Management Accounting Report: Cost Analysis and Income Statement

This report on management accounting analyzes various aspects of cost accounting and financial reporting. It begins with an introduction to managerial accounting, its objectives, and its application within Hilit GB, a leading engineering and technology company. The report then delves into the requirements of management accounting, the differences between management and financial accounting, and various types of management accounting systems, including inventory management, price optimization, cost accounting, and job costing. The report also covers the methods of management accounting reporting, such as cost reports, budget reports, performance reports, account receivable reports, control reports, routine reports, and special reports. Furthermore, the report examines cost analysis techniques, specifically marginal costing, and demonstrates how to prepare an income statement using marginal costing, including advantages and an example. The report highlights the importance of understanding costs and their impact on profitability, offering insights into financial performance and decision-making within the company.

Management Accounting

INTRODUCTION
Managerial accounting can also be recall as cost accounting. This type of accounting is
mainly use for making internal decision that can help firm in growing. it has objective such as
controlling, planning and also the decision making. This report is based on Hilit GB company is
one of the world's leading engineering and science technology which is expert in the precise
measurement and also the healthcare. It supply products and services which is used in the
application such as jet engine, wind turbine. This group currently had more than 80 offices in 36
countries and around 3,000 are employees worked here Present report lay emphasis on the about
the various management accounting system with the necessary requirements as well as the
managerial reports. it will also focus on the techniques of cost analysis, preparation for the
income statement by using the marginal as well as the absorption costing.
LO 1
P 1 Management accounting and its requirement
Accounting is an essential instrument which use to analysis and evaluate the organization
and its activities. Management accounting refers to an application of professional skills and
knowledge for the interpretation of performance and accounting information. It aids to the
management team of Hilit GB limited. To the preparation of rules and policies in operation,
planning and control undertakings. It is a concept for an effective and efficient planning for
selecting between alternative actions of firm. It has beneficial in decision making, strategic
management, planning of budgets etc.. Management accounting is not regulating by any law, it is
used by the organization for internal purpose(Kaplan and Atkinson, 2015). It is considered for an
evaluation and in making of effective planning and controlling in the organization. It considers
monetary and non- monetary informations of the business. Management and financial accounting
are different from each other, the difference in between them is that data of financial accounting
is aimed to offer the information to outsiders parties of organization, whereas management
accounting is focus on to assist managers to making any decisions within the business. Following
are the types of management accounting:
Inventory management:
Inventory management is a method of overviewing and controlling over the use, order,
and storage which production management applies in the manufacturing and selling of the goods.
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It is a system which combines barcodes, mobile software, etc. to manage stock of goods and its
supply in the market. Inventory management system also looks into the quality and quantity of
finished products that are ready to sell in the market(Otley, 2016). The main aim of such system
is to accelerate current inventory level and minimize the situation of overstock and under stock
of products. By this system manager gets all the information about the stock quantity across all
the location and have an insight and being capable to makes the decisions regarding sufficient
inventory (Maas, Schaltegger and Crutzen, 2016). Functions that represents the inventory
management system are: generating purchase orders, allocating it among the departments,
adjusting, disposing the stock, and packaging, shipping of goods etc. are the major functions of
the system. It is very beneficial to the firm it helps to improve the workflow within the business
and intensify stocks accuracy.
Price optimization system:
Price optimization can be defined as calculative analysis of product and its market. In
which it is determined that how customers will act about the cost of their goods and services
through various channels(Cooper, Ezzamel and Qu, 2017). It helps to organization by evaluate
and determine the price that a firm applied on their products are fulfilled their objective of
maximize the profitability or not. It creates an alternative through the broad performance or cost
reliable under the given guidance of system by which it increases the craved aspect and cutting
down the unwanted one.
Cost accounting system:
This is the method which applied on the cost of goods for stock valuation, cost control
and evaluation of profitability. It is performed based on either ABC (activity based control) or
traditional costing system. Cost accounting is type of accounting system which intent to getting
cost of production through monitoring on the expenditure on input material in every production
and add on fixed expenditure like depreciation (Quattrone, 2016). It measures the record and
then compared it to the actual results of outcomes to aid the financial management of the firm to
measure the financial performance of business.
Job costing system:
Job costing system is the process which involves the collection of data regarding the cost
associates with a particular production. Such information might be mandatory in order to provide
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the cost content to the buyers. It is also useful to accelerates the quality of computation system of
the business. It helps to financial management of Hilit GB Ltd. to decide the price of product
with reasonable profit rate. Job costing system needs three types of information to aid
management which are: information about the cost of direct material that were used in the
production process. It is calculates through tracking on cost sheets. Second one is direct labour
means the cost of expenditure on manpower to produce goods(Malmi, 2016). And the third one
is overhead, it has includes the depreciation of plant and machinery, rent and equipments at the
end of financial year.
P 2 Methods of management accounting reporting:
Management accounting reports are providing information which needs in cutting down
the expenditure of business, reward grate performing employees and makes an investment in a
beneficial era which offers high rate of return for the firm. It concentrates on the internal
information received through financial accounting(Weetman, 2019). It applies on the planning,
controlling and decision-making of the firm which depends on statements showing income, cash
flow, balance sheet etc. these reports are use for regulating, planning, decision-making and
ensuring the performance of the firm. These reports are continuously dealing it the records of the
account departments and bookkeeping period, according to the requirements. Following are the
types of managerial accounting reports:
Cost report:
Managerial accounting calculates value of goods which are produced in the financial
year. It is done by taking all the information about the raw material which is purchased in the
year to manufacture the actual goods and also overheads, labour or any other cost are included in
the calculation of final cost of production(Ax and Greve, 2017). After all the collection of
expenditure data sums and divided with number of goods produced. In these report all the data
regarding the cost per unit are summarized and report provides capability to manager to decide
the market price of the product with a reasonable profit on the basis of such cost reports.
Budget reports:
Budget reports helps to analysis the overall performance of the firm or assist mangers to
evaluate the department's performance and control over cost. The estimated expenses in budget
report is based on actual expenses of past year setting to the future forecasts. It can be used as
planning of providing incentives to the workers. Report includes the budget of the firm and list
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of the income and expenditure sources in the upcoming year. Budget always prepare for the
unforeseen situations which might arise. Generally budget are prepare on yearly, monthly or
weakly basis. It guides managers to negotiates with the vendors and supplier(van Helden and
Uddin, 2016).
Performance reports:
Management accountants using budget to evaluate actual expenditure and revenues with
the amount which given in the budget(Bobryshev and et.al., 2015). These reports are constructs
for examine the actual performance of the company. Normally manager of Hilit GB Ltd. Implies
these performance reports for making key strategic decisions relates to the future of business.
These report is vital for all the business to keep accurate measure of mission.
Account receivable reports:
Organisation relies on huge credits, account receivable reports provide recalling
information to the manager in a brief. It helps a manager to find out the issues in the company
regarding the collection process(Malina, 2017). If the report finds defaulters cases then firm may
needs tighter credit policies as cash flow is hard to operation for any business. Report shows the
bad debt that needs to be written off.
Control reports:
Control reports deals with the two major aspects. One is personal performance and the
other one is the economic performance. Personal reports are formed to judge and evaluates the
performance of managers. To identify that what kind of performance is given under the
prevailing situations and find the reasons of deviation in performance to resolve them. Economic
reports shows that how the responsibility of economic activity has centred (Chiwamit, Modell
and Scapens, 2017). Such evaluation is requires to the utilization of cost accounting. It considers
the following terms:
 Control report should relate to responsibility of managers.
 There should be comparison between the actual with standard performance.
 Important information should be highlighted.
 It should be calculated various ratio like efficiency ratio capacity ratio etc.
Routine reports:
Such reports are prepared for day to day working concern. It is regularly sent to the all
level of management. Routine reports may relates to the daily production figure, capital
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expenditure, sales informations and market trends etc. it is made as per daily, weekly, monthly or
quarterly basis(Bui and De Villiers, 2017). Important information in such reports are to be
presented in the different way or different links.
Special reports:
Special reports are made for special purpose only. Such reports are prepared in
accordance to needs of situation. If the available is not sufficient then data may collected again
and crates a specific report over the topic. It covers some sections in the report are: Reason for
the report, Investigation, Conclusions and recommendations(Zeng, 2018). It deals with the
following topic:
 Technological problems.
 Reports about Change in the method of production.
 Buying decisions.
 Reports about the Change in government policies.
 Trade association matters.
 Disputes among the labours and cost of production.
 Information about the market evaluation and methods of distribution.
LO 2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs
Marginal costing:- it is costing technique which is used to calculate the marginal cost. The cost
is occurred over the one more unit of production is called marginal cost. Marginal cost means the
cost of a marginal cost produced of the extra unit is produced(Malina, 2017). The marginal cost
is increase if the there is increase in the one more unit is produced.
Characteristics of the marginal costing-
 Classified into fixed cost and variable cost:-this cost is evaluated on the basis of the
variability of fixed cost and variable coast
 Valuation of inventories:- while valuation of the stock the variable cost is considered and
the variable selling distribution are not included.
 Determination of selling price:- the prices are decided on the basis of the marginal cost
and contribution of marginal cost.
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 Profitability:- marginal cost is help to ascertain the profitability of the company.
Advantages of marginal costing(Cooper, Ezzamel and Qu, 2017).
 easy to operate and it is simple to understanding
 marginal costing is very useful in planning of profit it determines the profitability of the
production at all levels
 the fixed cost is not controllable in the short run so this will help in the to reduce the
variable cost in the short run.
Interpretation:- under marginal costing cost will be increase in one more unit of production it
will increase for the rest of the production. In the month of may company is having loss of 550
pounds it shows that company is in loss(Otley, 2016). To make profit company have to increase
its sales to earn more profit. There is total sale of 15000 and contribution is 10200 because of the
cost of production 8000 and the cost of inventory 3200 which make an equation 1500 – 8000 +
3200 = 10200. fixed cost of the production 10750 which makes the loss of 550 pounds there is
fixed cost production 4000, selling cost 4000, administration expenses 2000 and sales
commission is 750.
Absorption costing:-
Absorption costing is also known as the full costing in the accounting standards. It is a
method to get cost associated with the manufacturing of product. It includes all the cost which
are incurred in manufacturing of a product. It includes wages of workers, raw material used,
overhead cost etc. it incudes only direct cost of the production(Zeng, 2018).
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Components of the absorption costing
 Direct material:- in this it includes only those materials which are directly related which
the finished goods.
 Direct labour:- the direct labour is used in the production of final goods.
 Variable manufacturing overhead:-this is those cost which are varied with the volume of
the production. It included only the cost of the finished sold goods (Chiwamit, Modell
and Scapens, 2017).
 Fixed manufacturing overhead:- this includes the fixed expenses related to the sold goods
only.
Step in absorption costing
 assign cost to the cost sectors:- this is related with the assignment of the cost to its origin
from which the cost is generated.
 calculation of usage:-after the assignment of cost to its origin second step is to calculate
the usage or the raw material used in the production and the cost of the raw material
which is used in the production of the good(Quattrone, 2016).
 assessment of cost:- after the allocation and calculation of usage the final step is to
calculate the cost of the production and the sold goods and to find out the total absorption
cost of the given data.
Interpretation:- From the above table it can be interpreted that absorption costing of the cost
related to the production of the product. This will help to get the profitability and the
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ascertainment of the production. In the above data it shows that the in absorption costing is
showing profit of the 37 pounds in the same level of cost and the same level of the production
where selling is 15000 and the net profit is 37 pounds just because it works on the direct cost and
actual production cost
Recommendation:- in the above given data it clearly shows that the absorption costing is better
for the Hilti GB Ltd because it gives profit of 37 pounds in respect of the marginal costing is
showing the loss of 550 pounds so that it is more important for the company to adopt the
absorption costing.
LO 3
P4 Advantages and disadvantages of different types of planning tools used for budgetary control
The process through which budgets are being arranged for future date and are compared
with the actual results in finding out the variance is known as budgetary control. The variance is
being compared so that alternate actions can be taken if is it in a negative interest of the Hilti GB.
It is the most essential tool in the organization for controlling costs and maximizing profits. It
promotes centralized control with the decentralized task(Ax and Greve, 2017). It assists in
smooth operation of the business because everything is being provided and planned for in
advance.
The main objectives of a budgetary control planning as budgeting insures effective
planning by setting up budgets, increasing efficiency and economy, increasing profitability and
anticipating future capital expenditure.
It has some disadvantages too like it is difficult to prepare accurate budgets under
inflationary situation (Alawattage, Wickramasinghe and Uddin, 2017). Company can face a lots
of difficulty in preparing the budget under the condition of inflation. Also for preparing this type
of budget a lot of expenditure is needed. So it can increase company’s operational cost. Also
preparing of budget for future duration is uncertain. Firm cannot rely on it particularly. So they
need to take out any backup plan for this. It is a tool of management but this tool do not lay any
emphasis on decision making of management.
Ratio Analysis: Ratio are correlation between two numbers which are derived from the financial
statements comparisons that gives more clear understanding of them. This method helps in
knowing about liquidity position of company. By this company can also know about the amount
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of profit which firm is going to earn by comparing financial statements. Company can also
compare their ratio with any other company to know about the exact position in market.
(Quattrone, 2016).
Advantages Disadvantages
 Ration analysis can help company in
knowing about their profitability and
liquidity statement.
 Ratio analysis can also help in knowing
the trends of company. It assists in
deterring firms position financially.
 It allows the Hilti GB in comparison
with other organizations, industry,
standards and intra-firm comparison.
 after making changes to the financial
statements for improvement of ratios
the use is over , after this they end up
being nothing but window dressing(Ax
and Greve, 2017).
 Accounting ratios completely ignore
the qualitative aspects of the Hilti GB
as it only take money aspects into
consideration.
 They do not solve any financial
problems of Hilti GB, they are a means
to end, not the actual solution.
Variance analysis: it is a technical jargon which is used to explain a situation where actual
results or outcomes of an event differs materially and significantly from planned, expected
targeted results and outcomes. The process of variance analysis is simple as it is just an act of
comparing standards with actual (Cooper, Ezzamel and Qu, 2017). Hilti GB usually set standards
from which actual performance is being judged. The preparation of variance analysis sheet is
being done by accountants in Hilti GB which makes the importance of accounting in decision
making very vital. There are majorly three types of variances related to specific type of costs that
are material price variance, fixed overhead spending variance and labour rate variance.
Advantages Disadvantages
 It helps Hilti GB in performance
measurement of managers and
employees.
 Variance analysis cannot help company
in controlling the cost.
 Analysis of variance cannot identify the
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 Performs responsibility accounting by
making the managing department
aware about all the grievances which is
coming in the firm.
 Variance analysis can be useful for
clearing up the grievances which firm
has been facing.
 Analysis of variances is basically used
for cost controlling.
 This analysis also helps in better
understanding of things as variances are
been analysed by company. (Otley,
2016).
planning inefficiency which is been
caused by company
 Analysis of variances can cause delay
in decision making of firm which they
need to provide early.
Zero based Budget: Zero base budgeting helps company in bringing out the new budget. It
clearly justify the expensed which needs to be placed. It must justifies all expenses before the
addition to the new budget, even old and recurring expenses are to be taken in consideration. The
primary objective of zero based budgeting is the reduction of unnecessary cost by looking at
where the cost can be deducted. The major advantages are lower costs, flexible budgets, and
more disciplined execution. Whereas disadvantages includes being manipulated by savvy
managers and bias towards short term planning.
Advantages Disadvantages
 It ensures that managers of Hilti GB
thinks about how the money is being
spent in every budgeting period by
justifying all operating expenses
(Kaplan and Atkinson, 2015).
 In zero based budgeting, legacy costs
may not be examined for years until
 Zero base budgeting when used in
company can lay short term thinking in
organization. This can let delay in
decision making. (Kaplan and
Atkinson, 2015). By this firm can lose
competitive edge.
 Zero based budgeting also make use of
more resources which actually results in
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there is some sort of economic shock
that forces the company to take extreme
actions.
Over and more utilization of resources.
P5 Comparison of organisations adapting management accounting systems to respond financial
problems
In order to respond financial problems, management accounting Is being adopted by
many of the companies. It plays a major role in overcoming the financial problems. Management
accounting is a process of preparing management reports and accounts to provide accurate and
timely financial and statistical information to managers for purpose of decision making which
will result in prevention of problems arising in future (Chiwamit, Modell and Scapens, 2017).
Hilti Gb is facing problems in cash flow and variance which being stopping the
organisation to grow. It is being forcing the organisation to increasing turnover, these problems
can be solved with management accounting. Where as Babcock international is an organisation
which is facing the problem in over costing, which can be overcome with the help of resource
management.
Hilti GB
Company is facing problem in cash flows which is affecting the productivity as due to
insufficient cash flow. For survival of a company cash flow plays a major role as all the dealings
are in terms of monetary forms(Alawattage, Wickramasinghe and Uddin, 2017). This is because
company has not implemented budgetary method and performance management method, due to
which cash flow are not stable of Hilti GB. With the inappropriate cash flow company is facing a
problem in variance. There is a huge variance between the previous years. For overcoming these
problems Hilti GB should use benchmarking and cash budget.
 Benchmarking is process of measuring performance of a company's services, its products
and the processes against those of another business. Considered to be the best in the
industry. As Hilti GB is facing problem in variance it is the best way to overcome this
problem. As there was too much variance in actual and standard performance of Hilti GB
it is being necessary for the company to measure the problems which are being arise. The
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problems which are being faced by the employees are to measured so that the employees
work efficiently and match the standard which is being aimed by the company.
Benchmarking is the best alternative to overcome the financial problem of
variance(Chiwamit, Modell and Scapens, 2017).
 A written estimate of a company's future cash position, which predict for some future
period cash receipts from different sources is known as a cash budget. Hilti GB was
facing a financial problem in cash flow management. It was because of high creditability
in the market which results in management of cash flow in a inappropriate manner by the
company. A cash budget plays a major role in managing the cash flows of the
organization because it contains the forecast of cash inflows, the forecast of cash
outflows and the forecast of cash balance which helps the company in managing the cash
flow of Hilti GB.
Babcock international
The company is facing the problem of over-costing from the past few years, which is
being resulting in decreasing profitability of the organization. This factor is making the company
to face problem of less profit than rivals. Over-costing is because of improper allocation of
resources which result in underutilization of resources that leads to increase in the cost of the
products produced(Malina, 2017). For overcoming this issue of financial problem, proper
utilization of resources should take place by using the method of activity based costing.
 Activity based costing assigns manufacturing overheads costs to the products in a better
logical manner than the traditional approach of simply allocating costs on the basis of
machine hours. It first assigns costs to the activities which are the real cause of overhead.
This method allocates the cost in much effective manner which will help Babcock
international to overcome the problem of over-costing(Quattrone, 2016). As the costs are
being allocated in a systematic manner which leads to proper utilization of resources
resulting in decreasing the costs.
CONCLUSION
From the above study it can be concluded the every company should management
accounting is very important. It helps to track all the expanses of the production. The Hilit GB
has to manage the system of the cost accounting, inventories management and price optimisation
system. And also it has to manage the information of the completion of the costing of the
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company. It aslo has the marginal and absorption costing in which firm can adopt the absorption
costing for the calculation so that it help to ascertain the real cost of the organisation.
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