Comprehensive Management Accounting Report: ABC Ltd Financial Analysis

This report provides a comprehensive analysis of management accounting principles and their application within ABC Ltd, a manufacturing business. It begins with an introduction to management accounting, its systems, and essential requirements, including inventory management, cost accounting, and price optimization. The report then delves into various reporting methods, such as account receivable and performance reports, and evaluates the benefits of these systems within the organization. Task 2 focuses on costing methods, calculating production costs using both marginal and absorption costing techniques, and producing budgeted profit and loss statements. The report also examines planning tools, including their advantages and disadvantages, and their role in budgeting and forecasting. Finally, it explores how organizations adapt management accounting systems to address financial problems and achieve sustainable success, evaluating the role of planning tools in solving financial issues.

Accounting

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Explanation of management accounting and essential requirements of its systems...............1
2. Different methods that are used for management accounting reporting..................................2
3. Evaluation of benefits of management accounting systems and their application within the
organisation..................................................................................................................................3
4. Critical evaluation of the way in which different systems and reports of management
accounting reports are integrated with organisational processes.................................................3
TASK 2............................................................................................................................................4
1. Calculation of production cost per unit, total production cost and total cost of sales for
January.........................................................................................................................................4
2. Application of techniques and production of budgeted profit and loss statement for January7
TASK 3............................................................................................................................................7
1. Explanation of different planning tools along with their advantages and disadvantages........7
2. Analyse the use of different planning tools and their applications for preparing and
forecasting budgets......................................................................................................................9
TASK 4............................................................................................................................................9
Compare how organisations are adapting management accounting systems to respond to
financial problems.......................................................................................................................9
Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success..........................................................................................11
Evaluate how planning tools for management accounting respond appropriately for solving
financial problems to lead organisations to sustainable success...............................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is a technique which is used in businesses for assessing business
performance with the help of internal reports. If the managers will not be able to generate them
in systematic manner, then it may result in unattained objectives of business. For all the
managers it is very important to be focused with it as it can help them to reach to long as well as
short term business goals as it facilitates the process of strategy formulation (Alsharari and
Abougamos, 2017). While planning to improve organisational performance it is very important
for all the managers to make sure that they are focused with it. Present report is based upon ABC
Ltd which is operating business under manufacturing industry and it is a medium sized entity.
This report covers various topics that includes management accounting, its systems, approaches
and techniques. Apart from this, different types of planning tools along with the way in which
businesses can use management accounting to respond financial problems are also discussed in
this report.
TASK 1
1. Explanation of management accounting and essential requirements of its systems
Management accounting could be defined as the technique which is used by businesses
for the purpose of generating internal reports and determine performance of the company. It is
very important for the businesses to make sure that they are focused with use of it as it will help
the management teams to make sure that they are formulating effective strategies. ABC Ltd
which is a medium sized enterprise also uses it as it helps the internal stakeholders to get aware
of actual situation of business. There are various types of management accounting systems that
are used within the organisation. Discussion of all of them is as follows:
Inventory management system: It is used by businesses for keeping track record of the
inventory which is used for carrying out operational activities in systematic manner. In ABC it is
used by managers for assuring that it is having sufficient goods to perform the manufacturing
activities of business. It is essentially required for the entity as by using it the management of the
company will be aware of that they are having enough inventory or not (Atmoko and Hapsoro,
2017).
Cost accounting system: It is a system which is used by businesses for the purpose of
analysing costs of all the items that are produced within the year. In ABC Ltd it is used for the
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purpose of making sure that it gets details of all the manufacturing related costs so that funds
could be arranged according to them. The essential requirement of it for the organisation is that it
facilitate the business to get information of the cost which may take place in future (Baños
Sánchez-Matamoros, 2020).
Price optimisation system: Under this type of system optimum price for all the products
that are sold by the entities are analysed so that the satisfaction level of all the customers could
be met. The managers in ABC are using it for setting appropriate price for all the items that are
manufactured by it so that it can attract large number of customers. The main requirement of it
for the business is that it can help to determine the best suitable price for the products that can
met expectation level of clients.
Job costing system: It is used by businesses for the purpose of analysing the cost of each
and every job which is performed for the purpose of meeting expectations of clients. In ABC Ltd
it is used by managers for making sure that they keep record of all the jobs that are performed on
the basis of specifications of clients. The main requirement of it for the business is that it can
help the managers to analyse cost of each job which is performed by the entity separately (Boyd
and Pitre, 2020).
2. Different methods that are used for management accounting reporting
Management accounting reporting is the process of recording internal information in
different reports so that the internal stakeholders can determine the position of business. In ABC
Ltd the managers are paying attention towards it as it can help to generate detailed reports for the
organisation. There are various reports that are generated by the organisation which are described
below:
Account receivable report: It is used by businesses for recording information of the
payment which is due by customers. In ABC Ltd it is used for the purpose of analysing total
outstanding amount which will be recovered from the customers in future. It is beneficial for
managers as it can help them to determine actual owed amount by the debtors (Daniyar and
Ruzanov, 2019).
Performance report: This report is used in businesses to record information of
performance of employees and business so that strategic decisions for future could be
formulated. In ABC Ltd it is used by the managers to analyse that business is able to meet the
desired level of success or not. The main benefit of it for the entity is that it can help to
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determine that the employees are performing appropriately so that bonus could be offered to
them accordingly.
Budget report: It is used in businesses for assigning funding to all the operations for the
purpose of proper execution of all of them. With the help of it, managers in ABC try to analyse
that the managers are assigning sufficient funds to all the departments according to their
requirements or not. It is beneficial for the enterprises because with the help of it the companies
will be able to perform operational activities in monetary resources that are assigned to them.
3. Evaluation of benefits of management accounting systems and their application within the
organisation
There are various types management accounting systems that are used by the managers of
ABC Ltd. Discussion of benefits of them along with application are discussed below:
Inventory management system: It is used in ABC Ltd by the managers for making sure
that they have detailed information of the inventory which is used for performing operations as it
is beneficial for execution of all the activities systematically (Datar and Rajan, 2018).
Cost accounting system: In ABC Ltd it is used by management team because it is
beneficial in determining cost of each and every activity performed by the enterprise.
Price optimisation system: Managers of ABC Ltd are using it for assuring that best
suitable price for all the products are determined as it is beneficial for meeting expectations of
customers.
Job order costing system: It is applied in ABC Ltd because it facilitates managers to
analyse cost of each and every job performed according to specifications of customers.
4. Critical evaluation of the way in which different systems and reports of management
accounting reports are integrated with organisational processes
In ABC Ltd the managers are using different types of management accounting reports and
systems. All of them are integrated with organisations processes. For example, inventory
management system is used by the managers for analysing that the entity is able to keep
sufficient goods for performing all the operations in systematic manner. On the other hand,
account receivable system is used for analysing the owed amount of different customers. For
example, if the managers of the organisation will not be able to analyse actual outstanding
amount then this report could be used by them to determine it (Feng and Ho, 2016).
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TASK 2
1. Calculation of production cost per unit, total production cost and total cost of sales for January
Marginal costing: It is a management accounting technique which is used by businesses
to determine the cost of additional unit which will be produced in future. If the entities will not
be able to pay attention towards analysis of it then it may result in increased cost of all the units
that are manufactured (Herasymovych, 2017). In ABC Ltd the managers are using it to analyse
the marginal cost and the application of it for the entity could be understood with the help of
following calculation:
Calculation of cost per unit:
Cost per unit
Marginal costing Cost per unit Total cost
Direct Material 10 180000
Direct Labour 20 360000
Variable Production Overhead 5 90000
Total production cost 35 630000
Income statement under marginal
sales 900000
Less: Marginal cost of sales
Direct Material 180000
Direct Labour 360000
Variable Production Overhead 90000
Closing stock 100000
Contribution 170000
Less: Fixed production cost 100000
Net profit 70000
Absorption costing: Under this technique of management accounting the businesses are
required to make sure that all the costs that have taken place within the organisation are
recovered from the revenues that are generated from selling of those units. With the help of it,
the company will be able to maintain the profits (Kumarasinghe and Haleem, 2020). It is also
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used in ABC Ltd by the managers so that they can analyse that all the costs are recovered from
revenues of the same units. The calculation of profit with the help of this technique for the
organisation is as follows:
Absorption costing Cost per unit Total cost
Direct Material 10 180000
Direct Labour 20 360000
Variable Production Overhead 5 90000
Fixed production cost 6.25 112500
Total production cost 41.25 742500
Income statement under absorption
sales 900000
Less: Cost of sales
Direct Material 180000
Direct Labour 360000
Variable Production Overhead 90000
Fixed production cost 112500
Closing stock 100000
Gross profit 57500
Add: Under absorption cost 5000
Net profit 52500
When scenario changes:
sales price 50
Closing stock 3000
sold units 19000
Production 20000
Marginal costing:
Cost per unit:
Cost per unit
Marginal costing Cost per unit Total cost
Direct Material 10 200000
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Direct Labour 20 400000
Variable Production Overhead 5 100000
Total production cost 35 700000
Income statement:
Income statement under marginal
sales 1000000
Less: Marginal cost of sales
Direct Material 200000
Direct Labour 400000
Variable Production Overhead 100000
Closing stock 150000
Contribution 150000
Less: Fixed production cost 100000
Net profit 50000
Absorption costing:
Cost per unit:
Absorption costing Cost per unit Total cost
Direct Material 10 200000
Direct Labour 20 400000
Variable Production Overhead 5 100000
Fixed production cost 6.25 125000
Total production cost 41.25 825000
Income statement:
Income statement under absorption
sales 1000000
Less: Cost of sales
Direct Material 200000
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Direct Labour 400000
Variable Production Overhead 100000
Fixed production cost 125000
Closing stock 150000
Gross profit 25000
Add: Under absorption cost 2500
Net profit 22500
By analysing the above calculations, it has been evaluated that if the entity will use
marginal costing then the profits will be high therefore it should be used by the business. If the
scenario will be changed then it will reduce the profits so the company should not increase
production.
2. Application of techniques and production of budgeted profit and loss statement for January
There are various types of techniques which could be used by businesses for the purpose of
analysing profits and formulating the income statements. All these techniques are discussed
below in context of ABC Ltd:
Standard costing: It is used in businesses for the purpose of determining variation
between actual and budgeted cost so that the ability of managers to forecast future expenses
could be analysed. By using it ABC Ltd will be able to perform all its operational in systematic
manner as it will facilitate it to analyse variation between actual and standard costs.
Historical costing: Under this technique of management accounting the businesses are
required to record all the assets and liabilities in the books on their actual value rather than
market value. By using it ABC Ltd will be able to analyse actual performance of business along
with its financial stability (Kuurila, 2016).
TASK 3
1. Explanation of different planning tools along with their advantages and disadvantages
Budget can be said to be the life blood of a business. In simple terms, it is the financial plan
developed for an organisation with the motive of making sure that the expenses of an entity do
not exceed the funds available with the company. Besides this, budgetary control can be defined
as the system whereby the budgets are developed for future course of time and contrasted against
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the actual performance given by the firm to reach at the variances. Now, it has been recognised
that there are several planning tools which are used by ABC Ltd. for carrying out budgetary
control (Li, 2018). These are critically discussed and evaluated as follows:
Zero based budget
Zero based budgeting in context of management accounting is concerned with the
preparation of budgets from the scratch, i.e., with a zero base. This encompasses re-evaluation of
every line item of cash flow statement along with the justification of all the expenses that need to
be expended by the department.
Advantages: This is helpful in effective and optimal allocation of resources. It drives
coordination and communication within the bounds of the company enabling streamlining of the
business operations. Further, it eliminates unnecessary or outdated activities.
Disadvantages: This is a very time consuming method, consuming time more than in the
case of traditional budgeting. For the preparation of zero based budget, extensive training needs
to be arranged for the manager of the company, increasing the overall cost.
Activity based budget
This can be said to be a budgeting method whereby the preparation of budgets is done by
making use of Activity based costing after consideration of overhead costs.
Advantages: This method of budgeting allows a more effective as well as relevant allocation
of overhead costs. Apart from this, it allows a much more effectual control of the overhead costs.
Further, this method further enables better management of activities (Mahajan and Deobagkar,
2020).
Disadvantages: This method is centred on the phenomenon of change management which
can lead to the emergence of resistance. In addition to this, this system works only in an instance
whereby the ABC system is up-to-date.
Capital budget
This method of budgeting circumscribes capital expenditure which is inclusive of extensive
outflow and inflow of funds for financing of the investment projects. In other words, it can be
said to be a procedure by way of which an organisation takes the decision related to whether or
not investment in project should be done.
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Advantages: This system provides due assistance in gaining knowledge of the risks and its
outcomes. In addition to this, this method enables to take decisions related to investment within a
project by taking into due consideration all the essential and necessary factors.
Disadvantages: The decisions taken by virtue of this method of budgeting is in long term
and thus cannot be reversed in any way. Apart from this, the techniques used to carry out capital
budget are assumed and not exist in reality (Nik, Abdullah and Said, 2016).
2. Analyse the use of different planning tools and their applications for preparing and forecasting
budgets
There are various types of planning tools that are used in ABC Ltd. these are zero based,
activity based and capital budget. All of them facilitate the organisation to forecast and prepare
budget so that success in future could be attained. With the help of them, managers try to analyse
the future incomes and expenses and then formulate decisions to assign budgets to different
departments (Shareia, 2016).
TASK 4
Compare how organisations are adapting management accounting systems to respond to
financial problems
In the business environment, management accounting systems are defined as important aspects
which should be consider while running a business as it supports to make the right business
decision. While running a business many financial problems arises, where it is important for
management to solve them by using best alternatives (Renz, 2016). ABC company is facing
different types of financial problem in their business that are as explained:
Improper cash flow management: For organisation it is important that prepare the cash
flow statement and manage them properly. If organisation is not able to arrange and organise
the financial records then a challenge will be occurred as low profitability. ABC Ltd is
facing the financial problem due to lack of cash flow management and not recording
financial information that needs to be solve.
Late payment by clients: The business mainly depends on creditors and debtors who
manages the activities by payment and receiving the money. In case if clients has deny and
make the payment late then financial problem arises in business. ABC Ltd can face the
challenge as customers are making late payment for buying the products.
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Financial governance: This stating as governmental authority who formulates different
regulations and laws that helps to run a business. This is the way of collecting, managing,
monitoring and controlling the financial information which helps to run a business
effectively in challenging environment.
Tools which are used to identify the financial problem
KPI: This means key performance indicator which is key measurable value uses to know
the financial and non-financial performance. This can be used by ABC Ltd company to
identify the gap between different activities and make the right business decision by
managing and organising all information.
Benchmarking: This tool is related to operation and management which can help to
complete the task and attain competitive benefits by comparing with other company. ABC
Ltd can use this tool for comparing with other company and formulate planning accordingly
that helps to solve the problems (Sekerez, 2017).
Comparison of organizations-
Basis ABC Morrison
Financial Problem This organisation is facing the
financial problem due to
difference in cash flows that
reduces profitability.
This is larger company that is
facing the financial problem due
to late payment by customers.
Identification of problem KPI tool is uses to identify
problem and uses of cost
accounting system states the
areas where cost have increases
so it can be handle properly.
The organisation is using
Benchmarking tool by
comparing with other company.
By using the price optimisation
system it can set retail prices
and get the proper records of
unpaid customers.
Management Accounting
System Used
For solving the financial
problem cost accounting
system is uses that can help to
maintain proper records of
For solving problem price
optimisation system is uses that
helps to set affordable prices
and receive the payment on
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