Management Accounting Report: Financial Analysis of KEF Ltd

This report provides a comprehensive overview of management accounting, focusing on KEF Ltd, a manufacturing company. It explores the meaning and different types of management accounting systems, including job costing, inventory management, cost accounting, and price optimization systems, along with their benefits and requirements. The report also details various management accounting reporting methods, such as cash, budget, performance, and cost reports, and evaluates how these systems are integrated within organizational processes. Furthermore, it delves into different costing techniques, including absorption and marginal costing, presenting calculations for production costs, total costs, and income statements. The report also examines the benefits and drawbacks of planning tools used in budgetary control and compares how different organizations adapt management accounting systems to address financial challenges, ultimately highlighting the role of management accounting in achieving sustainable success. The report concludes with a discussion on the integration of various planning tools and their application in creating and estimating budgets, emphasizing the importance of management accounting in financial problem-solving.

MANAGEMENT
ACCOUNTING

INTRODUCTION..........................................................................................................3
TASK 1..........................................................................................................................4
Meaning of Management accounting and essential requirements of different types
of management accounting systems........................................................................4
Different kinds of management accounting reporting.............................................5
Evaluation of how management accounting systems and management accounting
reporting is integrated within organizational processes..........................................6
TASK 2..........................................................................................................................7
Different types of costing techniques......................................................................7
Production Per unit Cost.........................................................................................7
Total cost of production..........................................................................................8
Under marginal costing :...............................................................................................8
Under absorption costing :.............................................................................................8
Total cost of sales....................................................................................................8
Under absorption costing :.............................................................................................8
Budgeted income statements...................................................................................9
Actual income statements........................................................................................9
TASK 3........................................................................................................................11
Benefits and drawbacks of various types of planning tools used in Budgetary
Control...................................................................................................................11
Use of different planning tools and their application for creating and estimating
budgets..................................................................................................................12
TASK 4........................................................................................................................13
Comparison among different organizations regrading how they adapt
management accounting systems for responding to their financial problems.......13
Management accounting leads organizations to sustainable success....................14
Evaluating how planning tools for accounting respond suitably for solving
Financial problems to lead organizations to sustainable success..........................15
CONCLUSION............................................................................................................15
REFERENCES.............................................................................................................17

INTRODUCTION
Management accounting is the term which signifies preparation of accounting
information in such a manner which aims of assisting the managers in formulation of
strategies, policies, in planning and controlling the operations of the company The
present report is about KEF Ltd, which is a medium size company belonging to
manufacturing sector. The report will highlight the meaning and different types of
management accounting systems, various methods of management accounting
reporting, benefits of different accounting systems and how these systems are
integrated with organizational processes. Further, the report will highlight different
planning tools’ advantages and disadvantages and how these planning tools are
applied by the company in responding its financial resources.
TASK 1
Meaning of Management accounting and essential requirements of different types of
management accounting systems
Management accounting can be defined as the process of evaluating and
analyzing the costs and expenses of the business for the purpose of preparing internal
financial reports, accounts for facilitating managers with needed information through
which management of the company becomes able to make more rationale decisions
for attaining organizational goals.
Benefits and Essential requirements of various kinds of accounting systems
Job costing system:
It is one of the kind of management accounting system which is concerned with
the process of ascertaining the costs systematically by the way of dividing the costs
between material, labour and direct overhead and forecasting them at their value in
actual terms. Firms like KEF Ltd operating in manufacturing industry applies this
costing system for controlling raw material consumption in the company, labour
hours, machines & equipment by the way of allocation of costs to each responsibility
centre separately (The job costing system, 2018).
Benefits:
 It facilitates managers in assessing the profits made my individual jobs, which

enables them to determine the jobs which are profitable and which can be
continued in the future.
 It helps in controlling the costs.
Essential requirements :
It requires information relating to direct labour, material and overhead for
estimating the costs. Information system and a cost accountant.
Inventory Management system:
This can be defined as the system which comprises of technological processes
and procedure which are concerned with the work of overseeing monitoring,
controlling and maintaining the stocks of the company. It facilitates the managers in
keeping the track of movement of inventory through which they are enabled to
identify the stock requirements and areas which are unnecessarily consuming the
inventory.
Requirements and Benefits :
 The above mentioned system is required for keeping the detailed record of each
unit of inventory of the business entity.
 It facilitates accurate planning and enables the company for meeting seasonal
fluctuations in the market for the product’ demand (Top 10 Benefits of Great
Inventory Management, 2011).
Cost accounting system :
It is a system which is also called by the name of product costing system which is
described as the process of estimating the costs of the products for determining the
profitability, inventory valuation and for the cost control. By the application of this
system, a company becomes able in achieving the objective of being cost effective.
Requirements and Benefits : It is needed for measuring and improving the cost efficiency within the
organization (Ahmad, 2017). It is essential for fixing or setting the prices of the products.
 It facilitates managers to determine profitable and non profitable activities.
Price Optimization system :
It can be defined as the procedure applied by organization for ascertaining the
retail value of the products or services. Price optimization is the process of identifying
the balance between value of product and profit. The manager of KEF Ltd evaluate
different prices of the products which the consumer is willing to pay and it also

analyses the lowest price which the company needs to set for avoiding any chance of
losses (Shields and Shelleman, 2016).
Requirement and Benefits :
 It leads to quick and better quality decisions.
 It allows managers to fix optimum and rationale price which assists them in
grabbing the attention of buyers in the market.
 It aids the business entity in surviving long in the competitive market.
Different kinds of management accounting reporting
Management accounting reporting involves collecting, analyzing, interpreting the
financial information by the application of professional skills of cost accountant and
facilitating such information to the managers within the business organization in order
to aid them in their decision making process(Francioli and Quagli, 2016). Different
types of management accounting reporting are as follows :
Cash reports :
These reports provides the detailed information about the cash transactions that
took place on weekly basis. It is helpful for the managers in the sense that it allows
them to keep a check on the cash outflow and inflow. It also helps them in identifying
the activities which are consuming more financial resources of the company and what
they are providing in return to the company.
Budget reports :
These are an important tool of measuring the performance of the business
organization. These are the expenditure plans for the company which provides a
guidelines to the company in spending its material resources for accomplishing its
organizational objectives (Askarany, 2016).
Performance reports :
Performance report consists of all the data and information about work
performance. It renders all necessary information to internal stakeholders and it is
very essential for the business concern to communicate the management plan.
Cost reports:
Cost reports is a financial report that aids in identifying cost and expenses
relating to products. All the costs and expenses are taken into consideration which are
then divided by total number of units produced by the organization. This report thus,

shows the summary of all such information and in controlling the activities of the
organization. Organization get helps through this report and becomes able to control
on excess cost.
Evaluation of how management accounting systems and management accounting
reporting is integrated within organizational processes.
Integration of management accounting systems and management accounting
reporting with the organizational activities is of great significance because it
formulation of decisions on the basis of information provided by managerial
accounting is more rational and optimal. This integration process is integrated
accounting system. For example, from the inventory management accounting system,
number of units present in the company, inventory valuation, minimum stock which
the company has to maintain, number of times, inventory has to be ordered in a year
etc., are derived based on which the cost accounting is practised and the cost for each
of the product is ascertained (Luft, 2016).
The integration is necessary it facilitates continuous improvement in the
processes and quality of the products of the company.Further, integration of
management accounting with different processes in the organization, it provides more
efficiency and effectiveness in the planning and controlling processes of the
management of KEF Ltd.
TASK 2
Different types of costing techniques
Absorption costing :
It is one of the technique of costing in which all the expenditure and costs related
to the products’ manufacturing are considered. All the expenses are charged to unit
cost production and this method is required by generally accepted accounting
principles (GAAP) for the purpose of external reporting.
Marginal costing :
This is a technique of costing wherein only the variable costs are taken into
consideration and only such variable cost are charged to unit cost of production. The
fixed costs related to the product is completely written off against the contribution

calculated for the relevant period.
Production Per unit Cost
Under Marginal costing
Production cost per unit Amount
Direct material 20
Direct Labour 12
Variable overhead 8
Per unit cost 40
Under Absorption
Production cost per unit Amount
Direct material 20
Direct Labour 12
Variable overhead 8
Fixed overheads (120000/20000) 6
Per unit cost 46
Total cost of production
Under marginal costing :
Total cost of production : Number of units produced* cost per unit
= 18000*40
= 720000
Under absorption costing :
Total cost of production : Number of units produced* cost per unit
= 18000*46
=828000
Total cost of sales
Under marginal costing :
Particulars amount
Direct labour 192000
Direct material 320000
variable overheads 128000

Less : closing stock (80000)
Total cost of sales 560000
Under absorption costing :
Particulars amount
Direct labour 192000
Direct material 320000
variable overheads 128000
Fixed overheads 96000
Less : closing stock (92000)
Total cost of sales 644000
Budgeted income statements
Under marginal costing :
Particulars Amount
Sales 960000
Direct labour 192000
Direct material 320000
variable overheads 128000
Less: closing stock 80000
Total cost of sales 560000
Contribution 400000
Less : fixed expenses 96000
Net profit 304000
Under Absorption costing :
Particulars Amount
Sales 960000
Direct labour 192000
Direct material 320000
variable overheads 128000
Fixed overheads 120000
Less: closing stock 92000
Total cost of sales 668000
Net profit 292000
Interpretation :
From the above income statements for the month of June under absorption and

marginal costing techniques, it can be seen that net profits under both the techniques
are different. This is due to the fact that marginal costing only considers variable cost
in its unit cost of production and such unit cost is taken for valuing the closing
inventory. On the other hand, absorption costing considered both fixed and variable
costs as its unit cost of production and closing stock was valued at such cost. This is
the reason that net profit was less in absorption costing than marginal costing.
Actual income statements
Marginal costing
Particulars Amount
Sales 960000
less :
Direct labour 192000
Direct material 320000
variable overheads 128000
Total variable cost 640000
less: closing stock 120000
Cost of goods sold 520000
Contribution 440000
Less : fixed expenses 96000
Net profit 344000
Absorption costing
Particulars Amount
Sales 960000
less :
Direct labour 192000
Direct material 320000
variable overheads 128000
Fixed overheads 120000
Cost 760000
less : closing stock 138000
Total cost of goods sold 622000
Net profit 338000
Interpretation :
When the actual income statements under marginal costing are looked upon, it
can be observed that actual net profit is greater than budgeted amount by 40000. The
difference is caused due to higher closing stock at the end of the month. Closing stock

adds to the net profits of the company as it is added with the sales in the revenue
statement of the company. Similarly, under absorption costing, net profit increased by
46000 due to the increase in closing stock which was valued at the rate of 46.
JOB COSTING :
KEF Ltd., can opt for the process costing technique. In this type of costing,
because it is more suitable and appropriate for the companies which have different
processes in the manufacturing of the products, wherein the finished goods of one
process is taken as the raw material for the another processes. This allows the
mangers of each department to know the cost of each process. Such determination of
different processes would help the management of the company in monitoring and
controlling each of the process with much more effectiveness (What is Process
costing? Advantages & Disadvantages of process costing, 2019). This would
ultimately help in reducing the cost of operations and would assist in achieving the
objective of being cost effective firm. Such reduction would be reflected in the low
costs products which would attract large number of customers and will allow the
company in increasing its profitability.
TASK 3
Benefits and drawbacks of various types of planning tools used in Budgetary Control.
Budgetary control refers to the system or process of ascertaining the different actual
results with budgeted or pre-determined amounts for the company for the future
accounting period and standards set then comparing estimated amounts with the
actual performance for identifying the deviation, if any. Budgets are created and then
actual performance is recorded. Through these evaluations and analysis, the KEF Ltd
becomes more competent to formulate even more effective strategies for the purpose
of achieving organizational goals and objectives. Below are the different planning
tools :
Operational Budget:
These are those budgets that facilitates information relating to forecasting of
diverse business activities. It aids in estimating in advance various operations and
holding back adequate amount of financial resources within a business enterprise.
Benefits :

 It assists in controlling the operational activities of the KEF Ltd. It provides room for budget inflation and facilitates greater amount of flexibility
(Yigitbasioglu, 2017).
Drawbacks : It is time intensive job for the management. Preparing operational budget is a costly affair for the company’s management.
Fixed budget :
These are those budgets which does not variate for any level of sales volume. It
remains fixed irrespective of any change in the level of production and sales. It is for
this reason why it is also known as static budget(Solovida and Latan, 2017). Fixed
budget is beneficial only for the company when the costs are mostly static so that
expenditure does not variate as income or revenue variate.
Benefits :
 Preparing of this budget is easy and does not require any continuous updates in
the budget for the period it is created.
 This budget provides useful insights about the costs of company especially when
a variance analysis is undertaken. This allows the management of business entity
in identifying the areas which might be under/over-estimated expenses which
leads to quality business decisions.
Drawbacks : These budgets does not provide and flexibility. These are created by utilizing past records and data which may not depict a clear
forecasting of the expenses and revenue.
Zero Based Budgeting :
It is a kind of budgeting in which the budget is prepared from the scratch.
Formulation of this budget involves re-evaluation of each of the constituent of
statement of cash flow along with the explanation of all the expenses that are to be
incurred by the different departments of the organization (Chris and Burritt, 2015).
Benefits : It provides correct and accurate outcomes by starting the budget from the scratch. It takes into consideration the budget inflation. It improves coordination and communication within the business concern.
Disadvantages : It takes long time for preparing a budget from a zero base.