimise
inventory and as such, production is achieved with much ease.
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4. Accounts receivables ageing report:
This report is quite useful tool for organisation as it helps to recover outstanding dues
from the credit customers. Vectair Holdings should effectively utilise accounts receivables
ageing report so that it may analyse outstanding amount from customers who have purchased
goods on credit basis. This report is quite useful so that customers can be contacted for paying
out amount (Wouters and Kirchberger, 2015). Usually, this report is provided to the management
to analyse unpaid customers invoices and as such, management takes steps so that overdue
payment can be made by them. If more credit is outstanding, then management should formulate
strict credit policies so that consumers may pay amount within stipulated time frame.
5. Job cost report:
Job costing report is effective method of management accounting reports which is helps
in controlling costs which are incurred on various jobs. This report is mainly useful in the
manufacturing sector as it involves various costs such as material, labour and overhead which is
assigned to specific job. This helps company to analyse and assess expenditures incurred on
various jobs and as such, effective steps are being taken for controlling costs in the best possible
way. Thus, expenditures are effectively controlled and organisation can achieve desired
production with much ease (Vigorito, 2016). As such, output is achieved and costs are cut down
up to high extent. This helps company to accomplish production by reducing expenditures and
achieving more production with much ease.
6. Operational budget report:
This report is quite effective tool for analysing how money is spent on various
operational activities in the organisation. Thus, operational budget report is the accumulation of
various costs and expenditures, future costs and forecasting of income as well. This is quite
important report as operational activities are analysed and then decisions are taken so that
organisation can easily achieve profits quite effectually. Operational budget report is prepared in
advance and provided to the management so that prediction of expenditures and revenues may be
easily completed. Thus, management is able to analyse revenue and expenses and then take
suitable action so that operational tasks can be carried without any difficulty.
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TASK 2
P 3 Computation of marginal and absorption costing
Income statement on the basis of marginal costing
Interpretation-
Marginal costing is one additional unit of output produced by the firm by incurring
additional cost. It can be interpreted from the income statement of marginal costing that firm has
good net profit. The sales figure on the basis of statement is 2100 which has 600 units at the rate
of 35. On the other hand, cost on production is 9100 which consists of 700 units at the rate of 13.
The closing inventory is 1300 which is calculated by having 100 units with rate of 13. Total
variable cost is 7800. While, contribution per unit comes to 13200.
The variable costs are deducted from contribution per unit to get net profit. As such,
variable overhead on sales is 600. While, production overheads is 2000, selling fixed cost and
administrative costs are 600 and 700 respectively. By deducting these variable cost, net profit is
ascertained.
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Income statement on the basis of absorption costing
Interpretation-
Absorption costing is being calculated above. Absorption costing is quite effective tool
used in manufacturing sector. It can be interpreted from above computation that sales are 2100
which is calculated as there are 600 units at the rate of 35. While, cost is 11200 which consists of
700 units at the rate of 16. Closing stock and fixed production overheads are deducted which are
1600 and 100. Thus, cost of production is carried out which is 9500. Contribution per unit comes
around 11500.
Furthermore, other costs are being deducted to arrive at net profit. In relation to this,
variable overhead on sales is 600. Selling and administrative costs such as 600 and 700 are
deducted and as such, net profit is ascertained which is 9600. Thus, it can be conveyed that net
profit of Vectair Holdings is quite good (Hiebl, Duller, Feldbauer-Durstmüller and Ulrich, 2015).
Difference between marginal and absorption costing
Marginal costing Absorption costing
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1. It is generally used as a decision-making
tool for management of the company.
1. Absorption costing is mainly utilised for
outside or external reporting.
2. Marginal cost is applied on inventories on
variable cost of production.
2. Absorption costing is applied to all costs that
were used in the production process.
3. Inventory is restricted to be valued as per the
accounting standards.
3. Inventory can be allowed for valuation
purpose as governed by IAS (International
Accounting Standards) section 2.
4. Over and under apportionment of costs does
not arise as fixed production overheads are not
considered while calculating marginal costing.
4. Here, over and under absorption rates are
ascertained as fixed production overheads are
apportioned while calculating absorption
costing.
5. Cost per unit remains same as variable cost
is charged on the production (EBRAHIMI and
MOGHADASPOUR, 2015).
5. Whereas, cost per unit decreases as
production maximises.
Thus, it can be said that marginal and absorption costing both methods provide fruitful
results to organisation and as such, it should be calculated by firm to analyse various costs in the
production process.
Giving techniques of Management accounting
 Revaluation accounting
Adjustment is made with the help of revaluation accounting so that book value of fixed asset is
adjusted with that of market value. This is required so that correct ascertainment of profit can be
made else, asset will continue at more cost in the books of company.
 Funds flow statement
The difference is highlighted by this statement in the balance sheets of two years with reason of
such change.
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 Historical costing
It is the acquired cost of asset in the books of the business. Thus, it has the disadvantage that it
has to be revalued so that proper ascertainment of profit can be accomplished (Quattrone, 2016).
TASK 3
P4 Discuss kinds of planning tools
The various kinds of planning tools which are required by Vectair Holdings are as
follows-
Zero based budgeting
Zero based budgeting is the method which prepares budget from the scratch base and as
such, new budget cycle is prepared every year. In simple words, it is does not take previous year
base for formulating budget (Coad, Jack and Kholeif, 2015).
Advantages
1. The main advantage of this budget is that efficiency is obtained as no historical figures are
taken as a base for preparation of new budget.
2. Funds are allocated according to the current requirement of departments and as such, budget
inflation is not done. This is effective planning tool and proper allocation of funds are achieved
and as a result, it is easier method to inculcate better results.
Disadvantages
1. Main limitation of this method is that it does not take into account previous figures and as
such, more manpower is required to prepare budget from completely scratch base.
2. This method is time consuming as whole budget is prepared from zero base. Instead of this,
incremental budgeting should be used so that time can be saved just by increasing figures from
the previous budget (Helden and Uddin, 2016).
NPV
NPV (Net Present Value) method is effective planning tool which is helpful for Vectair
Holdings in the event of investing in any new project. NPV provides useful information
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regarding the profitability aspect of the project and as such, it is quite effective method to
analyse profitability of the project. Higher the NPV, better for firm to invest in the project.
Advantages
1. The main advantage of using NPV as a planning tool is that it considers time value of money
while evaluating project's profitability. Thus, it helps to maximise value of firm quite effectively.
2. Cost of capital is being considered and risks associated with new project is also made
available to the management so that they may take decision whether to invest in the project or
drop the plan (Tucker and Schaltegger, 2016).
Disadvantages
1. Disadvantage of NPV is that it uses discounting rate to predict profitability of the project and
as such, dependency on discounting rate may not provide reliable results. It is also difficult to
calculate such rate.
2. NPV provides results on the basis of forecasting and as such, wrongful interpretations may be
provided as it does not give concrete information regarding profitability aspect of the project.
IRR
IRR (Internal Rate of Return) is used as a planning tool because effective results are
provided by it. This method measures rate of return on project in that way so that effectiveness of
it may be carried out without any difficulty. It uses projected cash flows and imparts useful
information to business whether to invest in the same or not.
Advantages
1. It is effectual tool for making enhanced decision as it considers time value of money quite
effectively while assessing usefulness of investing in the new project. Moreover, it does involve
complex calculations and is easier to obtain results (Pavlatos and Kostakis, 2015).
2. It is good method for desired results as it equally considers cash flows and this helps to
measure present value of cash flow with that of outflow.
Disadvantages
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1. It is not helpful in calculation when two projects used are mutually exclusive. Thus, no
comparison can be made with mutually exclusive projects.
2. Another disadvantage of using IRR method as a planning tool is that it does not consider cost
of capital and as such, results drawn are not accurate.
Thus, the above discussed planning tools may be used by Vectair Holdings to achieve
desired results with much ease. It depends on the nature of organisation as to select appropriate
planning tool for yielding better returns by investing in the project (Bromwich and Scapens,
2016).
Usage of planning tools
The planning tools such as zero based budgeting, IRR, NPV which are discussed above
are quite useful for the company as they provide clarity to the business whether to invest in the
project or not. Thus, the usage of planning tools are quite relevant to business and as such, better
and enhanced decisions are taken by the organisation which yield better returns. This helps to
provide better projected cash flows and as such, they consider time of value of money for
evaluating usefulness of the project. Thus, it is quite useful for company for investment purpose.
P 5 Management accounting system to respond to financial problems
Key performance indicators (KPI)
It is performance metric which is used for measuring performance of employees so that
desired results can be achieved. This helps to assess performance of workers and as such, if any
deficiency is observed, then steps are taken for enhancing overall productivity of employees. As
such, KPI is used to respond to financial problems of organisation with much ease. It is measured
to assess whether firm is performing as per strategic goals or not. As a result, KPI are used as
decision-making tool and as such, it is quite useful to respond to financial problems with much
ease (Dekker, 2016).
Financial governance
The financial governance is set of rules and regulations so that accounting processes are
governed in the best possible way. This is quite effective way to ensure effective governance in
terms of internal control in the company and as such, it helps organisation to strictly adhere to
rules. This is essential so that process workflows are achieved with much ease. Financial
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governance can be achieved by Vectair Holdings by keeping up to date financial records,
initiating risk assessment and auditing as well. Thus, by implementing financial governance in
the firm, financial problems can be solved with much ease.
Budgetary target
Budgetary target is the estimation made by the management regarding various
expenditures to be incurred in coming period (Theriou, 2015). Thus, targets are based on mere
estimation or prediction so that management may analyse how many expenses will be incurred
by various departments in a particular time period for carrying out daily activities with much
ease. In consideration to this, budgets are prepared by the organisation so that financial goals
may be easily achieved by organisation. Thus, with the help of budgetary target, financial
problems can be easily resolved by the firm.
Balanced Scorecard
It is performance measurement tool having four components such as financial, customer,
processes, learning and growth components. The balanced scorecard is developed by Kaplan and
Norton. These components give complete overall picture of condition of organisation. The
financial and non-financial information is combined to interpret concrete results. Thus, balanced
scorecard helps to respond to financial problems in effective way as it utilises qualitative and
quantitative information in effectual manner. Thus, it is useful performance metric tool for top
management to resolve financial problems with much ease. As such, balanced scorecard help
management to seek from four different components or perspectives.
Benchmarking
Benchmarking is used to compare one's organisation with other in the same industry.
Comparison is done with firm which is market leader in the same industry (Honggowati,
Rahmawati, Aryani and Probohudono, 2017). This is essential tool for Vectair Holdings as well.
It can easily compare its performance with other company and easily determine any deficiency in
the performance so that it may be initially corrected by implementing well-structured strategies
so that performance can be achieved with relation to best company in the sector. This will make
organisation to competent enough in the market and as a result, effective strategies can be
implemented to achieve overall efficiency.
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Variance analysis
This is a tool which is used to measure effectiveness of organisation's planned output
with that of actual one. The analysis is initiated to assess whether planned goals are met by
organisation or not (McLean, McGovern and Davie, 2015). In case of investigating the same, if
any deviations exist, then corrective actions are taken to remove deviations. Such deficiency
obtained is termed as variance and the whole process is known as variance analysis. Thus, if
income is deviated from the budgeted figures, then suitable action is taken by the management so
that variance can be removed and profits can be accomplished.
Management accounting for responding to financial problems
Management accounting is quite essential tool as it provides much relevant information
to the top management and as such, it is crucial for company to solve financial problems quite
effectually. KPI and benchmarking are useful tool which are helpful for company to make
certain improvements so that efficiency in the performance can be easily achieved in the manner.
Moreover, variance analysis is useful tool to initiate proper control in the company. Thus,
management accounting help to respond to financial problems with much ease. Hence,
management accounting is desirable tool for the organisation.
CONCLUSION
Hereby it can be concluded that management accounting plays crucial role in the
company be it involved in manufacturing, retail or construction sector. Every firm requires
management accounting information so that better internal decisions can be easily made by the
firm. The outcome derived from this report is that accounting plays key role in controlling costs
and that too management is benefited by such information and it tries to reduce costs in the best
possible way. Moreover, planning tools are also relevant for taking decisions whether to invest in
new project or not. Furthermore, financial problems are solved with the help of management
accounting system.
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Online
Vigorito, 2016 The Importance of Job Cost Reporting [Online] Available Through:
<https://www.accordantco.com/content/job-cost-importance/>
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