Financial Analysis: Capital Joinery Ltd Unit 5 Management Accounting

This report delves into the realm of management accounting, focusing on its application within Capital Joinery Ltd. It begins by defining management accounting and its systems, including inventory management, cost management, price optimization, and job costing. The report then explores various management accounting reporting methods, such as inventory reports, accounts receivable aging reports, and budget reports, alongside the integration of management accounting systems and reporting within an organizational process. Furthermore, the report analyzes different management accounting techniques, including marginal costing, absorption costing, and cost-profit-volume analysis, with supporting financial statements. The report includes an interpretation of the comparison between absorption and marginal costing methods, and concludes with a discussion on variance analysis.

Unit 5 Management Accounting

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
SCENARIO 1..................................................................................................................................1
Understanding management accounting and its systems.............................................................1
Different methods for management accounting reporting...........................................................3
SCENARIO 2..................................................................................................................................4
Types of management accounting techniques.............................................................................4
Explaining the different planning tools used by the company for budgetary control.................8
Comparing how organisations are adapting the management accounting systems for
responding to the financial problems.........................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUTION
The management accounting (MA) refers to the process through which relevant reports
pertaining to the business operations is being prepared which assists the internal managerial team
for undertaking the business decisions. This information can be helpful in short term as well as
long term. This report is on the Capital Joinery Ltd and provides an information about the MA
and the different types MA systems and reporting which is being used in an organization.
Alongside, the application of MA techniques for carrying out the cost analysis and implication of
planning tools for establishing the budgetary control.It also covers the identifying the tools
through which financial problems business is facing can be determining and a comparative
analysis of the MA systems being utilized by the companies for overcoming its financial issues
and attain sustainable success.
SCENARIO 1
Understanding management accounting and its systems
According to the Institute of Management Accountants, which describes the management
accountant as the profession which incorporates the functions like planning, performance
management, offering expertise services and implementing the strategy for the assisting the
management in achieve its goals.
Principles of management accounting
Accuracy: This means that the financial information available should be accurate in order to take
informed and right decision by the CJL.
UpToDate: The data should be updated from time to time for increasing its relevance for
undertaking decisions by the user of these information of CL.
Reliability:Every information should be reliable and this can be proved by the source document
or evidence. This is very vital for CJL for ensuring reliability.
Truth worthy:the data should be obtained from the reliable and trusted sources in order to avoid
any error or inaccurate information which is important for an organization like CJL.
Future planning: The financial information provided is helpful in undertaking various business
decisions which is significant for CJL and also helps in taking decisions for future.
Types of management accounting system
Inventory management system
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This system is being used by the management for the purpose of managing the inventory
of the business. This system helps in keeping track of the movement of the inventory from one
process of production to another. The process continues till the good is delivered to the client on
the specified time and quantity (Atieh and et.al., 2016). This MA system is mostly crucial for
Capital Joinery Ltd which is having an extensive and complex supply chain which makes it
difficult for the company to handle it keep record of it on a manual basis. Thus, this system is
essential in order to efficiently handling the stock level of the products.
Benefits:
 It helps in keeping track of the stocks and helps in reducing the error.
 It additionally assists in determining the reorder point and quantity required to avoid the
situation of over and under stocking.
 This system can be utilized in making estimation about the future demand and trends.
Application:
It is useful for all types of business entities and can be implemented by Capital Joinery
Ltd. for effectively managing its stock.
Cost management system
Under this MA system, the various types of costs are being monitored which can be
defined as the expected cost which will be incurred in order to produce the required quantity of
products (Kostyukova and et.al., 2018). It is useful for the business entity in identifying and
understanding the cost of various product which is important for setting the price of the
product.This is essential for Capital Joinery Ltd because it help in managing the cost in a better
way in order to maximise the profits.
Benefits:
 This approach supports in computing the profit or loss associated with the product and
the productiveness of the production procedures being used.
 It helps in exercising control over the product cost so that wastage and unnecessary
expense can be avoided.
 Also, it provides information about the productive and non-productive activities.
Application:
Application of it will support Capital Joinery Ltd. in determining the cost of each product
which will help in fixing price of it.
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Price optimization system
In this MA system, price is decided after considering the willingness of the consumers for
buying that product. This is based on the demand of the product in the market; thus, the price is
set in such a way that it helps the businesses in attaining the maximum profit (Wang and Wang,
2017).This system is essential for Capital Joinery Ltd in order to set the product price taking into
consideration important factors.
Benefits:
 It is based on market demand and customer willingness.
 Helps in attaining the maximum profitability.
 Also, it reduces the manual errors and in optimization of the process.
Application:
It will help Capital Joinery Ltd. in effectively appropriately setting the price of its
product.
Job costing system
This system is useful when the goods are being produced as per the specification of the
clients. Through this system, an organization in easily identify or compute the cost which will be
incurred pertaining to the specific product (Ahmad, 2017). It is essential in case of the
companylike Capital Joinery Ltdis involved into production of multiple products where the cost
and profit associated with each such activity is required to be determined.
Benefits:
 By determining the cost for each job helps in exercising cost control approaches.
 It helps in easily determining the wastage or not so necessary activity.
 Also, helps in knowing the profits under each job separately.
Application:
This will support the company in computing the cost and profits for each type of product
created by it.
Different methods for management accounting reporting
MA reporting helps the management in getting an insight into the business functioning
andthe performance and along with this, it provides assistance in identifying the weaker areas of
the business where it requires to put more focus. Some of the important MA reporting system is
explained below.
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Inventory report
This report provides the information pertaining to the current inventory levelof the
Capital Joinery Ltd(Maas, Schaltegger and Crutzen, 2016). This supports the management in
undertaking decision in regard to how much stock should to reordered and at what time which
will assist in overcoming the circumstances of less or more stocking. Through this report, the
company can also make forecasting about the future requirements.
Account Receivable Aging report
This report is very important for the businesses which provides goods on credit to its
customers. It includes compete details about the customers like date and time of sales, credit
period provided and so forth. This helps the organization in determining the account details of
the customers which also leads to gathering information about the ability of the customer repays
back (Pylypenko and Tyvonchuk, 2020). Therefore, it results into making management of
Capital Joinery Ltdaware of the chances of default that may arise so that they can have
arrangement for the same. It can also help inmaking changes in the organization’s credit policy
in order to overcomethe situation.
Budget report
It refers to the formal statement which incorporates the expected income and expenses of
the business pertaining to the future period for which the report is prepared. Under this, the
actual outcome or the performance is compared with the budgeted one and in case, if there is any
major deviation in the outcome the remedial steps are being undertaken for reducing such
difference (Erokhin and et.al., 2019). Through this report, the management of Capital Joinery Ltd
can analyze the expenditure and income which will help them in gaining insight about the causes
of it so that they implement strategy in order to grab control over the unnecessary expenditure
along with the increase the income level.This report differs from one year to another and
organization to organization.
Integration of MA system and reporting in the organizational process
By integrating the MA system and reporting will provide support to the company in
achieving its desired goals and objectives in an effective way.Through this way, the management
will be able to effectively deal with its business activities and managing its performance with
easy availability of the requirement by the way of MA reporting system. it helps in identifying
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the areas of improvement so that appropriate actions and decisions can be undertaken to
implementing the strategy.
SCENARIO 2
Types of management accounting techniques
The MA techniques are being used by the businesses for the purpose of analysing the cost
of the product and this analysis can be carrying out on the different techniques as per the
requirement of the business.
Marginal costing: This MA technique is very helpful to the management in which the
variable cost is being charges to the cost of product while the fixed cost is taken completely for
the period (Marginal Costing: Meaning and Features. 2020). This method helps in ascertaining
the marginal cost along with the impact on the profit in regard to the differentiating the cost into
fixed and variable.This is based upon the cost behavior and is useful in ascertaining the break-
even point as well.
Absorption costing: It is technique in which the cost is accumulated and allocated to the
individual products (Absorption Costing. 2020). Both the cost fixed and variable in
determination of the cost of product. This approach is also needed by the accounting standards
for the purpose of creating inventory valuation. This type of costing is useful in for the income
tax purpose also.
Cost profit volume analysis: This analysis is used for knowing the impact of change in
the costs along with the volume of sales which results into affecting the profits of the company
(Navaneetha and et.al., 2017).Through this, the company can get a better information about the
performance by determining how many units can be sold to attain the situation of break even or
the margin of safety.
Applying management accounting techniques and producing appropriate financial
reporting documents
Income statement as per Absorption Costing
Particulars May June
Sales Revenue (100*250)
2500
0 (75*250)
1875
0
Cost of Sales
Direct Materials (100*60) 6000 (80*60) 4800
Direct Labour (100*40) 4000 (80*40) 3200
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Variable Production Overheads (100*20) 2000 (80*20) 1600
Fixed production overheads (100*20) 2000 (80*20) 1600
1400
0
1120
0
Add:
Opening Stock 0 0
Less:
Closing Stock 0 (5*140) 700
(Under)/over absorbed Fixed prod o/h 0 (2000 - (80*20)) -400
1400
0
1090
0
Gross profit
1100
0 7850
Fixed selling 1000 1000
Fixed administration cost 3000 3000
Variable sales commission (25000*2%) 500 (18750*2%) 375
Net Income 6500 3475
Income statement as per Marginal Costing
Particulars May June
Sales Revenue (100*250) 25000 (75*250) 18750
Marginal Cost of Sales
Direct Materials (100*60) 6000 (80*60) 4800
Direct Labour (100*40) 4000 (80*40) 3200
Variable sales commission (25000*2%) 500 (18750*2%) 375
Variable Production Overheads (100*20) 2000 (80*20) 1600
12500 9975
Add:
Opening Stock 0 0
Less:
Closing Stock 0 (5*120) 600
12500 9375
Contribution 12500 9375
Fixed production overheads 2000 2000
Fixed selling cost 1000 1000
Fixed administration cost 3000 3000
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Net Income 6500 3375
Reconciliation of profit figures
May June
Profit under absorption 6500 3475
Difference in units of inventory * fixed production
overhead p/u 0 (5*20) 100
Profit under marginal costing 6500 3375
Interpretation:It can be concluded from the above that absorption costing technique is better
than the marginal costing as it takes into account fixed cost in calculating the cost of the product
which s not so in case of marginal costing. Along with that, it is used in external reporting also.
Variance analysis
CALCULATION OF VARIANCES:
i) Material Price Variance = Standard Price - Actual Price
= (Std Price - Actual Price) x Actual Qty)
(£12 - £9.3) * 2400 kg
6480 (Fav)
i) Material Usage Variance = Standard Usage - Actual
Usage
= (Std Qty - Actual Qty) x Std Price)
(2000 kg - 2400 kg) *£12
-4800 (Adv)
Inventory record
Inventory ledger record using Average Cost method
Date Goods purchased
Cost of goods
sold Inventory balance Average cost
Jun-
01
£350 (10 units *
£35) £35
Jun-
09
15 units *£38
=£570 25 units £920 £36.8 (920/25)
Jun- £441.6(12*£36.8 13 units £478.4
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15 )
Jun-
20
10 unit * £32 =
£320 23 units £798.4
£34.7
(798.4/23)
Jun-
23
£347 (10 *
£34.7) 13 units £451.4
Jun-
27 £104.1 (3*34.7) 10 units £347.3
Jun-
30 £69.4 (2*34.7) 8 units £277.9
Inventory ledger record using LIFO method
Date Goods purchased
Cost of goods
sold Inventory balance
Jun-
01 Beginning Balance
£350 (10 units *
£35)
Jun-
09
15 units *£38 =
£570
£570 (15 units
*£38)
Jun-
15 £456(12*£38)
£350 (10 units *
£35)
£114 (3 units *£38)
Jun-
20
10 unit * £32=
£320
£350 (10 units *
£35)
£114 (3 units *£38)
£320 (10 unit * £32)
Total 23 units £784
Jun-
23 £320 (10 * £32)
£350 (10 units *
£35)
£114 (3 units *£38)
Total 13 units £464
Jun-
27 £114 (3*38)
£350 (10 units *
£35)
Jun-
30 £70 (2*35) £280 (8 units * £35)
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Interpretation:It can be inferred that the value of stock at the end of the month in case of average
cost method is 8 units for £277.9, that is, per unit cost is £34.7 while in the LIFO method, the
inventory value is £280 (8 units * £35). This means that under LIFO method value is high.
Explaining the different planning tools used by the company for budgetary control
Budgeting refers to planning or creating a budget that is also called spending plan of the
organisation. It is prepared after considering factors that could influence the budget and
operations of business. It is an effective planning which is used for analysing the requirements of
business based on trends or previous budgets and making appropriate allocation of the resources
between different departments of company. It is aimed at balancing the expenditures of the
business so that adequate profits could be earned by the company. Budgetary control could be
described as process which is used for preparing budgets for future period and comparing the
budgets with actual performances of the company(Abdusalomova, 2019). The comparison with
actual output helps n identifying the variances or differences between the two. Based over these
differences management or organisation makes corrective measures to reduce these differences
and achieve greater level of efficiency and effectiveness. There are different budgeting tools
which are used as planning tool by the organisations and to achieve the organisational goals and
objectives.
Zero Based Budgeting
It is a budgeting approach for making budget from the scratch. ZBB do not involve
making budget using the previous budgets’ information or data. Every time the budget is
prepared detailed analysis of the different factors associated with the budget are assessed that
could influence the budget and operations of the departments. The budget requires the
management to justify each expense that is added to budget. Main motive of budget is of
reducing the spending of company by assessing every time where the costs could be reduced or
be controlled. Management could involve the employees in identifying the activities that are seen
to have maximum changes so that they could be assessed.
Advantages
It is prepared after analysing the business goals and objectives of the business. It is prepared
from the scratch every time that reduces the chances of discrepancies to be carried forward.
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The budget requires justification for every new expense added in the budget. It is useful for
the business or activities where more changes are seen.
Disadvantages
The budget is very expensive and time consuming. It is not suitable for all the business due to
long process. The time of managers could not be productively applied elsewhere.
Activity Based Budgeting
The budget approach is used in the cost accounting. The budget is prepared based on the
activities to be performed in the process. It also involves recording, researching and analysing
the activities that incurs cost for the company. In this approach the managers assess and
scrutinises the potential ways of creating efficiencies. Management also analyses the past budget
and the spending propositions for preparing the budget for current year ((Burritt and et.al., 2019)
). Based on the information from previous budgets and research of activities the budgets
are prepared by the management. The budget has proved to be very useful for the business
organisation for making allocation of different users.
Advantages
The budget makes research over activities for preparing the budget unlike traditional method
of budgeting. The budget has been very useful for the organisation that has various activities
or processes. It helps in assessing the cost and expenses of every budget so that appropriate
allocation of the resources. It helps in increasing the profit levels by controlling the costs.
Disadvantages
The budget is time consuming and expensive as assessing every activity involves time. The
process required professional knowledge to carry out the processes. The budget is suitable
only for companies that have multiple processes or activities going at the same time or
simultaneously.
Incremental Budgeting
The budgeting refers to type of the budgeting process which are based over idea that new
budget could be prepared by doing some marginal changes to previous budgets. In incremental
budget the budget of current year is taken as the based to whom incremental assumptions after
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