Unit 5: Management Accounting Report for Capco Financial Services

This report, prepared by a junior accountant at Capco, offers a comprehensive overview of management accounting. It begins with an introduction to management accounting and its various types, including inventory management, cost accounting, and job costing systems, along with their specific requirements. The report then delves into different methods of management accounting reporting, such as cost reports, budgetary reports, inventory reports, and performance reports, while critically evaluating the adoption of these systems. Furthermore, it demonstrates the preparation of income statements using both marginal and absorption costing techniques, accompanied by interpretations and variance analysis. Finally, the report explores the use of planning tools within a budgetary control system and compares the adoption of various management accounting systems in response to financial challenges, offering valuable insights for financial decision-making at Capco.

Unit 5 – Management
Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
SCENARIO 1...................................................................................................................................1
Explaining management accounting and various types of management accounting system along
with their requirements....................................................................................................................1
Explaining different methods of management accounting reporting...............................................3
Showing preparation of income statement using marginal and absorption costing techniques.....5
Explaining different types of planning tools of budgetary control system.................................8
Comparing the adoption of various management accounting systems as to respond to various
financial problems..........................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting can be defined as the branch of management that concerns with
the analysis of cost related activities of the business organisation (Otley, 2016). In this branch,
the professional knowledge and skills are used for preparation of a statement showing all the
accounting informations for helping the managers in their decision making activities. Capco is a
medium sized company in UK. The company was founded in 1998 for providing financial
consultancy services to its customers. The present study shows a report of junior accountant of
Capco which includes a brief introduction about the management accounting system along with
its various types management accounting and their requirements in the company. The study also
provides information about various methods of management accounting reporting and various
budgetary control planning tools. It also shows a comparison about the responding of various
management accounting systems for the purpose of responding various financial problems.
Further, the study also shows various calculations for the purpose of showing the use of various
management accounting techniques.
SCENARIO 1
Explaining management accounting and various types of management accounting system along
with their requirements
Management accounting
“ Management accounting can be defined as a process of applying professional
knowledge and skills for the purpose of preparing various accounting statements. These
statements are being prepared for the purpose of providing accounting informations to the
managers (Maas, Schaltegger and Crutzen, 2016). It is a process through which each accounting
information is being provided in such an efficient way so that it could help managers in
developing strategies for enhancing the financial performance of the business.”
management accounting system
Management accounting system is a set system that provides a set procedure through
which various financial statements and other financial reports are prepared in such a way so that
they can determine the financial performance of the business for the purpose of using it in their
decision making and strategic development procedure.
Types of management accounting system:
1

There are numerous types of management accounting systems which helps the managers
in determining various financial activities. The major types of management accounting systems
are as under:
Inventory management system:
It is the type of management accounting system that concerns with the measurement of
inventories of the company. The inventory management system helps the business in measuring
and monitoring the flow of inventories in the business (Cooper, Ezzamel and Qu, 2017). This
system is useful in all those businesses that keeps the stock in their business for the purpose of
using them in further processing or for further selling them in the market like, manufacturing
concerns, construction companies, retail industries, etc..
Requirements
 This system is required for monitoring each movement of the inventory within or outside
the business.
 The system helps in tracking the flow of inventory.
 For the purpose of determining the minimum requirement of inventory, the managers
need to involve this system within the organisation.
 It helps the managers in elimination of under or over maintenance of inventories in the
firm.
Cost accounting system:
In the cost accounting system, the management performs their managerial functions by
predicting the future cost of the company as per its efficiency and also analysing business' actual
performance and identify its actual performance through comparing actual cost related activities
with the estimated activities. For this purpose, the cost accounting system provides numerous
methods like budgetary control system, standard costing techniques, etc.
Requirements
 It is required by the company for having effective control over various costs of the
company.
2

 It enhances the ability of managers in detecting various problems along with the reason
behind the problem through providing various cost related data.
 The cost accounting system is required for determining change in the efficiency of
business through budgetary control ans standard techniques of this system.
 Further, for the purpose of determining the change in capacity of business, cost
accounting system is needed to be adopted by business.
Job costing system
Job costing system is the management accounting system through which the each
managers can determine the cost incurred by business in production of each job (Hall, 2016).
Generally this system is Required by those business organisations that manufactures goods or
provides services to their customers on the customised bases.
Requirement
 This system is required by business as to determine the appropriate price of a specific job
by providing actual cost incurred by business in manufacturing a specific job.
 With the help of this system, managers can easily determine the amount of inventory
used by the business in producing specific job.
 Further, for the purpose of determining and ensuring effectiveness in the budgetary
control system of the company, adoption of job costing system is required by the
managers.
In this regard, it can be evaluated that there are numerous types of management
accounting systems. Each system helps managers in enhancing the effectiveness in performance
of their managerial functions in different ways.
Explaining different methods of management accounting reporting
Management accounting reporting
Management accounting reporting can be defined as a process of preparing reports by
including all the relevant informations of financial activities of the business. In the process of
management accounting reporting, the managerial accountant uses various their professional
3

skills for preparing reports in such a way, so that they can be easily understand by the managers
and help them in their decision making process.
Management accounting reports includes budget reports, cost reports, performance
reports, inventory reports, etc. these are prepared by the managers for the purpose of helping the
managers in their various functions like planning, monitoring, organising, decision making, etc.
Further, there are various methods for preparing managerial accounting reporting as
under:
 Cost reports: cost reports helps the managers in determining various areas where the
company has spent its funds and other resources. These reports include information
regarding various costs incurred by the business like fixed costs, various costs, labours,
various overheads, etc. managerial accountant prepares a final report that includes a
summary of all the costs incurred by the company (Methods of Management Accounting
Report, 2018). With the help of it, managers analyses the performance of business in cost
related activities and develops effective strategies for enhancing cost control within the
organisation.
 Budgetary reports: Budgetary reports includes information regarding all the estimated
activities and performance of the business. These reports are helps the managers in
identifying the need of funds and other resources in the business within a specific time.
These reports are needed by the business in order to maintaining smoothness in various
activities of the business.
 Inventory reports: Inventory report are also a method of managerial accounting
reporting through which the accountant of Capco can provide information relating to the
flow of inventory within the whole organisation. With the help of these reports, the
managers can determine the need of inventories in the business and develop more
effective plans for making the business more effective in using the inventories.
 Performance reports: The performance reports are being prepared after analysing the
overall performance of the business and comparing it with the pre estimated performance
of it. These reports helps in determining the enhancement or reduction in performance of
4

the business. These reports are required by the managers in order to enhance the overall
performance of the business organisation.
In this regard, it can be analysed that there are numerous methods of preparing
managerial accounting reporting. Preparation of these reports can help the managers of Capco in
developing more appropriate strategies for the business.
Critical evaluation of management accounting system and management accounting
reporting
Both management accounting system and management accounting reporting are needed
to be included in the business organisation, as both helps the managers in having effective
control over various business activities and enhancing the efficiency of company in performing
various business operations.
On the other hand, adoption of various management accounting systems and management
accounting tool may result in enhancing the functions of the managers and cost of overall
business organisation as well.
In this order, Capco should adopt management accounting system and management
accounting reporting after analysing each method and system carefully. Further, they should be
adopted in such a way so that they could result in providing a sustainable success to the business
organisation.
Showing preparation of income statement using marginal and absorption costing techniques
Management accounting techniques:
In management accounting system, managerial accountant creates various management
accounting reports like, income statement, budgetary reports, variance reports, etc. these reports
can be prepared by them through using some management accounting techniques like marginal
costing technique, absorption costing techniques, etc. although, these techniques may provide
different techniques to the business, therefore, the company should adopt the technique after
analysing all the techniques carefully.
Marginal costing technique
5

Marginal costing technique is the technique in which all the variable costs incurred by
business are taken as a product cost and fixed cost as a period cost (Quattrone, 2016). In this
regard, fixed costs are not taken into consideration while evaluating the cost of production.
Therefore, this technique results in generation of more profit than other techniques.
Absorption costing technique
While preparing management accounting reports through absorption costing technique,
each cost incurred while producing the goods are taken into account while determining the cost
of production. Therefore, profit of the business through this technique comes lower than other
technique.
Statement showing budgeted income statement of TSR Ltd. using marginal costing
technique for budgeted production (1000 units)
Particular
Amount
(£)
Amount
(£)
Sales 250000
Less: Marginal cost of production
Direct material cost 50000
Direct labour cost 30000
Variable production overheads 20000
Variable selling and administration overheads 30000 130000
Contribution 120000
Less: fixed manufacturing expenses 40000
Fixed selling and distribution expenses 30000 50000
Net profit 70000
Statement showing budgeted income statement of TSR Ltd. using absorption costing
technique for budgeted production (1000 units)
Particular
Amount
(£)
Amount
(£)
Sales 250000
Less: Marginal cost of production
6

Direct material cost 50000
Direct labour cost 30000
Variable production overhead 20000
Fixed production overhead 40000 140000
Gross profit 110000
Less: Selling and administrative costs
Variable cost 30000
Fixed cost 30000 60000
Net profit 50000
Statement showing actual income statement of TSR Ltd. using marginal costing technique
for actual production (5000 units)
7

Preparation of actual income statement of TSR Ltd. using absorption costing technique for
actual production (5000 units)
8

Interpretation
From the analysis of above income statements, it can be interpret that the TSR Ltd. Has
prepared a budget plan for producing 10000 units during a specific period. The company
produced 5000 units in the particular period.
Further, it can be interpret that the income statements form the marginal costing
technique for both actual and budgeted production are providing higher amount of profit than the
absorption costing. The key reason behind this difference is the difference in the methods of
evaluating cost of production of the business.
Variance:
Variance refers to the difference between the estimated position and actual position of the
company. For the purpose of determining variance in the business, the managers can use
standard costing system through which they can easily evaluate the difference between budgeted
data and estimated data of the business and detect the amount of variance easily.
Calculation of variance for TSR Ltd.
Particular
Actual
amount (£)
Budgeted
amount (£) Variance Percentage of variance
Material cost
variance 22000 20900 1100 (Adverse) 5.26 % (Adverse)
Material mix
variance 2200 2000 200 (Adverse) 10 % (Adverse)
Direct labour cost
variance 17680 15000 2680 (Adverse) 17.87 % (Adverse)
Direct labour hours 3400 3000 400 (Adverse) 13.33 % (Adverse)
9

variance
Interpretation
From the interpretation of above variance statement, it can be evaluated that difference
has been occurred in the estimated cost and actual cost incurred by the TSR Ltd. These
difference can be arisen due to change in the cost of raw material, change in the labour cost or
change in the efficiency of working of the overall business as well.
Explaining different types of planning tools of budgetary control system
Budgetary control system
Budgetary control system can be defined as a process of management in which the
managers predicts various activities of the business by determining the efficiency of the business
based on its past performances (Li, 2016). This system helps the managers in developing
sufficiency of the resources within the business and ensuring the smooth working in each
department of the business organisation.
Budgetary control planning tools
For the purpose of preparing more effective and appropriate budget, the managers of
Capco can use various tools like cash budget, operating budget, etc. these tools of budgetary
control helps the managers in correctly predicting all the activities of the business for the purpose
of having effective control over all the activities of the business.
These planning tools can be easily understand as under: Cash budget: Cash budgets are prepared by the managers by estimating usage of cash
within various activities of the business (Cash Budget, 2019). The cash budget provides
information about various areas and sources through which cash would be spent and
raised within the business. Cash budgets helps the managers in planning for the utilisation
of cash and making sufficient cash available in the business as well.
Advantages
▪ It can help the mangers of Capco in reducing the chances of fraud within the
business.
▪ It may help in developing the business as more resourceful by predicting the
requirement of cash.
Disadvantages
10