Management Accounting Report: Cost Analysis, Planning and Solutions

This report delves into the realm of management accounting, providing a comprehensive overview of its systems, techniques, and applications. It begins by defining management accounting and its significance in organizational decision-making, particularly within the context of Merlin Financial Consultation and its client, Assail Architecture. The report explores various management accounting systems such as cost accounting, inventory management, price optimization, and job costing, elucidating their benefits and integration with organizational processes. It then examines different methods of management accounting reporting, including budget reports, performance reports, cost managerial accounting reports, and accounts receivable aging reports. The report further analyzes cost calculation techniques, specifically absorption costing and marginal costing, and demonstrates their application in preparing an income statement. Furthermore, it investigates the use of planning tools in management accounting and explores how organizations can leverage management accounting to respond to financial problems, drawing examples from Nestle and Unilever. The report concludes by summarizing the key findings and insights gained throughout the analysis.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
LO1 Understanding of management accounting system.................................................................3
LO2 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs................................................................................8
LO 3 Explain the use of planning tools used in management accounting.....................................11
LO4 Compare ways in which organisations could use management accounting to respond to
financial problems .........................................................................................................................15
CONCLUSION..............................................................................................................................18
REFERNCES.................................................................................................................................19

INTRODUCTION
Management accounting is a tool used for preparation of some confidential reports which
provides financial and non- financial information in any organization to take short term and long
term decisions (Amidu, Effah and Abor, 2011). It is a technique helps in planning, regulating,
decision making and measuring performance to the managers. It is a system which helps in
formulation and adoption of various policies by considering the financial information by the
managers to provide assistance for management of day to day activities. These are generated on
daily basis or as and when required as major decisions are dependent on such reports. To
understand the practices of management accounting Merlin Financial Consultation is selected, it
is located at London, United Kingdom and organises its operations to provide financial and
consultancy services to its customers. It serves its services to various clients in Manufacturing,
Consultation, Retail and Hospitality sectors. Assail Architecture is one of its client which is an
architectural firm having its headquarters at Putney, London, United Kingdom.
In this project report detailed information about management accounting and its essential
different types, benefits and applicability with different methods used are described. It also
focuses on different costing techniques, various planning tools for budgetary control with their
advantages and disadvantage and the ways in which an organization responds to financial
problems which leads towards sustainable success defined by taking two organisation as Nestle
and Unilever.
LO1 Understanding of management accounting system.
Accounting is a process of systematically identify, recording, measuring, classifying,
summarizing the financial records as well as interpreting and communicating the results to the
managers of an organization (Brigham and Ehrhardt, 2013). It is a way of recording all the
financial transactions in a comprehensive manner to disclose profit and loss along with advising
in taxation matter in particular period. It helps in summarization of organizational operations,
financial positions and cash flows in an accounting period. Accounting is further classified as
management accounting which is discussed below:
Management Accounting: Management accounting is defined as the provisions of
collecting and recording the necessary financial or non financial information which helps in
taking effective decisions and improving efficiency in current or future operations by

formulating strategies of an organization. It helps Merlin Financial Consultation in analysing
various costs by maintaining of internal records, reports which provides assistance to the
managers in taking decisions. Such system helps in forecasting future events by considering past
experiences to develop day to day along with long term policies. Assail Architecture would be
beneficial through these accounting systems by evaluating and analyse information properly.
Some of them are as follows:
Cost Accounting System: Cost accounting system is a technique used by the managers
to estimate various costs associated with the products in order to analyse the profitability,
inventory evaluation and cost control. The requirement of such accounting is to examine the cost
structure of an organization. It is concerned with developing a framework to analyse and
measure the total cost that is incurred during the production of a particular product. Merlin
Financial Consultation can uses cost accounting system to bifurcate the cost of different
commodities like, short term bonds and loan certificates. Assael Architecture company wants to
select lower cost financial product form Merlin financial consultation. Thus, by dividing sections
of products it can chose lower cost retaining product for it’s business that would be beneficial for
its construction operations.
Inventory management system: Inventory is a term that is used for the goods that are
used at various stages of production of product for the purpose of sale. Inventory management
system is used in the organizations to ascertain the actual information of the stock of raw
material, goods in progress and finished goods lying with them. Such system helps Merlin
Financial Consultation to tracking the inventory by forecasting and implementing various
strategies to effectively manage the available stock of capital with its clients. (Carlsson-Wall,
Kraus and Lind, 2015). This system will help Assael Architecture construction projects to ensure
the proper amount of inventory available and required to carry out the planned work. The
selected system in the selected organization helps in keeping a proper record of the total
inventory present in the construction process available in different departments.
Price optimization System: Price optimization is a tool, which helps in analysing and
determining the prices of the products to fulfil the organizational objectives. Such System
requires Merlin Financial Consultancy to analyse various ways in which its clients will respond
towards different prices of the securities as well as investments and accordingly formulation of
strategies is done. This system can be beneficial for Assael Architecture in order to determine the

buying behaviour of its customers and their preferences in relation to the prices of projects. Such
system helps in formulating various pricing decisions to derive sales and profitability of the
selected organization.
Job costing system: Job costing system is a process of acquiring information related to
the cost associated with the specific production of a product or service. The selected system can
be beneficial for Merlin Financial Consultation managers to keep a record of individual as well
as team performance in order to control cost and improve efficiency and performance. For
instance, the managers of Assael Architectural get the detailed of different products by analysing
costs of different sections. Such system is used in the organization to allocate the costs to
individual projects of the organization.
Explain different method of management accounting reporting.
Management accounting reports are those reports which are used in planning, decision
making, and also in for measurement of performance. These reports should be prepared without
any errors because many critical decisions are taken by company on the basis of these reports. In
addition, on the behalf of these reports managers make important policies and strategies. The
managers of Assail architecture limited prepares many reports to make effective policies and
decisions, reports prepared by them are following:
Budget Report- Budget reports are generally prepared to compare and evaluate
performance of organisation and as well as of employees (Dražić Lutilsky and Dragija, 2012). In
these reports there are certain standards and on the basis of these standards, managers compare
actual performance. This report consists only financial data and standards. Generally budget
reports are prepared on the basis of previous year data because it is an estimation of income and
expenses for a particular period of time. Assail architecture limited makes budget reports to
measure performance of their employees and as well as of organisation. It helps managers in
taking important decisions regarding to the employees and company.
Performance Report- Performance reports are used for review the performance of
company and also of each employee (Granlund, 2011). Management department makes many
important decisions for future on the basis of these reports. This report helps in keep an extra site
of eye on the employee's performance. On the basis of these reports effective and highly
performed employees get awards and rest of other employees gets training to improve
performance. Assail architecture limited company makes this report to analyse performance of

their employees. It helps them to decide how many employees are able to get appraisal and
awards.
Cost Managerial Accounting Report- Cost managerial accounting report is a report
which includes all the cost which occurs in production (Johnson, 2013). It consists raw material
cost, labour cost, electricity cost, labelling and packaging cost. Basic concept of this report is that
it compares total amount of cost with the total selling amount of all the products. In addition, it
has the record of total cost of production. It also helpful in calculate each product's cost by
dividing total amount of cost with number of units produced. The managers of Assail
architecture limited makes this accounting report to check the total cost of production. It helps in
analyse that they are getting profit or loss because it compares cost amount with selling amount.
It is also helpful for manager of company to make policies and plans for future because this
report reflects the actuality of company's performance.
Accounting Receivable Ageing Report: Accounts receivable ageing report is prepared
for those organisations, which deals mostly in credit (Nixon and Burns, 2012). In this report
those transactions take place which are on credit. It helps companies to check that how many
collection they have in market. In addition this report also include date on which credit
transaction took place. The report makes work easy of finance managers because it is not easy
for them to keep remember that how much amount is due by different customers. So main
objective of this report is to recover the debt amount from customers. Managers of Assail
architecture limited makes this report to analyse that how much money they need to collect from
customers. This report is helping company in finding issues regarding to the collection process.
M1. Evaluation of benefits of various management accounting systems
Management accounting systems Benefits
Cost accounting system  Such system helps to collect detailed information
related to cost which is involved in construction
process.
 The selected system in recording of all the
construction related operations in the
organization.
Inventory management system  It helps in keeping up dated information about

inventory available and required to carry out the
planned work without any obstacles.
 Application of such system saves time, money,
increases efficiency and productivity while
contributing towards the growth of the selected
organization by managing the inventory.
Price optimization system  It helps in analysing the customers’ behaviour
and their perception towards prices of the
organizational projects.
 Managers can have control over the pricing
decisions and can formulate better and effective
decisions for the selected organization.
Job Costing system  It benefits the managers to analyse various costs
associated with the completion of the
organizational projects.
 It helps in tracking the individual performance for
the organizational profitability in order to
improve efficiency.
Management accounting system and management accounting reporting are integrated with
organisation process.
Management accounting systems and management accounting reporting are integrated
with organisation process in such a manner that price optimization, inventory management etc.
have a link with the management accounting reports like budget report, performance reports etc.
The link between both is due to their financial data and activities. Like performance report
requires various data from various accounting systems as well as various accounting systems
also requires management accounting reports. So overall both have link with each other. In
Merlin Financial Consultation limited they prepare both accounting reports and accounting
systems. For making accounting reports they need accounting systems due to their link.

LO2 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Absorption costing- Absorption costing is a type of method which calculates the total
cost of production, and after that assign the cost to each product's unit individually. This method
of costing is also known by full costing method.
Marginal costing- Marginal costing is a type of technique in which variable cost is
considered as the cost of unit, on the other hand fixed cost is considered as the period cost.
Income statement by absorption costing method
Particular Amount
Sales
Less: Cost of goods sold
Gross profit
Less: Selling and administrative expenses
Income
250000
140000
110000
60000
50000
Working notes*
Calculation of cost: 250000
(25*10000)
Calculation of cost of goods sold: (50000+30000+20000+40000)= 140000
(Direct material+ direct labour+ Variable manufacturing overhead+ Fixed manufacturing
overhead)
Calculation of selling and administrative expenses :(30000+30000) = 60000
(Variable selling and administrative expenses+ Fixed selling and administrative expenses)
Income statement by marginal costing method
Particulars Amount
Sales
Less: Marginal cost of sales
Contribution
Less: Fixed cost
250000
130000
120000
70000

Net income 50000
Working notes* -
Calculation of marginal cost of sales: (50000+30000+20000+30000) = 130000
(Direct material+ Direct material+ Variable manufacturing overhead+ Variable selling and
administrative expenses)
Calculation of fixed cost: (40000+30000)= 70000
(Fixed manufacturing overhead+ Fixed selling and administrative expenses)
Interpretation- From above solved numerical it has been recommend that in the
absorption cost method, net income is 50000 and with marginal cost method, net income is also
50000. In the absorption costing method cost of goods sold is calculated by adding direct labour,
direct material, fixed and variable manufacturing expenses which is 140000. Sales is of 250000.
Gross profit is calculated by difference between sales and cost of goods sold. Then, fixed cost
deducted from gross profit and which is 50000. In marginal cost method marginal cost of sales
calculated by adding all the variable expenses, direct material and direct labour which is 130000.
Then it is deducted from sales to calculate contribution which is 120000. After that, fixed cost
deducted from contribution which is 70000. In the end fixed cost deducted from contribution
which is the net income 50000 from marginal costing method. The reason behind the same profit
under both the costing methods is the same units which are produced and sold by the company.
Income statement by absorption costing method( When 5000 units of radiators are
sold)
Particulars Amount
Sales (5000*25)
Less- Cost of good sold
Gross loss
Less- Selling and administration
expenses
Net loss
125000
140000
(85000)
60000
(145000)
Working Note*
Calculation of sales (5000*25) = 125000

Calculation of cost of goods sold: (50000+30000+20000+40000)= 140000
(Direct material+ Direct labour+ Variable manufacturing overhead+ Fixed manufacturing
overhead)
Calculation of selling and administrative expenses:(30000+30000) = 60000
(Variable selling and administrative expenses+ Fixed selling and administrative expenses)
Income statement by marginal costing method(When 5000 units sold)
Particulars Amount
Sales (5000*25)
Less- Marginal cost of sales
Contribution
Less- Fixed cost
Net loss
125000
130000
(5000)
70000
(75000)
Working Notes*
Calculation of sales(5000*25)= 125000
Calculation of marginal cost of sales: (50000+30000+20000+30000) = 130000
(Direct material+ Direct material+ Variable manufacturing overhead+ Variable selling and
administrative expenses)
Calculation of fixed cost: (40000+30000)= 70000
Interpretation- From above numerical it has been recommend that while taking 5000 units of
radiators in selling, then there is a loss of (145000) in the absorption costing and in marginal
costing loss is of (75000)
Financial reporting document with labour and material variances:
Budgeted Actual Variance
Units 1000 1100 100 F
Hours 3000 3400 400 (A)
Unit per hours 3 3.09 0.091 (F)

Labour 15000 17680 2680 (A)
Labour rate per unit 15 16.07 1.07 (A)
Labour rate per hour 5 5.2 0.2 (A)
Actual
Units 1000
Material used Kg 2200
Actual Material cost 20900
Material cost per kg 9.50
Material cost per unit 20.9
Budgeted material cost per unit of the product 2kg at £10/kg
Budgeted material cost per kg ( £ 10/2) 5
Budgeted Material cost 11000
Variance (Actual- budgeted) 9900
Management accounting techniques and financial reporting documents.
Management accounting techniques helps an organisation in accurate forecasting for an
organisation. There are different types of management accounting techniques. Assail architecture
limited uses various management accounting techniques in their context. Some of them are given
below:
Financial planning- Financial planning is a plan which decides the finance or money
uses. It makes a plan and organisation follow that plan. It is important technique because it
makes efficient use of finance. Assail architecture limited uses this tool to make their future
financial plans.
Historical cost accounting – This technique provides past data to about the various cost
methods to the management so that they can make important decision on the basis of that data.
Assail architectural limited use this method and with the help of this they make their decisions
because it provides important data regarding to decision making (arker, 2012).
Financial reports which applies to interpret many business activities

Financial reports are very important to represent all the business activities. Financial
reports means showing the all business activities in numerical form. There are many financial
reports like income statements, balance sheet etc. These all are important because without these
reports all the information regarding to business can't be interpret. If a business wants to analyse
their profit and loss, for this they are needed P&L account because this is a statement which
shows all the activities which produce loss or profit. Assail architecture limited use many
financial reports to interpret their all the profit and losses and to make other statements.
LO 3 Explain the use of planning tools used in management accounting
Advantages and disadvantages of different planning tools used for budgetary control
Budgetary control process- Budgetary control system is a method in which managers set
financial and non financial goals with the help of budget and compares actual performance with
pre set standards. Assail architecture limited applies budgetary control process and its various
tools. Herein some advantages and disadvantages of different planning tools given below:
Budget- Budgets are also known by financial plans. It is an estimation of income and
expenses for particular time period. It includes performance evaluation standards in itself. An
organisation follows these standards to match actual performance. Budgets are generally
prepared with the help of previous year's data. It helps organisation in making future plans and
policies. Assail architecture limited makes the budget to evaluate their actual performance
because this helps in making compare of actual performance with targeted goals or standards.
This makes their task easy regarding to the policies making.
Advantages-
 Increase in probability of objective achieving- Budgets increase in probability that
organisation will achieve its goals and objectives because it sets the pre standards of
target so that it helps organisation to work according that targets.
 Extra control over money- Budgets gives an extra control over money. With the help of
budgets company spends money according to budget. They try to spend money less then
to budget.
Disadvantage-
 Inaccuracy- Budgets do not produce accurate result. It makes just an estimation about
future. Companies can't relay completely on budgets.