Management Accounting Report: ABC Limited, HNC in Business

This report provides a comprehensive overview of management accounting principles and practices, focusing on the context of ABC Limited, a manufacturing entity. It begins with an introduction to management accounting systems, their essential requirements, and the integration of various systems such as inventory management, cost accounting, and price optimization. The report then explores different types of management accounting reports, including account receivable reports, performance reports, and budget reports, highlighting their benefits and applications. A significant portion of the report is dedicated to calculating net profit using different costing methods, namely marginal and absorption costing, and comparing their advantages and disadvantages. The analysis includes the preparation of budgeted and actual profit and loss statements under both costing methods. Furthermore, the report examines various planning tools and their advantages and disadvantages, and compares how different organizations respond to financial problems, offering insights into the adaptation of management accounting systems and planning tools. Overall, the report aims to provide a solid understanding of management accounting concepts and their practical application in a business environment.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1. Management accounting systems and its essential requirements.....................................3
P2. Different types of management accounting reports .......................................................5
TASK 2............................................................................................................................................6
P3. Calculate net profit by using different costing methods..................................................6
TASK 3..........................................................................................................................................10
P4. Different plaining tools along with advantages or disadvantages..................................10
TASK 4..........................................................................................................................................13
P5. Comparison of organizations that how they respond to any financial problems...........13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Every entity in today's competitiveness industry and changing environmental scenario
wants to achieve their defined objectives and targets within scheduled time-frame. Management
in every trade and business enterprise put their efforts towards accomplishment of targets and
other short term goals (Arena and Arnaboldi, 2014). Management accounting is only the crucial
aspect which provide an assistive framework to managerial personnel for attaining goals within
planned time-frame. Management accounting is like full flagged package of all the vital tasks
primarily concerned with both management and accounting aspects.
This study-report emphasises on fundamental and critical aspects of managerial
accounting in context of ABC Limited which is a mid-size entity operating in manufacturing
sector. It also covers necessary requisites of its systems and comprehensive discussion on
different reports used in managerial accounting reporting as well as use of planning-tools in
responding to numerous kind of financial problems. Moreover it consists of comparison of
enterprises in terms of manner of adaption of MA systems and different planning-tools.
TASK 1
P1. Management accounting systems and its essential requirements
Management Accounting: Management or managerial accounting referred as set of
systematic functions which effectively contributes towards detailed tracking and analysis of
internal costs related to multiple business processes which assist a corporation and enterprise in
making of determinations and decisions concerned with productions, core-business operations
and investment & funding in market-place (Azudin and Mansor, 2018)). Enterprises need
managerial accounting and its different aspects to assess efficiency predetermined budgets, costs
of key operations and thereafter efficacious allocation of funds and resources accordingly in
respective departments. Therefore, herein role and function of managerial personnel and
accounting officials is quite significant for business' success.
As per Anglo-American Council of Productivity management accounting is defined as
“Structured presentation of crucial accounting facts and information in structured means with
object to aid in formation of managerial policies and routine operations of business entity.”
Management accounting system: A management-accounting system described as operating
framework which aid in generating crucial information that is ultimately assist in formulation of

strategies and decisions. MA involves multiple systems which are employed by managing staff
as per business requirements and organisational structure.
Integration of MA-systems within organisation: Core function of managerial
accounting is to provide critical and meaningful information for management's decision making
tasks, which make it necessary to integrate MA systems within enterprise. Since lack of
integration lead to barrier in generation of such information and eventually affects decision
making. In a organisation like ABC limited, accounting processes and division provides useful
information which is used in one or more MA-systems, thus structured integration here is
needed for quick generation of information/data.
Inventory management system
Inventory management system is a system where the accounts for all inventories and
stock are maintain. It is a combination of both hardware and software. The software helps in
keeping the database- entering, storing and editing the data regarding inventories. Where as
hardware are the tools which reads the barcode labels. This system helps ABC limited in
overseeing its inventories, generates report about stocks, do forecast regarding stock ordering,
and the like. Inventory management system essentially required to maintain records regarding
the flow of its inventories for example amount of stocks are in process, amount of finished and
semi finished products, number of stocks kept in warehouse and so forth.
Cost accounting system
Cost accounting system is a framework adopted by the firm for estimating the cost of
their products. Estimating the true and fare value of cost for products is every essential for
profitability analysis, inventory valuation and cost control. Further, this system helps in
estimating the closing value of finished and work-in progress goods for financial statement
preparation (Chenhall and Moers, 2015). The objective of cost accounting system is to ascertain
the cost, true estimation of selling price, cost reduction & control, ascertaining of profit margin,
making cost decision accordingly.
Price optimization system
Price optimisation is the tool / method used to identify the fluctuation in demand of
every increase or decrease in the price of a product. It also control price that company
determines, which will help to achieve the objectives through maximisation of profits. This
system is used for dynamic pricing strategies for hospitality, e-commerce, etc. It provides

immediate financial benefits by providing opportunities to focus on variety of goals. It maintain
its consistency with efficiency control. This system essentially required to determine initial
pricing, promotional pricing, and markdown (discount) pricing which influence demand. Initial
Price Optimisation works for most durable products. Promotional price optimisation set
fluctuating prices of sales to meet the desired target of the firm through its promotion.
Markdown optimisation helps ABC limited for short duration products, subject to fashion trends
and seasonable – airlines, hotels, retailers and mass merchants.
P2. Different types of management accounting reports
Account Receivable Report : The Account Receivable Aging Report is also known as
“Schedule of Account Receivable”. This report is a record that shows the result of the firm's
clients/ customers who have not cleared their dues for long time and are bound to pay as soon as
possible. Report inform about unpaid invoice balance along with the duration for which they
have been outstanding. It helps the business to keep them on top as they are the slow paying
clients. Aging report is the primary tool which maintain the collection and contain the contact
information for each customer (Fullerton, Kennedy and Widener, 2014). It is also used by
management of ABC limited, to determine the effectiveness of the credit and collection
function. Variation is schedule may contain a simple listing of receivable by customer, rather
than breaking them down further by age. ABC limited uses this report by collection practices,
credit risk and allowance for bad debts.
Performance Report : It is an statement that measures the results of its success over a
specific time frame. It is report, routinely produced by government, being financed by public
money to justify that money was spent effectively and efficiently. Such reports contain
performance indicators which measure achievements of organisation and its programmes.
Performance report measure individual performance of ABC limited employees. Recipient is
expected to take action when there is an unfavourable variance. Performance report can vary
from company to company, whether they maintain same sort of data. Quality of a good
performance report may contain the specific performance and analyse data which provide
suggestion to improve and move forward. Best performance report focus on the organisation
goals with that outline the employee's strength, success, weakness and opportunities. It's required
by ABC limited to set new targets each time while performing tasks.

Budget Report : This report used in financial management to evaluate difference
between estimated budget projections with actual budget performance occurred in a specific
duration. Budget is an financial goal, which is targeted by a firm to achieve it, through managers
planning , directing and controlling. Actual output after the performance is to be evaluated with
the estimated output, and the difference are to be controlled with the recommendations and
suggestions (Hitomi, 2017). This report is used by ABC limited to determine which expenditure
level are too high, so that actions may be taken to bring the level back down to the budgeted
amount. A modified income statement can be used as a budget report. Financial data is
documented and recorded in a budget report, often referred to as a Financial Report, which can
be brief and simple.
Above mention all reports are used by ABC limited and make sure that it will help
organization to maintain information and take further decisions accordingly.
Benefits of different management accounting systems:
Management
accounting systems
Benefit and application
Cost accounting
system
It is applied in ABC Ltd as it helps managers to determine cost of
different products that are sold by it in the market.
Inventory
management system
The purpose to utilise in ABC Ltd by managers is to maintain inventory
order level because it is beneficial for prevention of product shortage.
Price optimisation Managers of ABC Ltd, use it to determine consumer response on
fluctuating prices,which helps to analyse margin of sales.
Job order costing ABC Ltd's managers use it to keep record of different jobs that are
performed by it as it is advantageous to allocate funding to different
departments according to their requirements.
TASK 2
P3. Calculate net profit by using different costing methods
Marginal Costing: It can be described as the technique of controlling the relationship
between the profit and volume of output. Here, aggregate cost fluctuates the volume of output

through increasing or decreasing by one unit. This concept is used to identify the optimum
production quantity for company.
 Advantages:- This approach is preferable for decision- making process, remove under/
over absorption of overheads. It helps to differentiate fixed and variable cost, which
promotes short-term pricing decisions. Avoids the manipulation of profits through high
production volumes.
 Disadvantages:- It is difficult to segregate the fixed and variable cost which can give
misleading results. Semi-Variable Cost are either excluded or incorrectly, leads to
distortion.
Absorption Costing: It refers to the cost included in manufacturing of a finished
product, which includes- direct material, direct labour, variable overheads, etc. It is a cost
accounting method for the valuation of inventory (Ismail and King, 2014). It's a process of
linking all production cost to prepare total cost per unit.
 Advantages:- It is best for companies with differentiation of products. It helps the
managers to understand the cost of their department, which makes profitability easier to
achieve. Disadvantages:- It creates delay in organisation goal achievement as there is danger of
under/ over absorption. It is only applied in large firms not in small firms. Indirect cost
need to be paid, even when production not takes place.
Calculation of cost by using marginal or absorption costing:
Budget: Absorption costing technique
Production Cost
Per Unit Total
£ £
DM 10 18000x10 180000
DL 20 18000x20 360000
VOH 5 18000x5 90000
FOH 5 90000
40 18000x40 720000

ABSORPTION COSTING: BUDGETED PROFIT OR LOSS STATEMENT
PER UNIT TOTAL
£ £ £ £
SALES 50 800000
COST OF PRODUCTION
DM 10 180000
DL 20 360000
VOH 5 90000
FOH 5 90000
40 720000
OPENING INVENTORY 0
CLOSING INVENTORY -80000
COST OF SALES -640000
STANDARD PROFIT 160000
ADJ. FOR UNDERABSORPTION -10000
BUDGETED PROFIT 150000
ABSORPTION COSTING: ACTUAL PROFIT OR LOSS STATEMENT
PER UNIT TOTAL
£ £ £ £
SALES 50 800000
COST OF PRODUCTION
DM 10 190000
DL 20 380000
VOH 5 95000
FOH 5 95000
40 760000
OPENING INVENTORY 0
CLOSING INVENTORY -120000

COST OF SALES 40 -640000
STANDARD PROFIT 10 160000
ADJ. FOR UNDERABSORPTION -5000
BUDGETED PROFIT 155000
MARGINAL COSTING: BUDGETED PROFIT OR LOSS STATEMENT
PER UNIT TOTAL
£ £ £ £
SALES 50 800000
COST OF PRODUCTION
DM 10 180000
DL 20 360000
VOH 5 90000
FOH 35 630000
OPENING INVENTORY 0
CLOSING INVENTORY -70000
COST OF SALES 35 560000
CONTRIBUTION 15 240000
FOH PRODUCTION -100000
BUDGETED PROFIT 140000
VARIABLE COSTING: ACTUAL PROFIT OR LOSS STATEMENT
PER UNIT TOTAL
£ £ £ £
SALES 50 800000
COST OF PRODUCTION
DM 10 190000
DL 20 380000

VOH 5 95000
FOH 35 665000
OPENING INVENTORY 0
CLOSING INVENTORY -105000
COST OF SALES 35 560000
CONTRIBUTION 15 240000
FOH PRODUCTION -100000
BUDGETED PROFIT 140000
Particulars BUDGET ACTUAL
£ £
FOH CHARGED TO PRODUCTION COST 90000 95000
under FOH charged to Profit or Loss account 10000 5000
FOH CHARGED IN THE MONTH 100000 100000
FOH TRANSFERRED THROUGH CLOSING INVENTORY TO
NEXT MONTH OCT 2018 10000 15000
FOH CHARGED 90000 85000
Different costing techniques:
Standard Costing
It is a method used in Cost Accounting to identify variances between the actual cost
incurred in production of goods and the cost that should have been incurred according to
industrial standards . It helps to investigate differences and the reasons due to which they occur
and also provides measures for rectification.
Historical Costing
It is a method of accounting in which value of an asset is recorded at its original cost or
historical cost. It is used as per Generally Accepted Accounting Principles(GAAP) and is based
on the conservative aspects of accounting. Mostly those assets are recorded at historical cost
which are purchased for long-term.

TASK 3
P4. Different plaining tools along with advantages or disadvantages
Budget:A budget is a document which shows the receipts and expenses of a company for
a particular period of time say a year. The process which is used to prepare it is known as
Budgeting. It is the task of a Financial Manager to prepare it. It helps ABC limited in many ways
to enhance operational efficiency and effectiveness.
Budgetary Control: It is a process of comparing actual budget figures with set standards
so as to see whether there are variances or not. If there is one, then immediately steps and
measures should be take so as to remove it very quickly. It forms a part of the controlling process
in the firm. It helps in planning for the future, eliminates chances of frauds, reduces the chances
of errors and mistakes etc. Thus, It is quite necessary for ABC limited to manage their budget
and perform accordingly.
Process of budgeting: Process of budgeting includes business goals, targets and
objectives to be achieved in near future which is quite important for ABC limited as on the basis
of these expectations would be set, Historical value of previous years for the sake of comparison
needs to be accessed which is important, base has to be developed as it is one on which
accounting would be done, Data is searched, found out, scanned and filtered to suit out the
requirements of the company. Next comes the preparation of the actual budget itself by the
manager, After its completion review needs to be done to find out errors and mistakes made in
the general course, Report of it has to be submitted and analysed to ascertain what work has been
completed and the progress of it needs to be monitored. After this, process is now complete and
ready to be displayed.
Different planning tools: Different planning tools are as follow:
Master budget: It refers to an aggregation of all the budgets prepared in the company. It
is essential for summary of Cash, Production, Labour and Overall Financial position of the firm.
 Advantages: Functional Budgets are given in it in capsule form, all of them are classified
into one, verification is made easy with its preparation, estimation of profit can be done.
It help managers of ABC limited to make budget departmental wise and evaluate each
unit performance.
 Disadvantages: Making a master budget can be extremely tiring and time consuming
process for managers. Furthermore, it is also costly and expensive work to prepare it. It

is also not suitable to be prepared by small companies and business enterprises. Skills and
high-level of efficiency are required to prepare it which may be missing even in
managers. Certain errors and mistakes can crop up in preparing it which may hamper
depiction of the financial standing of concern and can create problems for it. Accuracy is
also an issue. It can impact operational efficiency of ABC limited which further affect
profit margin as well.
Cash flow budget: It is an estimate of all the cash receipts and payments to find out
whether there is a surplus or deficiency of it in the organisation. The work for preparing it lies
with the cashier of the firm. This budget can be used by managers of ABC limited but it has
some positive or negative aspects which mentioned below:
 Advantages: It helps in evading any shortage of cash, planning effectively and
efficiently, better decision-making in the enterprise. It leads to a smooth process in the
concern. Better management can also be done. Liquidity level can be maintained easily
so that there are no problems in the future.
 Disadvantages: It can cause distortions, may not reflect the entire picture of the financial
position of the company. It does not accounts for various other incomes which are not in
cash such as those ones in which amount will be received in near future. Thus , It
becomes very difficult to depict standing of the firm.
Zero base budget: In it, receipts and expenditures of a particular period of time are
recorded without having a base from previous year estimation. It is prepared a fresh and new
budget for business. Thus, All the work must be done without comparisons with the previous
years. Managers of ABC limited can follow this budget and its advantage or disadvantages are as
follow:
 Advantages: Resources can be allocated efficiently, costs can be reduced significantly,
inflated budgets can be detected easily etc. It is useful for various departments of the
organization and try to minimise wastage in business operations.
 Disadvantages: More consumption of time, manpower is required, extensive knowledge
is essential for its execution, too much details have to be given, lack of uniformity of the
organization is another problem, high-level of skills are necessary in the staff which is
difficult to find. Furthermore, its preparation is highly costly and expensive also. Thus, it
can be said that it is not suitable for the small-scale enterprises.

Static budget: In this budget, estimated values of activities will not change even after
change in quantity. For example: In ABC limited, sales commission is 200,000 and the sales
quantity is 5000 units. So, sales commission is still same even after change in volume such as
6000 or 8000 units. Its advantages or disadvantage are as follow which helps managers of ABC
limited:
 Advantage: It is very simple budget which helps in estimating taxes and beneficial for
small organizations where single person manage all accounting functions.
 Disadvantage: One of the biggest disadvantage of this budget is lack of flexibility
because budget will remain same even after change in quantity. Company unable to
manage change which influence production as well as profitability.
Rolling budget: It is continuous budget which required regular update after expiry of
previous one. It can also said that, budget can extend for the next period with same estimation or
projection of each functions. Rolling budget can be used by ABC limited but before that, they
need to evaluate its advantages or disadvantages which are as follow:
 Advantage: This budget follow incremental approach where some incremental amount
added to previous budget. It is helpful for management for short term planning and
fundamental assumptions also added.
 Disadvantage: One of the major disadvantage of using this budget is that, it is very time
consuming process which demoralize staff members. Rolling budget not updated every
period which will cause overall performance of operations.
Flexible budget: In this budget estimation of activities or volume can change during the
period. It is more sophisticated or useful budget in comparison to static budget because here
managers unable to change budgeted amount. It can be followed by management of ABC limited
but after analysing its advantages or disadvantages. All are mentioned below:
 Advantage: This budget used to manage seasonal expenses or irregular incomes which
help managers to make adjustments accordingly. Flexible budget reduces stress because
make managers are not in the limits to make budget.
 Disadvantage: Flexible budgets are quite confusing because it required more planning to
track expenditures and adjust them in different time period. This budget has less
discipline which impact overall actions or activities.

Kaizen budget: Main objective of this budget is to reduce actual cost in comparison to
standard cost. In this budget, managers not focus on estimating cost for the current practices but
they focus on reducing already estimated cost. This budget can be followed by ABC limited but
it has some advantages or disadvantages which are as follow:
 Advantage: This budget is not only beneficial for business operations but also useful for
consumers, employees and entire organization. It also helps in improving team work
which enhance overall efficiency as well as effectiveness.
 Disadvantage: In current organization system, it is very difficult to implement Kaizen
budgeting because it has various limitations and managers should aware about it. For the
implementation of this budgeting method, management have to provide training to
understand its concept.
TASK 4
P5. Comparison of organizations that how they respond to any financial problems
Financial Problems-
Financial problems refers to situations in which a company faces financial hardship and
pressure due to different reasons such as excessive spending, inefficiency of accounting system
etc. These issues can be addressed by taking of timely measures. ABC Ltd. faces various
problems like lack of cash flow, excessive ad spending.
Types of Financial Problems-
Lack of Cash Flow- When cash flow is limited in an organisation it directly affects its
liquidity position. It is unable to pay its creditors on time and its working capital is affected
which is a problem faced by ABC Ltd due to some of its receivables not clearing dues on time.
Excessive Ad Spending- Unnecessary and over-expenditure on advertisements and
publicity adversely impact a firm's finances which is another financial problem faced by ABC
Ltd because of excessive spending on publicity and ads of its products.
Sticking on budget: It is the another issue which organizations faces where managers
have to stick on budget and perform operational activities accordingly. But, in order to complete
task as per budget can cause the quality of work because they unable to expand resources.
Poor accounting practices: It is of the essential aspect of financial management where
manager ensure that company perform accordion to accounting standards and practices. Due to

insufficient practices organizations face trouble. It will financially cause the business, so in order
to resolve this issues they have to hire professional accountant.
Unnecessary expenses: In the organization, unnecessary activities will generate cost but
not contributed in profit margin. It will leads to generate financial problems which impact
production as well as profitability.
Lack of capital: Due to lack of capital in the business will cause financial problems and
management unable to perform their functions. Lack of capital will leads lack of resources which
minimise overall production and profitability.
Unforeseen expenses: In organization, managers will predict cost for known activities
but they can't easily predict the cost of damaged stock, equipment, stolen inventory, suddenly
required maintenance in infrastructure. It will also cause financial problems in business which
required to manage.
Affordable quality staff: Company required to attract quality staff but they need to
spend more on their training or pay high wages. It will cause financial issues because busienss
unable to afford high salary packages.
There are many techniques which can be used for identifying financial problems and
addressing them so that financial burden on enterprise can be reduced. ABC Ltd. can use
following techniques to resolve its issues related to finance-
KPI- These are different types of values which indicate how a company is faring in
achieving its objectives,goals and targets. Types of KPIs are financial and non-financial KPIs.
Financial KPIs indicate the financial performance of a firm in comparison to the set standards.
Non-Financial KPIs are indicators which have no link with finances of organisation such as
employee satisfaction level, customer satisfaction level etc. ABC Ltd. uses financial KPIs such
as current ratio, liquid ratio to identify the problem of lack of cash flow as both of them are used
to gauge liquidity position of organisation.
Benchmarking- It involves setting up of standards which an organisation must achieve
and then measuring performance for comparison with competitors. ABC Ltd. uses it to identify
problem of excessive ad spending by comparing its current advertisement and publicity
expenditure with other companies.
Financial Governance- It is a method through which a company can monitor its overall
financial performance and resolve its issues related to finance. ABC Ltd. uses it to solve its

problems like lack of cash flow and excessive ad spending. Financial governance helps the
manager to formulate accounting records according to appropriate principles which helps to
ignore the problem of lack of cash flow. Excessive ad spending problem can be solved by
formulating a budget and making sure to follow it to keep advertisement expenses in check.
ABC Ltd. Air Dry Ltd
ABC Ltd. can use cost accounting system to
deal with the problem of lack of cash flow
because it helps to determine cost of all the
products that will be sold to customers. If the
management will have information of cost then
this problem could be resolved.
Air Dry Ltd. can use cost accounting system to
bring cost-effectiveness in its operations which
will resolve its issue of unnecessary
expenditure.
ABC Ltd. can use job order costing system to
deal with the issue of excessive ad expenditure
because it will help to keep the advertisement
expenditure in check.
Air Dry Ltd. can use job order costing system
to keep expenses incurred in execution of job
orders in check which will resolve its issue of
excessive expenditure in completion of job
orders.
CONCLUSION
From the above discussion it has been concluded that management accounting is very
essential which help business to manage their operational activities and functions. By using
different accounting systems, managers improve their employees efficiency as well as
effectiveness. In addition, accounting report helps managers to evaluate overall performance or
further make strategies decisions or improve productivity as well as profitability. It further helps
in achieving business goals & objectives.
REFERENCES
Books & Journals