Management Accounting Report: Techniques of Cost Analysis, Oshodi PLC

This report provides a comprehensive analysis of management accounting principles, focusing on Oshodi PLC. It delves into various aspects, including different types of management accounting, methods of reporting, and the application of cost analysis techniques such as absorption and marginal costing. The report includes the calculation of income statements using both methods. Furthermore, it explores the advantages and disadvantages of planning tools used for budgetary control and examines how organizations adapt their management accounting systems to address financial issues. The report also covers cost accounting systems, inventory management, job costing, and price optimization, providing a holistic understanding of the subject matter. The report concludes with an overview of the impact of management accounting on decision-making within the organization.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Management accounting and essential requirements of different types of management
accounting...............................................................................................................................1
P2 Different methods for management accounting reporting................................................3
LO2..................................................................................................................................................4
P3 Calculate costs using appropriate techniques of cost analysis to prepare
an income statement using marginal and absorption costs...........................4
LO3..................................................................................................................................................8
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control....................................................................................................................8
LO4................................................................................................................................................11
P5 Compare how organisations are adapting management accounting systems to respond to
financial issues......................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15
Books and journals...............................................................................................................15
Appendix........................................................................................................................................15

INTRODUCTION
Management accounting is a process of preparing financial report to assist the management team
to make policies to control business operations. Financial information helps in making strategic
decisions. It helps in evaluating the performance of the company by analysing previous year data
with the actual data. Present report is based on Oshodi PLC which is a juice manufacturing
company. Report contains the concept of management accounting, different types of
management accounting, methods of reporting. Report will include the techniques of cost
analysis i.e. absorption and marginal costing, calculation of income statement is presented by
both the methods. Further report also contains the how organisations adopt accounting systems to
respond to financial issues(Kaplan and Atkinson, 2015).
LO1
P1 Management accounting and essential requirements of different types of management
accounting.
It lays down the procedure for applying knowledge and professional expertise for
preparing the accounting plus financial information in a way assisting the management team to
formulate policies and to control the industrial operations of the firm. Process that helps the
mangers in making managerial decisions with the help of financial information and the
resources, management accounting is also referred as managerial accounting. Management
accounting is for the internal management team of the company and this difference makes it
stand apart from the financial accounting process. Finance administration discuss reports such as
financial statements, reports of the revenues and the other transactional reports with the
management accounting team of the organisation. Motive of management accounting is to take
exact and effective decision with help of statistical data to control the business enterprise.
Management accounting lays down the procedure for presenting financial data and the business
operations to help the management team to make decisions.
Types of management accounting system
 Cost-accounting systems
 Inventory management systems
 Job-costing systems
 price-optimising system
1

Cost Accounting System
Cost accounting is a branch of management accounting which is concerned with
classifying, allocating and recording the present and the future prospective costs. At the present
times it is considered to be the essential part of business management as the organisations are
highly benefited by applying cost accounting(Merchant and White, 2017). It helps the
organisation to classify its costs along with its recording. Management are able to classify its
costs into direct, prime, factory etc. Such allocation helps the organisation in controlling its costs
and to determine the profitability from the operations . Cost accounting also helps the
organisation to have a control over its various cost s such as material labour and other factory
overheads. It helps the organisation to set standards to increase its efficiency and to manage its
operations to achieve the set standards.
Inventory Management System
Inventory management helps the organisation to mange stocks of the business and
keeping the track records of the inventory of the business. Inventory management also helps the
company to be aware of its stock requirement and to order stocks on time without impacting the
production process. They have a major importance in the industries such as food and beverages,
health care etc. An active stock management system keeps the track records of the inventory fro
its entrance in the factory to the warehouse and from warehouse to the customers. Proper
inventory management system helps the company in keeping its business well maintained.
Updated records help the company to know its inventory requirements and to fulfil the
requirement on time without breaking the production process. Companies can maintain reorder
level, safety stock and to know the break even points.
Job Costing System
Job Costing helps the organisations to use cost records to know the profit margins of each
job and to compare it with budgeted profit margins. It is defined as the process of gathering
information about production and service activities and the costs connected with each activity. It
helps the organisation to know the reliability of the estimate made by it. The prices quoted
should be bale to acquire a reasonable profit for the company. It mainly helps the organisation in
maintaining three types of records such as direct materials to have the records of the
consumption of the materials, direct labour for getting the exact labour costings to the company
and the other overhead costs applied in manufacturing process(Schaltegger and Burritt, 2017).
2

(Maas, Schaltegger and Crutzen, 2016)Price-optimising System
Price optimisation helps the organisation to analyse the variation in demands with the
change in prices of the products of the company. Then on the basis of the costs information
gathered and the available inventory level organisations make decisions on the prices that can
prevail in the market. It helps the company to determine its initial, promotional and the
discounted pricing policies. Price optimisation helps the company to know its standing in the
markets as well as the prices with which it can survive in the market. It tells the company about
the cost reduction or to improve the production process to match the pricing levels without
sacrificing profits of the company.
P2 Different methods for management accounting reporting.
Management accounting helps the Oshodi PLC in trimming its costs whit the help of
information provided by the managerial reports. Accounting reports also enable the organisation
to shred down its non rewarding product lines and to focus more on the goods which will offer
high financial returns to the Oshodi. Company may also generate reports considering its timely
requirements such as on quarterly, half yearly or on the annual basis(Maas, Schaltegger and
Crutzen, 2016).
Budget Reports
Budget reports helps the organisation to assess its efficiency and the performance of its
operations whether they are able to meet its set standards or the production is not declining.
Budgetary standards are set on the basis of the actual expenses occurred by the department and
the production level they were achieving at that costs levels in the prior years. It will also help
the company to change its budget reports if the expenses are going beyond the budgeted levels
even after making all the possible changes in the same budget. Budget reports also help the
organisation to trim its costs if the expenses are going beyond the attainable standards. Budgeted
reports help the managerial officials to analyse the performance of the workforce and to reward
them with incentives for meeting the targeted standards(Boučková, 2015).
Job Cost Reports
Job cost report helps the organisation to display its costs records over a specific process.
Reports are generally compared with the estimated revenue levels for evaluating the profitability
of the specific jobs. Job cost reports help the PLC to find out areas that give high returns and to
put extra efforts in enhancing those areas and ensure that the company does not waste its time on
3

low returning jobs. It helps the organisation to control the costs of the ongoing project and to
make necessary changes by applying other cost-efficient methods to enable the organisation save
itself from the losses that could offer.
Performance Report
Oshodi generates its performance reports for reviewing the overall performance of the
PLC and the each employee working in the organisation. Performance reports enable the
managers to take decisions and to frame strategies to improve the future performance of the
company. Efficient employees are rewarded to perform even better and the inefficient employees
are trained and motivated to improve the performance. Performance report also helps the
organisation to know its efficiency in meeting the production levels to achieve its targets so that
the company can make necessary changes to improve the performance of the company as a
whole. Performance reports plays a vital role to detect the flaws and to implement new strategies
to achieve the target level(Chenhall and Moers, 2015).
Other Managerial Accounting Reports
There are other reports also that can be generated by the company as per requirement of
its business activities have a better monitoring and controlling the business operation. The
reports which also helps the PLC in analysing the existing business and its operational activities.
These reports can be prepared by the company itself or by the professionals working outside the
company and preparing reports as per the specific business requirement. Professionals possess
the knowledge and expertise to make reports and also also help the company to analyse its
impact. It also provides the company with the suggestive measures that can be used by the
company to improve its cost control measures along with the operations.
LO2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
INCOME STATEMENTS USING MARGINAL COSTING
Marginal Costing
Profit or Loss statement of Oshodi PLC for November
and December
4

Novemb
er
Decemb
er
Particul
ars
Price
per unit Units GBP GBP
Price
per unit Units GBP GBP
Selling
price 50 10000 500000 50 12000 600000
Less: Cost of
goods sold
Op. Stock @ 25 25 2000 50000
Cost of Prodn
variable 12000 300000 10000 250000
2000
Less: Cl. Stock @
25 2000 50000 300000
(Weetm
an,
2019) 250000
Varianc
e
Analysis
Cost of Prodn
variable 5 10000 50000 5 12000 60000
300000 300000 240000 2400000
Contribu
tion 200000 360000
Less: Cost of
Prodn Fixed 200000 240000
Production Cost 99000 99000
Selling
Cost 14000 14000
5

Administration
Cost 26000 139000 26000 139000
Net
Profit 61000 101000
Profit as per Marginal Costing of
Nov. and Dec.
(Weetm(
Weetma
n,
2019)an,
2019)
Novemb
er 61000
Decemb
er 101000
162000
Marginal Costing
Particulars GBP GBP
per unit
Selling Price 50
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
Total 25 25
Contribution 25
6

Working Note 1
Calculations of Variable Costing
Particulars GBP
Direct Raw Material 18
Direct Labour 4
Producion Overhead Variable 3
Total Variavle cost 25
Working Note 2
Particulars GBP GBP
Selling Price 50
Production cost cariable 25
Selling overhead variable 5
30 30
Contribution p.u. 20
Working Note 3
Selling overhead variable 10% of sales value
50*10%
5
Absorption Costing
Profit or Loss statement of Oshodi For November and December
November December
Particulars Unit GBP GBP Units GBP GBP
Selling Price 10000 500000 12000 600000
Less: Cost of goods sold
Op. Stock @ 34 2000 68000
Absorbed Prodn Cost 12000 408000 10000 340000
2000 68000
340000 340000 408000 408000
Gross Profit 160000 192000
Adj. for Under/Over Absorption 9000 -9000
16900 183000
Less: Overhead Cost
Selling Overhead variable 50000 60000
Selling Overhead fixed 14000 14000
7

Admin overhead Fixed 26000 90000 26000 100000
79000 83000
Calculation for Under/ Over Absorption for Oshodi PLC for November and December
Month Units of Prodn. O/H absorbed p.u. Total Absorption Actual O/H Under/ Over Absorption
November 12000 9 108000 99000 9000
December 10000 9 90000 99000 -9000
Working Note 1
Normal Production Level 11000 units
Overhead cost Fixed 99000
Fixed O/H absorbed 99000/11000
GBP 9
Total Prodn Cost Variable Cost + Fixed O/H absorbed
Variable Cost 25
Fixed O/H absorbed 9
Total Prodn Cost 34 per unit
LO3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
Financial Budget:
Financial budget explains the details about the incoming and outgoing of the amount from the
business and also explain the future plans of spending money to gain large profits for the oshodi
plc company.
Financial budget includes:
 Cash budget: This portrays inflows and outflows of the cash in the business daily, weekly
or monthly or in a particular period of time.and also predicts amount available in the
manufacturing company.
8

 Capital expenditure budget: This concentrates on the large investment on the fixed assets
of Such as, land buildings, vehicles or the new setups of the oshodi manufacturing
company of the jojo fruit juice.
 The balance sheet budget: This includes liabilities, shares and the assets available in the
firm during the present period of accounting.
Advantages:
 Financial budget carries all the details about incoming and outgoing money and the profit
margins of the company.
 Financial budget provides ideas about further investment of the money and about
increasing the earnings from the jojo fruit juice.
 Financial budget allows inflow and outflow of the cash that means it carries all the details
about available cash amount in the company which makes higher possibility to plan for
more profits and easy to recognise financial position of the company.
Disadvantages :
 Business with Cash is quiet risky as it can be loose somewhere or there is a probability of
its stealing.
 Financial capital expenses is the permanent investment and is an irreversible process, so
after investing money in permanent assets it cannot be used for further profits or sales.
 Financial budget plan is time consuming process, as it needs an upgrade every now and
then as it is very short term process used on the regular days(Weetman, 2019).
Operating Budget:
Operation budget describes planning over a particular period of time such as annual or quarterly
etc. to portray sales and income of the business, actual and expected profit of the business.
Operating budget includes:
9

The sales and revenue budget: This allocates the amount of money received by the normal
running of the business and determines the future economic positions of the oshodi PLC
manufacturing company.
The expense budget: This traces the expected expenses of the firm in a specific period of time
and also relates to approaching expenses of the business.
The project budget : This includes estimation of the amount authorised in a projects handled by
the oshodi plc company of jojo fruit juice.
Advantages:
 Operating budget shape all the budget required for operating entire business which helps
in prediction of financial position of the company in the future.
 It calculates the amount used for the production of jojo fruit juice and also calculate the
amount of the goods and services used for the production.
 It also analyse profit margins of the business by calculating profit per each packet of juice
and also calculate no. of packets sold which helps in examining its demand and trends.
Disadvantages:
 It is time consuming process, creating budget and detailing money inflows and outflows
of the company.
 Operating budget varies directly with change in the sale volumes , income and even with
the change of goods and services.
 It is short term process, needs updation after every short period of time(Suomala, Lyly-
Yrjänäinen, J., Laine and Mitchell, 2017).
static Budgets:
Static budget describes inflexible constant non changing budget with increase or decrease in
sales, income or other activities of the sale in the business.
Advantages:
10