Comprehensive Management Accounting Report for Alpha Ltd

This report provides a comprehensive analysis of management accounting principles and practices, focusing on the case of Alpha Ltd, a medium-sized UK-based company known for its pizza products. The report begins with an introduction to management accounting, its scope, and its importance in organizational decision-making. It then delves into different types of management accounting systems, including inventory management, cost accounting, job costing, and price optimization systems, highlighting their benefits for Alpha Ltd. The report further explores methods of management accounting reporting, such as budget reports, cost managerial accounting reports, account receivable aging reports, and execution reports. It also examines the integration of management accounting systems and reports within organizational processes. The core of the report involves the calculation of costs using marginal and absorption costing methods, including the preparation of profitability statements and reconciliation statements. Finally, the report addresses break-even point calculations and provides insights into the financial performance and decision-making processes of Alpha Ltd, offering a practical application of management accounting concepts.

Management Accounting

Table of Contents

INTRODUCTION
MA is concerned with the presentation of accounting information in such a manner which
assist organisation in the creation of policy in order to undertake day to day operation in an
effective and efficient manner. Moreover, it enable company to assist managerial activities help
them in ascertaining financial planning for acquiring best position among competitive
marketplace (AlMaryani and Sadik, 2012). Along within this, its contains huge scope as it covers
the areas like financial and cost accounting, budgetary control, usage of statistical methods like
regression analysis and many more for maintaining better business position within an industry.
For this report, Alpha Ltd is considered which is one of the reputed medium sized company in
UK and it is mainly well known by its product i.e. pizzas which covers all age brackets across
the globe. In this study, it covers outline of management accounting along with its types and
methods, formulation of income statement, highlights pros and cons of different budgetary
planning tools. Finally, role of company in managing complex financial problems is also
mentioned here.
P1 Management accounting and different types of management accounting system
It is mandatory for each type of organisation to record financial transaction in order to
monitor their revenue and expenditure that is earned by an organisation in a particular time
period. This functions are done through management accounting and financial department of an
organisation. On other hand this functions are performed by internal departments of organisation
which determines that it is an important part for management. In context of Alpha Ltd financial
or monetary transaction is considered as one crucial decisions for this it is necessary for them to
include new methods and concepts of management accounting (Disney and Gathergood, 2013).
It assist them to control business's actions that is taken by management of Alpha Ltd through
evaluating their performance. Some different types of management accounting are mention as
follow:
Inventory management system- Inventory management works as an effective accounting
management system which is used by organisation to manage their inventory. This system helps
an organisation to deliver their stock within minimum time period. For Alpha Ltd inventory
management system is beneficial because it work as a discipline method that specify needs shape
of goods according to need of customer's. On other hand inventory management is required at all
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locations where organisation operates their business in order to predate their regular stock of
materials.
Cost accounting system- An effective cost accounting system is execute by manufacture
and organisation to record cost of their production activities. This works as a framework that is
used by firms for predicting cost of their products through recording them regularly.
Management of Alpha Ltd uses cost accounting system to decide profit margin on their products
through analysis cost of their operations for making inventory and products. Moreover this
system perform an critical role for operating profitable business's in market through deciding
their profit margin. Another factor assist organisation to analyse price of product and inventory
for manufacturing product. By doing assessment, it has identified that company can determine
price by using cost accounting system. Moreover, it clearly indicates unit price associated with
the operations. Thus, by adding mark-up in unit cost firm can set optimal price for the product or
services.
Price = Unit cost + (cost * mark-up%)
For instance unit cost is £50 then price will be
Price = 50 + (50 * 20%)
= £50 + £10
= £60
Accordingly, by offering products at the price of £60 firm can get desired profit margin.
Job Costing system- This is also known as order costing. This work as a system that is
used to assign and accumulating operational cost of particular unit and batch which is
manufactured by organisation. In context of Alpha Ltd job costing system it is beneficial for
organisation because it helps them to identify cost of various item which is different from each
other. With help of this it is easy for organisation to identify profits for each specific unit of
organisation. On other perspective with order costing organisation decided prices and
manufacture each product unit according to need and demand of customer's (Hawkey, Webb and
Winskel, 2013).
Price optimisation system- Price optimisation accounting system assist an organisation to
formulate an effective framework which helps management for identifying price of their
products and services. Moreover this system is beneficial for organisation as well as customers
because it decided price through mutual concern of all departments. It determines prices which is
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decided by organisation is fair and includes marginal profits. So it attracts more number of
customer's through charging minimum prices from them. Within circumstances of Alpha Ltd
price optimisation system leads management to make effective decisions by asserting unbiased
prices from them. In the context of business unit, price optimization system is required with the
motive to setting down appropriate pricing framework. Moreover, when company charges higher
prices for its offerings then it may result into low customer base and lack of competitive
advantage. On the other side, in the case of setting high low prices profitability of the company is
affected negatively. In this way, by undertaking this system business unit can set suitable prices
as per customer’s preferences and thereby would become able to get desired level of outcome or
success.
P2 Methods of management accounting reporting
Management Accounting focuses on information provided by financial accounting for
decision making (Henttu-Aho and Järvinen, 2013). Management Accounting reports facilitate
planning, decision making, regulations etc. these reports are based on financial accounting &
reporting which are prepared throughout the year as all the facts and figures need to be
considered and accuracy requirement is high. Various methods of management accounting
reporting followed by Alpha Ltd are -
Budget Reports- Budget reports are those managerial reports which are used to analyse
the performance of the of the organisation. They can be prepared department wise, activity wise
for a specific period of time. Alpha Ltd prepare a overall budget on the basis of past experiences,
it includes all the possible income and expenditure for the specific time period. These reports
help them to plan for reduction in expenditure and to identify funds requirement. Moreover this
helps an organisation to control prices of all activities that is performed and organised by
management to attain their goals.
Cost Managerial Accounting Reports- In cost report all the cost related to raw material,
labour, overheads are included which gives a clear picture of total cost incurred in production
process. When total cost is divided by total output it gives per unit cost (Kanellou and Spathis,
2013). Alpha Ltd prepare this report as it facilitate them to identify all the cost and profit margins
so that they can optimise the use of resources by reducing the wastage in terms of inventory,
labour hours etc. This types of cost accounting report helps an organisation to estimate price of
their products which is manufactured by them.
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Account Receivable Ageing Reports- These reports are prepared to keep a check on
debtors. When organisation provide frequent & large credit then this becomes so important.
Alpha Ltd prepare this report to identify the debtors who can default in future and to improve the
collection process. Also this helps in planning and creating provisions for bad debts and to
decide the extent for which the credit can be extended to a few parties.
Execution reports- Management account develop and utilize plans for constant and
genuine use of income through including all planned sums. After developing new budget for
organisation all changes are predicted and recorded to make an effective report. Usually this
reports are formulated on annual basis in an organisation (Lavia López and Hiebl, 2014). While
in context of Alpha Ltd they operates their businesses in beverage industry. So it is mandatory
for them to decide price of their products because it enables them to match their product demand
with upcoming future along with cost additions.
M1 Benefits of management accounting system
Management accounting system Benefits
Price optimisation system Accounting system leads an organisation to
analyse prices of their products through
implementing effective decisions. For Alpha
Ltd it helps them to delegate products
effectively.
Cost accounting system Cost accounting system is developed by
organisations for calculating the overall cost of
organisation. Further this system is used by
Alpha Ltd to decide price of products through
analysing its in-depth information (Lovat and
Zhang, Sharp Laboratories of America Inc,
2013).
Job costing system An organisation develops several types of
products in order to offer them in market.
Therefore this is mandatory for Alpha Ltd to
identify prices of products on individual’s basis
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for evaluating products on each factor.
Inventory management system For an organisation it is essential to manage
inventory according to demand of customer's.
Therefore it is important for them to
manufacture inventories according to upcoming
demands of customer's.
D1 Integration of management accounting system and report within organisational process
Type of reporting & Systems Integration with organisational process
Inventory management report: This report
is prepared through taking base of
information that is gathered from system and
integrate them for benefits of organisation.
This integration is beneficial for organisation
because it helps them to organise raw materials
according to estimated level of purchase orders
that raises in upcoming future (Nganga, 2014).
Performance report: This report is
prepared according to different information
system that is gathers from all departments
of organisation. This includes all actual
performance of Alpha Ltd departments.
Integration of this method in organisational
process helps organisation to make effective juice
by removing deviations and ineffective methods
that increases burden of their cost.
TASK 2
P3 Calculation of cost using marginal and absorption cost
Cost accounting techniques are effective tools which helps organisation like Alpha Ltd.
To identify cost that is incurred by them while going through their production activity. This helps
them to decide profits for each activity. For this task profits for Alpha Ltd is mention through
using marginal and absorption costing.
Marginal Costing: Marginal costing system work as a tool that undertakes only variable
cost for the revenue that is generated from sales (Otley, 2016). While fixed cost is written off
against contribution only for a specific period.
Problem 1
1. calculation product cost unit and income statement as per absorption and marginal costing
Profitability statement as per marginal costing method is enumerated below:
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April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Opening Inventory 0 0 45 0 0 45
Add: Production Cost (Variable Only) 225 225 225 225 225 225
Less: Closing Inventory 0 -45 0 0 -45 -15
Marginal Cost of Sales 225 180 270 225 210 240
Contribution Margin 375 300 450 375 350 400
Less
Fixed manufacturing Cost -150 -150 -150 -150 -150 -150
Non-manufacturing Cost -50 -50 -50 -50 -50 -50
Net Profit 175 100 250 175 150 200
Absorption costing method
April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Inventory at the beginning of period 0 0 75 0 0 75
Add: Prod Cost(Variable +FC) 375 375 375 375 425 350
Less: Ending Inventory 0 -75 0 0 -75 -25
Over/Under recovery of Fix O/H 0 0 0 0 -20 10
Cost of Sales 375 300 450 375 330 410
Gross Profit/Loss 225 180 270 225 230 230
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Non-manufacturing Cost -50 -50 -50 -50 -50 -50
Net Profit 175 130 220 175 180 180
Reconciliation Statement
April May June July August September
Profit as per Absorption costing 175 130 220 175 180 180
+ op stk @ FOH rate at op. date 30 30
- Closing stock @ FOH rate at
cl. date 0 30 0 0 30 10
Profit as per marginal costing 175.00 100.00 250.00 175.00 150.00 200.00
Problem 2
1.
a. BEP in units and in GBP
Particulars Formula Amount
Fixed cost 180000
Contribution per unit 12
Breakeven point (in
units)
Fixed cost/ contribution
per unit 15000
Fixed cost 180000
Contribution margin 30.00%
BEP (in revenues)
Fixed cost/ Contribution
margin ] 600000
b. CMR
Particulars Amount
Total revenue 540000
Variable cost 378000
Contribution
margin ratio
Total revenue- variable cost/
Total revenue 30.00%
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2b.
Calculating contribution margin ratio in case of new installation of machine
In case of new machine is installed
Fixed cost 416000
Contribution per unit 26
Break even point (in
units) Fixed cost/ contribution per unit 16000
Fixed cost 416000
Contribution margin
BEP (in revenues) Fixed cost/ Contribution margin ]
Total revenue 540000
Variable cost 189000
Contribution margin
ratio
Total revenue- variable cost/
Total revenue 65.00%
2c.
In case company expects for selling 20000 units for next month
Revised profit @ sales of 20000 units
Sales 20000*40 800000
Less: Variable
cost 20000*28 560000
Contribution 240000
less: fixed cost 180000
profits 60000
Income statement in case of machine installed and not installed
Revised profits in case of
installation
Sales 540000
Less: Variable cost 189000
Contribution 351000
less: fixed cost 416000
profits -65000
Revised profits in case of not
installed
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Sales 540000
Less: Variable cost 378000
Contribution 162000
less: fixed cost 180000
profits -18000
Interpretation- the above scenario shows that installation of machinery for the firm is
not profitable as fixed costs are too high and generated a huge loss.
Working notes:
Working note
Particulars Cost per unit
Sales 40
Less: Variable cost 28
Contribution per unit 12
Old fixed cost 180000
Revised fixed cost 18000+236000 416000
Old variable expenses per unit
Revised variable cost per
unit 14 28-50%
Sales 40
Less: Variable cost 14 28
Contribution per unit 26 14
TASK 3.
P4 Advantages and disadvantages of different kind of planning tools of budgetary control.
Budgetary control can be defined as a process in which managers of an organisation set
different standard to complete a task with the help of Budget. It works as an prediction for
organisation after this actual performance of organisation is compared with estimated budget
(RW Hiebl, 2013). This is done is order to know that organisational actual performance is
according to estimated budget or not. Due to this it is easy for them to adopt changes which
increases probability of earning high profits for a longer term period. In present scenario there
are several tools that are related with budgetary control along with their advantages and dis-
advantage are mentions as follow:
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Static budget- Static budget refers to those budgets that are not flexible. It determines
that they are fixed in nature. This kind of budget are not change because of change in sales of
products. As static budget are complex so they are suitable for those which remain constant for
longer time period. Further this budget is beneficial for Alpha Ltd as it helps to accomplish their
goals within shorter time period. Merits and de-merits of this budget are mention as below:
Merits
This budget remains same for longer time period so there is no need to update them. This
results it helps organisation to save their time and cost. Static budget are easy to monitor because
they are not modified according to need of market and remain same (Soin and Collier, 2013).
De-merits
The major dis-advantage of static budget is lack of flexibility. It results that organisation
is not able to adopt essential changes which increases their sale. Moreover this budget are
inappropriate as they does not provide any effective way to record their expenses.
Zero based budget- Zero based budget is an effective method of budgeting in which all
expenses are identified and justified for new period. This process starts from zero and then each
function of organisation is analysed for its needs and costs. In context of Zero based budget helps
top level management to implement budget into functional areas of organisation (Veprauskait
and Adams, 2013). As in this first cost of organisation are grouped and then it is measured
against previous and current expectations. Advantages and dis-advantage of this are mention as
follow:
Merits
With implement of zero based budget it is easy for organisation to bring efficiency in
their budget results. This helps an organisation to remove those activities that are not justified
within budget.
Demerits
In order to make an effective zero based budget organisation need to invest too much
time and money in organisation. This is not possible for single individual to formulate zero based
budget. More number of team member is required to make this budget.
Flexible budget- This type of budgets are modified and adjust themselves according to
changes in volume and activity. As compare to other budget flexible budget are more beneficial
for organisation and management. Cost of a product or service will change according to volume
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