Interactive Investor: Detailed Management Accounting Report Analysis

This report delves into the significance of management accounting within the context of Interactive Investor, an online business platform. It explores the essential requirements of a management accounting system, contrasting it with financial accounting and highlighting its evolution. The report examines various management accounting methods, including job costing, inventory management, and price optimization, illustrating their practical applications. It provides insights into cost calculation, the preparation of income statements, and the application of planning tools for budgeting and forecasting. Furthermore, the report addresses the identification of financial problems, financial governance, and the use of management accounting skills to develop effective strategies and systems. The analysis showcases how Interactive Investor utilizes these tools and techniques to enhance decision-making, improve efficiency, and achieve its organizational goals. The report covers topics like costing methods (absorption and marginal), fixed/variable costs, and pricing strategies, ultimately aiming to provide a comprehensive understanding of management accounting's role in business development.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................4
LO 1.................................................................................................................................................4
P1 Essential requirement of management accounting system................................................4
Management accounting.........................................................................................................4
Management accounting system.............................................................................................5
Evolution of management accounting....................................................................................5
Difference between the financial and management accounting.............................................5
P2 various method used for management accounting report..................................................6
Characteristics of good management accounting system.......................................................7
Need of the understandability of the management accounting report....................................8
Various management accounting reports...............................................................................9
LO 2.................................................................................................................................................9
P 3 Calculation of cost and preparation of income statements...............................................9
Definition of cost and cost analysis........................................................................................9
Explanation of cost- Volume Profit, flexible budgeting and cost variances........................10
Calculation of Absorption costing and Marginal Costing....................................................10
Fixed and Variable costs, Cost allocation............................................................................14
Normal and Standard Costing, activity- based costing and the role of costing in setting Price
..............................................................................................................................................14
LO3................................................................................................................................................15
P4 Use of Planning tools used in management accounting .................................................15
Application of planning tools in forecasting of budgets......................................................16
Pricing...................................................................................................................................18
LO 4...............................................................................................................................................19
P5 Identification of financial problems................................................................................19
Financial Governance...........................................................................................................21
Management accounting skills.............................................................................................21
Effective strategies and systems...........................................................................................22
CONCLUSION..............................................................................................................................22

REFERENCES..............................................................................................................................24

INTRODUCTION
Management accounting is the process of using the various data to generate information
for further use of different management levels like top management, middle management and
lower level management to improve the performance of the organization by taking the effective
decisions. Interactive investor is a medium size company which operates their business via
online. They provide platform to the retail companies to operate their business from their
websites and portal and get the financial information and investment option on their portal. The
report highlights the importance of management accounting systems within the organization with
different management functions and evolution of management accounting. This report
demonstrates the difference between the management accounting and financial accounting. The
report explains the different types of management accounting systems like job costing, inventory
management and cost accounting. It also explains the functioning of accounting tools in the
organization and the various uses of accounting tools. Management accounting techniques help
to provide the information by using the different costing method like absorption and marginal
cost to make decisions for the company and provide a suitable method to minimize the cost of
the production.
The report explains the different planning tools and their importance in the company to
set the budget and calculating the variances to improve the performance of the different
department by analysing their functioning. It also explains the different pricing strategies to set
the price to maximize their profit by capturing the greater market share and increasing the profit
margin like penetration pricing, skimming pricing etc. The report highlights the various financial
problem like increasing the production cost, management cost etc. and adopt various method to
resolve the financial problems. They use controlling tools to evaluate the variances in the
expected and actual budget like key performance indicators, budgetary control, Benchmarking
etc.
LO 1
P1 Essential requirement of management accounting system
Management accounting
Management accounting : Management accounting is the process to gather, sort,
analyse and process financial information in order to prepare reports to help the organisation to
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take the effective decision about the usage of resources and funds to get the better result. It also
helps to accomplish the organisational goal. Management accounting support the decisions of top
management and provide them various data and information to explore their knowledge and
understand the financial position of the business (Otley, 2016). It is used to prepare the
accounting information to help managers for making policy, procedure and plan for achieving
the organization objective.
Management accounting system
Management accounting system: It is the process of using the internal financial
information and prepare reports presenting the data in useful manner to take the effective
decisions for the growth and development of the company. It provides the direction to run the
company more efficiently by analysing the various alternatives and variances.
Evolution of management accounting
The evolution of management accounting is improved due to the changes in technology,
government interference and the different policies. Before 1950 the focus of the accounting is
financial accounting and cost accounting to provide the financial data and maintain the profit of
the organization but after 1950 the emergence of management accounting is start. The role of
management accounting is increasing nowadays. People are more concern about the management
accounting to use the data for taking decisions and also improving non-financial performance.
Now the role of management accounting is to communicate the information within the
organization to connect the employees toward the common organization goal and improve their
performance to get the goal and objective.
Difference between the financial and management accounting
Basis Financial accounting Management Accounting
Meaning The aim of financial accounting is to
concentrates on the financial
statement of the organization like
balance sheet, income statement and
cash flow statement.
Management accounting help the
managers to take the effective
decisions for the organization to
improve organization performance by
using these financial data.
Information Financial accounting only provides
the monetary information regarding
Management accounting provide the
monetary and non monetary
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the company. information about the company.
Objective The objective of financial
accounting is to provide information
like sales, revenue and profit of the
company.
The objective of management
accounting is to provide various
information such as sales of the
company, trend in growth to the
employees and manager to prepare the
management reports.
Auditing Financial report are compulsory to
published and auditing by the
auditors.
There is no compulsion to publish the
management report in newspaper and
board meetings.
Users The user of the financial accounting
are internal and external parties.
Only internal management uses the
management accounting system.
P2 various method used for management accounting report
Importance of management accounting system within the organization
There are different types of management accounting system like job costing, inventory
management. Price optimization etc. which help the organization to set the price of the product
and services and assign the job to the different departments.
Job costing system: It is used to accumulate and assign the cost for manufacturing the product
for individual output unit. It is mainly used when the produced items are different from each
other. The system used to assign the cost for each activity and analyse the performance of each
activity and compare by compare it with last year or previous year cost, so they can manage their
cost. It helps the company to control the company cost (Why Job Costing Is Important, 2017).
Importance
Job costing system provided different scopes to control the cost of the products and
services. It is helpful for the small and medium size business to ascertain the cost of each job.
Interactive investor company use the job costing method to record the profit earned on each job.
It also helps to evaluate the performance of each job and take effective steps to control the cost.
They compare the selling price, cost of each job with their profit. It permits the manager to
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calculate each job cost and profit and understand the performance and take decisions whether the
job is desirables for the future use or not.
Price optimization system: It helps the organization to determine behaviour of the customer
regarding the different amount and value of money offer to them for the different product and
services. They analyse the inventory level, cost of the product, operating cost and historical
prices for the estimating the price which best suited their product and help them to increase the
operating profit (Ferreira, Lee, and Simchi-Levi, 2015). By price optimization system a company
can evaluate their performance by analysing the buying behaviour of the customer.
Importance
Interactive investor use the price optimization system to influence the buying behaviour
of the customer by evaluating their buying pattern and taste and preferences. It influence the
organization to concentrates on the areas like profit margin. Sales conversions number etc. It also
supports the organization to generate the revenue of the company. It helps the interactive
investor company to reduce the manpower by automating the entire process. Interactive investor
mainly done their business via online so price optimization system add value in their functioning.
Through this method company can easily take the decisions regarding setting the price of t eh
product.
Inventory management system : It is a management software which was used by the
organization to check the inventory level, order quantity, sales and delivery of the goods. It helps
to reduce the maintenance cost of the inventory in the warehouses by regulating the inventory
level timely and make the order when they needed. It also helps them to fulfilling the demand of
the customer.
Importance
Inventory management system provides the better techniques to calculate the inventory
level via computerized system which reduces the role of manpower and help the organization to
regulate the inventory level and make order according the stock to manage the cost of
maintenance. Inventory system also help the organization to manage the sales and deliver the
product and services on time. Interactive investor company can manage the inventory level and
improve their performance by improving the delivery system.
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Characteristics of good management accounting system
Accuracy : It provides the accurate data regarding the performance of the organization
such as its total sales, revenue, cost, expenses etc. It provides accurate data to the Interactive
investor to measure its position in the market and take efficient measures to improve their
performance. The accuracy of the data shows the reliability of the organization.
Decision making : management accounting support the decisions of the organization by
presenting the data in different report such as balance sheet, cash flow etc. and help the manager
to evaluate the sale and profit of the interactive investor company. It also helps them to compare
the last year performance with the current year performance.
Improving efficiency: The role of management accounting is to contribute to make a
better use of resources the performance and efficiency of the firm by optimum utilization of
resource. They fix the target and goals for the different departments to accomplish the objective
of the organisation. The favourable variances are appreciated but in the case of adverse variance
they try to manage them by using the various tools like training and development program etc.
Techniques and concept : management accounting use the various techniques such ad
standard costing, budgetary control, cash flow, balance sheet, ratio analysis etc. to make t eh
information and accounting more useful (Zahller, 2017). Each technique used by the interactive
investor is for the special purpose like to present the data. Managing the organization or to take
the decisions.
Cause and effect relation: the role of financial accounting is to present the data in profit
and loss account of balance sheet but the role of management accounting is to present the cause
and effect relation of the data and their decisions. If the company suffer from the losses than the
role of management accounting is to find the reason behind the losses. The profit of the
organization is also analysed to check the accuracy of the process and data.
Forecasting : the role of management accounting is to take the decisions for the future
events on the current performance of the company. Interactive investor company forecast their
company sales and revenue by the past year performance and prepare budget according to it
forecast the expenses.
Need of the understandability of the management accounting report
The report of the management accounting should be in proper format so that it is easily
comprehensible, and functional to make decisions in better way and get the result quickly. The
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decisions of the top management and employee are base on these report (Hada, Todoran, and
Avram, 2016). By evaluating the records of the report like the sale, profit, employee
performance, productivity of the organization, overall expenses, cash inflow and outflow etc. on
the basis of this transaction they make the decisions. For example : If the profit of the Interactive
investor is high then they take the decision to invest them in more productive activity or
distribute the profit as dividend. But if the report are not present in the understandable manner
than there is high chances of taking wrong decision which may affect the business.
Various management accounting reports
The company uses various kind of management accounting report to present their data in
more systematic manner and calculate the variances on the basis of reports. The management
reports are as follows :
Performance report : It provides an overview about the performance of the organization
and its employees and help the company to get the knowledge about the organization activity in
particular period. It helps to get the growth and success journey of t eh company in accounting
year and compare the performance to different organisation to prepare a better strategy to
accomplish the goal and objectives. The performance report also helps to analyse the weak area
of the company to focus on the particular segment.
Budget report : Budget report help the company to estimate the expenses and sources of
income in particular period. It also provides a comparison to analyse the company performance
that how efficiently a company is able to achieve the target on time. It is based on historical data
and performance. It helps to allocate the financial resources to the different activities to complete
the task within the given budget.
Cash flow : It is used to present the total cash inflow and outflow of the organization in
particular accounting period. It was used by the organization to maintain the cash level to meet
the day to day requirement of the company. It helps Interactive investor company to manage the
cash inflow and outflow from the various retail business to provide their services and product.
LO 2
P 3 Calculation of cost and preparation of income statements
Micro economic techniques:
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Definition of cost and cost analysis
Cost means the total expenses incurred by Galway Plc for the production of one unit of
good. The cost covers all the direct and indirect expenses of the company (Pearce 2016). These
cost are known as the cost of goods sold.
Cost analysis is the measure where the company determines the cost- output relationship
of Galway Plc. The managers are concerned about the cost incurred in hiring the inputs and then
rearranging them back to increase the productivity of Galway Plc.
Explanation of cost- Volume Profit, flexible budgeting and cost variances
Cost- Volume Profit Analysis is process where Galway Plc checks the impact of varying
levels of production with the varying levels of operating profit. This method is also known as
break even point analysis. Breaks even point for any company is achieved when company comes
to the point where there is no profit and no loss for the company (Keller 2015).
Flexible Budgeting is the method for preparation of budget in which budgets are prepared
on the basis of the level of activity of the company. Galway Plc uses this method to prepare on
budget on the basis of their level of activity.
Cost Variances is the difference between the budgeted performance and actual
performance of Galway Plc. These variances are used as a standard for many management
reports.
Calculation of Absorption costing and Marginal Costing
Calculation of production cost as per the
marginal cost
particulars amount
material 8
labour 5
Production overheads 3
Total production cost per unit 16
Preparation of income statement by marginal cost for May month
Basis amount amount
Revenue 15000
Marginal costs
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Opening stock 0
+ production cost 8000
- closing stock 3200
Marginal cost 4800
contribution 10200
Fixed costs
Total production 4000
Selling price 4000
Administrative cost 2000
Variable sales commission 750 10750
profit -550
Preparation of income statement by marginal cost for June month.
Basis amount amount
Revenue 25000
Marginal costs
Opening stock 3200
+ Cost of production 6080
- closing stock 1920
Total marginal cost 7360
contribution 17640
Fixed costs
Total production 4000
Selling cost 4000
Administrative expenses 2000
Commission on sales 1250 11250
profit 6390
Calculation of net profit or loss under Absorption costing
Under Absorption Costing
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Cost per unit
Direst Material 8
Direst Labour 5
Variable O/H 3
Fixed o/h 10
Total absorption cost per unit 26
Particulars Workings Amount (£) May
sales (300*50) 15000
Cost of sales:
Opening inventory 0
Material (500*8) 4000
Labour (500*5) 2500
Fixed o/h 10000
Variable o/h (500*3) 1500
18000
-Closing inventory (200*26) -5200
-12800
Gross Profit/Loss 2200
-Variable selling cost -750
Actual Net profit/(Net Loss) 1450
Particulars Workings Amount (£) June
Sales (500*50) 25000
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