Management Accounting Report: Financial Analysis of Pavestone Company

This report provides a comprehensive analysis of management accounting principles and their application within the context of Pavestone, a UK-based manufacturing company. It delves into various aspects of management accounting, including its types, such as cost accounting, price optimization, and inventory management. The report explores different reporting methods, including performance reports, inventory management reports, and job cost reports, and evaluates how these methods can be integrated into organizational processes. It also examines costing techniques, such as marginal costing and absorption costing, with a practical example using Pavestone's cost data. Furthermore, the report discusses budgetary control and various planning tools, along with their advantages and disadvantages. Finally, it addresses how management accounting systems can respond to and resolve financial problems, emphasizing their role in achieving sustainable success. The report is a valuable resource for students seeking to understand the practical application of management accounting in a real-world business setting.

MANAGEMENT
ACCOUNTANTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and its types..................................................................................1
P2: Different methods of management accounting reporting.....................................................2
M1: Benefits of management accounting system and its applications.......................................4
D1: Critically evaluation on how management accounting system and its reporting can be
integrated within organisational process.....................................................................................4
TASK 2............................................................................................................................................5
P3: Calculation of costing...........................................................................................................5
M2: Different types of accounting techniques............................................................................8
D2: Data interpretation................................................................................................................8
TASK 3............................................................................................................................................8
P4: Budgetary control and various types of planning tool with some advantages and
disadvantages used in budgetary control.....................................................................................8
M3: Applications of planning tools for preparing and forecasting budgets with its uses.........10
TASK 4..........................................................................................................................................10
P5: Responses of management accounting system for dealing with financial problems..........10
M4: Management accounting can lead organisation for sustainable success in respect to
financial problems.....................................................................................................................12
D3: How planning tools for accounting respond appropriately to resolve financial problems 12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is considered as a systematic approach which support major
activities of business by planning, organising, controlling and monitoring. All these processes
help in enhancing performance of organisation in an appropriate manner. Along with this, it also
helps managers in developing their knowledge by which they can take decision related to
investment and finance. This kind of management generally used to prepare financial statements
like balance sheet, income, profit and loss account etc. through which position of business can be
determined during an accounting period. In this context, the report has been prepared on
Pavestone which is a manufacturing company of UK. It deals in construction sector and supply
building materials to other organisations on reasonable price rates (Bodie, 2013). This
assignment has made a discussion on various management accounting systems, some reporting
methods and its benefits for enterprises. Management of this company uses some important cost
methods in order to evaluate product cost. Moreover, an application of different planning tools
for planning and budgetary control are discussed with their benefits drawbacks. For resolving
problems related to finance, the way of adapting management accounting system also have been
discussed in further part.
TASK 1
P1: Management accounting and its types
The term management accounting links with analysing business costs and operations in
order to prepare internal financial report and statements. It supports managers' to take day to day
business decisions and obtain business goals and objectives. Management accounting is an act of
making sense of financial data and translating it into useful information (What is Management
Accounting and its importance. 2017). It increases efficiency of business operations which aids
management of Pavestone in planning controlling as well as coordinating all business activities
by getting standard and assessing actual performance which enables management to perform in
better manner.
Management accounting system helps manager to achieve goals and objectives of the
company. Thus maximum profits can be gained, if capital is invested in business. In addition,
information received through management accounting highlight past trading cycle of company;
with this assistance finance manager can recognise how trade cycle get affected and apply
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safeguarding for the same. There is defined several methods of management accounting which
are stated as under -
Cost accounting system – It is a procedure of demonstrating the cost of product,
producer and project through systematic tracking, diversifying, interpreting and measuring costs
related with business operations. Then taking several course of action in order to control such
costs. The chosen organisation, Pavestone is developing wide range of pre-cast concrete walling
and paving products which are served over the nation among builders and landscapers (DRURY,
2013). In this manner, it is necessary for top management of the company to make optimal and
efficient utilisation of available resources by eradication of wastage. In addition to this, there are
three types of cost accounting techniques, such as- actual, normal and standard. In which actual
cost is labour, material and overhead costs whereas normal costing is based upon direct cost and
overhead rates.
Price Optimisation system – It is one of the effective management accounting system
which entails that management must follow optimal pricing policies of its products in order to
gain high competitive edge. Pavestone deals in importing, selling and supplying of materials like
– stones and concrete and acquire price optimisation system for creating effective pricing
strategy which may attain large number of customers towards company. Along with this, the
management accounting system increases customer satisfaction level and raise their willingness
to purchase products or services (Mat, Smith and Djajadikerta, 2010). This system recommends
alteration in price strategy which helps in company's progress.
Inventory management system – The accounting is liable to track company's stock
availability in business organisation; in other words, inventory management looks whether or not
employees have enough amount to stock thus to produce products and services. Along with this,
it covers each and everything from warehouses to shipping, manufacturing to retail and further
movement of stock in and out of organisation. These are the main types of inventory
management system, such as – LIFO, FIFO and weighted average. The chosen business
association Pavestone follows system guidelines of inventory management system thus to
manage cash inflows and outflows at workplace and take imperative decisions.
P2: Different methods of management accounting reporting
Management accounting reporting refers to a process of preparing management reports
through which managers of a company can take appropriate decision related to further
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investment (Tools of management and accounting, 2018). It includes availability of cash in
business, sales revenues, current status of finance and more. In context with Pavestone, it deals
in small sector and willing to expand its marketplace in a rapid manner by enhancing customer
base. So, it focuses on improving performance of business more by giving good quality of
products. For maintaining financial reports such as balance sheet, profit or loss a/c, shareholder's
statements and more, this firm has used various methods of management accounting reporting as
given below:-
Performance report: This method of accounting management reporting helps in
determining performance of business during an accounting period. It involves details of project
such as collection and distribution, communication development, utilisation of resources and
forecasting of progress. In this regard, managers of Pavestone prepare performance report to
analyse its performance within all levels of management by comparing estimated production
with actual. It helps in taking necessary actions for variations of business. In order to attract
stakeholders, this company has distributed some major responsibilities for managers of all
departments at individual levels by which performance of business can maximizes.
Inventory management reports: Companies which deals in product-oriented business
always seek to manage and maintain inventories at optimum levels. In this regard, there is going
on a tug-of-war consideration between need of sufficient products for fulfilment of customer's
demand with desire avoiding costly pitfalls related to overstocking. Thus, in this context,
inventory management reports help in comparing the holding cost with profitability. It provides
information related to inventories through which managers can take sensible decisions for
managing production and operations (Lukka and Vinnari, 2014). As Pavestone supplies stone,
concrete and other materials to construction companies so, for maintain inventories in sufficient
manner, it ie required by managers to prepare inventory management report on quarterly basis.
They can use some effective methods like Economic order quantity and ABC analysis for further
classification of inventory management reporting. In this regard, EOQ is considered as best
reporting method bas it states quantity order which helps in holding inventory cost.
Job cost reporting: This system of reporting system helps in assembling costs by
different job. For determining total cost of job, this report track actual amount related to costs of
direct material, equipments, labour and subcontract. In context with Pavestone, its managers use
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cost report for identifying cost of each particular job order by comparing with investment on
production of the same. It will help in avoiding extra expenses and minimising wastage also.
M1: Benefits of management accounting system and its applications
Benefits of Management Accounting System for Pavestone:-
System Advantages
Cost Accounting System This system of accounting also known as cost
controlling system of production which helps
Pavestone in measuring efficiency of
processes.
Price Optimisation System It assist this company in market levelling by
providing price feedback to management.
Inventory Management System It helps in improving system of delivery by
enhancing transparency in information.
D1: Critically evaluation on how management accounting system and its reporting can be
integrated within organisational process
Type of reporting Integration with organisational process
Performance Reports This type of report helps managers of
Pavement in planning for future production by
integrating it with organisational activities.
Job Cost Reports Different activities of Pavement can be directed
towards achievement of objectives related to
costs by integrating this report. Furthermore, it
also helps in taking decisions related to price
strategy for reducing overall production cost.
Inventory Management Reports Integration between this report and process
involved in Pavement helps in effectively
management of inventory level. It also assists
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in managing manufacturing costs at the time of
placing different purchasing orders.
TASK 2
P3: Calculation of costing
Costs refers to an amount which has to be paid by a purchaser to seller at the time of
buying a product. It represents value of a product which includes price of raw materials used for
manufacturing, labours price, risk incurred and overall process of production. In terms of
business, cost can be distinguished as fixed and variable. Under this, costs which doesn't change
with variation and remains constant for a particular level of output refers to fixed costs. While
costs which change with variation is termed as variable costs which increases with enhancement
of production level. But in context with fixed cost, it decrease with increase in production cost.
For enhancing customer base it is necessary for managers of Pavestone to set price of
each product in right manner (Qian, Burritt and Chen, 2015). If price of products is not attractive
and under purchasing power of customers then it will affect sales performance and profitability
of business in a large manner.
Marginal costing- It refers to costing technique which helps in measuring marginal cost
of a company. It is considered as best source for decision-making procedures of a company
under which variable costs are allocated to unit of cost. But in this technique, fixed costs is
written off fully for the period to aggregate contribution.
Absorption costing – This technique used to treat overall cost of production as product
cost by taking underpinning all the resources and expenses of the same. It includes direct labour,
direct material as well as both variable and fixed cost of overhead expenses.
According to case study, the cost card of Pavement is given as beneath:-
£
Direct Labour 6
Direct Material 7
Variable Production Overhead 2
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Fixed Production Overhead 1
Fixed Production Overhead incurred
actually
£6000
Variable selling & distribution expenses 30% of sales value
Selling Price 55
Sales 20000
Working Notes:
Formula of marginal costing:
sales revenue – marginal cost of goods sold = contribution – fixed cost = net income
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200+1200+1500 ) 5900
Net profit 17500
Formula of absorption costing:
Net Profit = (Sales revenue) – (Cost of goods sold) = (Gross profit – Selling and
Administrative expenses)
Particulars Amount
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Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break-Even Analysis: It helps organisations in determining how much they have to sell
for covering cost of production (Ogata and Spraakman, 2013). In respect with Pavestone
company, it shows on which point the business will be in state of no profit or loss. Along with
this, it is also useful in evaluating relationship between variable and fixed cost.
a. The number of products which are needed to be sold for break even point can be calculated as
Sales per unit 40
Variable costs VC = DM +
DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. In accordance with sales revenue, break even point can be calculated as
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution /
sales * 100 30.00%
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BEP in sales 20000
c. Calculation for obtaining desire profitability of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
d. If 800 products are sold then margin of safety will be
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
Margin of safety- It provides the difference between BEP and actual sales of a company.
In context with Pavement, it also shows the reduction in sales which may occur before BEP is
reached. In other words, margin of safety is considered as gross receipt that a company gains
after paying all fixed and variable cost of production.
M2: Different types of accounting techniques
There are many methods of accounting techniques are available among which Pavestone
can opt the best for determining net operating income and influencing profitability of business. It
includes-
Standard costing: It refers to accounting and management tool which helps in
determining the difference between standard and actual cost of products (Napier and Haniffa,
2011). It periodically recorded the variance which represents variations among expected and
actual costs.
Marginal costing: It helps in computing net profitability of business which includes
variable cost of production. It aids business by enhancing net profits of organisation. Therefore,
it is considered as best method for Pavestone to apply marginal costing technique in accounting
system.
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D2: Data interpretation
Interpretation of Data:
It has been interpreted from above mentioned data that as compared with other
accounting techniques, marginal costing refers to most useful method for Pavestone. The main
reason behind this is that it helps in growth of profitability. As per calculation, by marginal
costing, net profit results to £17500 while absorption technique obtains £15675. Hence, in this
context, the difference among both cost has arise because of fluctuations in variable costs.
Furthermore, in BEP analysis, it has evaluated that 500 units are required to be sold for reaching
a break-even point i.e. 20,000. Along with this, for earning profitability near about £10,000,
employers of Pavestone are required to sale approximate 1333 units with 37.5 as a margin of
safety in case of selling 800 units.
TASK 3
P4: Budgetary control and various types of planning tool with some advantages and
disadvantages used in budgetary control
Budgetary control – It consists with financial process of managing income and
expenditures of a business organisation. Budgetary control is acquired by management in order
to compare actual revenues and disbursals to forecasting revenues and disbursals. The method
aids to track financial information of the company, i.e. how much money inflow and outflow is
taking place as well as need of investments then apply accordingly necessary changes if required
(Murray Lindsay, 2012). Along with this, Budgetary control method is acquired by Pavestone
thus to prepare an effective budget for future and compare it with future perspectives.
Budgetary control is required in policy formulation and controlling; it act as an
instrument of coordination. The prime objective of this system is to make plan for future by
setting different budgets, requirements and expected performance is anticipated for an enterprise.
It aids to eliminate wastages and increases profitability, centralise the control system and
corrections of deviations from established standards. While developing a budget, it is necessary
for management of Pavestone to determine actual budget needs and then allocate the amount to
be spend in various working activities. After this, management is required to compare, assess and
interpret the actual performance thus to meet business goals and objectives (Arroyo, 2012).
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Various planning tools are required in budgetary control in which some of them are stated as
under -
Forecasting tools – This budgetary planning tool helps management through its efforts to
control future risks or uncertainties. It makes future predictions or forecasting on the basis on
past data or information as well as present analysis of trends. Making forecasting decisions is
totally relies upon knowledge, congnition and opinion of top management.
Advantages Disadvantage
Forecasting planning tools aids to deliver
valuable information to managers which
facilitate to make imperative business
decisions. It also ensures about optimal
utilisation of available resources by revealing
weak areas.
There is no guarantee of accuracy of results
which is considered as main drawback of
forecasting tools.
Contingency tools – These tools are adopted by Pavestone to prepare for upcoming
uncertainties or risks which may occur in near future (Jones, 2011). Contingency tools are used
for situations where results are unpredictable and management wants to know the upcoming
results of plan before executing it.
Advantages Disadvantages
Distribute working roles and responsibilities of
employees as per their abilities.
Prepare to management to face future
uncertainties.
Very expensive to apply, every business cannot
acquire it effectively.
M3: Applications of planning tools for preparing and forecasting budgets with its uses
In Pavestone, planning tools are used by firm to have knowledge about customer's
requirements. Along this, management require to prepare system in according to crisis which
have possibility of occurrence in future (Jones, 2011). These are tactic which help top personnel
in budgetary control from past and future trends. For this, separate limit of funds is set for each
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activity for execution of appropriate business activities. Along this, uncertainties and risk that
have chance in future are also acknowledged which benefit administration to make appropriate
decisions. Thus, management is able to utilise resources properly and conduct operations in
according to market conditions.
TASK 4
P5: Responses of management accounting system for dealing with financial problems
Financial issues are usually arises in a company when there is a shortage of fund or
available finance is not utilise in appropriate manner. In general, small companies are facing
much problems related to management of finance due to lack of managerial skills. In this regard,
some problems are discussed below which are faced by employers of Pavement:-
Lack of finance management system: It is considered as one of the financial issue that
faced by managers of Pavestone. If there is no effective system of management then they cannot
prepare proper record of finance related to transaction in business (Laine, Paranko and Suomala,
2012). It will impact on budgetary system also. So, it requires by this firm to implement some
effective system of management and accounting tools in organisation by which managers can
track record of every deal of business.
Lack of proper information related to cash transaction: If information related to
transaction of cost is not maintained properly then it will entire process of finance management
(Ismail, Ramli and Darus, 2014). Therefore, it is necessary for employers of Pavement to give
proper training to managers and employees so that they can understand how to maintain record
of information of each business activity.
Overload expenses: There are many situations occur in business where a firm has to
invest more without its willingness. Since such kind of expenses are not forecasted before in
budget of a company. Therefore, this kind of unexpected expenses will also arise financial issues
in business like shortage of funds. Hence, to deal with these issues, employers use monetary
resources.
Low quality products: For enhancing sales performance in rapid manner, sometime
companies not concern much on quality of products. It will impact on brand image of them in
negative manner. In context with Pavement, as it supplies stone and other construction material
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to other builders so, it has to focus on quality of each product. It will help in satisfying the
expectations of customers in large manner.
Applications for tools used to overcome from financial issues:
Key Performance Indicator (KPI): This method is taken into consideration for
evaluating efficiencies of an organisation. It helps a company in attaining targeted goals and
objectives in a short period of interval. Through this technique, employers of Pavestone can
examine business performance by resolving issues related to financial activities (Leitner, 2013).
Through this process, they can also determine whether their company is getting progress or fails
in attaining desired outcome. It consists two effective methods for evaluating performance that
are lagging and leading indicators. To anticipate changes in economy and evaluate outcomes of
business activities, leading indicators of KPI is used. While lagging indicators is used to predict
whether a project after execution attains success or not in desired manner.
Financial governance: This type of method is used for monitoring, collecting and
managing financial information of an organisation. In case of lack of financial governance, it
creates various risks like reducing level of trust for investors, penalties to regulatory bodies and
more which impact on decision-making activities of business also.
Benchmarking: It is an important tool that helps in evaluating revenue of business by
comparing strategies with competitors. This kind of comparison also assist a firm in changing its
policies and create modification in operational activities through which business can run in more
successful manner (Humphrey and Miller, 2012). In context with Pavestone, this tool supports in
planning, executing, selecting a projects by setting up desired target. Along with this, it also
helps in measuring cost of products, quality and more by which a firm can overcome from
financial situation also.
Pavestone Airdri
 Benchmarking is useful in giving a
tough competition to competitors by
setting positive brand image of business
at marketplace.
 In addition to this, KPI brings
capability through which Pavestone can
accomplish its targeted goals and
 Employers of Airdri used Just-In-Time
approach for reducing time of
production.
 This approach of management is
helpful in maintaining stock or
inventories in a proper manner.
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objectives in predetermined time.
 In terms of Financial governance, it is
beneficial for using monetary resources
in utilised manner.
 Moreover, this method is also helpful in
increasing efficiency of business by
reducing wastage in production units.
M4: Management accounting can lead organisation for sustainable success in respect to financial
problems
In sustainable success of business, management and accounting plays a crucial role
(Mistry, Sharma and Low, 2014). It helps in many ways to overcome from financial issues in
following manner:-
 With management accounting tools and techniques, managers of a company can build
strong and unique strategies through which sustainability of business can be earned.
 It includes various costing tools like managerial, absorption, standard, break-even
analysis and more. All these techniques help in integrating sustainable matters into
different decision-making process of business.
 In addition to this, management accounting is beneficial in development of reporting
policy. It will further integrated issues related to sustainability which in turn help in
obtaining information of reporting related to financial and non-financial terms.
D3: How planning tools for accounting respond appropriately to resolve financial problems
The different planning tools help management of a company in addressing issues related
to finance. Through these tools and some applications of management accounting, a firm take
appropriate decisions related to utilisation of finance. It will contribute to cope up from financial
issues in a successful manner (Hillier, Grinblatt and Titman, 2011). Along with this, further
analysis and interpretation of financial data also helps in external reporting. It would help in
ensuring sustainable growth of business by executing various planning tools and techniques of
management accounting.
CONCLUSION
As per this above mentioned report, it is concluded that management accounting plays a
vital role in growth and success of every business organisation; it helps managers to get record of
their financial statements and take business decisions accordingly. The report has stated,
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different methods of management accounting, such as - Cost accounting system, price
optimisation system and inventory management system. There has been defined several
management accounting reports, such as – performance, inventory and job costing reports. Apart
from this, forecasting and contingency are the main budgetary planning tools which aids
management to take imperative budget decisions.
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