Management Accounting Report: Cost Analysis, and Planning Strategies

This report provides a comprehensive analysis of management accounting principles and their application within the Balti Palace restaurant. It begins by outlining the essential management accounting systems, including cost accounting, inventory management, and price optimization. The report then explores the significance of managerial reports, such as budget reports, cost reports, receivable aging reports, and inventory reports, in aiding decision-making processes. Furthermore, it delves into the evaluation of cost and profit margins using both absorption and marginal costing techniques, providing a comparative analysis of their application. The report also assesses various tools that management accountants can utilize for effective planning and addresses the role of management accounting in responding to monetary challenges faced by the business. Overall, the report offers valuable insights into the practical implementation of management accounting strategies to improve financial performance and operational efficiency.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
P1 Stating management accounting (MA) systems that firm needs to employ....................1
P2 Presenting the manner in which managerial reports aid in decision making....................3
P3 Evaluation of cost and profit margin on the basis of different techniques such as
absorption and marginal.........................................................................................................5
P4 Assessing tools that can be used by management accountant for planning......................8
P5 Stating tools of MA that helps business organization in responding monetary problems
..............................................................................................................................................11
CONCLUSION........................................................................................................................14
REFERENCES.........................................................................................................................15

INTRODUCTION
In the current times, every business unit, whether small or large sized, places high
level of emphasis on undertaking management accounting tools and techniques. Tools and
techniques of management accounting assist manager in preparing financial reports. By
making evaluation of managerial accounting reports manager of the firm can take effectual
day to day and short term decisions. For this project report, Balti Palace restaurant has been
selected that offer dinning services to the customers at suitable prices. In this, current report
will provide deeper insight about management accounting system and reporting aspects.
Further, it also entails the manner in which marginal and absorption costing helps in doing
monetary evaluation. Various planning tools associated with the system of management
accounting will also be evaluated. In addition to this, manner in which managerial accounting
system helps in responding monetary issues will also be analyzed.
P1 Stating management accounting (MA) systems that firm needs to employ
To
Management Team
Balti Palace
Date: 21st January 2018
Subject : Management accounting systems
Introduction: In this, report will provide insight about the extent to which MA and its tools
as well as systems are essential for restaurant unit. Along with this, report also presents
benefits and drawbacks which are associated with different types of management accounting
systems.
Main Body:
Management accounting and its significance
MA is the process of preparing reports, related to internal operations, that provide
information about performance and helps in devising suitable plan. In the current times,
management accounting system is used by business unit’s at large level. By using the tools
and provision of management accounting restaurant unit can make appropriate forecast
regarding future aspects (Management accounting and its importance, 2018). Besides this, MA

also helps in analyzing the rate of return and enables to do profit planning. Further, field of
MA assists in making appropriate estimation of cash flows and understanding performance
variances. All such aspects clearly shows that management accounting tools & techniques aid
in the growth and success of firm significantly.
Systems of management accounting and their essential requirements within the firm
 Cost accounting: It is the process of recording, classifying, analyzing, summarizing
and evaluating alternative course of action. In the context of concerned restaurant
unit, requirement of cost accounting system is significant which in turn advises
appropriate course of action to management on the basis of efficiency and capability
(Edmonds and et.al., 2016). In addition to this, data regarding cost incurred pertaining
to carrying out an activity also helps firm in arriving at suitable decision regarding
price.
Advantages Disadvantages
 Cost accounting system helps in
eliminating wastage, losses and
inefficiencies
 Under such system, new methods
are followed which in turn leads
cost reduction.
 Facilitates price fixation and helps
in doing marginal analysis of cost.
 Costing records serve information
about past, whereas management
team is concerning about future.
 Further, costs are usually absorbed
on the basis of pre determined rate
which in turn leads the issue of
under or over absorption of
overhead (Advantages and
Disadvantages of Cost
Accounting, 2018).
 Inventory management: Such system helps firm in assessing stock level that needs to
be managed within the firm. Restaurant unit is required to consider suitable inventory
management and valuation tools such as EOQ, JIT, LIFO, FIFO etc which in turn
leads cost reduction (Kim and Schmidgall, 2017). Moreover, ordering and holding
cost enhance the level of overall expenses significantly.
Advantages Disadvantages
 Reduction in cost
 Maximization of profit margin
 For developing skills of personnel
in relation to dealing with
inventory software firm needs to

conduct training and development
session.
 Price optimization: By using such system, restaurant unit can analyze the manner in
which customers are reacting at varied price level (Olesen and Cheng, 2017). Hence,
setting suitable prices on the basis of such system restaurant unit can deal with the
competitive environment or situation prominently.
Advantages Disadvantages
 Helps in enhancing customer base
 Leads high productivity and
margin
 Complex in nature
Conclusion: At the end of this report, it can be mentioned that management accounting
systems help in managing funds and operations in the best possible way. Along with this, it
can summarized from evaluation through undertaking cost accounting, inventory
management and price optimization firm can control operations more effectually.
Management Accountant
P2 Presenting the manner in which managerial reports aid in decision making
To
Management Team
Balti Palace
Date: 21st January 2018
Subject : Managerial reports and its significance
Introduction: This report highlights the significance of managerial reports in the context of
restaurant unit. Besides this, it also entails different types of report that restaurant can prepare
for getting monetary information.
Main Body
Managerial reports provide business unit with the performance of every department in
financial terms. By undertaking such reports manager can assess the extent to which each
department is performing well. Hence, by making evaluation of managerial reports
management team can develop competent framework for performance improvement.
From assessment, it has identified that managerial reports have high level of importance for

the firm as it provides information about sales etc on day to day basis. In addition to this,
through making evaluation of managerial reports manager can identify training and
development need for personnel. Further, different types of report and their evaluation gives
clear indication in relation to taking suitable measure for the maximization of both
productivity and profitability.
 Budget or performance report: This report contains information regarding deviations
occurred in the performance of department during the specified time frame. For
making effective usage of funds company focuses on setting standards that employees
need to follow while performing activities. In this, budget report entails the level to
which expenses incurred by the department are in accordance with the budgeting
framework (Appelbaum and et.al., 2017). Further, performance report also entails the
causes of deficiencies found. Thus, considering such report manager of Balti Palace
can formulate sound strategic and policy framework. Further, through such report
manager also would become able to set appropriate budget and standards for the
upcoming time period.
 Cost report: For effective decision making, manager of the firm also needs to prepare
costing report. Costing report contains information about the expenses incurred for
producing or offering products and services. By undertaking such report manager can
track cost information over the time frame. This in turn helps business unit in
determining whether there is a need to take strategic measure for controlling cost or
not. In addition to this, cost report also assists firm in setting pricing strategies and
doing profit planning. By accumulating overall expenses and dividing the same from
offering firm can assess per unit cost. Hence, by adding desired level of margin in unit
cost restaurant unit can set prices of offerings.
 Receivable ageing report: Such report helps in ascertaining period within which
debtors are making payment. Usually, in restaurant unit, customers use services on
cash basis or term but for the generation of high sales and margin it also makes deal
with tourist firms. In this, by making assessment of ageing report firm can assess the
customers having potential to default in the upcoming time frame (Lachmann, Trapp
and Trapp, 2017). It also clearly exhibits debtors who are making payment within the
assigned credit duration. Thus, such report gives indication whether there is a need to
update existing credit terms or not.
 Inventory report: Stock report gives information about ordering and holding cost as
well as level of wastage. Through making evaluation of such report, manager can

assess whether inventory cost is inclined or decreased over the time. By evaluating
this, manager can determine suitable inventory level that needs to be maintained
within the firm for ensuring smooth functioning and reducing cost. Further, cost of the
stock that restaurant unit requires for offering services to the customers are perishable
in nature. Thus, it is advised to restaurant unit to use either EOQ or just in time
method for assessing stock level. This in turn helps in managing cost and enhances
profit margin significantly.
Conclusion: It has been concluded that managerial reports give specific information to the
management about internal performance. Besides this, reports based on managerial reporting
system also helps in taking decision about future aspect. Thus, it is recommended to the
owner of Balti Palace to prepare inventory, debtors, cost and performance report for
measuring or evaluating performance over the time period.
Management Accountant
P3 Evaluation of cost and profit margin on the basis of different techniques such as
absorption and marginal
Specifically, there are mainly two types of costing system that can be undertaken by
the owner of Balti Palace namely marginal and absorption. Both such costing systems help in
determining unit cost and profit margin.
Marginal costing: Decision making technique that is considered for ascertaining total
cost of production recognized as marginal costing. Under marginal costing, variable cost is
treated as product, whereas fixed expenses considered as periodical. In this, cost is classified
in terms of fixed as well as variable and profit is measured in terms of PV ratio (Difference
between Marginal Costing and Absorption Costing, 2018). It highlights contribution that is
associated with each product.
Absorption costing: In accordance with such costing technique, apportionment of cost
is based on its respective centre. Under absorption costing method, business unit considers
both fixed and variable expenses for the determination of total production cost. In this,
overheads are classified in terms of production, administration, selling & distribution
(Soderstrom, Soderstrom and Stewart, 2017). Absorption costing system also known as full
costing in which variances take place in opening and closing stock does not affect per unit

cost. In this, cost data is presented in conventional way which in turn helps in determining net
margin. Such costing method entails that due to the inclusion of fixed cost profitability is
highly influenced.
Computation of Unit cost
Absorption costing ( per unit)
in £
Marginal costing (per unit in
£)
Material 6 6
Labour 5 5
Production
overheads
Variable 2 2
Fixed (2100 / 700) 3 Nil
Unit cost of
production 16 13
Gross and net profit evaluation as per absorption costing method
Particulars
Amount (in
£)
Total sales revenue (600 * 35) 21000
Less: Total production cost
Material (700 * 6) 4200
Labour (700 * 5) 3500
Variable production overheads (700 * 2) 1400
Fixed production overheads (700 * 3) 2100
Total manufacturing cost 11,200
Add: Opening inventory 0
Less: closing inventory (100 * 16) 1600
9600
Over-absorbed fixed overheads 100
Costs of goods sold (COGS) 9500
Gross profit (2100 – 9500) 11500

Less: Other overheads
Administration expenses 700
Selling expense 600
Variable sales overheads 600
Total overheads 1900
Net profit (11500 - 1900) 9600
Income statement as per Marginal costing method
Particulars
Amount (in
£)
Total sales revenue (600 * 35) 21000
Less: Total production cost
Material (700 * 6) 4,200
Labour (700 * 5) 3,500
Variable production overheads (700 units @ 2 PU) 1,400
Total production cost (4200 + 3500) 9,100
Add: beginning inventory 0
Less: Stock at the end of year (100 * 13) 1300
COGS 7,800
Add: variable sales overheads 600
TVC 8,400
Contribution 12,600
Less: Other overheads
Adm. expenses 800
S & D expenditure 600
Fixed cost of production 2000
Total overhead cost 3400
NP (12600 – 3400) 9,200
Interpretation: Tabular presentation shows that cost per unit is higher such as £16 in
the case of absorption costing method over marginal. Moreover, total production cost,
marginal system, excludes fixed production overhead due to this it accounts for £13. By

doing evaluation, it has assessed that GP and net margin according to absorption costing
system accounts for £11500 & £9600 respectively. On the other side, marginal costing
system entails £12600 (contribution) and £9200 (net margin) respectively. By taking into
account overall evaluation it can be mentioned that owner of Balti Palace should undertake
absorption costing system for the assessment of both cost and margin because it is highly
realistic in nature.
Reconciliation statement
Particulars Amount (in £)
NP (according to absorption costing method) 9,600
Less: Fixed production overhead with respect to ending stock (100 * 3) 300
Less: Over-Absorbed overhead 100
Net profit (marginal costing method) 9,200
P4 Assessing tools that can be used by management accountant for planning
In the competitive business arena, for gaining competitive edge over others and
attaining success firm needs to develop an effectual financial plan. There are several
traditional and modern techniques that manager can undertake for developing suitable budget.
Now, every firm creates spending plan with an objective to make effective use of financial
resources. Along with this, budget also helps company in making appropriate estimation
regarding revenue and developing future plan. Hence, by using below mentioned technique
Balti Palace can make effective plan.
Zero base budgeting: This technique of budgeting lays focus on justifying every line
of item or expense before including the same in budget. In accordance with ZBB, managers
start with zero bases and make efforts in relation to assessing cost effective ways of
performing activities (Nuhu, Baird and Bala Appuhamilage, 2017). Hence, manager of Balti
Palace should employ such technique for preparing budget or financial planning. At the time
of considering such technique business entity should keep in mind benefits and drawbacks
associated with ZBB such as:
Advantages Disadvantages
 Cost effective alternative ensures
enough usage of funds and enhances
 Time intensive exercise
 For preparing budget according to

profit margin.
 In this, every expense is clearly
justified by the manager so it helps in
evaluating the performance of each
department. This in turn also helps in
developing suitable compensation
plan.
 Assists in identifying and avoiding
redundant activities.
 Facilitates efficient allocation of
financial resources and improves both
co-ordination as well as
communication among departments.
ZBB firm requires more human
resources. Hence, manager and other
personnel has to devote their more
time for preparing plan as per such
technique which in turn affects other
productive activities.
Activity based budgeting: This budgeting tool entails that cost allocation must be on
the basis of respective driver. ABB has gained high level of importance in the recent times in
the category of modern techniques. Moreover, in this, revenue generated and expenses
incurred are directly allocated to the unit which in turn responsible for the activity. Now,
majority of the manufacturing and other firms undertake ABB technique for budget
preparation (Activity Based Budgeting, 2012). Hence, by preparing budget as per ABB,
business entity of Balti Palace can bring efficiency in the activities of an organization.
Advantages Disadvantages
 In ABB, budgets are setting down
after in-depth research as well as
analysis and thereby eliminate
bottlenecks. This in turn helps
business unit in gaining competitive
edge over others.
 ABB tool also enhances relationship
which takes place between company
and its customers. Moreover, realistic
budget helps in exerting control over
 High complexity is considered as
major disadvantage. Such budgeting
technique demand for high and in-
depth understanding.
 ABB technique only makes focus on
short term goals and objectives rather
than long run (Activity Based
Budgeting, 2018).

cost and thereby provides customers
with services at suitable price.
 It facilitates realistic evaluation
because in this every cost driver is
assessed.
Incremental budgeting: Under this, by making some additions in the budget of
previous year, current financial plan is developed by the manager. Hence, in this, previous
year budget is considered as base for arriving at new one. Incremental budgets are prepared
on the basis of assumption that department will continue at their current expense level.
Hence, in this, according to requirement more expenses are included in budget to arrive at
next year budget estimation. Thus, through undertaking incremental budgeting technique
owner of Balti Palace can do financial planning with ease.
Advantages Disadvantages
 Incremental budget does not include
complex calculations so it is
considered as time saving exercise
 Conflicts among the departments can
be avoided
 By using such technique co-
ordination between budgets can easily
be achieved (Incremental Budgeting –
Meaning, Advantages and
Disadvantages, 2018).
 Under incremental budgeting
technique, there is the absence of
incentives for cost reduction and
development of new ideas.
 Assumption in relation to the
adoption of same activities and
working methods is unrealistic.
Responsibility budgeting: Now, for achieving gaols firm makes focus on creating
several responsibility centre’s regarding revenue, expense, profit etc. On the basis of such
budgeting, all the centre’s are controlled by specific manager and emphasis is placed on the
delegation of basis roles as well as responsibilities. Further, responsibility budgeting tends to
make focus on taking input from the managers of each department. Along with this, on the
identification of deviation owner also asks question regarding the same. Referring all such
aspects, it can be presented that responsibility budgeting helps in planning to a great extent.