Management Accounting Report: Analysis of Hochtief Construction Ltd

This report provides a comprehensive analysis of management accounting systems and their application within Hochtief Construction Ltd. The report begins with an introduction to management accounting, emphasizing its role in strategic decision-making. It then explores various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, detailing their essential requirements and benefits. The report also examines different methods used for management accounting reporting, such as budget reports, performance reports, and cost managerial accounting reports, highlighting their significance in providing timely and accurate financial information. Furthermore, the report delves into cost analysis using income statements under marginal and absorption costing methods. It also explores the advantages and disadvantages of different planning tools for budgetary control and analyzes how these tools aid in solving financial problems. The report concludes with an evaluation of how management accounting systems contribute to organizational success and offers insights into the integration of management accounting systems and reporting within an organization. References and appendices are included to support the findings.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P1. Essential requirement of different types of management accounting systems.................1
P2. Different methods used for Management Accounting reporting.....................................3
M1. Benefits of application of the management accounting system in an organisation........4
D1. Management accounting system and management accounting reporting is integrated in an
organisation............................................................................................................................5
LO 2.................................................................................................................................................6
P3. Cost analysis with the help of an income statement under Marginal and Absorption Costs.
................................................................................................................................................6
M2. Financial Reporting documents......................................................................................6
D2. Financial report interpretation.........................................................................................7
LO 3.................................................................................................................................................7
P4. Explaining the advantages and disadvantages of different planning tools of budgetary. 7
control.....................................................................................................................................7
M3. Analyzing the usefulness and application of different planning tools..........................10
LO 4...............................................................................................................................................11
P5. Different types of management accounting systems that are used by the organization to11
resolve the financial problems..............................................................................................11
M4. Analysing how the management accounting systems leads to organizational success.12
D3. Evaluating how the planning tools help in solving the financial problems...................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14
APPENDICES...............................................................................................................................16
Annexure A..........................................................................................................................16
Annexure B...........................................................................................................................17
Annexure c............................................................................................................................20

INTRODUCTION
Management accounting is concerned with the process of making sound business strategies,
plans and concepts which aids in the preparation of management reports, accounts and
statements which provides accurate and timely information related to financial and statistical
data of the company thereby assisting the managers in decision making process. The present
report is based on Hochtief Construction Ltd which falls under the category of reputed
engineering firm. Hochtief is engaged in the business which provides Construction
services, project and facility management to customers worldwide. The report will discuss about
various types of management accounting systems available and how its benefits Hochtief
Construction Ltd. Further the report will discuss about the concept of management accounting
reporting and its uses in decision making. Income statement of Hochtief using appropriate
technique for analyzing cost factor will be disclosed. At last the report will disclose budgetary
concepts and how it aids in decision making process. The report will also provide advantages and
disadvantages about different budgetary planning tools and how it assists in solving financial
problems of the company.
LO 1
P1. Essential requirement of different types of management accounting systems.
Management accounting system is the internal systems by which Hochtief organization
uses various means and methods so as to measure the performance of business operations and
activities and also assist in evaluating its processes for the management.
Essential requirements of different types of Management Accounting System are as follows:
1. Cost Accounting System – It is a method of management accounting system with the
help of which Hochtief can make estimation and analysis of cost for their products and
services. This method aids Hochtief in assessing the profitability level or profit amount
earned against their quality service (Bromwich and Scapens, 2016). It also helps in
making business plans and strategies for controlling the cost incurred for carrying own
production and manufacturing functions. This methods has two sub parts:
1. Job Order Costing Method – This part of cost accounting system helps in assessing
the cost value incurred for producing or manufacturing a specific unit or group of
products.
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2. Process Costing Method – It is a method which can be used by Hochtief for gathering
and making assignment of cost related to manufacturing processes or to the units
produced. It is helpful in when large production has to be made of identical units.
2. Inventory Management System – This method focuses on managing inventory and
stock level of the company. Hochtief can assess and track the quantity of goods,
inventory or stock through supply chain or with the help of areas in which business
operations takes place. This method helps company in making inventory valuation and
also improves the accuracy of inventory by maintaining continuous workflow
(Panchenko, 2018). It also assists in evaluating the level of inventory available with the
company and its reorder so as to facilitate smooth functioning of business operations.
Valuation of inventory can be done with the help of following two methods:
1. LIFO – It stands for Last In First Out. In this method, goods which are bought or
purchased at last are available for sale at first place.
2. FIFO – This stands for First In First Out, it emphasizes on selling first of that stock
which is purchase or bought in at first place.
3. Job Costing System – It is a method in which Hochtief can gather or collect information
related to the cost incurred with the production function of some specific job or product
group. This method considers every information related to direct materials, labour and
overhead costs. Under this system, information related to cost incurred for every job
work completed is submitted to customer for getting cost reimbursed.
4. Price Optimisation System – In this method, Hochtief can understand that how demand
for their products or services varies due to change in the price levels of company’s
product over time (Uyar and Kuzey, 2016). This helps in improving the profit level of
company by charging that price which brings success and growth to the business along
with customer satisfaction.
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P2. Different methods used for Management Accounting reporting.
Management Accounting Reporting is a process which provides accurate deep insight
about the business operations and procedures especially related to statistical and financial
information to the management of the company in timely manner as required for making day to
day as well as short term decision making.
Different methods used for management accounting report are:
1. Budget Report – This report assist Hochtief in making budgetary plans and strategies for
the smooth functioning of business operations. With the help of budget report company
can assess the level of performance as well as profit and cost amount. Budget are
prepared on the basis of previous experience business has met with (Brandau, Endenich
and et.al., 2017). With proper estimates and budget, company can deal with future
contingencies and cost expenses.
2. Performance Report – On the basis of this report, Hochtief can review the performance
of its business operations and processes along with performance level of each employee
and as a team. By using these performance reports management of company can make
important strategic decisions and plans about the future of business organization.
Performance-related reports provide deep insight about the working process of the
company. With the help of performance report, company can monitor or measure their
strategy and plans formulated for successful attainment of business goals and whether
these strategies are working towards mission statement or not.
3. Cost Managerial Accounting Report – This managerial accounting report helps in
assessing or computing the amount of cost incurred for manufacturing or producing any
product. For this assessment all cost related to raw material, overhead, labor and others
added are taken in consideration. This helps managers in realizing the cost and selling
prices of their products and services thereby helps in estimating the profit margins for the
company in near future.
4. Account Receivable Aging Report – When company conducts its business operations
with the help of acquisition of raw material, labour on credit basis or rely at large level on
credit amount for carrying on business activities, then accounts receivable aging report is
helpful (Rikhardsson and Yigitbasioglu, 2018). With the help of this report, the manager
of Hochtief can determine defaulters of non-payment of money as well as it also helps in
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assessing the problem or issues which the company is facing in its money collection
process.
M1. Benefits of application of the management accounting system in an organisation.
By adopting effective management accounting system, Hochtief can get following benefits:
Management Accounting
System
Benefits to Hochtief
Cost Accounting System 1. It helps in budget compliance i.e. actual
costs incurred can be compared with
budgeted cost for assessing most costly
part of business.
2. It helps in measuring the operational
efficiency of business (Brandau, M.,
Endenich, C. and et.al., 2017).
3. It also assists in providing information
related to cost factor and any improvement
required to be made for reducing cost
expenses.
Inventory Management System 1. It helps Hochtief in minimizing the cost
expenses incurred for inventory production
and manufacturing.
2. By managing inventory, company can
improve its delivery performance.
3. Stock out situation or excess stock quantity
can be avoided by managing proper
inventory.
Job Costing System 1. With the help of job costing system, Hochtief
can calculate or track cost per job assigned.
2. It helps in tracking the performance of
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individual as well as team in terms of cost-
control, operational efficiency and
productivity.
Price Optimisation System 1. It helps Hochtief in analyzing and evaluating
the buying pattern of the customers along
with their taste and preferences against
different price changes
2. With the help of analysis of the customer
behavior, decision related to better pricing
options can be made by Hochtief.
D1. Management accounting system and management accounting reporting is integrated in an
organisation.
1. Performance Report – With the help of performance report Hochtief can evaluate
and monitors the performance level of its employees as well as of the business
organisation. By performance report, company can maximise its profit margin by
making sound business plans and strategies for improving the quality of products and
services, performance level and also operational efficiency of the business.
2. Budget Report – A budget report is type of financial report which helps Hochtief in
monitoring and evaluating the actual amount of income and expenditure of the
business of definite period is compared to the budgeted amount for the same definite
period of time. This report helps the managers of the company in assessing whether
forecasted plans are working on track or not, in terms of financial aspects.
3. Cost Accounting Report – The term Cost accounting is defined as the process of
recording, analyzing and allocating costs to various business operations and process,
and taking action for controlling such cost factor (Purville, Ye and Clode, Netsuite
Inc, 2017). From this report, manufacturing cost of each product can be determined.
Selling & cost price can be determined for its products and services.
4. Accounts Receivable Ageing Report - It can help Hochtief in understanding the
amount of outstanding receivables along with their quality. The account receivable
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ageing report can be used for assessing or detecting that invoices or bills that are
making payment process slowly. Also, from this report company can identify the
problems or issues coming in way of money collection process.
LO 2
P3. Cost analysis with the help of an income statement under Marginal and Absorption Costs.
Cost analysis is a factor which assists in determining cost associated with manufacturing or
production process or any value assigned to a particular product. With the help of cost analysis,
income statement can be prepared under two methods:
1. Marginal Cost - The term marginal cost defines the amount of change or amount of
increase or decrease taken place in the total cost of a production i.e. for making one
additional extra unit of the product (Uyar and Kuzey, 2016.). Thus, marginal cost at each
level of production or manufacturing process involves the cost of the additional resources
which is required for producing the next product unit. In simple terms, margin cost is
the cost of producing one more extra unit of product.
2. Absorption Cost – This is one of the cost accounting method which is concerned with the
inventory valuation process. Absorption costing includes all the costs which is associated
with the process of manufacturing or producing a product or good and also includes both
the fixed cost and variable cost. Thus, from this it can be understand that under
absorption cost it includes direct cost factor such as material, labour costs and indirect
cost such as overhead which are considered in the pricing of inventory.
M2. Financial Reporting documents.
Financial reporting is defined as the process of preparing or making reports or statements that
provides information related to organization statistical and financial performance level and
business operations to its end users viz. management, investors and other stakeholders. The
financial reporting document comprises of four basic reports which are as follows:
1. Income Statement – It discloses about revenue, expenses, profits and
losses which is ascertained during a specific period of time which shows
the operating performance of the company.
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2. Balance Sheet – It depicts the status of assets, liabilities of the
company as of the certain reporting date. Balance sheet shows the total
of all assets as well as liabilities and equity which is prepared as the
accounting principles (Messner, 2016). It provides information about the
liquidity, solvency position of the company.
3. Statement of Cash flows – It provides information about the cash inflows
and outflows for the specific period.
4. Statement of Retained Earnings - It presents the changes in equity for
certain reporting period. It includes sale or repurchase of sales,
payment of dividend.
D2. Financial report interpretation.
The financial report provides information related to the company’s data especially statistical and
financial thereby assisting managers and investors in decision making process (Purville, Ye and
Clode, Netsuite Inc, 2017). The accurate and correct interpretation of data can help Hochtief in:
1. Assessing the strength, weaknesses, threats and opportunities.
2. Decision making process related to investment, formulation of new business strategies
and plans.
3. It provides information about profitability and liquidity position to its stakeholders.
LO 3
P4. Explaining the advantages and disadvantages of different planning tools of budgetary
control.
Flexible Budget - The budget which adjust changes with the change in the level of activity.
Measurement of actual revenues and other activity are recorded in the flexible budget after the
completion of an accounting period. This budget is created particular to the inputs (Otley, 2016).
The actual expenses are compared with the actual revenues for keeping control over the cost
under this budget.
Advantages Disadvantages
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Facilitates change- Any change in the level of
activity is evaluated so that accuracy in the
results increases. For example- increase in cost
of material for product, makes the item
unprofitable. This variance can only be spotted
by flexible budget and management could take
corrective action timely for overcoming the
variance.
Performance measurement- As flexible
budget inculcates restructuring based on the
change on the change in other resources, it
accounted as an effective tool for determining
the performance of the employees at regular
interval of time.
Creates opportunities- In flexible budget the
variable expenses are defined as % of sales.
For instance- If sales increases, greater the
flexible budget can be adjusted for higher
spending on the marketing for taking benefit of
unexpected rise in revenues.
Provides current data- Expenses and revenues
are continuously adjusted in this budget for
operating with current conditions. For
example- New regulations of the environment
may rises the production cost and could lead to
purchase of new machines. Weather conditions
results in increased shipping cost and due to
this delay in shipment is faced by the Hochtief
Construction Ltd . Thus, this budget helps in
knowing the current and updated data.
Formulation- Though it is a good tool for
budgeting but it is difficult and complex to
administer and formulate as it includes the
changes. Also, a lot of time has to be devoted
in preparing this budget for developing the cost
formulas which incurs more time in the process
of budget.
Revenue comparison- It does not facilitate
comparison between the actual and the
budgeted revenues, as both contains the same
number. This budget is designed for matching
the actual and the expected expenses, and not
for comparing the levels of the revenue (Maas,
Schaltegger and Crutzen, 2016). It does not
highlight whether the actual revenues are
below or above the expectations.
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Fixed Budget- this budget is designed for single activity level and does not change, irrespective
of the change in other resources (Hopper and Bui, 2016). It is also known as static budget. For
example- a corporate pay a fixed rate of commission @ 5% on its sales. The Hochtief
Construction Ltd frames the fixed budget with the projected operations of $1 million, the
commission for sales in its budget fixed to $50000. If the actual sales resulted as $900000 then
also the commission in fixed budget will remain same that is equals to $50000.
Advantages Disadvantages
Easy to frame- This budget is simple to use
and develop because It does not incur any
adjustments in relation to the volume of sales
and changes in turnover.
Tax simplification- Estimation of the taxed
owed by the Hochtief Construction Ltd can be
easily made. Corporate usually assume the
payment of taxes on a quarterly, monthly or
yearly basis by adopting this budget so that
interest payment can be avoided on the money
owed.
Master budget- Flexible budgets are often used
as the master budget for analyzing the data and
forecasting. Static budget is prepared for the
overall business and not for each department in
the entity.
Inflexible- It lacks the flexibility in the budget
as it remains unchanged and any change in the
expenses and the revenue are not evaluated
which results in unrealistic budget.
Lacks forecasting- forecasting becomes
difficult in static budget due to lack of
presence of actual changes with the changing
environment.
Cash Budget- It is prepared with the estimation of the inflows and outflows of cash for the
business over a particular time period.
Advantages Disadvantages
Practical benefits- cash budget restricts the
spending of the entity which reduces the debt
of the Hochtief Construction Ltd . It shows the
Relies on estimates- Previous year allocations
in relation to the inflows and outflows are used
for allocating the cash for the items in the
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realistic assessment of the cash related
expenditure and incomes during the specific
period.
Self Evaluation- It acts as the base for
comparing the assumptions and forecast made
with the actual events (Chenhall and Moers,
2015). It helps in tracking the spending as
planned by the Hochtief Construction Ltd .
Communicate financial position- It
communicates the current state of the financial
health of the enterprise by determining the cash
received and paid. For example- reducing cash
levels reflects the entity's inability to payoff its
current debts and states chances of future
bankruptcy.
coming year. Thus, it is not possible that cash-
flows will remain same for every year and
leads to vague results.
Limits the spending power- several businesses
have stopped accepting the cash payment so it
reduces the spending power of the enterprise.
For example- some hotels accept reservation
only on the basis of debit and credit card
number. Thus, if the Hochtief Construction Ltd
uses only the cash budget, it may find
difficulty in using the other services that are
required by the business. This in turn limits the
overall productivity of the corporate.
Capital budgeting or investment appraisal analysis
This is recognized as the most effectual techniques which in turn ensures effectual
planning in monetary terms. Moreover, capital budgeting tools include payback period, NPV,
IRR etc which assists in identifying whether proposed investment will offer high and positive
returns or not. Annexure 3 clearly presents that, in the context of project X business entity will
recoup initial investment within the period of 4 years. On the other side, in project Y, payback
period implies for 5 years. Referring this, it can be presented that, in the case of project X
business entity will recover amount, invested at initial level, earlier over others. Further, net
present of project X and Y accounts for £417 and £(817) respectively. On the basis of selection
criteria company business entity should invest money in project X which in turn proves to be
more profitable for the firm. In this way, investment appraisal tool helps in rejecting unprofitable
proposal and contributes in effective planning.
M3. Analyzing the usefulness and application of different planning tools.
Planning tools Uses Application
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