Management Accounting Systems and Costing Methods for ABC Ltd

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Management Accounting
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Table of Content
Task 1...............................................................................................................................................4
a):.................................................................................................................................................4
b):.................................................................................................................................................6
c):.................................................................................................................................................7
d):.................................................................................................................................................9
Task 2.............................................................................................................................................10
1):...............................................................................................................................................10
2)................................................................................................................................................13
3)................................................................................................................................................15
References......................................................................................................................................19
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Introduction:
Due to rapid alterations in market conditions and economic factors, effective management of
resources and controlled implementation of plans are necessary to make a business sustainable.
This report is based on the ABC Limited and going to be created to explain different concepts,
tools and advantages of the management accounting system. The report will be created in two
different sections, in which the first section will be based on management accounting systems
and present elucidated knowledge about systems of management accounting. Also, Report will
explain the concepts of management reporting and provide knowledge about the management
accounting reports that can be prepared by ABC Limited to support the managerial decision-
making. In the second section, concepts of marginal and absorption costing will be explained
along with practical skills of income determination under both costing methods.
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Task 1
Introduction
This report is going to be created so that the suitability of management accounting system for
ABC Ltd can be discussed. It solves the financial problem of the organization to make effective
control of every department of the organization. The management accounting is using the
different types of report to take the control.
a):
Management Accounting refers to the process of collecting, identifying, analyzing and
communicating financial and economic information to the management for effective decision
making (Surrum, 2019). The management accounting system involves various systems such as
cost accounting system, inventory management system, price optimization system, job costing
system etc.
As per CIMA, management accounting is a set of some planning and analytical tools which is
utilized by the business managers to enhance the quality of decisions. This system assists the
managers in the decision-making process by delivering analyzed information about business
outcomes.
The essential requirements of various managerial accounting systems are as follows:
 Inventory management system:
The inventory management system is the one which keeps a track of inventory i.e. for predicting
and reordering of inventory (Pontius, 2019). The essential requirements of inventory
management system are:
 A proper record of physical inventory has to be maintained in order to see them when the
next order needs to be placed, the minimum and average inventory level that needs to be
maintained all time etc.
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 A record of ordering cost and carrying cost that the firm is willing to spend, the
warehouse cost, the supplier’s information, minimum reorder days and minimum & maximum
lead times that the firm wants. All these information are a prerequisite for efficient inventory
management.
 Cost accounting system:
The cost accounting system is the one which keeps a track of cost of a particular product so as to
analyze the profitability and control the cost. The essential requirements are:
 A record of all the direct and indirect cost must be taken into consideration.
 It must suit the nature and size of business.
 The cost accounting system must be able to adapt itself to changing business situations.
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b):
Accounting report is the compiled document containing financial records that are derived by
analyzing the financial information from cash flows, balance sheets and income statement
(Controller, 2019).
 Budget reports:
A budget report is an internal document prepared by the managers to compare the actual and
budgeted performance for a given financial year. This helps individual departmental managers to
analyze their own department’s performance. Also, this report helps to find out deviations and
correct them in future. This is a major tool for cost reduction and cost control.
 Accounts receivables ageing report:
This is a document that keeps a record of all the debtors, the number of funds to be collected, the
debtors. This is a great tool to understand the amounts receivable and to analyze bad debts. This
helps in formulation debtor’s policies and keeping a check on accounts receivables (Controller,
2019).
 Inventory and manufacturing report:
This is an internal report which keeps a track of inventory manufactured and sold, the work in
progress, and closing and opening stock, idle labour hours, inventory waste etc.
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c):
The benefits are as follows:
 Effective inventory management:
The relevant and timely information provided by the management accounting system helps in
effective and efficient decision making. For example, The installation of an inventory
management system helps to take quick decisions for economic order quantity, average
inventory and minimum stock level to be maintained in the organization (Neal, 2019).
 Cost control and cost reduction:
The installation of cost accounting system helps to identify the profitability of products. This is
beneficial as it helps to find out the products which are not profitable. The products which are
getting over costly can be identified and cost control and reduction can be accessed.
 Aids in Price maximization:
The price maximization system aids in setting up a higher price for the products which is
beneficial for increasing the profit margins. This helps in finding how different customers react
to different prices through different marketing channels (Neal, 2019).
 Aids in the determination of direct and indirect cost:
It helps in finding out the exact cost of direct material, direct labour and overheads. With the
help of this, all these costs can be kept in control and profit margins can be adjusted accordingly.
 Better planning;
Planning is a very essential part of managing activities because the quality of planning decides
the effectiveness of the implemented strategy. Through better planning, ABC Limited can
improve the wellness of the overall efficiency of organizational activities.
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d):
Critical evolution of management accounting system and report with the organization process
 The integrated on the organizational process the budgeting reports make a systematic way
for the organizational activities to achieve the objective.
 The integration of the accounts receivable in timely collecting the accounts detail of the
members for maintaining the accuracy and flexible in the work environment (Daraban, 2018).
 The integration on the job costing, management accounting is mainly an analysis of the
job costing for making or deciding the pricing strategies of the organization to control the cost of
the product.
 The integration on the inventory reports, the management accounting is providing a better
inventory management level and it is minimizing the manufacturing cost.
 Performance reports are also made by management accounting. Managers are planning
for future productions, cost deduction and improving profitability for the organization (Daraban,
2018).
 Order report is helpful for the management accounting, for the analyzing and replacing
the order of sales information. Giving better services to customers with the help of order
information report.
Conclusion
From the discussion provided in the above report, it can be concluded that management
accounting is very supportive and beneficial for the business organization and, ABC Limited can
adopt management system to maximize the organizational profitability and efficiency. For the
motivation to the employee management accounting is preparing the future forecasting result and
giving the instruction to all the members of the organization to perform well in the process to get
the good result to the organization.
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Task 2
Absorption costing:
This method is based on the traditional approach of cost accounting and indicates that all costs
that are relevant to the production process should be charged to the product cost without
considering the nature of cost. In the more elucidated image, all fixed and variable costs should
be charged as the primary cost of the finished product (Popesko and Novák, 2014). This method
works on the concept of financial reporting and accepted under taxation regulations.
Marginal costing:
This method is suitable for the explanatory study of costs which is highly supportive in cost
control activities. This method indicates that costs should be charged as per nature so that
effective cost control program can be implemented. As per this system, marginal/variable costs
are required to be charged against product cost and fixed costs should be allocated as periodic
cost (Toughnickel, 2016).
1):
Production cost per unit Amount
Direct material 10
Direct Labour 20
V. production O.H. 5
Total Variable cost (a) 35
Total Fixed O.H. 100000
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Units produced 18000
Fixed O.H. per unit (b) 5.56
production cost per unit [a/b] 40.56
Total production cost
Units produced 18000
Per unit cost 40.56
Total production cost 730080
Total cost of sales
Units sold 16000
cost per unit 40.56
Cost of goods sold 648960
Marginal costing
Particulars Amount
10

Direct material 10
Direct Labour 20
V. production O.H. 5
Production cost per unit 35
Total production cost
Units produced 18000
Per unit cost 35
Total production cost 630000
Total production cost
Units sold 16000
cost per unit 35
Cost of goods sold 560000
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2)
Absorption Costing Amount
Revenue 800000
Less:
Cost of sold products
Opening inventory 0
(+) Production cost [Working note 1] 730080
(-) Amount of closing inventory [Working note 1] 81120 648960
Contribution 151040
marginal costing Amount
Revenue 80000
0
Less:
Opening Inventory 0
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