Management Accounting Report: Financial Performance and Strategies

This management accounting report, prepared for Professional Leads, a UK-based accounting firm, provides a detailed overview of management accounting systems. It covers the definition and essential requirements of management accounting, differentiating it from financial accounting, and explores various types of management accounting systems like cost accounting, inventory management, job costing, and price optimizing systems, along with their benefits. The report further delves into different methods of management accounting reporting, including financial, cash, sales, and item cost reports. It includes the preparation of income statements using marginal and absorption costing techniques, comparing their outcomes and advantages. Additionally, it discusses the advantages and disadvantages of budgetary control planning tools and various management accounting systems to address financial problems, along with key performance indicators, offering valuable insights into financial performance and strategic decision-making within organizations.

Management accounting
report

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
Management accounting and essential requirements...................................................................1
Different types of methods for management accounting.............................................................2
LO 2.................................................................................................................................................3
Preparation of income statements using different management accounting techniques.............3
LO.3 ................................................................................................................................................5
Explaining the advantages and disadvantages of different planning tools for budgetary control.
......................................................................................................................................................5
LO 4.................................................................................................................................................9
Different management accounting system to be used for reposnding various financial
accounting problems....................................................................................................................9
Key performance indicators.........................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management Accounting system is refers to a system adopted by managers as to develop
the efficiency of the company in context with its financial performance. It is a process of
providing all the relevant financial information to the managers so that they could use them and
develop effective strategies for enhancing financial performance of the company and its cost
efficiency as well. Professional leads is a famous accounting firm of UK. It provides accounting
services to various companies. The present study shows a report of an intern as to provide a
brief information about the management accounting system to a client of the company. The
report includes a description of management accounting and management accounting system.
Further, it also shows various types of management accounting system and their requirements
within a business organisation. It shows numerous methods for the management accounting
reporting.
The report also shows preparation of income statement using different techniques of
management accounting. Furthermore, it also shows different planning tools of budgetary control
system and various systems of management accounting that can be adopted by managers as to
respond different financial problems.
LO 1
Management accounting and essential requirements.
Management accounting is a process that helps in prepare financial report and it helps in
making decision for achieve organizational goal and meet objective. This account statement
prepare by managers for evaluate and analyze all data for making decision and improve work. It
main purpose is make plan and strategy and policy formation for set goals and take action
according to prepared statement. All data helpful in making decision by manages like cost,
profit, price and saving so they make any strategy for achieve goal after evaluation and analyze
of all data. So this is a tool of evaluate all costs and data than making decision and make plan
(Malmi, 2016).
financial accounting is a system that records all data and double entries book keeping of
financial year (Dutta and Patatoukas, 2016). It track all transaction that related to finance and
record, summarize and analysis of data and information.
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Difference between management accounting and financial accounting :-
Management accounting Financial accounting
Legal requirement It has no legal requirement in
organization.
Limited and other companies
must prepare this account.
Format of presentation Management of organization
mainly focus on require all
information and data in
effective way.
It format are compulsorily
trues and fare according to
relevant act (Christensen,
Nikolaev and Wittenberg‐
Moerman, 2016).
Area of coverage It cover internal part opf
organization.
It includes all external parties
that out of organization.
Types of data use Qualitative and quantitative
both data includes.
Only qualitative data use.
Following types of management accounting system:-
Cost accounting systems :- this system is a framework that use by firms for make
estimate and set cost of product through that it also analysis of profit. This system helps in make
budget, standard cost and actual cost. Firm easily evaluate profit of all department of
organization through analyze gap between cost and revenue. After analyze all data like past
present and future than management take decision related to investment and expand business.
This system of accounting important for all organization.
Inventory management system :- this management system is use by all manufacturing
organization because through this system firms track every information about inventory. It tracks
whole supply chain and raw material that work in progress. It includes stock production to
warehouse and warehouse to shipping so it makes easy to manage inventory. So this system
includes all tracking of inventories. Orders, sales and deliveries. This system is very useful for
manufacturing organization that helps in manage all records and easily evaluate about
information of products and goods. for example if organization have reorder level and minimum
stock level that helps in manage cost and funds for purchase goods and maintain order. Reorder
level means that sufficient costs are available with organization that it take same order (Bucci,
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Hyde and Keen, 2019). Minimum stock level mange minimum amount compulsorily with it and
maximum stock level fix limit of cost for purchase stock.
Job costing system :- this system is very useful for organization that make products and
services according to order by customers. That means different types of customers give order for
different design and products so organizations has to produce according to demand and order
receive. In this process more cost incur so firms use job costing system that helps in calculate
easily all cost and revenue. Through this system they can easily calculate per item cost and
revenue. Firms evaluate that revenue is earned or not more than expenses that means profit earn
on per item or not so it helps in evaluate and making decision that order accept or not that
depend on profit and loss (Maas, Schaltegger and Crutzen, 2016).
Price optimizing system :- this system is use by all types of organization because
through these firms evaluate customers reaction regard price of products. Customer wants to
quality products on low price and if organization provide products at low price so customer
demand increase and if price is high for customers that effect on customers demand. So firm
easily evaluate and analyze customers reaction and they can set their price of products and also
take decision about price of products.
Benefits of management accounting system :- management accounting system helps in
organization for measure actual performance (Gunarathne and Lee, 2015). It also beneficial in
comparison of actual budget with required budget so management easily take decision according
to reports and also make plan for improve and develop of performance for achieve target.
LO 2
Different types of methods for management accounting reporting
Management accounting reports is tool that helps in understanding everything related to business
and activities of firms. It includes expenses, revenue, tax and collection of data. Following
methods are used for management accounting report:-
Financial report :- Financial reports shows the overall financial transactions of the
company. With the help of these reports, management can analyse overall financial performance
of the business. Further, it can also be seen as a summarised report of the overall business
operations. In this regard, with the help of these reports, the managers can analyse various
financial information and developing strategies for the company.
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cash reports :- cash reports shows overall cash flow of the organisation. It includes all
the cash flow in organization (Nitzl, 2016). With the help of this report, managers can develop
better control over the business activities.
Sales report :- Sales report shows information about the sales activities of the company.
With the help of this report, overall sales activities of the business organisation. In this regard,
the managers can develop effective strategies through which the company could achieve its
business gaols.
Item cost report :- this report is very lengthy and consume more cost because this
includes all cost and expenses according to material, labor and other expenses on per product so
that helps in evaluate and calculate profit on per products. This report divides all cost according
to different expenditure and then analyze about earn profit.
Management accounting system is a process of control and effective manage through
evaluate of data and profit for making decision. It is very best way of evaluate all things and
make strategy very effectively for earn more profitability. It also helps in compare past present
and future year records. It affects to top management because they have to evaluate time to time
all records and evaluate performance in short term. Management accounting reporting is measure
actual performance of organization and compare require budget and available budget. It
consumes more cost and time because it evaluates and calculate profit on per product according
to labor and material and other expenses (Van der Stede, 2016).
Preparation of income statements using different management accounting techniques
Marginal costing:
marginal costing is a technique of costing in which all variable costs are being considered
as as the product cost (Jermias, Gani and Juliana, 2018). Whereas, all the fixed costs are being
considered as period cost. In this regard, fixed costs are nit being taken into account while
calculating cost of production.
Importance of marginal costing
 Marginal costing method is helpful for business for taking its short term decisions.
 Marginal costing helps in controlling cost of production because it eliminates overhead
cost.
 Marginal costing helps in effective decision making and profit planning.
Absorption costing:
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Absorption costing is a technique in which each cost incurred by a business while
producing a product are being considered while calculating cost of production.
Importance of absorption costing
 Absorption costing helps in effectively identifying the importance of fixed cost at the
time of production.
 Absorption costing helps in preperation of financil accounts nad statemnets with
higher accuracy.
Difference between marginal and absorption costing system
Both marginal costing and absorption costing provides different results. Key difference
between these techniques are calculation of cost of production. Income statement prepared
through marginal costing system shows higher amount of profitability of the business (Maas,
Schaltegger and Crutzen, 2016). On the other hand, absorption costing system shows lower level
of profitability of the company.
In major limitation of both the techniques are that marginal costing does not take into
account while calculating the profit of the company. On the other hand, absorption costing
provides lower amount of profit to the company.
Income Statement (Marginal Costing)
as on 30th May 2019
Particulars Amount
Sales 8000 units @ £15 120000
Less- Opening Stock -2000
Less- Variable Cost (8000
units @ £2)
-16000
Contribution 102000
Less- Fixed Cost -40000
Profit 62000
Income Statement (Absorption Costing)
as on 30th May 2019
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Particulars Amount
Sales 8000 units @ £15 120000
Less- Opening Stock -2000
Less- Variable Cost of
Production 10000 units @ £2
-20000
Contribution 98000
Less- Fixed Production
Overhead
-40000
Profit 58000
Interpretation
from the above preparation of income statements using marginal and absorption costing
techniques of the management accounting system, it can be interpret that, both techniques
provides different results to the company. The gross profit of the company in marginal costing is
termed as contribution. The above income statements states that gross profit from income
statement comes 62000. on the other hand, in the absorption costing, the gross profit is being
calculated to be 58000 which is less than the gross profit of marginal costing income statement.
Recommendation
In this regard, it can be interpret that absorption costing is more appropriate approach of
preparing income statement. Although, marginal costing can be more appropriate for those
business units that needs higher profitability from the business.
Critical evaluation
The major reason behind such difference is difference in the method of calculating cost of
production. While calculating cost of production under marginal costing system, only variable
costs incurred by a business organisation are being considered. On the other hand, in absorption
costing each cost incurred by company while producing its goods are being considered for
calculating cost of production.
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LO.3
Explaining the advantages and disadvantages of different planning tools for budgetary control.
Budgetary control is an effective process of determining and evaluating the actual results
with the budget plan to effectively analyses the results. In case of any deviation it helps
management of the Excite entertainment ltd. to take corrective actions accordingly in order to
increase the performance and productivity of the Excite entertainment ltd.
Budget: It is the financial plan for a defined period, often one year. It might be include
planned sales, volumes and revenues, resource capabilities, costs and expenses, asserts,
liabilities and cash flows (Chenhall and Moers, 2015).
Different planning tools for Budgetary control
 Cash budget
Cash budget is the budget plan which includes inflow and outflow of cash of an organization for
a particular period of time. Cash inflow and outflow comprises expenses paid, revenue collected,
loan payments and receipts (Appelbaum and et.al., 2017)). Cash budget helps in measuring the
cash position of the Excite entertainment ltd. Cash budget helps in forecasting cash inflows, cash
outflows and cash balance.
Advantages of cash budget
 Cash budget helps in planning the resources effectively and efficiently (15 Cash Budget
Advantages and Disadvantages, 2018).
 Cash budget helps in performance evaluation and leads to higher operational efficiency of
the organization. Cash budget helps in avoiding debt and focus on activity which will generate more
revenue and income for Excite entertainment ltd.
Disadvantages of cash budget
 Cash budget is not flexible i.e., it is strategically rigid. Cash budget only includes financial transaction, it does not take into consideration non-
financial transaction. Hence, cash budget limits the ability to consider credit transaction
for accurate and reliable information (Yılmaz, 2018).
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 Operating budget
Operating budget portrays expenses, income and expected cost for a particular financial year
(Yılmaz, 2018). Operating budget helps in evaluating income generating activities of the Excite
entertainment ltd and also helps in forecasting revenue and expenses for a particular period.
Advantages of Operating budget
 Operating budget helps in projecting future expenses which helps in building financial
reserves fort the organization. Operating budget helps in managing current expenses of the organization and also helps
in determining financial position of the company.
Disadvantages of Operating budget
 Preparation of operating budget is time consuming which leads to delay in decision
making. The allocation of the budgeted plan do not match the actual cost of running each
departmental unit of Excite entertainment ltd.
 Fixed budget
A fixed budget is also referred to as static budget. Fixed budget is not flexible it remains constant
regardless of the activity in the organization. It remains constant throughout the budgeting period
(Stea and Andresen, 2017).
Advantages of Fixed budget
 Fixed budget helps in prioritizing the expenses and set clear distinction between the
activities to meet the desired goals and objectives of the organization.
 Fixed budget helps in tracking the budget and in case of any deviation necessary action is
taken effectively and efficiently. Fixed budget helps in controlling the cost of the business.
Disadvantages of Fixed budget
 The major disadvantage of fixed budget is that it lacks flexibility.
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 Additional resources can't be allocated which impacts the revenues of the business
(Webb, 2016). The major drawback of fixed budget is that the budget is no change in the budgeted plan
of the business even if there is a change in the level of the business activity.
Budgetary control system
 Zero based budgeting
Zero based budgeting is a type of budgetary control in which the budget is prepared from the
scratch. Zero based budgeting ensure cost effectiveness and the management of the Excite
entertainment ltd do not take into account previous year's budget plan.
Advantages of Zero based budgeting
 Zero based budgeting helps management of the organization to effectively evaluate the
operations and programmes. Zero based budgeting focus on maximizing the profits of the organization and helps in
reducing error (Strengths and Weaknesses of Different Budget Systems, 2016).
Disadvantages of Zero based budgeting
 Zero based budgeting do not focus on cost centres and are highly complex budgetary
control tool.
 Zero based budgeting is a very time consuming process and resource intensive as the
budget is prepared from zero i.e. from the scratch. Implementation of Zero based budgeting is difficult as employees of the organization
might have problem adjusting the whole new budget plan.
 Incremental budgeting
Incremental budgeting is a type of budgetary control which are prepared using budget of the last
financial year (Ho, 2018). This helps in adding incremental value to the new budget plan which
helps in improving the financial position and performance of the Excite entertainment ltd
effectively and efficiently.
Advantages of Incremental budgeting
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 Incremental budgeting is simple and are based on the historical data for future predictions
which leads to improved budget plan. Incremental budgeting is easy to implement and understand which leads to higher
operational efficiency, performance and productivity.
Disadvantages of Incremental budgeting
 Incremental budgeting do not take into account future and present situations which leads
to outdated budget plan and lower growth and sustainability of the budget plan (White
and Fancy, 2017). Incremental budgeting do not develop new ideas and techniques to reduce cost and
expenses of the organization (Miller, 2018).
 Activity based budgeting
Activity based budgeting helps in critically analysing the cost of the business to carry out a
particular activity (Ho, 2018). Activity based budgeting helps in high degree of refinement
within the cost planning and also helps in analysing the activities which are crucial for the
development of Excite entertainment ltd. Activity based budgeting helps in analysing cost
attached with each activity.
Advantages of Activity based budgeting
 Activity based budgeting helps in identifying critical success factors which helps in
sustainable growth and development of the Excite entertainment ltd.
 Activity based budgeting helps management in critical evaluation and building in- depth
knowledge on the particular activities which leads to higher operational efficiency of the
business. Activity based budgeting helps in better and effective understanding of the overhead and
also helps in identifying non valuable activities in the organization.
Disadvantages of Activity based budgeting
Activity based budgeting is not useful for small businesses (de Campos and Rodrigues, 2016).
Activity based budgeting is costly to maintain and can be easily misinterpreted.
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