Management Accounting Report: Cost Analysis and Reporting Techniques

This report delves into the realm of management accounting, focusing on its systems, reporting methods, and cost calculation techniques, using Eastern Engineering Company Ltd (EECL) as a case study. The introduction provides a foundational understanding of management accounting's role in financial decision-making. Task 1 explores various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, outlining their essential requirements within the context of EECL. It also examines different management accounting reporting methods such as job costing reports, inventory management reports, accounts receivables aging reports, and budget reports. Task 2 focuses on the calculation of costs using marginal costing and absorption costing, highlighting their advantages, disadvantages, and providing justification for their use. The report concludes with a summary of the key findings and provides references to the sources used.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management Accounting Systems........................................................................................1
P2: Management Accounting Reporting......................................................................................3
TASK 2............................................................................................................................................4
P3: Calculation of costs...............................................................................................................4
TASK 3............................................................................................................................................7
P4: Advantages and Disadvantages of planning tools.................................................................7
TASK 4............................................................................................................................................9
P5: Comparison of organizations in adaptation of management accounting to solve financial
problems.......................................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management Accounting refers to using of different types of financial provisions which
will help in deriving the right results for the future time period (Abernethy and Wallis, 2019). It
is quite helpful in deriving the advantage for the company. It helps the managers a lot by
ensuring that they are able to take short-term and long-term decisions. Through it, analysis and
interpretation can be done to derive conclusions and recommendations in an effective manner.
This report is based on EECL that is Eastern Engineering Company Ltd which operates as
medium sized venture within manufacturing field.
In this assignment, focus will be made on demonstration of understanding of
management accounting systems, methods for preparation of its reports. Additionally,
explanation of the use of planning tools and comparison of ways in which the companies can
make its use to respond to financial problems will be made as a part of this assignment.
TASK 1
P1: Management Accounting Systems
Concept of management accounting evolved during 1900s with the purpose of supplying
finance related information to management of entity together with other stakeholders that have
role to devise business decisions. Within EECL, management accounting information serves
objective of assisting administrators in devising well informed and reasoned decisions. Intended
aim of the accounting is to aid users for internal people in making effective determinations for
future. There are various types of systems which are used in management accounting. Some are
explained in context to EECL below:
Cost Accounting System- In this system, there is an estimation of various costs in the
company (Armitage, Webb and Glynn, 2016). Thus it can be very helpful for the purpose of
determining the costs. For the management of EECL it is essential that they are able to make its
use for segregating the costs and determining the overheads. These overheads can be allocated
according to the expenses which are made by the various departments such as Production,
Finance, HR, Sales and Marketing etc.
Essential requirements-
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 This system needs to ensure that the different types of costs are calculated in an effective
manner within the organization. Thus in the context of EECL it must be able to identify
and segregate the various costs and expenses which are being incurred.
 This system must be able to advise the management on the techniques which can be used
so that costs can be reduced and profits can be maximized. For EECL, it is important that
the company is able to consider it and reduce costs for enhancing the level of profits.
Inventory Management System- This system is used in order to track the stock levels and
manage them in an effective manner (Arunruangsirilert and Chonglerttham, 2017). By making its
use, inflows and outflows of various items can be tracked in a better manner. Thus for the
managers of EECL it is extremely helpful so that they are able to ensure that stock is properly
managed and there is not misplacement of the items.
Essential requirements-
 In a good inventory management system, there should be identification of different items
and their related information. Thus the managers of EECL will be able to identify various
stock items by making appropriate use of it.
 In an inventory management system, there must be the use of a software which can be
helpful in the tracking and managing of stock items. Thus in the context of EECL it can
be quite useful for ensuring that there is no misplacement of goods.
Job Costing System- In this method, there is an estimation of various job costs. It is
essential to be used in those companies which are indulged in the process of manufacturing
(Aureli and et.al., 2019). In the context of EECL, it can be very helpful to manage its job order
inflows and outflows effectively. In this way the firm will be able to make sure that it can attain a
higher level of efficiency and effectiveness.
Essential requirements-
 In a good job costing system, there must be tracking of job performance. EECL will be
able to ensure that they can identify deviations and variances and remove them.
 A good job costing system ensures that the level of profits can be enhanced effectively by
ensuring that the costs and expenses which are associated with them are reduced. In this
way, EECL will be able to maximize its level of profitability.
Price optimization system- In it, there is setting of price by the managers through the use
of appropriate methods and techniques (Bedford and Speklé, 2018). Therefore, for the managers
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of EECL are required to ensure that they make the use of this system by forecasting the change
in prices in the market.
Essential requirements-
 In a price optimization system, there must be use of mathematical methods to forecast the
changes in demand of goods. This will help EECL to set a right price.
 A price optimization system must help the managers to be able to collect the historical
data related to the price of various products. In the context of EECL, it can be quite
helpful.
P2: Methods in management Accounting Reporting
Multiple kinds of reports of management accounting are prepared by managers so that
they are able to focus towards information about financial accounting. Within EECL, certain
kinds of methods related with management accounting report are used by administrators to plan,
regulate, make decision addition to measure performance. Either daily, weekly, monthly,
quarterly, half yearly or annually, management accounting reports are generated as per
requirements. There are different methods used by departmental managers of EECL for
management accounting reports. These are explained under:
Job Costing Reports- In these reports, there is an analysis and interpretation of job costs
in an effective manner (Ghasemi and et.al., 2019). It analyses the flow of job orders related
information in an effective manner. They are useful for those companies which deal in the
process of manufacturing. By preparing them they can identify the methods and techniques they
can use for the purpose of enhancement of the level of profits which is earned by completing the
orders of clients. For EECL, they are useful in the management of job orders so that they can
derive adequate information whenever required. All the records can be maintained in the desired
manner when the managers use them.
Inventory Management Reports- These reports are prepared in order to maintain the
desired information related to the stock items (Ghasemi and et.al., 2016). A detailed record of
stock items over the year can be maintained as a part of them. Thus for the management they
become quite useful and are required to be used in an appropriate manner. Effective analysis and
interpretation can be carried out by making them. In EECL, they can be used so that the
managers can identify any problems which are being faced while maintaining a detailed record
of inventory. Rectifying measures can be taken with immediate effect if required.
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Accounts Receivables Ageing Reports- The managers of organizations prepare these
reports to maintain a track record of their trade receivables (Hariyati, Tjahjadi and Soewarno,
2019). Proper details regarding each and every debtor of the firm can be thus maintained. The
number of days for which the credit has been provided to them is included as a part of them.
Thus the debtors who have not paid their dues on time can be identified. In the context of EECL,
it is essential that the management manages the accounts receivables and identifies those debtors
who have not paid their dues since a long time in the organization. Thus a strategy can be framed
effectively for collecting the amount which is due with them.
Budget reports- In the companies, there is a specific requirement for the preparation of
these reports to maintain a record of the budgets which are made (Honggowati and et.al., 2017).
They are prepared specifically for a year and can be adjusted according to the change in the
requirements due to the prevailing situations and circumstances in the market according to which
the organizations can make the required adjustments. For the management of EECL, there is a
requirement to identify the detailed aspects related to the budgets so that deviations and
variances in the performance can be identified. This will help a lot to control the expenses and
forecast the incomes in a better manner. Thus higher-level of efficiency and effectiveness can be
maintained in the processes.
TASK 2
P3: Calculation of costs
In a firm, there can be use of various types of techniques through which costs can be
calculated. These are explained as follows-
Marginal Costing- It is a technique through which the organizations are able to
determine the level of profitability and the break-even point which is the level where the firms
neither earn profits nor incur losses (Maas, Schaltegger and Crutzen, 2016). The management of
EECL can use this method so that they are able to estimate the profits which they are earning.
Advantages-
 With the use of this technique, the managers are able to ensure that they take short-term
decisions. Thus EECL will be able to make use of it to take the appropriate decisions
which will be very helpful in the short-term period of time.
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 The use of this method is very useful for the comparison purposes. It can be facilitated
either with the set industrial standards or with the previous data of the company.
Disadvantages-
 In this method, there is an use of different assumptions. Thus the management of EECL
will face a disadvantage if any of these assumptions prove out to be wrong.
 Through this technique, effective control cannot be exercised. Thus for the managers of
EECL this can result in a disadvantage if they are not able to control the various aspects
in the organization.
Absorption Costing- It is a method through which the overall level of costs can be
calculated in the organization (Messner, 2016). By making its use, the organizations will be able
to make sure that they can estimate the costs in a highly effective manner. In the context of
EECL it can be very useful so that it can estimate the level of profitability.
Advantages-
 When this method is used by the organizations it can be quite helpful in bringing a
higher-level of responsibility in the managers for their respective departments. If their
department is having excessive costs then the reasons for the same can be identified. This
can initiate rectifying actions to be taken for reducing them effectively and efficiently.
Thus in EECL an advantage can be created.
 The use of this technique by the companies can ensure that inefficient utilization of
resources can be avoided in the organization. Thus in this way under-utilization and over-
utilization of resources can be prevented and their optimum-utilization can be ensured so
that the best results can be derived from them which can be highly beneficial for the
company in the future time period. For EECL, this can be quite helpful in creating an
advantage.
Disadvantages-
 The right use of this method is dependent upon the accurate apportionment of overhead
costs. Thus in EECL this can lead towards a disadvantage.
 This technique is not helpful for preparing flexible budget and also does not helps in
segregation between fixed and variable costs. In the context of EECL, this can create a
disadvantage.
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Justification- Both of these techniques are highly useful for the organizations so that
they are able to estimate the level of profits. Thus for the management of EECL it is
recommended that they use them to ascertain their profitability level for a specific time period.
Calculations of costs in order to produce income statement of EECL through Marginal
costing:
Marginal costing
January February
Variable production cost £4,50,000.00 £5,17,500.00
Per unit cost £45.00 £45.00
Income statement January February
Sales £13,23,000.00
£15,68,000.0
0
Less: Marginal cost of sales £4,41,000.00 £5,04,000.00
Variable production cost £4,50,000.00 £5,17,500.00
Closing stock £9,000.00 £22,500.00
Opening stock £0.00 £9,000.00
Contribution £8,82,000.00
£10,64,000.0
0
Less: Fixed production cost £3,50,000.00 £3,40,000.00
Net income £5,32,000.00 £7,24,000.00
Calculations of cost for producing income statement by absorption costing for EECL
Absorption costing
January February
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Variable production cost £4,50,000.00
£5,17,500.0
0
Fixed production cost £3,20,000.00
£3,68,000.0
0
Total cost £7,70,000.00
£8,85,500.0
0
Per unit cost £77.00 £77.00
Income statement January February
Sales £13,23,000.00
£15,68,000.
00
Less: Cost of sales £7,54,600.00
£8,62,400.0
0
Variable production cost £4,50,000.00
£5,17,500.0
0
Fixed production cost £3,20,000.00
£3,68,000.0
0
Closing stock £15,400.00 £38,500.00
Opening stock £0.00 £15,400.00
Gross profit £5,68,400.00
£7,05,600.0
0
Less/add: Over/under absorption of fixed cost £32,000.00 £16,000.00
Net profit £6,00,400.00
£6,89,600.0
0
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TASK 3
P4: Advantages and Disadvantages of planning tools
Sum of finances that are allocated for some specific purpose along with summary of
intended proposals addition to expenditure is said to budget. It generally comprises budget
surplus, deficit in expenses than revenues and providing financial resources for usage at some
future duration. With budget, financial managers of EECL are able to control spendings, save
money along with track expenses. There are several planning tools used in EECL that facilitates
budgetary control. These tools are explained as follows-
Cash budget- It is an estimation of the overall receipts and payments in cash over a
specific period of time (Otley, 2016). In EECL, its use can be made so that the managers are able
to properly estimate the cash requirements in an effective manner.
Advantages-
 The use of this budget is quite helpful in the organizations for the purpose of maintenance
of liquidity. Therefore this is highly beneficial for the managers of EECL.
 By making this budget the management can determine the best way to manage their cash
and other liquid resources to optimize their use. In the context of EECL, this can create
an advantage.
Disadvantages-
 This budget can create an impact on flexibility. For EECL this can result in a
disadvantage.
 Preparation of this budget consumes a lot of time in the organization. In EECL, this can
lead towards a disadvantage.
Overhead budget- In this budget, there is an estimation of various types of overheads
within the organization (Quinn and et.al., 2018). It can be very helpful for the management in
ensuring that proper segregation of overheads can be made. For the managers of EECL this can
be helpful in controlling of the expenses in an effective manner.
Advantages-
 Better segregation of overheads can be made when these reports are used. In EECL this
can create an advantage.
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 When this budget is used within the companies it can ensure that they are able to exercise
greater control over the operations in an effective manner. For EECL, this can result in an
advantage.
Disadvantages-
 Preparation of this budget within the companies requires the application of higher-level
of skills. For EECL this can create a disadvantage if its workers do not have these skills.
 In this budget, there can be an over-allocation or under-allocation of the overheads. In
EECL this can result in a disadvantage if the overheads are not allocated in a proper
manner.
Master budget- It is a budget which includes several types of smaller-level budgets in
the company and is inclusive of cash flow forecasts, financial statements and financial plan
(What Is a Master Budget, 2020). For EECL, it is quite important that they are able to properly
estimate the requirements in an effective manner with the use of this budget.
Advantages-
 With the preparation of a master budget a comprehensive overview of the organization
can be obtained. EECL can ensure that overall estimation of a business's earnings and
expenses can be made by preparing it.
 Deviations and Variations in the different processes of a firm can be identified
effectively. For the management of EECL, this can result in an advantage.
Disadvantages-
 Preparation of this budget is quite time-consuming for the firms. In the context of EECL
this can create a disadvantage.
 The use of this budget can lead to an increase in the overall costs and expenses. Thus for
the management of EECL, this can lead towards a disadvantage.
Justification- All of these planning tools are quite helpful for the managers in order to
create plans suiting their needs and requirements. This will allow them to be able to take
decisions for the future time period.
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TASK 4
P5: Comparison of organizations in adaptation of management accounting to solve financial
problems
Financial problem- It is a situation where creates an impact on the financial situation of
the firm. Thus it can lead towards losses for the organization (Shields and Shelleman, 2016).
Thus it is required from the companies that they are able to find a solution to the problem. Like
other organizations EECL also faces financial problems. The problems which it faces are as
follows-
 Segregation of overheads- In EECL the overheads are not segregated in a proper
manner. This can result in an increase in the overall level of expenses and thus an impact
can be created on the profitability of the organization.
 Mismanagement of job orders- In EECL, there is a problem which has been created in
the management of job orders. This has lead towards issues because the costs to complete
job orders has increased and thus this can create an overall impact on the level of profits.
Techniques for solving financial problems-
 KPIs- These are Key Performance Indicators. They are Financial as well as Non-
Financial. Their use can be made by the managers to identify and assess the overall
performance in a highly effective manner. Their use can be made by EECL to solve the
problem of overheads as by using them it can be judged whether there has been a
substantial increase in the overheads and the techniques which can be used to reduce
them.
 Balanced scorecard- In it, there is a constant monitoring by the managers on the staff
members in various departments and the tasks which are performed by them (Soderstrom,
Soderstrom and Stewart, 2017). Thus the overall performance of the organization can be
judged easily through it. In the context of EECL, it can be used so that the management is
able to solve the problem related to job orders.
Comparison between organizations-
Basis Asda Aldi
Financial problem It is facing the problem of
increase in the overall costs
It is facing the problem of
management of stock items
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due to wrong distribution of
overheads among the
departments.
due to improper application of
inventory control methods.
Management accounting
system used
It can make use of the Cost
Accounting System as it will
help in estimating accurate
cost for each product with the
purpose of analysing profits,
valuation of stock and
controlling cost at EECL.
It can make use of Inventory
Management System. With
this, inventory managers of
EECL will be able to adopt
effective methods including
barcodes and others to
maintain proper stock levels.
Application of the system It can apply this system by
ensuring that various costs can
be identified and therefore
right methods can be applied
to reduce them in an effective
manner. Further, this system
can also help in right
apportionment of overheads.
It can apply this system by
making sure that the various
stock items are identified and
thus the appropriate use of the
right methods of this system
can be made to manage the
stock items in a proper
manner.
Thus, it can be said that the management of EECL can learn a lot through the examples of
Asda and Aldi and can ensure that the right management accounting system is used by them to
solve financial problems. By making the use of Cost Accounting System the problem related to
overheads can be solved and by using the Job Costing System the problem related to job orders
can be easily resolved.
CONCLUSION
From the above report, it can be concluded that management accounting can be used to
be able to take decisions in a highly effective manner. It has various types of systems which can
be used by the companies. Its reports are very helpful for analysis and interpretation in an
effective manner. Different types of techniques can be used so that the costs can be calculated.
Budget helps organisation in making better decisions, emphasising towards financial objectives
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and preparing towards emergencies. When business have effective budgetary control then it
ensures that business savings are on track and spendings are in control. There are various
planning tools which can be used for budgetary control. Firms can make the use of management
accounting systems to be able to solve their financial problems.
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REFERENCES
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Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014.
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<https://www.thebalancesmb.com/budgeting-what-is-a-master-budget-393049>
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