Management Accounting Report: Financial Analysis of KEF Limited

This report provides a comprehensive analysis of management accounting practices applicable to KEF Limited. It begins with an introduction to management accounting, its importance, and its role in organizational decision-making. The report then delves into various management accounting systems, including price optimization, inventory accounting, and cost accounting, highlighting their relevance for KEF Limited. Different reporting methods, such as budget reports, inventory reports, and cost accounting reports, are discussed, along with the benefits of implementing management accounting systems. The report further explores the integration of management accounting and reporting systems, using examples to illustrate their interconnectedness. A significant portion of the report focuses on costing methods, comparing and contrasting marginal and absorption costing techniques through detailed calculations and financial statements. The report also offers advice on choosing appropriate costing techniques for KEF Limited. Finally, the report examines budgetary control tools, including master budgets, variance budgets, and flexible budgets, discussing their advantages and disadvantages. The use of these planning tools in budget preparation and forecasting is also addressed, along with a comparison of organizational approaches to solving financial problems with the help of management accounting systems.

Management
accounting

Table of Content

INTRODUCTION
Management accounting is considered as an important part of an organisation
which drives them to make corrective actions and suitable plans on the basis of
information available in the financial statement of company such as P/L account, Cash
flow statement, Balance sheet etc. It includes both monetary as well as non-monetary
transactions which are properly analysing and evaluating for the purpose of making an
effective decisions. The present report is based on KEF Limited which is engaged in
manufacturing sector. The report includes the discussion of concept of management
accounting along with its different systems in context of achieving organisational goals
and objectives. In addition with this, costing methods, budgetary control tools, use of
management accounting systems in resolving financial issues are properly discussed
under this report.
TASK 1
Management accounting and its system along with their requirement in an organisation
Management accounting is the process of analysing the financial records of an
organisation in order to identify the actual financial position of company. It enable
accounting manager to make an effective decision and plans for the purpose of
providing beneficial outcome to company. In the context of KEF Limited, there are
various accounting systems which can be used by the management in order to retain
their financial and market stability for longer duration:
Price optimisation system: It is the system which provide relevant information
to the management about the actual perception of their targeted and loyal customers
towards their current pricing strategies. It makes easy for the management to frame an
effective pricing policy which can satisfy both the company's and customers
expectations (Arnaboldi, Lapsley and Steccolini, 2015). Using such system by KEF
Limited help in fixing right price of the product and services which easily motivates the
customers to shift their buying behaviour towards their company instead of rivals
company. It indirectly makes positive impact on the existing customer base of an
organisation.
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Inventory accounting system- It is a system which manages and analyse the
current inventory level of an organisation which includes raw material, opening and
closing stock. It is essential for KEF Limited to use such system in order to maintain
availability of stock in their warehouses at the time when high demand of their products
and services occurs in the market. It maximises the brand image of company in
customer's mind which directly makes positive impact on the net profitability of company
(Management accounting and its importance, 2019).
Cost accounting system- It is a system which assist manager to analyse the
total cost invested in execution of production and other business activities. It help in
identifying the cost allotted to specific product which in result facilitate in making
decision that which product who provides maximum amount in return should be
manufactured more or less. In the context of KEF Limited., using such system help in
computing overall invested amount in business activities so as to bring out maximum
amount in return (Bromwich, and Scapens, 2016).
Different methods for management accounting reporting:
Management accounting reports may be defined as a document which contains
the details about the transactions made by the business organisation on daily basis. It
assist management in identifying actual financial position of company which drives to
make an effective strategies for the betterment of an organisation. These management
accounting reports includes:
Budget report- It is a report which contains the details about the cost
invested in the future business activities after determining the current profitability of
company. For this, the manager forecasted the business activities through analysing
previous year expenditures along with their return. In the context of KEF Limited,
preparing such report facilitate company in minimising their business cost by utilising
cost in optimum manner.
Inventory report- It is a document which provides the details about the current
level of inventory the company have at present to meet the needs and requirements of
their targeted and loyal customers. Preparing such report by KEF Limited company
enable their manager to maintain level of inventory by ordering requires stock from
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suppliers at the time of requirements. It reduces inventory storage cost which makes
positive impact on the revenue of company.
Cost accounting reports- It is a document which contains the entire information
about the company's overall investment in the execution of their business activities. In
the context of KEF Limited., preparing such report help in analysing the total cost
invested in business activities which brings motivation among employees to utilise
resources in order to bring out maximum output in return (Bryer, 2013).
Benefits of management accounting system:
Management accounting system Benefits
Price optimisation system Using such system helps in determining
the actual perception of customers towards
company's existing pricing policy which
enable manager to make an effective
pricing strategy that can easily influence
the buying behaviour of customers in
favourable way.
Cost accounting system It help KEF Limited in getting maximum
return on their investment by analysing the
total cost incurred in business activities
and set pricing strategy accordingly.
Inventory management system It reduces inventory storage cost by
ordering raw material from suppliers
whenever the company feels requirement.
It drives company to meet customer's
needs and requirements on time without
any delay.
Management accounting system and reporting integrated with each other.
Management accounting and reporting system are two different concept but are
integrated with each other. For example, price optimisation system help KEF Limited. in
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setting an effective pricing strategy for its products and services through taking support
from cost accounting report which contains the information about the total cost incurred
in manufacturing and selling of products and services (Wood, 2016).
TASK 2.
Use of marginal and absorption costing method for different calculation.
Production cost per unit:
Total production cost:
(III) Total cost of sales:
BUDGETED COST Amount
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£
Cost of production 828000
Opening Inventory 0
Closing inventory -92000
COST OF SALES 736000
(IV) Budgeted profit and loss statement for June:
(a) Absorption costing method- It is a method which includes both fixed and variable
cost due to which provides accurate net profitability of company.
ABSORPTION COSTING: BUDGETED PROFIT OR LOSS STATEMENT
(b) Marginal costing method- This is a method which includes only variable cost due
to which it assist company in showing more profitability in their financial statement than
actual which indirectly attracts investors.
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MARGINAL COSTING: BUDGETED PROFIT OR LOSS STATEMENT.
Preparation of final accounts:
ABSORPTION COSTING: ACTUAL PROFIT OR LOSS STATEMENT FOR JUNE
Interpretation- From the above mentioned table, it has been analysed that profits
are changed in at the level of 19000 production units. At the 18000 units, profit is of
£3340000 and at the 19000 units, it is of £399000.
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(VI) Advice to the company about costing techniques.
Both marginal and absorption costing method provides net profit or loss of
company but with different way. Marginal costing methods provides more profitability in
profit/loss a/c than absorption costing method thus mostly adopted by small and
medium sized organization. Through this, they can attract new investors. On the other
hand, absorption costing methods provide actual financial position of company by
showing accurate net profit or loss in profit/loss account thus adopted by large sized
organization. Through this, they can retain their loyal shareholders.
Therefore, KEF Limited. is small and medium-sized organization due to which
they can use marginal costing method in order to calculate net profits or loss as it help
in justifying each activity which minimizes the possibility of errors in financial
statements.
TASK 3.
Advantages and disadvantages of different kind of planning tools of budgetary control
Budget-
A budget is a financial statement made for a particular period of time, mainly one
year. It includes expected sales volumes, revenues, cost and expenses. This is used by
companies, organisation and other organisation to form strategic plan of all activities in
measurable value (Lachmann, Knauer and Trapp, 2013).
It is an essential for KEF Limited to reduce business cost so that maximum
profitability can be achieved. For this, there are various tools which can be adopted by
company in order to continue their business operations as per pre-determine goals and
objectives.
1. Master budget- It is a document representing estimated sales, production levels,
purchases, future expenditures incurred, capital investment and loads to be
acquired or repaid. It provides all the financial budget and budgeted income
statement and balance sheet. KEF Limited created master budget for expansion
planning as a machine purchase include current cash flows, current loan rates
and expected future sale which is provided by master budget (McVay, Kennedy
and Fullerton, 2016).
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Advantages-
 It is an important planning tool for company as includes all the detailed
information required for planning such as overall profitability, assets and liability
position of the company.
 It measures the performance of company as actual is compared to budgeted and
shows the efficiency of performance.
Disadvantages-
 This puts pressure on the staff of company for achieving standard figures
presented in the budget which lead to low estimation of revenue and higher
estimation of expense.
 This budget is not easy to modify as it involves many steps in budget and a
single change in any step will lead to high complexity in formation.
5. Variance Budget- It refers to a situation where actual figures are different
from variable figures. It involves comparison of standard with actual. KEF
Limited uses this for comparison of set standards to actual which help in
decision making process by highlighting where it went wrong (Morden, 2016).
Advantages-
◦ This helps in measuring performance of the managers and employees of
company as it involves the finding deviation and correction of deviation.
◦ Through this budget accountability is represented of managers. As it is
done on departmental basis it makes easy to make department to held
accountable for any deviation.
Disadvantages-
◦ There is an high possibility of estimating wrong standards which result in
more variances.
◦ Manager if purchase better quality goods will lead to increase in use of
more material than estimated.
6. Flexible budget- A flexible budget is a statement that changes with
change in sales volume or any factor. It is also known as variable budget.
It is used in estimating revenues and expenses on the basis of current
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amount. KEF Limited maintain the budget to analyse the accurate
performance in the organisation (Zoni, Dossi and Morelli, 2012).
Advantages-
 It allows company to predicts its performance and the changes in
production,sales and expenses can be forecasted.
 It provide more correct assessment of managerial performance and
efficiency of organisation.
Disadvantages-
 It absorbs the huge amount of cost and possess no accounts related to
discounts in bulk purchase.
 This budget is based on the assumption of continuity whereas cost might
behave in a discontinue manner.
Use of different planning tools to prepare and forecasting the budget.
It is important for KEF limited to adopt various planning tools such as master
budget, flexible budget, operating budget etc. in order to control unnecessary expenses
that may occurred due to contingency in future. For example, flexible budget allows
manager to make relevant changes in their existing budget according to the needs and
requirements in future activities. It reduces wastage of cost which makes positive impact
on the profitability of company.
TASK 4
Comparison of organisation to solve the financial problem with the help of management
accounting system.
Management accounting systems contribute equally towards resolving financial
issues of company by assisting in making an effective decisions and suitable plans for
the better financial position in market.
Financial problem- It is an issue which arises due to shortage of funds. It makes
huge impact on the current operations of company due to which it is important to
resolve such kind of issues within shorter time period. Financial problem may arise due
to following reasons:
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Spending more then earning- It is a situation under which the company spends
more than their earning in execution of different business activities. This will impact
other functioning of business as well.
Unequal cash flow- Another reason of financial issue is unbalanced cash flow.
In this issue, company's cash inflow does not match with the cash out flow (Quattrone,
2016).
Tools to resolve above financial issues:
Benchmarking- It is determined as target which build after analysing the rival's
strategies, complexities of business environment, past performance level of employees
etc. It motivate employees to perform at an standard level and bring out maximum
output to company in gaining strong financial position.
KPI (key performance indicator)- It is another effective tool which help in an
analysing the performance level of employees by comparing their actual with standard
performance . It help in identifying the deviations which restrict them to perform well and
accordingly make corrective actions to eliminate such deviations. Increasing
performance level of employees makes direct impact on the productivity and profitability
of company (Senftlechner and Hiebl, 2015).
KEF limited company faces rivalry competition from Continental Clothing
company in market thus differentiation between these two organisations in terms of
adopting tools to resolve their financial issues help them both to sustain in market for
longer period of time:
Basis KEF limited company Continental clothing company
Financial
issues
Such organisation in currently
facing financial issue related with
incurring expenses more than their
income which affect the
functioning of business.
This company is also from the
manufacturing sector. They are
spending more money into
different activities but earning is
less which is resulting in a
financial issue. Due to this
problem their revenue is getting
decrease and expenses are
increasing as the time passing.
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