Financial Performance Through Management Accounting Report

This report comprehensively examines management accounting, its core principles, and various methods for financial reporting. It delves into different management accounting systems such as inventory, cost, job costing, and price-optimizing systems, highlighting their benefits. The report also explores diverse reporting methods, including budget, cost, performance, and job cost reports. It includes detailed cost analysis techniques, such as fixed cost, CVP analysis, flexible budgeting, marginal costing, and absorption costing. The report further analyzes planning tools used for budgetary control, like capital budgets, master budgets, activity-based budgeting, incremental budgeting, and zero-base budgeting. Additionally, it applies PEST, SWOT, and Balanced Scorecard analyses to understand company operations and pricing strategies. Finally, it investigates how organizations adapt management accounting systems to address financial challenges, incorporating key performance indicators, benchmarking, and financial governance aspects.

Executive Summary
In this assignment, I have produced written document, essay and report which has entailed the
importance of management accounting of an organization, that has certified an efficient financial
performance to foster the growth and development of the organization. The written document
mainly emphasizes on the management accounting and its different methods that can be applied
for management accounting reporting. It also evaluates the integration between management
accounting system and management accounting reporting within an organizational process. It
also produces a financial report which is can be applied reliably in order to interpret the data for
business activities.
In the Scenario 2
Part A
I have developed an essay which explains the pros and cons of various types of planning tools
which can be used for budgetary control.
In the Scenario 2
Part B
I have prepared a report which compares how an organization are adapting management
accounting system to respond to financial problem.
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Table of Contents
EXPLANATION OF MANAGEMENT ACCOUNTING WITH THE ESSENTIAL REQUIREMENTS OF DIFFERENT TYPES OF
MANAGEMENT ACCOUNTING SYSTEM................................................................................................................ 4
MANAGEMENT ACCOUNTING............................................................................................................................................4
PRINCIPLE OF MANAGEMENT ACCOUNTING......................................................................................................................4
THE DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING ARE AS FOLLOW:......................................4
DIFFERENT TYPES OF MANAGEMENT ACCOUNTING SYSTEM WITH ITS BENEFITS ARE EXPLAINED BELOW............5
1. INVENTORY MANAGEMENT SYSTEM.......................................................................................................................5
2. COST-ACCOUNTING SYSTEM.................................................................................................................................5
3. JOB COSTING SYSTEM.........................................................................................................................................6
4. PRICE- OPTIMIZING SYSTEM.................................................................................................................................6
EXPLANATION OF THE DIFFERENT METHODS USED FOR MANAGEMENT ACCOUNTING REPORTING.....................6
1. BUDGET REPORT................................................................................................................................................7
2. COST REPORT....................................................................................................................................................7
3. PERFORMANCE REPORT.......................................................................................................................................7
4. ACCOUNTING RECEIVABLE AGING REPORT...............................................................................................................7
5. JOB COST REPORT..............................................................................................................................................7
CALCULATING COSTS USING APPROPRIATE TECHNIQUES OF COST ANALYSIS TO PREPARE AN INCOME
STATEMENT USING MARGINAL AND ABSORPTION COSTS...................................................................................8
COST................................................................................................................................................................... 8
I. FIXED COST.......................................................................................................................................................8
II. COST- VOLUME PROFIT ANALYSIS (CVP)................................................................................................................8
III. FLEXIBLE BUDGETING..........................................................................................................................................8
IV. MARGINAL COSTING...........................................................................................................................................8
V. ABSORPTION COSTING.........................................................................................................................................9
EXAMPLE............................................................................................................................................................ 9
THE ADVANTAGES AND DISADVANTAGES OF DIFFERENT TYPES OF PLANNING TOOLS USED FOR BUDGETARY
CONTROL.......................................................................................................................................................... 11
BUDGETARY CONTROL................................................................................................................................................11
1. CAPITAL BUDGET..............................................................................................................................................11
2. MASTER BUDGET.............................................................................................................................................12
3. ACTIVITY-BASED BUDGETING..............................................................................................................................12
4. INCREMENTAL BUDGETING.................................................................................................................................13
5. ZERO-BASE BUDGETING.....................................................................................................................................13
TO UNDERSTAND THE OPERATION AND PRICING STRATEGY OF THE COMPANY, PEST, SWOT AND BALANCED
SCORECARD ARE ALSO PERFORMED BELOW:..................................................................................................... 14
1. PEST ANALYSIS................................................................................................................................................14
2. SWOT ANALYSIS............................................................................................................................................. 15
3. BALANCED SCORECARD......................................................................................................................................16
COMPARING HOW ORGANIZATIONS ARE ADAPTING MANAGEMENT ACCOUNTING SYSTEMS TO RESPOND TO
FINANCIAL PROBLEMS...................................................................................................................................... 17
KEY PERFORMANCE INDICATORS...................................................................................................................................17
BENCHMARKING........................................................................................................................................................ 17
FINANCIAL GOVERNANCE.............................................................................................................................................17
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1. ANALYTICAL........................................................................................................................................................18
2. CRITICAL THINKING...........................................................................................................................................19
3. INTERPERSONAL COMMUNICATION......................................................................................................................19
4. ADAPTABILITY..................................................................................................................................................19
CONCLUSION.................................................................................................................................................... 20
REFERENCES...................................................................................................................................................... 21
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Explanation of Management accounting with the essential requirements of different types
of management accounting system.
Management Accounting
Management accounting system is defined as the method by which an information interlinked to
accounting are analyzed, interpreted and presented. The costing and accounting information is
used to collect the required information which helps the management of an organization in
decision making process applicable for short duration or daily purpose. Extent of performance,
observation of risk, preparation and presentation of financial statement for the organization are
the main core process of management accounting.
Principle of Management Accounting
 To determine the purpose and extend of financial and managerial accounting, as well as the
usage of accounting data in managers’ decision-making process.
 To explain the differences between operational and capital budgeting, as well as their roles in
planning, control and decision-making.
 To prepare an operating budget, describe its primary components, and explain how the
various components interact.
 To made explanation of performance evaluation methods.
 To make operational decisions based on accurate financial data.
 To demonstrate the utilization of accounting data for management choices in the areas of
product costing, cost behavior, cost control, and operational and capital budgeting.
The differences between management accounting and financial accounting are as follow:
Financial Accounting Management Accounting
Revenue, income and expenditure, and property
accounts are all maintained in financial
accounting records.
Cost and revenue are generally reported by
responsibility centers or profit centers in
management accounting.
Financial accounting reporting is required once a
year.
Management accounting reposting is not required
every year.
The focus of financial accounting is on the past
history.
Management accounting is concerned with the
future as well as the present.
Financial accounting aids in making investments Management accounting aids decision-making by
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decisions and credit rating choices. assisting management in recording, planning, and
controlling activities.
Different types of management accounting system with its benefits are explained below.
1. Inventory Management System
Inventory management system is the process that directs the monitoring and maintenance of the
stocked product i.e., raw materials, supplies, organization assets or any other final products
which are ready to be sold out in the marketplace. This system allows an organization to
maintain a centralized record of each item and asset (Hayes, 2019). However, it has also main
other drawbacks such as, consumption of storage spaces, running out of stock of essential
inventory supplies. (Pontius, 2020)
Benefits of Inventory Management System
 It helps to enhance the transparency.
 It helps in better reporting and sharpens the capabilities of estimating.
 It helps in improving the interpersonal relationship among suppliers, partners and vendors.
2. Cost-Accounting System
Cost accounting system is defined as the process concern with the classification, recording,
allocation, distribution, summarization and accounting aspects of the current and prospective of
cost. It is the mechanism by which the cost of products and services are determined. It is an
internal reporting system with the main purpose of aiding the management in the planning and
decision-making phase. (Tuovila, 2020)
Benefits of Cost Accounting System
 The cost accounting system helps in controlling the cost with the application of techniques
such as standard costing and budgetary control.
 It gives essential information related to cost to the management for planning, implementing
and controlling.
 It helps in introducing the cost reducing program.
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3. Job Costing System
Job costing system is defined as the system which is purely based on the customer’s description
used while evaluating the cost of specified jobs in an organization. In this system, each job’s cost
is determined individually which assists the organization to ascertain the profit or loss on the
individual job. It also helps the management of an organization to identify the job which may
either bring profit or loss to the organization.
Benefits of Job Costing System
 The profit for each job can be separately ascertained.
 It provides a detailed cost analysis of labor, materials and overheads whenever as per the
job’s requirement.
 It helps in preparing the estimates of an organization.
4. Price- Optimizing System
It is a system which computes how demand varies at various price level and then combines the
specific data with the cost information. And inventory levels in order to recommend a price
which will enhance the profit. This system helps an organization to determine initial pricing,
promotional pricing and discount pricing. (Walkowski, 2018)
Benefits of Price-Optimizing System
 It helps an organization to gain immediate financial benefits.
 It allows parallel working with various categories.
 It helps to eradicate the need of manual work and minimizes the possibilities of mistakes a
human is likely to make.
Explanation of the different methods used for management accounting reporting.
Management accounting reporting is defined as the process of preparing the accounts and
management reports of an organization with the sole purpose of aiding the managers by
providing validate and reliable information related to financial status and different plans and
policies of an organization. This reporting processes helps an organization by determining
various procedures that needs to be undertaken in effective ways through the managerial aspects.
Different methods used for management accounting reporting are:
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1. Budget Report
The budgetary control of an organization is determined by budget report. This report also helps
to evaluate the future performance of an organization. This report also enables an organization to
build a plan for spending money and ensures that the money is being spent cautiously.
2. Cost Report
The method of managing and controlling the future costs by providing information to the
managers and leaders that has authority on the cost related sector of an organization is known as
cost report. On the basis of cost of raw materials, manpower requirements, overheads, and any
other supplementary cost, the final cost report is prepared.
3. Performance Report
The reports that are used to assess and evaluate substantive expenses and revenues to the
amounts which has already been assigned is defined as performance report. This report is mainly
used by management accountants in order to forecast and define the future of an organization in
terms of increasement in both costs and production.
4. Accounting Receivable Aging Report
This report helps in identifying the unpaid invoice of the customer along with the unused credit
memos in-accordance with the particulars date and contact information for the consumer of an
organization. An organization can determine effectiveness of the credit function and data
collection of the consumer by the help of accounting receivable aging reports.
5. Job Cost Report
This report explores the list of job and the related cost which involves labor cost, materials cost,
overhead cost and forth. This report can be utilized to evaluate the expenditure on individual
activities that the organization undertakes.
Therefore, the above mention point are the different methods of management accounting
reporting.
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Calculating costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Cost
Cost is defined as the amount measured in monetary units which is attributed in exchange for
some goods or services for the particular purpose. It can also be defined as the sacrifice or giving
up resources. Cost signifies an amount of expenditure to secure some benefits.
The types of cost are explained below:
i. Fixed Cost
A cost that remains consistent even though the amount of goods and services that is produced or
sold may increase or decrease is defined as fixed cost. It is independent of specific business
activities.
ii. Cost- Volume Profit Analysis (CVP)
CVP analysis is used to figure out how changes in expenses and volume effect a company’s
operating income and net income. Several assumptions were made in order to conduct CVP
which includes the constant sales price per unit, variable cost per unit is constant, the total fixed
cost are fixed and many more. All of the company’s costs including manufacturing, selling and
administrative costs must be classified as variable or fixed in order to do a CVP analysis.
iii. Flexible Budgeting
A flexible budget adapts to changes in actual revenue. Once an accounting period is concluded,
actual revenues or other activity metrics are loaded into the flexible budget which generates a
budget that is customized to the inputs. For control purpose, the budget is then compared to
actual spending. It helps to identify all fixed costs and segregate them in the budget model.
iv. Marginal Costing
Marginal costing is beneficial in profit planning. This cost helps to determine profitability at
different level of production sale. It is suitable in decision making about complex of selling
price, export decision and make or buy decision. P/V ratio and break even analysis are one of the
useful techniques of the marginal costing. By using marginal costing, different department of an
organization can be evaluated.
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v. Absorption Costing
The method of capturing all cost both variable and fixed to the manufacturing processes,
operation and products is defined as absorption costing. This cost includes production cost,
administrative cost, and other cost such as rent, insurance cost etc. It assigns fixed overhead costs
to the products in order to find out the total cost of production.
Example
Following information is related to XYZ company which sells Watchs. This information is from
the year ended 31st May 2019.
Particulars Amount (Rs)
Opening Stock (Valued at marginal cost Rs. 61900 and
total cost Rs.72,000)
Units produced
Closing Stock
Units Sold
Variable Cost
Factory Overheads(Fixed)
Selling Cost: Variable
Fixed
Selling Price Per Unit
10,000 units
60,000 units
4,000 units
66,000 units
Rs.3,57,000
Rs.70,200
Rs.3,40,000
Rs.50,000
Rs.20
Requirement:
Prepare income statement for the year ended 31st March 2017 using (a) marginal costing and (b)
absorption costing and brief about the differences between the two income statements.
Solution:
Marginal Costing Income statement
For the year ended 31st May 2019
Particulars Amount (Rs) Amount (Rs)
Sales
Less: Variable Cost
Add: Opening Stock
3,57,000
61,900
13,20,000
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Less: Closing Stock (3,57,000/60,000 x 4,000)
Variable Selling Cost
Contribution
Less: Fixed Factory Cost
Fixed Selling Cost
4,18,900
23,800
3,95,100
3,40,000
70,200
50,000
(7,35,100)
5,84,900
1,20,200
Net Profit 4,64,700
Absorption Costing Income Statement
For the year ended 31st May 2019
Particulars Amount (Rs) Amount (Rs)
Sales (66,000 x Rs. 20)
Less: Cost of Goods Manufactured: Variable Cost
Factory Manufacturing Overheads
Opening Stock
Less: Closing inventory (4,000/60,000 x 27,200)
Gross profit
Less: Selling Cost: Variable
Fixed
3,57,000
70,200
4,27,200
72,000
4,99,200
28,480
50,000
3,40,000
13,20,000
4,70,720
8,49,280
3,90,000
Net Profit 4,59,280
The difference is profit of Rs.5,420 (which is Rs.4,64,700 – Rs.4,59,280) under absorption and
marginal costing due to fixed factory overheads included in opening stock and closing stock.
Opening Stock (Rs) Closing Stock (Rs)
Marginal costing
Absorption Costing
61,900
72,000
23,480
28,480
10,100 4,680
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The advantages and disadvantages of different types of planning tools used for budgetary
control.
Budgetary Control
Budgetary control is defined as a planning tool which is used to plan and control the production
and selling of product or services and also to foster the communication and co-ordination
between several departments of an organization. Budgetary control is a detailed framework of all
the aspect of the organizational operation that ensure the organization will achieve its objectives
in the future.
Advantages of Budgetary Control
 It helps to coordinate different departments in the activities which the organization
conduct.
 It translates strategic plan into action
 It helps to carry out the strategic plan by specifying the resources, activities and revenues.
Disadvantages of Budgetary control
 In budgetary control the problem arises when the budgets are used rigidly and
mechanically.
 Due to lack of participation in budgetary control an employee can feel demotivated.
 It can cause insights of unfairness.
1. Capital budget
Capital Budget is a method which an organization uses for the long-term investment
opportunities mainly for determining whether to invest in a project or not. The investment
opportunities may include construction of building, factory facilities or a new plant and
machinery etc.
Advantages of Capital Budget
 It helps an organization to analyze the different risk involved in an investment
opportunity.
 It helps the organization to forecast which investment opportunity will produce more
benefits comparatively.
 It helps an organization to build a long-term plan on strategic investment.
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Disadvantages of Capital Budget
 Since the decision are for long-term in capital budgeting, they are mainly irreversible in
nature.
 Capital budgeting technique is based on estimations and assumption which cannot be
applied in the future as it is always uncertain.
 An ineffective capital budgeting decision-making process can affect the long-term
durability of an organization.
2. Master Budget
A summary of an organization’s plan which sets a particular target for production, distribution,
sales and financial activities is known as master budget. This budget demonstrates an overall
view of the management’s plan for the future and how this plan can be achieved. It comprises a
number of individual but interdependent budgets.
Advantages of Master Budget
 It helps an organization by generating an idea of where an organization wants to reach
and what should be done in order to reach there.
 It helps an organization to forecast cash flows in a project which will help the
organization in getting specific type of financing.
 It allows an organization to assess problems and plan ahead.
Disadvantages of Master Budget
 The preparation of master budget is time consuming.
 Lack of specificity is one of the disadvantages of master budget.
3. Activity-based Budgeting
Activity-based budgeting is a type of budgeting that calculate the sum of cost required to meet
the target of the expected level of activities.
Advantages of Activity-Based Budget
 It enhances the efficiency of an organization by identifying and shutting down the
performance gap.
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