Management Accounting Techniques and Applications in Laing O’Rourke

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MANAGEMENT ACCOUNTING
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Contents
INTRODUCTION:......................................................................................................................................3
LO1.............................................................................................................................................................4
P1:...........................................................................................................................................................4
P2:...........................................................................................................................................................6
D1:.......................................................................................................................................................8
LO 2:...........................................................................................................................................................9
P3:...........................................................................................................................................................9
M2:........................................................................................................................................................13
D2:.....................................................................................................................................................14
LO3:..........................................................................................................................................................16
P4:.........................................................................................................................................................16
M3:........................................................................................................................................................18
LO4:..........................................................................................................................................................19
P5:.........................................................................................................................................................19
M4:........................................................................................................................................................20
D3:.....................................................................................................................................................21
Conclusion.................................................................................................................................................22
References:................................................................................................................................................23
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INTRODUCTION:
In this scenario, it will be discussed about the organization's nature of work. It will also explain
about management accounting, management accounting technique viz. cost, absorption, and
marginal costing. Here the organization selected is Laing O’Rourke, engaged in project
management. It is engaged in developing and constructing. This organization providing project
management services. In the Laing O’Rourke, there are over 20,000 employees and near about
50 organization participating organization in this project. The Laing O’Rourke’s organization is
dedicated to provide good services in the corporate world, encourage the projects of Laing
O’Rourke and with the aid of five professionalism dimensions, it will manage programming.
Under this, a discussion on the cost, budget, marginal and absorption costing is explained. And
present income statement of TSVR organization.
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LO1
P1:
This is also known as Managerial accounting. Management accounting is the method or
procedure of analyzing cost of business and this cost will help the management in the preparation
of financial management accounting for internal purpose. This cost also affects the decisions so
while be taking decisions these business costs are also determined. The financial reports and
accounts are usually prepared for the external users like government, offering issue and lenders
etc. These accounts are also used by the internal management for taking the decision regarding
expansion or see their Laing O’Rourke financial position. These accounts are based on the
Generally Accepted Accounting Principles (GAAP). Under GAAP, rules are described how
accounting entries are posted in their respective accounts from journal entries. Ultimately, it will
help the overall management parties to know their position in the market (Angelakis, et. at.,
2015).
Different types of management accounting are:
In the Laing O’Rourke, the management team uses different types of the accounting system.
Some of them are below:
1. Job costing system: It refers to allocate or distribute the cost of the job according to the
task completed. In this system, it will assist the management to know the cost of a
particular task or project. This type of costing system is mostly used in the construction
Laing O’Rourke, to know the specific job cost. This cost is to be submitted by the Laing
O’Rourke in order to reimbursement (Breuer, et. at., 2013).
2. Inventory costing system: It helps in controlling the inventory level in the warehouse. It
assists in finding the inventories level. Using an inventory costing system, over wastage
of inventory can be minimized by the proper controlling system of inventory.
3. Price optimization system: This system is the process of discovering the estimated price
and aids in understanding the market situation and customers, who are able and willing to
pay at maximizing price (Breuer, et. at., 2013). It helps in seeing changes in price by
changing the demand.
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4. Costing accounting system: It provides a method to record the stock of production
activities. This method is used by this Laing O’Rourke in order to estimate the cost of
products for the analyzing of Laing O’Rourke profitability. In this accounting system,
mainly two costs are inbuilt such as process cost and job order cost.
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P2:
Management accounting reporting is made every year when needed. It will assist the
entrepreneur. This report helps the management to check the Laing O’Rourke execution of work.
The report of management accounting can be prepared as needed such as weekly, fortnight,
monthly or quarterly or even on a daily basis.
Some of the organizational reports have been discussed below:
Budget reports: Under this report, the cost incurred in the future is presented. This budget is
prepared in present working time for ascertaining estimated future costs in accordance to meet
future needs. Budget reports help in analyzing business performance (Daraban, 2017). Budgets
are generally prepared by using previous data, plans related to financial and adapting of future
plans. For achieving the Laing O’Rourke objectives, each department makes full efforts to meet
the desired task in accordance with the budgeted plans. This report is help in distributing
incentive, bonus to the worker who works their assignment with full efficiency and effectiveness.
Manufacturing and inventory: For making manufacturing unit more profitable, these reports
are used by the managerial persons. To know and understand that improvement is needed, this
report used by the top management to compare various assembly lines in the selected Laing
O’Rourke. This report includes different elements such as labor cost hourly, overhead cost and
waste of inventory.
Cost reports: This report contains the cost of a specific task or job. This will compare with
estimated revenue, so the Laing O’Rourke able to know the profitability areas of job in the Laing
O’Rourke. This cost also helps in determining the cost (expenses) while the project is in work in
progress. To reduce unwanted and unethical cost, cost reports used (Daraban, 2017).
Accounts Receivable Aging Reports: It is also known as Bills receivables. It is a management
accounting tool used to manage cash flow in the Laing O’Rourke. To know the customer's
financial position, these reports help to a break down the customers owes for a short period. It
also helps in knowing the Laing O’Rourke collection process and make necessary changes, if
required.
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M1:
Several advantages inbuilt in management accounting. These benefits often help business with
the capacity of an Laing O’Rourke to overall profitability and enhance operations. By developing
cost management technique management able to create competitive advantage.
 Planning: Both the financial and non-financial data is recorded produce in continuous
intervals. This will help in forecasting and plan future business activities. In the planning
section, it includes information about a particular product. Out of the information,
resultant data has been helping in managing to set objectives and provide outlines on how
they will achieve by planning.
 Controlling: The information has been obtained from the report of planning help the
manager a sense of mind-controlling over the organizational affairs. Managers can
exercise qualitative and quantitative feedback. Since the information obtained is used by
the internal users of the Laing O’Rourke, so they did not follow the principles of GAAP.
 Strategic management: This will help in changing a decision regarding new
improvement in the existing product or new innovation. It will help the management to
take decisions based on the accounting principles.
 Decision making: As it offers various information about the product, market, customer
behavior, and other related information, help management to take decisions for the
betterment and positively successful of Laing O’Rourke (Gornjak, 2014).
The person responsible make reports of producing goods on a cost, expenses in relation
to employees training programs and marketing cost other activities. Use of management
accounting is to reduce risk related to the decision-making process. A report showing
inventory waste or any other wastage of money or in kind might help the managers to
take corrective measures. For instance, a manager can be compared his lines to his
followers, or to the compared previous time period (Gornjak, 2014).
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D1:
Managerial accounting tool helps the manager to use organizational resources in an optimum
manner in order to take decision-related with the Laing O’Rourke’s department
(Makrygiannakis, and Jack, 2016). This will help in managing and controlling the overall
organizational performance. Following tools help in management by which they analyze and
make decisions.
 Help in reducing conflicts.
 Help in creating and developing a good atmosphere.
 Help in taking managerial decisions.
 Help in coordinating among the different department.
 Optimum utilizing of resources.
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LO 2:
P3:
An amount that has to be given or paid in order to receive something is determined as cost. Cost
is the monetary consideration to get something in return. Cost is the monetary value, used in the
production and manufacturing of goods and providing services. It is the amount incurred in the
production and manufacturing of goods or in providing services. Break-even point is that point
of sale where no one party get benefits either seller or buyer. This situation occurs when the
seller sells the product at costs price (at the price of production). In this situation, profit is not
earned.
In every product or services, different types of cost included. Following costs are included in the
production of goods or providing services (McLaren, et. at., 2016).
1. Fixed cost: This cost is fixed in nature. And it not changes even the production f goods
increase or decreases to specified level. Example of fixed cost island and building rent,
staff salary and wages, insurance premium etc.
2. Variable cost: It refers to that cost which changes as the production of goods varies or in
services. Examples of labor cost, direct material etc.
3. Indirect cost: That cost which is not accountable to a particular task. This cost either fixed
or variable cost depend upon the nature of providing services.
4. Direct cost: That cost which is directly distributed to the goods and in services.
Marginal costing system
 It is a cost on adding of one unit in the production. This concept of cost is used to where
the cost needed to be minimized. Variable cost is considered as the cost of production and
the fixed cost is considered as the cost for current period related to variable (McLaren, et.
at., 2016). The cost of the variable is charged against the cost of the goods and fixed cost
is written off against the accumulated contribution.
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Particular Amount (£)
Units sold 10,000
Price per unit 25
Direct Material 50,000
Direct Labour 30,000
Variable manufacturing overhead 20,000
Fixed manufacturing overhead 40,000
Variable selling and admin expenses 30,000
Fixed selling and admin expenses 30,000
Income statement under marginal costing:
Income Statement
Particular Amount(£) Amount(£)
Sales revenue 250000
Less: Marginal cost of sales:
Direct Material 50,000
Direct Labour 30,000
Variable manufacturing overhead 20,000
Fixed manufacturing overhead 40,000 140,000
Gross Profit 110,000
Less: selling and admin expenses
Variable 30,000
Fixed 30,000 60,000
Net Profit 50,000
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Absorption costing system:
It is a method to allocate overall variable cost to stock. It is charged at the time of incurring to
the production of expenses, whilst variable overhead and direct material cost charged against the
inventory.
Income statement under absorption costing:
Income Statement
Particular Amount (£) Amount (£)
Sales 125000
Less: CoGS _
Gross Profit 125000
Less: direct labor 50,000
direct labor 30,000 80,000
Net Profit 45,000
Particular units / amount
Budgeted material cost per unit (£) 2
Budgeted material quantity (kg) 10
Actual output (units) 1000
Actual material purchased and used (kg) 2200
Actual material cost (£) 20,900
Material variance:
Material cost variance
= budgeted price - actual price
= -0.5 (unfavourable)
Material price variance = (budegted price actual price) X actual quantity
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= 1100 (unfavourable)
Material usage variance = (budgeted quantity - actual quantity) X budgeted price
= -2000 (unfavourable)
Labour Variance:
a) Labour Cost Variance = Standard Labour Cost- Actual Labour Cost
=15000-17680
=2680 (unfavourable)
b) Labour rate of pay variance = Actual time(Standard rate- Actual rate)
Standard rate = 15000/3000=5
Actual rate = 17680/3400=5.2
= 3400*(5-5.2)
= 680 (unfavourable)
c) Labour efficiency variance = Standard rate(Standard time- Actual time)
= 5(3000-3400)
=2000(unfavourable)
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