Management Accounting Report: Tools and Techniques for Freestyle IT

This report, prepared for Freestyle IT, delves into the realm of management accounting, examining its various components and applications to enhance business efficiency. It begins by defining management accounting and its role in aiding managerial decision-making, particularly for Freestyle IT, a firm with 18 employees. The report then identifies key tools like cost accounting, job costing, batch costing, price optimization, and inventory management, illustrating how each can contribute to improved operational activities. Furthermore, it explores different management accounting reporting methods such as budget reports, job cost reports, debtor aging reports, and inventory reports. The report also provides a comparative analysis of marginal and absorption costing methods, discussing their respective strengths and weaknesses in calculating costs and profit margins. The report also provides a comparative analysis of marginal and absorption costing methods, discussing their respective strengths and weaknesses in calculating costs and profit margins. The report aims to provide Freestyle IT with insights into financial planning, cost analysis, and decision-making, with the ultimate goal of enhancing its operational quality and profitability. The report also mentions budgetary control systems and planning tools which are vital for the organisation.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
P1 Determining the management accounting and its various components for Freestyle IT. .2
P2 Identification of various methods used for management accounting reporting for Freestyle
IT............................................................................................................................................3
P3 Estimating the fruitful method of costing such marginal and absorption costing for
Freestyle ................................................................................................................................5
P4 Presenting the pros and cons of various budgetary control systems as well as planning
tools........................................................................................................................................9
P5 Application of management accounting system by various entities in terms of overcoming
the problems in finance........................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
To enhance the efficiency and the operational quality of the business there is need
to have the proper management systems in the business. Management accounting plays the main
role in analysing the internal strength of the entity as well as facilitates the managers of
professionals to present the fruitful decisions. In the present report there will be identification of
various tools and techniques which are used in management accounting system as to enhance the
performance of Freestyle IT. The firm is located in Hook with the strength of 18 employees. In
order to provoke the work environment in the organisation the report will help them in analysing
the various budgetary, planning and forecasting tools on which they could become able to
motivate quality work in the premises. In this, report will provide deeper insight about the tools
and techniques that Freestyle IT can undertake for managing internal operations. Besides this, it
will also shed light on the manner in which different costing methods help in making suitable
decision. Report will also describe different planning tools that can be used by the concerned IT
firm for making optimum use of financial resources. Further, it also depicts the tools that help in
responding financial problems or issues that prevail within the business organization.
To: General Manager (Freestyle IT)
From: Management accounting Officer
Subject: Implication of the management accounting system as to enhance the efficiency of
business.
Introduction:
Sir, It will be beneficial for the internal analysis of the business which in turn helps in
making the profitable decision making. Therefore, there will be increase in the operational
activity of the business as well as beneficial decision would be made by managerial
professionals. In terms of developing the operational efficiency of this IT reseller organisation
there is need to have the sound accounting systems in the organisation. Thus, here is a report
which contains various tools and techniques which are the main sources of management
accounting system and are beneficial in operational development of business.
1

P1 Determining the management accounting and its various components for Freestyle IT
Managements accounting is a helpful tool that helps in making the adequate efforts in the
operational activities such as analysing the costs, expenses and revenues of the business. This the
most appropriate tools that helps managers or professionals in making the adequate decision
making (Bryer, 2013). Therefore, there will be various components which are indulged in
management accounting systems and helps in making the appropriate planing and decision
making for operational development. Therefore, in the following chart there has been various
tools of management accounting such as:
Illustration 1: Management Accounting System for Freestyle IT
(source: Hickman, 2016)
Cost Accounting: This technique is helpful in terms of analysing the requirements for
funds in order to complete operations of business. Freestyle IT professionals in to implicate such
technique in the organisational operations as to analyse the cost requirement in the firm. It
consists of analysing the uses of funds in the operational activities such as purchase, sales,
producing the outputs (Chan, 2015). These all transactions which are meant to be recorded by the
managers and then they summarize the data and analyse adequate costs for each operations.
Job Costing: This accounting method helps in determining the costs over the jobs and
duties performed by managers, employees and the organisation itself (Ozdil and Hoque, 2017).
2

Therefore, this costing technique will be beneficial for the professionals in terms of analysing,
summarising the data set as well as the requirements of costs in the operational activities of
Freestyle IT.
Batch Costing: These costing method helps in making the adequate estimation of the
future cost in producing a unit. Therefore, in these regards Freestyle IT will be beneficial if the
professionals will focus over the gains and profitability over cost of the particular batch
(Simionescu and Bica, 2016). So this all consideration by the company and set the budget
according to department. If the departments who give their best then next year budget will
increase for them, and the department who cannot be able to get the goals of the company, they
will not get the budget.
Price Optimisation: These strategies were followed by the professionals in these regards
as to allot the prices over products and services and then they seek the reaction of consumers
over such rates. Therefore, if the majority of buyers preferred a particular price of the product
then the firm at such price for the product and services (Wei and et.al., 2016). Freestyle IT will
be beneficial in terms of making the adequate efforts as well as enhancing the profitability with
estimating the prices for the services and products of business.
Inventory Management: These tool helps in storing the volume of goods to meet the
demand sin the particular season or events. Thus, here the managers will fetch the information
about the requirement of products in the market and then make the necessary decision to fill such
needs (Dragomir, Avram and Domnişoru, 2016). There will be management which based on the
appropriate storage of products and services that will help in making the improvements in the
operational activities of business.
P2 Identification of various methods used for management accounting reporting for Freestyle IT
To: General Manager (Freestyle IT)
From: Management accounting Officer
Subject: Implication of the management accounting reports as to analyse the cost efficiency of
business.
Introduction:
3

Sir, in order to have the fruitful plans for the future expenditures and costs, there are
various budgetary techniques that helps in making fruitful decision as well as analysing the
operational needs. It will be beneficial for the internal analysis of the business which in turn
helps in making the profitable decision making. The Following report will help in making better
analysis over various reporting techniques for Freestyle IT. These will help in enchaining the
efficiency as well as analysing the costs requirements in every departments or in industrial
activities.
Illustration 2: management accounting reports
(source: Pemsel and Wiewiora, 2013)
Budget Report: These techniques helps in making the adequate efforts for the increment
in operational activities such as analysing the costs and expenditures in the previous period.
Thus, in accordance with previous outcomes and results the managers in Freestyle IT will make
appropriate estimation for presenting the reports (Garcia and et.al., 2016). It will help in
bounding a firm to make expenses for the limited costs and investments in business operations.
Job cost report: The report is based on revenue and expenses incurred by firm in the
particular job or piece of work. Freestyle IT will be beneficial in terms of analysing the costs
4

over performing operations in a particular tasks. However, there can be analysis which is based
on the use of laborious efforts, material and duration in producing the single unit as well as cost
required for the completion of such business operations (Hickman, 2016). Therefore, the salaries
to employees and costs of material and efforts by machineries will be estimated by them to have
the appropriate improvements in the operational improvements.
Debtor aging report: It helps in analysing the payments to be received by the firm over
the trade they have made. This reporting technique will help the managers in analysing the time
over which they will receive the funds from debtors. Freestyle IT will be beneficial in terms of
analysing the financial funds which are yet to be received by them in the period (Hopper and
Bui, 2016). Thus, this reporting technique will be beneficial in terms of making estimation
relevant with the future debts as well as the revenue to be gained by them.
Inventory and manufacturing report: This report will be beneficial in terms of analysing
the costs incurred in the inventory and manufacturing the units. Therefore, with the help of such
techniques the business will be beneficial in terms of estimating the costs and expenditure for the
business operations (Lock, 2014). Freestyle IT will make the adequate efforts in terms of making
the appropriate estimation relevant with the inventory management in the premises. Therefore,
there will be stocks and inventory relevant with the devices to be used performing the business
operations. It will help them to analyse the requirement of funds to improve the quality as well as
availability of the devices.
P3 Estimating the fruitful method of costing such marginal and absorption costing for Freestyle
In order to calculate cost and profit margin Freestyle IT can use either marginal or
absorption costing method. Both such methods are highly significant which in turn provides high
level of assistance to firm in ascertaining the profit will be generated over the cost incurred as
per relative output. Main aspects of absorption and marginal cost are enumerated below:
Absorption costing: It is also recognized or known as full costing method because in this,
manufacturing costs are absorbed on the basis of unit produced. Hence, such costing method lays
high level of emphasis on including all the costs such as material, labour and overhead which is
highly associated with the production (Marginal V Absorption costing, 2017). This aspect shows
that under absorption costing method considering the utility cost gross profit or margin is
determined by the business unit.
5

Marginal costing: Such method presents the cost that will be incurred on the production
of one additional or extra unit. Hence, marginal cost can be obtained by the firm by dividing
changes in cost from deviations take place in quantity produced. It is one of the most effectual
methods that can be undertaken by Freestyle It for assessing both contribution and net margin.
Under this, variable expenses are considered to determine unit cost, whereas fixed cost is
completely written off in against to the contribution.
Difference between marginal and absorption costing is as follows:
Marginal costing method is the one that provides high level of assistance in ascertaining
the total cost of production. Absorption costing method also renders information about the same
but in this apportionment of cost is based on cost centre. Further, another major difference is that
absorption costing method treats both fixed as well as variable expenses as product cost.
However, on the other side, variable costs are considered as product, whereas fixed cost
recognized as a periodical one. Marginal costing method presents classification of overhead in
terms of fixed and variable.
In contrast to this, absorption costing method classifies overhead in terms of production,
administration, selling & distribution. As per marginal costing method PV ratio is calculated for
assessing or measuring profitability (Marginal & Absorption Costing – Comparison, Difference,
Importance, Limitation, 2017). However, under absorption method profit margin is getting
affected due to the inclusion of fixed cost. MC presents contribution in relation to per unit,
whereas absorption costing method indicates net margin generated during the specified frame.
Unlike marginal, variance which takes place between the level of opening and closing inventory
has significant influence on cost level.
Unit cost assessment (absorption and marginal costing method)
Particu
lars
Cost per unit
according to
absorption
costing method
(in £) Cost per unit according to Marginal costing (per unit (in £)
Material 6 6
Labour 5 5
Production overheads
6

Non-
fixed
expense
s 2 2
Fixed
(2100 /
700) 3
Unit
cost of
product
ion 16 13
Assessment of GP and NP (absorption costing method)
Working note 1:
Total production cost
Material (700 * 6) 4200
Labour (700 * 5) 3500
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Variable production overheads (700 * 2) 1400
Fixed production overheads (700 * 3) 2100
Total 11200
Income statement (Marginal costing method)
Working note 2:
Total production cost
Material cost (700 * 6) 4,200
Labour cost (700 * 5) 3,500
Variable production overheads (700 units @ 2 PU) 1,400
Total production cost (4200 + 3500 + 1400) 9100
Reconciliation statement as per marginal and absorption costing is enumerated below:
Particulars Amount (in £)
NP as per absorption costing method 9,600
Less: Fixed production overhead on closing inventory (100 * 3) 300
Less: Over-Absorbed overheads 100
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Net profit as per marginal costing method 9,200
Interpretation: The above depicted table presents that cost of production calculated as
per marginal costing method accounts for £13 respectively. On the other side, according to
absorption costing method product cost determined is comparatively higher such as £16 due to
the inclusion of fixed expenses amounted to £3. Thus, it is one of the main reasons due to which
cost of production is higher under absorption costing as compared to marginal. Outcome of
analysis presents that, GP as per the AC implies for £11500, whereas MC analysis exhibits the
contribution of £12600 significantly. High cost of goods sold is the cause due to which GP
assessed is lower as compared to MC. Further, evaluation of different elements present that NP
margin will be generated by Freestyle IT on the basis of absorption costing method is £9600. In
contrast to this, NP is lower as per marginal costing method as it deducts all the fixed cost from
contribution. Considering all such aspects it can be stated that Freestyle IT should lay emphasis
on undertaking absorption costing method over marginal. Moreover, AC considers both fixed
and variable cost for the determination of both cost as well as GP and helps in presenting the fair
view of financials.
P4 Presenting the pros and cons of various budgetary control systems as well as planning tools
Freestyle IT can use several planning tools for employing funds in highly productive
activities that contribute in cost reduction and profit maximization.
Investment appraisal techniques: In the recent times, rather than focusing on project,
business unit lays emphasis on making several capital investments. Hence, in this, manager faces
difficulty in making selection of profitable proposal out of several alternatives available (Capital
Investment Appraisal / Appraisal Techniques, 2017). Thus, by using techniques of investment
appraisal such as payback method, net present value, average and internal rate of return manager
of Freestyle IT can assess the attractiveness as well as viability of project. Moreover, payback
method of investment appraisal helps in identifying the time period within which it will recover
initial investment.
Further, considering the time value of money concept NPV presents monetary return that
will be generated through initial investment after the specific time frame. In addition to this, IRR
indicates return in the form of percentage that is associated with the specific investment
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proposal. Considering all such aspects, it can be depicted that by applying the technique of
investment appraisal Freestyle IT can select appropriate project that aid in the success of firm.
Advantages Disadvantages
 It provides high level of assistance in
determining return and making
panning about profit
 NPV and IRR presents solution by
considering the time value of money
concept and considering cash flows
over the whole life of project
 NPV and IRR method is not suitable
for the two mutual excusive projects
 Further, payback and ARR method of
capital budgeting completely ignores
the time value of money concept.
Calculation of NPV
year
Propos
al A
PV
factor
@ 10%
Disco
unted
cash
inflow
Propos
al B Discounted cash inflow
1 55000 0.909 50000 58000 52727.3
2 72000 0.826
59504.
1 77000 63636.4
3 68000 0.751
51089.
4 74000 55597.3
4 89000 0.683
60788.
2 92000 62837.2
5 105000 0.621
65196.
7 108000 67059.5
Total
discount
ed cash
flows
28657
8 301858
Initial
investme
nt
15000
0 150000
NPV
(sum of
discount
ed cash
flows –
initial
13657
8
151858
10