Financial Analysis: Management Accounting Report for Imda Tech

This report provides a detailed analysis of management accounting principles and their application within Imda Tech (UK) Ltd, a manufacturing company. The report begins by differentiating between management and financial accounting, highlighting their distinct purposes and applications. It then delves into the practical application of costing methods, including the computation of income statements using both absorption costing and marginal costing. The report further explores various budgeting types, outlining their advantages and disadvantages, and the processes involved in budget preparation. Additionally, it examines pricing strategies relevant to Imda Tech. Finally, the report discusses the balanced scorecard approach and its implementation in delivering performance measures, offering a comprehensive overview of management accounting tools and techniques for financial decision-making and performance improvement. The report concludes by providing references for all the content included.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
a) (I) Definition of management accounting and difference between management accounting
and financial accounting.............................................................................................................1
a) (II) Significance of management accounting when used as decision making tool.................2
TASK 2............................................................................................................................................5
Computation of Absorption costing............................................................................................5
Computation of marginal costing................................................................................................6
TASK 3............................................................................................................................................6
(a) Types of budget and its advantages and disadvantages.........................................................6
(b) Process involved in preparation of budget............................................................................7
(c) Pricing strategies....................................................................................................................8
TASK 4............................................................................................................................................9
a) Balanced Scorecard approach and its implementation in delivering performance measures. 9
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is an important tool, used by the companies in decision making
process. It advises on short term and long term financial decisions of the company based on its
financial and non financial data. Imda Tech (UK) Ltd is a manufacturing company involved in
producing special charges for mobile telephones and other carry on gadgets that can be sold on
retail outlets of UK. The report discusses difference between management accounting and
financial accounting (Tucker and Lowe, 2014). Further it focuses on calculation of income
statement based on two methods that is absorption costing and marginal costing for Imda Tech
Ltd. Moreover, various types of budgets and budget process is discussed in the report. Moreover,
pricing strategies are suggested to Imda Ltd that can be adopted to sell chargers and other
gadgets to the customers. In the end, the report ponders on the use of balanced scorecard and
discuss the effect of its implementation on improving the performance of the company.
TASK 1
a) (I) Definition of management accounting and difference between management accounting and
financial accounting
Management accounting is a combination of accounts, finance and management where
business skills are used to add value to the organisation. It is a framework to identify, analyse
measure, interpret and communicate information in order to achieve organisational goals.
Management accountants are competent enough to give advice not only on financial issues but
also takeupon the big business decisions, formulate strategies and monitor risk (Boyns and
Edwards, 2013). Managers use financial information to make short term decisions for day to day
operations. They generate weekly or monthly report which shows availability of cash, sales
revenues, debt outstanding, trend chart, variance analysis etc. These informations are used to
create a metrics and evaluate business performance.
There are various differences between financial accounting and management accounting.
Some differences are listed below:
Financial Accounting Management accounting
Preparation of report based on past trends in
order to fulfil reporting requirements.
Uses the information of revenue, cash flow,
assets and debts to generate the trend report
and produce statistics which is helpful in
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taking business decisions.
Generate the financial information so that it
can be used by various other departments
functioning in the company.
UseConsiders the financial information to
display the complete picture of the business
which act as a success parameter while
comparing the businesses.
The financial produced are based on past
finance trends of the company.
It is based on current and future trends and
therefore, the results are not exact (Parker,
2012). Various factors such as economical and
legal factors are considered while forecasting
financial for the company.
Financial accounting is produced for the sake
of external stakeholders in order to convey
company's financial position.
Management accounting is produced for
internal use.
It is precise and follow the principle of
Generally Accepted Accounting Principles
(GAAPs)
It is more dependent on estimates and forecasts
rather than using exact numbers while taking
decisions.
a) (II) Significance of management accounting when used as decision making tool
Management accounting plays vital role in decision making process. This tool is used by
every department before reaching to any conclusion. It helps to take sound decisions for the
business. Imda should use this important tool of decision making because:
 It takes care of inflow and outflow of cash and plan cash wise financing based on short
term and long term strategies of the company. For instance, analysing the current ratio
which is calculated by dividing current assets and current liabilities (Bodie, 2013). It
verifies that whether the business will be able to meets its short term debts with the
available current assets.
 It helps to estimate income and expenses of the company at a certain point of time. It
ensures that the business is going on track and as per the plan of the managers. It helps to
determine that the company have sufficient revenues and is running into profits. If not,
the Imda Tech is required to take necessary steps to improve business conditions.
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 It helps to read the generated reports and take decisions based on them. For instance, if
the budgeted sales on the company are way more than that of actual sales, the company
have to investigate the reason of variance in order to get the budgeted and actual sales
equal.
 It helps to ascertain losses or risks beforehand, which further prevents the company from
bad financials.
 It helps to take cost control measures which can further reduce the prices for ultimate
consumers (Renz, 2016). When the quality of the products are predetermined then it
becomes easy to produce quality goods and transfer it to ultimate consumers.
 Management accounts are helpful in making important decisions forof the company
based on the financials present in front of the management accountants. It also measures
the performance of each department by comparing actual cost with that of standard cost.
The deviations found between the cost can be termed as good or bad conditions based on
the favourable and unfavourable values.
 Management accounting helps to increase the efficiency of the business by evaluating the
risk beforehand and take important measures to achieve the organisational goals (Soin
and Collier, 2013).
b) There are different types of management accounting systems. Some of them are mentioned
below: Cost accounting system: It is a toolprocess to estimate the cost of a product in order to
analyse profits, evaluate inventory and control cost of the product. It is important to
estimate correct cost of the product in order to evaluateidentify if the product is profitable
or not. Further, the cost of the product helps the company to evaluate the closing
inventory value, work in progress, finished goods for the purpose of preparing financial
statements (Otley and Emmanuel, 2013). Cost can be of three types:
◦ Actual cost: The amount actually occurred in opposition to that of estimated amount.
Cost of actual direct labour cost, material cost or predetermined overheads on
manufacturing are the actual costs incurred by Imda.
◦ Normal costing: In case of normal costing the cost of direct material and labour are
actual. However, the cost of overheads are estimated.
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◦ Standard costing: It is a tool to plan budgets, manage and control costs and evaluate
the performance of the management. It estimates the cost of production.
 Inventory management systems: Use of desktops, barcode scanners and printers and
mobile devices is conducted to design and provide the management of inventory. It tracks
two main functions of warehouse that is receiving and shipping (Caglio and Ditillo,
2012). The main motive is to control the current inventory level and reduce the situation
of under stock and overstock. It improves the stock accuracy of the company and further
helps in smooth workflow. Imda can use this system to track its inventory level and take
smarter inventory decisions. Some functions of inventory management system are:
◦ Creating orders of purchase
◦ Receiving, allocating, adjusting and disposing the inventory
◦ Creating sales orders
◦ Picking, packing and shipping the product
◦ Counting the physical inventory available in the warehouse and evaluating cycle
counts.
◦ Printing barcode labels
 Job costing systems: It is a process to collect information with respect to the cost
associated with the production of a specific product or service. Job costing system is used
when cost information is required to be submitted to the customer under the contract
when customer himself is going to bear the cost (Chenhall and Moers, 2015). It is
required to collect the following information, such as:
◦ Direct material
◦ Direct labour
◦ Overhead cost
This job costing system can be tailor-made according to the requirement of the customer
as some customer allow charging the cost from them, when buying a product.
 Price optimising system: It is tool used by the company to assess the reaction of the
customers to different prices of the products and services using various channels. Based
on the evaluation it is assessed that which price of the product will serve the objectives of
the company to the maximum. For instance Imda can evaluate its pricing strategy of
chargers by adopting various methodologies (Lavia López and Hiebl, 2014). The price
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chosen should meet atleast basic demands of the product. It starts from segmentation of
the product that is to whom the product will be offered by the company. Imda can further
evaluate that how demand can vary at different level of pricing strategies. The company
can choose the point where it can fulfil the demand and also earn profits. Price optimising
technique helps to determine initial pricing, promotional pricing and discount pricing of a
product or service.
TASK 2
Computation of Absorption costing
Preparation of income statement of Imda ltd. For the month of September using
Absorption costing
Income Statement using Absorption Costing Method
Particulars Per Unit Cost Amount
Number of units produced 2000
Number of units sold 1500
Sales 35 52500
Less: COGS 30000
Add: Over absorption cost (Working Note 2) 5000
Cost of sales (Working Note 1) 35000
Gross profit 17500
Less: Non manufacturing cost of production
Fixed selling, distribution and administration expenses -10000
Variable selling, distribution and administration expenses -7875
Profit/(Loss) -375
Working Note 1:
Calculation of Cost of Sales
Particulars Per Unit Cost Amount
Manufacturing cost Units= 1500
Direct material 8 12000
Direct labour 5 7500
Variable production overhead 2 3000
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Fixed production overhead 5 7500
Cost of sales 20 30000
Working Note 2:
Calculation of Over Absorption cost
Particulars Amount
Budgeted fixed overhead 15000
Actual fixed overhead (2000/3000*15000) 10000
Over Absorption cost 5000
Computation of marginal costing
Preparation of income statement of Imda ltd. For the month of September using Marginal
costing
Income statement using Marginal Costing Method
Particulars Per unit cost Amount
Number of units produced 2000
Number of units sold 1500
Sales 35 52500
Less: Marginal cost of sales (Working Note 1) 30375
Contribution 22125
Fixed Manufacturing Cost 15000
Fixed selling, distribution and administration expenses 10000
Net Profit/(Loss) -2875
Working Note 1:
Calculation of Marginal Cost of Sales
Particulars Per unit cost Amount
Units sold 1500
Direct material 8 12000
Direct labour 5 7500
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Variable Production Overhead 2 3000
Variable selling, distribution and administration expenses 15% of sales value 7875
Total marginal cost of sales 15 30375
TASK 3
(a) Types of budget and its advantages and disadvantages
Budget is an estimate of cost, revenues and resources for a specified period. It reflects the
future positioncondition of the company. A budget serves as an action plan in order to achieve
quantifiable goals, to set standards for the performance and devise a plan to cope up with
foreseeable adverse conditions. There are five types of budget in management accounting (Christ
and Burritt, 2013). They are:
 Master Budget: It is the comprehensive statement of all the budgets which gives an
overview of all the budgets. It is the projected activity of cash budget, estimated income
statement and estimated balance sheet. Master budget is interrelated to various other
departments budget which a re also called subset budgets. It plays an important role in
setting standards to achieve performance objectives. Imda Ltd. can set estimates and
evaluate the performance based on the set standards by comparing the estimates with the
actual performance.
 Operational Budget: This type of budget covers the estimation of revenues and expenses
of day- to -day activities conducted by the company. Revenues can be in terms of sales
and expenses can be in terms of cost of goods sold, overhead cost and administration cost
which are directly related to production (Figge and Hahn, 2013). Operational budgets are
prepared weekly or monthly rather than annually in order to reduce the variance between
actual and the estimates. Managers compare the variances over the years in order to
reduce variations between actual budget and estimated budget.
 Cash flow Budget: It estimates the inflow and outflow of the business on day -to -day
basis. It predicts ability of the company whether the company will be able to have enough
cash inflows in order to meet the demand of outflows. Managers prepares and monitors
this budget so that the company do not get involved in unwanted outflows. Cash flow
budget suggests production cycle and inventory levels so that the company can utilise its
resource to the maximum.
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 Financial Budget: This type of budget estimates receipts and payments where revenues
are from core business activities and cost incurred is from capital expenditures. Managing
core assets of the company in order to evaluate financial health of the company. It helps
to preparein preparing strategic plan for future. Imda can use this budget in order to
evaluate financial performance of the business.
 Static Budget: According to this type of budget, expenditure remains the same in
accordance with variations in level of sales (Fullerton, Kennedy and Widener, 2013).
Overhead cost budget is a type of static budget. It is fixed for entire period, however, it
can change over a period due to external forcing factors.
(b) Process involved in preparation of budget
Process of preparation of budget involves the following listed steps:
 Getting estimates: Managers get the estimates of sales, production level, resource
availability based on the actual outcomes of previous year. Managers are also required to
consider current market forces that can change budgeted amount which has a great
impact on the functioning of the company. Plan is prepared according to detailed
discussions with the managers of different departments involved in the company.
 Coordinating estimates: Managers evaluated the plan submitted by various departments
and determine whether the plan has enough potential to fulfil the overall objectives of the
company. Managers also evaluate the availability of resources which can be allocated to
different departments that are present in Imda Ltd.
 Communicating Budget: The budget is then communicated to respective departments
and responsible managers. After evaluating the availability of resources and allocating
the budget to different departments, the budget is communicated for applying it into
actions. If any changes or modifications are performed in the final budget then it is also
communicated to the responsible managers (Fullerton, Kennedy and Widener, 2014). It is
required that the budget is effectively communicated to the managers for its successful
implementation.
 Implementing the budget: After preparation of final budget, it is finally implemented
for operation in the next budget period. Departments are provided with necessary
material, labour and other resources for successful incorporation of the budget.
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 Reporting progress towards the objectives: The performances achieved by different
departments are required to be communicated to top level management so hat they can
assess whether the budget is able to fulfil its objectives or not. These investigations can
further help in making modifications in the stated budget for high performance.
(c) Pricing strategies
Pricing plays an important role in the success of any produce or services. It is required to
prepare the pricing strategy in such a way that it can fulfil Organisational goals. Imda Ltd can
use various pricing strategies in order to promote its special chargers. Some strategies are listed
below:
 Premium Pricing: According to this pricing strategy, Imda can keep the price of its
chargers a bit higher than that of its competitors. This strategy is used when the company
is offering something unique i.e. market penetration or when the product is launched by
the any company for the first time in the market (Herbert and Seal, 2012). It is an
optimistic approach of pricing with a hope to earn higher revenues in the early stage of
product cycle.
 Penetration Pricing: In this strategy, the company enters the market with relatively low
price in order to attract the customers towards that product. The idea behind this pricing
strategy is to initially create loss with the hope to earn profits in the late stage of product
cycle. Imda Tech can use this policy which will increase its word of mouth in the market
and also will create brand awareness about the special chargers.
 Economy Pricing: The company charges bare minimum price from the customers in
order to create a customer base. The products offered are not fancy but basic products
that are easily available in the market. This strategy attracts the customers of specific
segment which is very price sensitive due to common product offered by various
companies.
 Price Skimming: The company offers the product at maximum price and gain revenues
in the initial stage of product cycle (Lambert and Sponem, 2012). The idea is to earn
maximum profit in the beginning before any other competitor enter the market with same
product at low price. Imda Ltd can use this strategy and earn high revenues at initial
stage.
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 Psychological Pricing: This is strategy is based on the theory that certain prices have
great impact on the minds of people. For instance pricing a product for 99 rather than
100. However, the difference is just for 1 but it created high psychological impact. People
tend to purchase a product priced in odd numbers more rather than when it is common
even numbers. Imda Ltd can use this strategy and which will definitely impact sales and
generate higher revenues for the company.
TASK 4
a) Balanced Scorecard approach and its implementation in delivering performance measures.
Balanced Scorecard approach is the strategic performance management tool to identify
and improve the variousdifferent internal functions of the business and their consequent
outcomes. It's is used to measure organisational performance and furnishing feedback to
organisation (Cooper, Ezzamel and Qu, 2017). To make better decisions for the company the
proper and relevant data are to be collected, as they are used by executives in decision-making
process.
Measuring financial performance is not adequate to measure Imda's current position. This
approach views four major perspectives of the organisation, Financial, Customers, Internal
Business Process and Learning & Growth.
 Financial: Steps that are to be undertaken to improve sustainable economic value. Data
such as turnover, expenses, financial gain are used to determine the financial performance
of Imda Tech. These financial metrics includes dollar amounts, financial ratios, budget
variances or income targets. Focusing upon this perspective, coves the profit targets and
revenue targets of Imda. Additionally, Budget and cost-saving targets are looked upon.
The good financial performance is the outcome of increased performance in other three
perspectives.
 Customers: Their needs and desires from the company and ways to achieve those
requirements by customers. Growth and service targets with the branding objectives are
focused in this perspective. Satisfaction of customers with product and services offered to
them, regarding prices, availability and quality. They provide feedback on their needs
being fulfilled with current product or service.
 Internal Business Process: Identifying Levels of productivity, efficiency and quality to
satisfy the stakeholders. Management of product range is the another measure for this
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perspective. Focuses on internal operational goals and includes objectives relating to
deliver services and product to customers. Here, companies outline the internal business
processes goals and to push the organisational performance the things that are to be done
really well internally.
 Learning & Growth: Focuses on intangible drivers of future, broken into three parts;
Human Capital their skills, knowledge and talent, Information Capital i.e. databases,
information system, networks and technology infrastructure. Third component is
Organisational capital; culture, leadership, employee alliance, cooperation and
knowledge governance. Contribution from employee management system, including
feedbacks, support increased performance. Also, investigating of the training and
knowledge resources.
These four perspectives comprehend the vision and strategy of the company and require active
management to analyse the data collected. Therefore, the balanced scorecard is often referred to
as a management tool, not a measurement tool.
Measurements of these Perspectives: Financial- Return on capital employed, Economic value added, turnover growth and cash
inflow and outflow. Net income and ROI (return on investment) for profit oriented Imda,
they are measures for improving performance. It provides a common language for
assessing and comparing financial position of the company. Customers- Market Share, Customer acquisition, retention, profitability etc. KPIs in this
perspective considers customer satisfaction, service levels, net promoter scores, market
share and brand awareness. Internal Business Process- The measurement for internal value chain are: Innovations,
Operations and After sales services. KPIs include process improvements, quality
optimisation and capacity utilisation.
 Learning & Growth: Under this perspective the measurement generics are people; the
employees in the organisation and the systems followed to measure operational
performances. KPIs considers staff appointment, skills appraisal, performance
management scores and corporal culture audits. (DRURY, 2013.)
Success Factors in Implementation
1. Selecting the appropriate Scorecard Champion.
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2. To start the two way communication process in Imda Tech. And a common language of
communication.
3. To see this approach in the long term journey for the organisation.
4. Take help form the outsiders if needed for better implementation of approach.
5. Provide a non-subjective way to see if strategy is working.
6. Offer a scrutiny that gauges the degree of performance change over time.
7. Employees' attention on what matters most to success.
8. Measuring of accomplishments, not just of the work that is performed.
9. Help trim down the intangible uncertainty.
Different Scorecards have different impact on each organisation.
While the four perspectives of the Balanced Scorecard are distinctly broad ranging. Some
companies have prolongedextended the four perspectives added other perspectives to highlight
specific areas of performance. Other perspectives that especially matter to them, such as health
and safety or corporate social responsibility and environmental performance.
This approach does not affect each organisation in same way. Charities are varying for
each for commercial companies, that their primary objectives are non-financial. They have to be
organised in a financially efficient way and appeal to investors to maximise the income
generating potential. For a military organisation implementation of directives should be quick
and effective, because they are delivering services to public on government principles. But the
overall perspectives remain relevant to every company.
Approach to Financial measurement of Imda Tech.
As per the authors the sound approach to financial measurement is to make sure that the
data collected includes Past data, Current data and Future data.
 Past data is all about the performances of the company in previous months or recently
passed financial period.
 Current data are today' performance, the achievements of the company in present
financial period.
 Future data is the estimated position of company in coming months or period.
From a financial point of view, the purpose of business is to create wealth for owners
(shareholders). Output and previous financial measures helps the organisation in keeping score
of how well it is doing for creation of wealth. Such data are always past focused, they are based
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on already occurred events, for ex. net profit for current period versus previous period. Average
revenue, average stock price for current and previous period. These are the corporate
performance measures based on past. Any kind of information provided in report to shareholders
or other stakeholders are considered as past data.
Another measure of financial performance is value of total assets compared to liabilities
in the organisation or the liquid assets the company holds. Third type of data required in overall
set of measures is used to prognosticate company's financial performance (Parker, 2012.). These
predictions are used to plan future workload and resource requirements.
Organisations often curtails the costs during hard times, which may cause to them to
mortgage their future for benefit of short term financial gains. Growth in turnover from a specific
geographical region or a particular sector may also be a future-oriented financial data if the
company is entering into new or emerging markets.
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CONCLUSION
With this report the management accounting techniques are discussed in the retail sector
for Imda Tech UK, dealing in special charger for mobile phones and other gadgets.
Understanding of management accounting and its importance is highlighted as a decision-
making tool. Further, types of management accounting and their varying uses in different
departments to improvise reports are discussed. For example Cost accounting or inventory
management has different benefits to different organisations. Income Statements has also been
prepared using absorption and marginal costing methods. The managerial involvement in
preparing budgets and taking of responsibility of the budget preparation lies with senior
management. Departmental budgets are to be prepared depending upon the operations of that
particular unit. Also, process for preparing budgets and different pricing strategies are discussed
in the report. Balanced Scorecard approach and its implementation in delivering range of
performances are explained through this report.
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