Management Accounting Report: Costing Methods and Systems

This report on management accounting explores its significance in business operations, using Brightstar and Hawthorn International as examples. It is divided into four tasks. Task 1 defines management accounting and its types, emphasizing its role in decision-making and its distinction from financial accounting. Task 2 details costing techniques like absorption and marginal costing for income statement preparation. Task 3 examines planning tools and their merits/demerits, while Task 4 discusses how businesses use management accounting to address financial problems. The report covers various cost accounting systems, inventory management, and pricing optimization, highlighting their benefits and the importance of reliable information. Different types of managerial accounting reports, including budget, accounts receivable aging, performance, and inventory reports, are also discussed. Additionally, it covers costing methods like marginal costing, absorption costing, and activity-based costing, alongside valuation methods like LIFO, FIFO, and weighted average. The report concludes by emphasizing the importance of management accounting in enhancing profitability and operational efficiency.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ....................................................................................................................................1
P1.Management accounting and its various types:......................................................................1
P2.Different methods for management accounting reporting: ....................................................2
TASK 2 ..........................................................................................................................................5
P3.Costing Techniques to prepare income statements:................................................................5
TASK 3............................................................................................................................................9
P4 Merit and demerit of planning tools:......................................................................................9
TASK 4..........................................................................................................................................13
P5 the way in which business entities are using management accounting systems to respond
financial problems......................................................................................................................13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
In any business environment, management accounting system shall be considered as a
important aspects for functioning of business operations effectively and efficiently. Management
accounting system plays a important role because it acts as a link between finance operations and
other functions of a business organisation. By applying various management accounting
techniques such as budgetary tools, cost accounting, job costing, an organisation can identify its
core weaknesses and it may leads to enhancing profitability in long run. For better understanding
of management accounting, Brightstar is chosen which is engaged in providing financial
consultancy services to manufacturing firms and other companies. Hawthorn International is
also considered which is UK based manufacturing company. This report is divided into four
tasks, in which task one defines about the MA and MAS and its various types. Task two provides
the details about the two techniques for calculating the income statements which is absorption
costing and marginal costing. Task three mentioned different planning tools which are used in
management accounting whereas, task four includes ways in which an company may use such
system to respond to financial problems.
TASK 1
P1.Management accounting and its various types:
Management accounting refers to the process of preparing management reports and
related accounts that give correct and timely financial and statistical information required by
managers for its day to day decisions.
Management accounting system may be defined as a method that provides financial
information to the management for reporting purposes. It is deployed to provide information that
management can use to make good decisions. Such system includes various accounting
techniques such as cost volume profit (CVP) analysis, budgetary control, cash budget, marginal
costing and so on.
Importance to integrate this system within an organisation includes various aspects
such as assist companies by providing quantitative and qualitative information financial
performance, continuous improvement for its business operations, and assist in cost
management. The benefits from implementing such system is that it assist in increasing the

PDCA cycle efficiency almost 50%. It means that foremost importance of this integration is to
increase the work efficiency of the management management accounting provides quantitative
and qualitative information on operational and financial matters. Management accounting system
is used by the owners, mangers and working staff which uses it to control and plan operations
and assist in taking effective decision making (Serena Chiucchi, 2013).
Origin, Role and Principles of management accounting: It is originated from financial
accounting, but it is very different from financial accounting. It is originated during the 1900's
but at that time more focus was placed on financial accounting. Its main role is to serve the core
needs of internal management. It includes principle of causality and principle of analogy. These
principles helps the company in improving its overall business operations that helps in enhancing
the profitability of the company which is the ultimate goal of an entity.
Distinction between management accounting and financial accounting:
Basis Management accounting Financial accounting
Information mainly for For Internal use For External use
Purpose of information To aid planning, controlling
and decision making
To record financial
performance in a period
Legal requirements None To record the financial
transactions and prepared the
financial statements.
P2.Different methods for management accounting reporting:
In management accounting system, there are different methods which may be used for
reporting purposes by the company which are as follows:
 Cost accounting systems: It is a system used by firms to estimate overall cost of their
product and thereafter compare with actual figures for profitability evaluation. This may
assist the company like Hawthorn International in identify the products which are not
profitable for the company in terms cost involved.
 Inventory management systems: This is very useful for the companies in manufacturing
sector to have such inventory management system. Because it helps the Hawthorn
International in tracking inventory, orders, sales and deliveries and also useful in

production related documents (Lindholm, Laine and Suomala, 2017). Due to this,
company' cost in maintaining its inventory related cost gets reduced by implementing this
system.
 Job- costing systems: It includes that system which provides the process of gathering
information about the costs which is associated with a specific production or service job.
This provides details about the workers performance regarding a specific job.
 Price optimisation systems: This is a type of a tools which helps the company like
Hawthorn International in fixing the prices of a particular product. It also help in
determining the customer's response in case of different prices of a product set by the
company.
Benefits of different types of systems:
By using these systems which have tremendous effect on the functioning of a company in
a positive manner. There are various benefits of using these systems as discussed as above:
Particulars Benefits
Cost accounting Systems It has tremendous benefits as it gives an
opportunity to Hawthorn International in
estimating its product's cost accurately. It helps
company in raising the required money in
advance for future operations.
Inventory management systems It provides benefits to the company in
controlling and reducing its inventory related
cost.
Job costing Systems It provides the Hawthorn International proper
information about each job task which is
performed by a specific worker.
Price optimisation systems It helps the Hawthorn International in
determining the correct price of its products
based on pricing strategy.
Characteristics of good information:

In any companies in manufacturing sector like Hawthorn International, Information is to
be considered as an important and essential resources, because profitability of company depends
upon a reliable information. Business organisation needs to control and monitor the process of
creation such information within the organisation. Some of the characteristics of information are
as follows:
 Reliability: It is a measure of failure or success of using information for decision-making.
If information leads to correct decision on many occasions, than it is said that information
is correct.
 Accuracy: Information provided should be accurate in itself because only right
information can be used in decision making process. Therefore Hawthorn International
shall considered this fact while creating and communicating of information.
 Up to date: The information should be refreshed from time to time as it usually rots with
time and usage. In case of communication of information which is outdated may lead to
conflict and loss of profitability in a manufacturing organisation such as Hawthorn
International.
Reasons for presentation of information shall be understandable:
It is necessary to present the information in legible and understandable way because if
information is not presented in accurate way then it can not be useful for any one in the
organisation (Stechemesser and Guenther, 2012).
Different types of managerial accounting reports:
 Budget Report: This report helps the companies like Hawthorn International to evaluate
its performance which may lead to control the cost. The estimated budget for the period is
generally based on the actual expenses of previous years. It can be use as providing
incentives to the employees if they meet the specific budget criteria.
 Accounts receivable ageing reports: It is a critical tool for managing cash flow for the
companies that sells goods on credit to its customers. It helps the management in finding
the issues with company's collections process.
 Performance report: It provides management with a report which assist the company like
Hawthorn International in evaluating its employee's performance. If there is positive
changes in the performance of the employees then company shall required to give
incentives to the employees for future survival and profitability of company.

 Inventory Report: This report may be made by the company for its physical inventory
which lead to providing more efficient process for production system. A company like
Hawthorn International may compare the different assembly lines within the company for
evaluating the best performing production line (McVay, Kennedy and Fullerton, 2016).
TASK 2
P3.Costing Techniques to prepare income statements:
The term cost can be defined as amount of money which occur in process of
manufacturing of any kind of product. Under this cost various kind of expenses are included and
it plays an important role in order to set the price at an effective level. There are a wide range of
costs which occur in companies operations and activities. Some of them are mentioned below
which are as follows such as:
 Fixed cost: It is a periodic cost that remains same irrespective of the output level or sales
revenue. Fixed cost are recovered by the organisation by different recovery rates such as
labour recovery rates, material recovery rates and so on.
 Variable cost: a variable cost is the cost which changes with the changes in the output or
sales volume of an company.
 Direct Cost: A direct cost is a that can be completely occurred related to production of a
particular goods or services. Such cost includes material cost, direct labour expenses and
so on.
 Indirect cost: Indirect costs are costs that are not directly attributable to a specific
production of goods and services such as depreciation, administration expenses and so
on.
Cost volume profit: This may be defined as a kind of method which is used by companies in
order to assess the variation in cost and volume that can impact to revenues. The above
Hawthorn international company is using this technique to evaluate the change in cost and
volume.
Flexible budgeting: This is being used by Hawthorn International for future period level of
operation which are not fix. Therefore, as name suggest, this budget is prepared for more than
one level of operation.

Cost variances: It refers to the differences among the actual costs of an organisation like
Hawthorn International with its estimated the standard figures.
Marginal Costing: Marginal costing is the technique of cost accounting in which only relevant
cost is to be considered i.e. the cost which is to be responsible for manufacturing of a product).
Absorption costing: It is a technique of management cost accounting in which company like
Hawthorn International also consider the fixed cost or historical cost. It is considered when
entity's has an existing product.
Cost allocation: It means determining and assigning the cost to various products in an
organization. Hawthorn International used this in order to effective allocation of expenditures in
particular activities seprately (Schaltegger, 2012).
Normal costing: This can be defined as a kind of costing method by which companies can
compute total cost of a produced product. Under above company, they are using this costing
method for assessing actual cost.
Activity based costing: It is an method of allocating the fixed cost based on the activities which
are most utilised by the different activities.
Standard costing: This is the system of cost accounting in which company like Hawthorn
International uses the standard cost in which it is compares with actual figures.
Valuation methods:
 LIFO: Under it, stock which is first purchased are utilises first in production system.
 FIFO: Under it, stock which is last purchased are utilises first in production system
irrespective of purchase order.
 Weighted average: Under it, inventories are valued as per weighted average cost of
available stock of inventory.
Overhead: It is an expense which are occurred indirectly and can not be identified in a particular
product's cost. Such as in above Hawthorn international company some types of overhead like
rent, salaries which are not linked with any specific product.
Income statement under Marginal costing technique for month of May
Heads amount amount
sales revenue 15000
less: Cost of production
opening stock 0
Add: Cost of production 8000
less: closing inventories 3200

total cost of production 4800
contribution 10200
less: Fixed costs
production overheads 4000
selling costs 4000
administration overheads 2000
sales commission 750 10750
profit -550
Income statement of Galway Plc under Marginal costing technique for June
Heads Amount Amount
Sales revenue 25000
less: cost of production
opening stock 3200
Add: Cost of production 6080
less: closing Inventories 1920
total cost of production 7360
contribution 17640
less: Fixed costs
production overheads 4000
selling overheads 4000
administration overheads 2000
sales commission 1250 11250
profit 6390
Per unit production cost of Galway Plc using Absorption costing technique
Heads amount
Direct material 8
Direct labour 5
Variable production overheads 3
fixed production overheads 13.33
total production cost per unit 29.33
Income statement of Galway Plc under Absorption costing technique for June

Heads amount amount
sales revenue 14667
less: cost of goods sold
opening stock 5867
Add: production overheads 6080
less: closing inventories 3520 8427
gross profit 6240
under absorbed production cost 587
less: other costs
selling overheads 4000
administration overheads 2000
sales commission 733 6733
net profit 93
Income statement of Galway Plc under Absorption costing technique for May
Heads amount amount
sales revenue 15000
less: cost of goods sold
opening stock 0
Add: variable production cost 14667
less: closing inventories 5867 8800
gross profit 6200
under absorbed overheads 587
less: other overheads
selling overheads 4000
administration overheads 2000
sales commission 750 6750
net profit 37
Statement showing variance analysis of material of the company

Material usage variance
Particular Amount Amount Variance
Standard hours–
actual hours)
*Standard price (1000-2200)*10 -2000 Adverse
Material price variance
Particular Amount Amount Variance
Standard price -
actual prices ) *
Actual hours (10-9.5)*2200 1100 favourable
Calculation of closing inventory of material using LIFO and Weighted average method:
Under LIFO (last in first out) method:
Date Purchased Issued Closing stock
Units Units
(in £)
Total
(in £)
Units Units
(in £)
Total(in
£)
Units units(in
£)
Total(in
£)
01/05/19 40 3 120
12/05/19 20 3.6 72 - - - 40
20
3
3.6
120
72
15/05/19 20
16
3.6
3
72
48
24 3 72
20/05/19 20 3.75 75 - - - 24
20
3
3.75
72
75
23/05/19 - - - 10 3.75 37.5 24
10
3
3.75
72
37.5
27/05/19 - - - 10
15
3.75
3
37.5
45
9 3 27

30/05/19 - - - 5 3 15 4 3 12
Valuation of closing stock by using weighted average method:
05/01 Previous balance
(inventory) 40 3.0000 120.000
0
05/12 Bought 25 units
at £ 3.60 each 25 3.60 90. 65 3.2308 210.000
0
05/15 Issued 36 units 36 3.2308 116.30
77 29 3.2308 93.6923
05/20 Bought 20 units
at £ 3.75 each 20 3.75 75. 49 3.4427 168.692
3
05/23 Issued 10 units 10 3.4427 34.427
0 39 3.4427 134.265
3
05/27 Issued 25 units 25 3.4427 86.067
5 14 3.4427 48.1978
05/30 Issued 5 units 5 3.44 17.213
5 9 3.4427 30.9843
TASK 3
P4 Merit and demerit of planning tools:
In present time every type of business prepare budget to estimate income and expenses of
each department of company. The budgets are produced for a particular time and present in front
of top management. It will help in taking effective decisions. Hawthorn International, prepare of
budget by determining of actual financial position in reference to improve the reliability in
budgeted figures (Schaltegger, 2012).
Budgetary control is systematic process which can control business activities and used in
Hawthorn International to analysis the projected budgets with real information at a specific time
frame. The budget of the company prepare in systematic manner, The following steps are
required to follow to prepare budget -
 Set goals of the company
 Analysis income and expenses of a company