Management Accounting Report: Financial Problem Solutions

This report delves into the core concepts of management accounting, examining its role in internal decision-making and policy formulation within organizations. It explores the essential components of management accounting systems, including planning, organizing, controlling, and decision-making processes. The report details different costing systems such as actual, standard, and normal costing, as well as inventory management techniques like FIFO and LIFO, and job and batch costing. Furthermore, it analyzes various reporting methods employed in management accounting, such as budget reports, accounts receivable reports, and job cost reports, highlighting their importance in decision-making, cost reduction, and enhancing financial returns. The report also provides a practical application by calculating costs using marginal and absorption costing methods and preparing income statements. Finally, it discusses the merits and demerits of budgetary controls and how management accounting systems aid companies in addressing financial problems.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1:Demonstrating management accounting and requirements of systems of management
accounting...................................................................................................................................1
P2: Different methods used in management accounting reports.................................................3
TASK 2 ..........................................................................................................................................5
P3: Calculating cost using appropriate techniques and preparation of income statement..........5
TASK 3 ...........................................................................................................................................7
P4: Various types of budgets and their merits and demerits.......................................................7
TASK 4 ..........................................................................................................................................9
P5: Adapting management accounting systems in responding to financial problems................9
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting is the process of accounting that is implemented in the
organisations for the internal management of the companies. The managers and supervisors of
the company uses the reports made by the management accountants for the decision making and
for formulating policies for the organisations. Management accounting reports consists of the
summaries of financial statements of the company, and the future economic and non economic
activities that may be implemented in the markets in future. The management accounting
reporting is quantitative in nature. This project report will discuss about the the various
management accounting systems and their requirements in the companies. Methods used in the
reporting of management accounting reports( Amoako, 2013 ). Analysing the techniques that are
used in the estimation of costs using marginal and absorption costing in preparing statements of
profit and loss. The merits and demerits of using planning tools that are utilised in budgetary
controls. And finally analysing how the management accounting systems helps the companies in
responding to financial problems.
TASK 1
P1:Demonstrating management accounting and requirements of systems of management
accounting
Management accounting, as the name implicates is the accounting that is done for the
internal management of the company. The management accounting is done by analysing and
summarising financial statements of the company and also uses the estimations of the future
economic and non economic policies in its reports that may be implemented in the markets and
which will impact the company.(Management accounting and its importance [Online]) The
managers then uses these reports in the decision making process and formulation of policies for
the companies according to future trends of the market. The essentials of management
accounting systems are discussed as under:
Planning: Planning is done by every company for the attainment of the objectives of the
organisation. It is done for the achievement of the short term as well as long term objectives of
the companies( Bushee, Carter, and Gerakos, 2013 ). The management accounting process helps
the mangers in the formation of the different budgets that are required to analyse the estimates of
costs and expenditure in the operations. These budgets also assists in setting performance
standards for the company as a whole and for the individual employees.
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Organizing: This organisational process deals with managing the people of the company
in order to formulate well defined framework for the organisation and defining the roles and
responsibilities for each department and employee. This process assists in creating and
maintaining a proper hierarchy for the workplace and this is done with the help of management
accounting.
Controlling: This process of the companies deals with measuring the performances of
the departments and employees in the organisation by comparing their actual performances with
the standard performances as per pre-stated in the budgets of the companies. The controlling
process also measures the actual sales of the companies with standard sales then finding the
variations and taking corrective measures if required. This is all done because of the
management accounting as it helps in the preparation of budgets.
Decision making: The main purpose of management accounting reports is to assists
internal managers of the companies in the decision making process and making policies and
regulations for companies taking into consideration the market trends that may impact the
operations of the company by using the management accounting reports.( Chiarini, 2012 )
Different Costing systems:
Actual costing: This system of costing involves the measurement of actual expenditure
that is incurred in the process of production and other operations. This method of costing
considers the costs that is incurred in each job including the costs related to direct labour, direct
material and other overheads.
Standard Costing: This costing system estimates the standard cost that should be
incurred in the production process . The standard cost of various operations are analysed in the
company for different overheads such as material , labour etc. and then these are uses as
comparing tool for analysing the actual performances.
Normal costing: This method considers the original rates that are assigned to the
manufacturing heads such as labour, material etc. at the initial stage of the year. The material and
labour are assigned the actual rates and only overheads rate is fixed as earlier determined.
Inventory management systems: The management of inventories is very essential in the
organisations as it is necessary in the efficient production process and meeting customer
demands. The raw material inventories management helps companies to provide production
department with the goods as and when required without hindering the process. And finished
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goods inventory is managed for meeting customers satisfaction and market demand. The various
inventory management process that is used in companies are as under:
FIFO: This technique of inventory management implies that the goods that came into the
stock of company initially will be cleared out firstly from the stock.( Harris, and Mongiello, 2012
) According to which, the cost of goods sold will represent that inventory that came in first and
the inventory that came in later will be transferred to closing stock. US-GAAP and IFRS both
allows the use of this system.
LIFO: This inventory management system implies that if the goods are coming late into
the stock then they will go out first from the stock. This means that the cost of goods sold will
represent those goods that came in later and the earlier purchased goods will move into closing
inventory. The LIFO system is restricted under IFRS but is allowed in US-GAAP.
Job Costing System: This system allocates the production costs related to the specific product
or batches of products. The job costing system considers the cost of direct material and direct
labour that is incurred in producing that particular product. The internal management analyses
the net earnings that will be realised from the production of that product and accordingly they
determine the cost that can be expensed in the production.
Batch costing: In this type of costing the cost is determined for the batch of products.
And every batch includes the identical products but each batch is will be somewhat different
from other batches.
Contract costing: This costing involves the cost that is incurred in the specific contracts
from different customers.
Service costing: This costing determines the cost involved in providing services to the
customers.
P2: Different methods used in management accounting reports
Every Transaction whether its nature is financial or non financial and the future economic
and non economic policies these all are required to included in the reports that are made my
management accountants for future purposes. Which is why it becomes important for the
companies to make these reports for enhancing the operations of the companies. The various
reporting mechanisms that are adopted by the organisations are as follows:
Budget report: The budgets are prepared in every companies and in each department so
as to make the estimation about the expenses that will occur in the operations in each one of
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them. The preparation of these reports are necessary for the organisations in order to make
estimation of incurred during the previous financial year. Thus it will help the companies in
making estimation regarding the future scenario of business activities to the concerned persons.(
Juras, 2014 )
Accounts receivable report: this report makes an analysis of the total debtors that the
company have in its balance sheet. It measures the amount that is to be received from them and
on which date. This report also quantifies the debtors which are not paying their debts on the due
date and bad debts. Which helps the companies in tightening their collection period for the
upcoming periods. ( Williams , and Seaman, 2010)
Job cost reports: This report provides the estimates about the information regarding the
total sales or cost regarding the specific product or a batch of product. This report informs about
the profitability in the particular job function and estimates about the cost in comparison so that
the companies can decide regarding the capital that should be invested in the project. Thus this
reports helps in the allocation of capital according to the profitability of project over the period.
Importance of information of management accounting reports:
Decision making: The management accounting reports helps the managers in getting
information regarding financial and non financial matters as well as future economic and non
economic activities. These informations helps the internal management in making important
decision regarding the operations of the company. The different reports made under management
accounting helps in taking decisions regarding different things such as accounts receivable
reports helps in taking decision for tightening or loosening the collection periods according to
circumstances.
Cost reduction: These reports assists internal management of the company in
anticipating the problems that can be confronted in future and therefore it helps the in
formulating effective plans to eliminating those issues and this in turn helps in reduction of costs
that would otherwise be confronted in future.
Increases financial returns: The management accounting reports such as budget reports
provide summary of financial statements of the company and thus it helps in analysing and
interpreting projects that are profitable and suitable for the company according to the future
markets trends. These projects increases the profits of the company and ultimately the wealth of
the shareholders.( Klychova, Faskhutdinova, and Sadrieva, 2014 )
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TASK 2
P3: Calculating cost using appropriate techniques and preparation of income statement
Cost: This is that amount which is to be invested by the company in the production
process for producing the quality goods and providing services to the customers. This is the
amount that is incurred in each activity initiating from the production process till the product is
sold to the final customers.
Marginal costing: This is the cost that incurs when the company decides to the extra
production. It is the additional cost that is incurred when an additional unit of product is
manufactured. The marginal costing includes the variable cost of production and does not
include fixed costs as it remains constant. The additional production is beneficial for the
companies till the profit from producing that additional product is higher then the cost involved
in manufacturing.( Kurunmäki, Lapsley, and Miller, 2011)
Absorption costing: This method of costing takes into consideration the actual cost of
production, the absorption cost takes into account both variable and fixed cost of production.
Because the absorption costing considers variable as well as fixed cost the profitability under this
costing method comes out to be lower as compared to marginal costing method.
Calculation through marginal costing using
Income statements
Particulars Amount
Sales 35*500 17500
Less:
Production cost 6+5+2+3 = 16*500 8000 8000
Contribution 9500
Less:
Variable sales overhead 500*1 500
Selling and administrative cost expenses (800+400) 1200 -1700
Total Profit / Loss 7800
Computation of Net profit by using absorption costing
Income statements
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Particulars Amount
Sales 35*500 17500
Less:
Production cost 6+5+2 - 7800
Closing stock: 100*13 - 1300 -6500
Gross profit 11000
Less:
Variable sales overhead 500*1 500
Fixed overhead -1800
Selling and administrative cost expenses (800+400) -1200 -3500
Total Profit / Loss 7500
Income statement as per marginal costing
Amount
Sales value (35*600) 21000
less:
Cost of Production (6+5+2) -9100
closing stock (100*13) -1300
variable overheads -7800
Contribution 13200
less:
variable sales overheads (600*1) -600
fixed cost -2000
Admin & selling cost (700+600) -1300
-3900
Total 9300
Income statement as per absorption costing:
Amount
Sales value (35*600) 21000
less:
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Cost of Production 9600
Gross Profit 11400
LESS:
Fixed and variable cost:
variable sales overheads (600*1) 600
Admin & selling cost (700+600) 1300
Less: over absorbed fixed production overheads -100 -1800
Net profit 9600
Marginal costing Absorption costing
Marginal costing only considers variable cost
in the additional production.
Absorption costing considers both variable as
well as fixed cost in the additional production.
Profitability is higher in case of marginal
costing as product cost only includes variable
cost.
Profitability is lower as compared to marginal
cost because variable and fixed cost both are
included in the price of the product.
TASK 3
P4: Various types of budgets and their merits and demerits
There are various kinds of projects which are need to be prepared by the managers of the
companies with the attempt to increase the efficiency of the businesses. These budgets include
master budget, flexible budget, operational budget, cash flow budget etc. The description of such
budgets are as under:
Master budget: This budgets assists in forecasting the future sales, level of production,
required capital investment in executing future business operations.( Nakajima, 2010) The
master budgets are interrelated with budgets of various departments of the company. These
budgets are prepared with the purpose creating effective plan and setting performance objectives.
 Advantages: The master budget helps in the estimation of overall cost that is incurred in
production.
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 Disadvantages: These budgets are prepared for a specific activity or purpose thus
reliability and accuracy of information is reduced.
Operational Budget: This budget includes revenue and cost that is involved in the day to day
operations of the business activities. The costs that are considered in these budgets are overheads
and administrative costs are required to be determined by the company management.
 Advantages: This budget covers the cost and revenue that is incurred in day to day
operations. It helps in decreasing expenses incurred in future business activities.
 Disadvantages: this operational budgets requires more time for its preparation.
Cash flow Budget: This budget assists the internal management in managing the cash of
the organisations. The budget determines the cash inflow and outflow of cash in the regular
operations of the business. Therefore for the smooth functioning of day to day operations , the
management tries acquire funds from those sources who have the capacity of repayment in future
. The main purpose of preparing these budgets is to ensure that sufficient funds are available in
operating business activities. ( Unerman, Bebbington, and O’Dwyer2010)
 Advantages: the budgets assists the company in managing the cash in the business and
keeping records of inflow and outflows of cash so as to maintain sufficient liquidity in
business for meeting short term obligations.
 Disadvantages: It becomes critical for the managers to keep control on cash outflow as
the chances of wastages will be more.
Fixed Budget: This budget is prepared at the initiation of the accounting year for recording the
expenses that are fixed in nature. These budgets cannot be modified according to sales , whether
they increase or decrease. The budget does not allow the change of financial plans for executing
business activities.( Nixon, and Burns, 2012 )
 Advantages: This assist small businesses in measuring their growth and profitability.
 Disadvantages: this budget cannot be modified for the factors such as prices of raw
material , rate of interest and degree of competition.
Flexible budgets: These budgets are modified and enhanced with the changes in levels of sales
or business activities of business. These budgets can be modified anytime whenever the
managers require the need of change.
 Advantages: This is helpful in managing possible outcomes by making changes into it as
and when the need arises.
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 Disadvantages: The additional funds are required for the execution of operations of
business of the managers found the need of adjustment. Thus, it will rise the project cost.
Different Pricing systems :
Cost plus pricing: This is an efficient method of pricing in which the costs related to
factors such as direct material , labour and other overheads are included in prices of products and
services.
Full cost pricing: In this pricing strategy company determines the price of product and
service on the basis of direct cost included in the production of various units.
Marginal cost pricing: It is the additional cost which is incurred when the additional
units are produced by the company and then price is determined according to the additional cost.
Different costing system:
Direct costing: In this this costing method includes the cost that are changed with the
change in the production volume of the product. It includes various components such as direct
labour, direct material etc.
Standard costing: This system determines the standard cost that may be incurred in the
producing products. The standard costing is done in the budgets of the company. This cost is
then used to compare the actual performances of the various departments and the individual
employees.( Tessier, and Otley,2012)
TASK 4
P5: Adapting management accounting systems in responding to financial problems
Key performance Indicators (KPI): This performance indication system is considered
to be an effective technique in measuring and comparing the actual performances of the
employees with the pre specified standard performance and assists internal management in
finding the variations if any, and then rectifying the issues by taking corrective actions. KPI can
be used at various levels of organisation for evaluating the success and capability in attaining
desired objective.( Nørreklit, 2014 )
Balance scorecard approach: The approach is useful in alignment of business activities
according to the objectives and policies made by the organisation such that each activity of the
business are evaluated and coordinated. This can be achieved by providing training programs to
the employees so that they can perform the allotted task in an efficient and effective manner.
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The perspective of balance card approach are discussed below:
Financial: The main purpose of any business entity is to attain a strong financial position
in the market , and this can be possible only when the funds are allocated to profitable projects
are it is utilised efficiently.
Customers and stakeholders: The duty of every business is to provide good quality
product and services to the customers and increasing the wealth of the shareholders of the
company.( Quagli, 2011 )
CONCLUSION
It has been concluded by the above research on the project management accounting , that this
form of accounting is very important for providing necessary information to the internal
management so that they can make decisions and formulate better policies that are in relation
with the trends of the market. This project report discusses about various management
accounting reports such as budget reports , accounts receivable report which helps the companies
in managing the operations and increasing the profitability of the organisation. The use of
marginal and absorption costing in formations of statement of profit and loss. And at the end
discussion about tools that helps in responding to financial problems such as key performance
indicator and balance scorecard approach to prevent financial problems.
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REFERENCES
Books and Journals:
Amoako, G. K. , 2013. Accounting practices of SMEs: A case study of Kumasi Metropolis in
Ghana. International Journal of Business and Management. 8(24). p.73.
Bushee, B. J. , Carter, M. E. and Gerakos, J., 2013. Institutional investor preferences for
corporate governance mechanisms. Journal of Management Accounting Research,
26(2), pp.123-149.
Chiarini, A., 2012. Lean production: mistakes and limitations of accounting systems inside the
SME sector. Journal of Manufacturing Technology Management. 23(5). pp.681-700.
Harris, P. and Mongiello, M., 2012. Accounting and Financial Management. Routledge.
Juras, A., 2014. Strategic Management Accounting-What Is the Current State of the Concept?.
Economy Transdisciplinarity Cognition. 17(2). p.76.
Klychova, G. S. , Faskhutdinova, М. S. and Sadrieva, E.R., 2014. Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences. 5(24). p.79.
Kurunmäki, L., Lapsley, I. and Miller, P., 2011. Accounting within and beyond the state.
Nakajima, M., 2010. Environmental management accounting for sustainable manufacturing:
establishing mangement system of material flow cost accounting (MFCA).
Nixon, B. and Burns, J., 2012. Strategic management accounting.
Nørreklit, H., 2014. Quality in qualitative management accounting research. Qualitative
Research in Accounting & Management. 11(1). pp.29-39.
Quagli, A., 2011. Goodwill accounting as a missing link between financial and management
accounting: literature review and research agenda. Financial reporting.
Tessier, S. and Otley, D., 2012. A conceptual development of Simons’ Levers of Control
framework. Management Accounting Research. 23(3). pp.171-185.
Unerman, J., Bebbington, J. and O’Dwyer, B., 2010. Introduction to sustainability accounting
and accountability. In Sustainability accounting and accountability (pp. 20-35).
Routledge.
Williams, J. J. and Seaman, A. E. , 2010. Corporate governance and mindfulness: The impact of
management accounting systems change. Journal of Applied Business Research. 26(5).
p.1.
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