Management Accounting Report: Decision Making, Costing, and Planning

This report provides a comprehensive overview of management accounting, focusing on its importance for decision-making and improving organizational performance. It explores various management accounting systems, including job order costing, sales forecasting, and budget management rep...Read More

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
1) Importance of management accounting for decision making process towards improving
organisation's performance..........................................................................................................1
2) Different management accounting systems for preparing reports..........................................2
3) Critical evaluation on management accounting systems........................................................4
4).................................................................................................................................................5
a) Comparative income statement using marginal and absorption costing.................................5
b) Reasons behind profit variation..............................................................................................8
c) Reconciled statement of profit and loss account.....................................................................8
SECTION 2 (Nero Ltd)...................................................................................................................9
Part (a) Different planning tools.................................................................................................9
Part (b) Ways to prevent financial problems obtained at Nero Ltd..........................................10
CONCLUSION..............................................................................................................................11
REFERENCE.................................................................................................................................12

INDEX OF TABLES
Table 1: Income statement using marginal costing method.............................................................6
Table 2: Income statement using absorption costing method..........................................................7
Table 3: Fixed and under absorbed costs for 1st and 2nd quarter...................................................8

INTRODUCTION
Management accounting is composition of all accounting systems including financial,
cost, inventory and so on. It is essential for identifying actual position of business operations and
decision making for organisation's effectiveness. The present report is based on understanding
significance of management accounting regarding business activities of Nero Ltd. In this regard,
various types of management accounting reports, income statement for through marginal and
absorption costing is to be described. However, different budgetary control systems for
forecasting and decision making can be introduced through this assignment. Along with this,
financial tools for reducing economic problem of the entity is to express. Thus, learners are able
to understand importance of management accounting for decision making regarding business
operations of the organisation through this report.
SECTION 1
1) Importance of management accounting for decision making process towards improving
organisation's performance
Management accounting is multidisciplinary approach that evolves several tools for
decision making and organisation's effectiveness. For example; financial accounting, cost
accounting, inventory management accounting, performance management accounting and so on.
However, management accountant of the entity analyses all financial tools and further makes
decision regarding further business operations to improve its economic position. Moreover,
sevral tools are used for decision making such as costing, budgeting, variance analysis etc. In
which, organisation's performance is analysed at first and further strategies are prepared for
better quality services and enhancing effectiveness (Akhavan, Ward and Bozic, 2016). Along
with this, it remains helpful for optimum utilization of resources and fund that impacts on
productivity and profitability of the entity effectively. Therefore, various tools are recognised
that impacts on further operations and its competitiveness for longer time periodicity. Thus,
management accountancy reads, analysis and interprets the informations and data obtained from
the external and internal business environment and reports the data to the management. This
report helps the management in making policy related decisions in effective manner.
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 Management accounting helps the management in comparing actual figures with the
already set standard figures to track deviations. This feature of management accounting
helps the management take further decisions.
 All the business decisions and planning is done on the base of accounting information
applying budgeting and forecast techniques. All these techniques are woven together to
achieve the organisational objectives. These budgeting and forecasting techniques are
applied and implemented by the management accounting (Akyol, Tuncel and Bayhan,
2015).
 Optimal utilization if the capital is made possible with the help of management
accounting. Management accounting help in effective running of the business.
 Management accounting facilitates smooth coordination between al the departments
making running of business better. Coordination between the departments also make the
decision making process of the business swift.
 Management accounting plays a significant role in organizing the business win an
efficient way (Chouhan, Soral and Chandra, 2017). Management accounting assists the
management via the tools of internal control and internal audit in fixation of targets and
responsibilities, appraisal of performance, problem identification and solutions to these
cost and profit centres and executing overall control of the business organisational
activities.
 Management accounting through these activities of departmental coordination help the
management to motivate employees.
 The inventory is a very important part of business, it is necessary to control the inventory
from the moment it is purchased to all the processes in the business. This control is does
with the help of the inventory control technique of the management accounting, this also
helps in the decision making process of the organisation.
 The management accounting tools of forecasting budgeting and inventory control help
the management in cutting the cost and manage the cost at different stages.
2) Different management accounting systems for preparing reports
The Management accountant of an organisation maintains and develop different reports
which present various financially and non-economical execution of an organisation such as its
listing of management reports, analysis of different reports, cost for job ordering inventory,
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manages and reports performance, and in setting up of different budgets. These managements
can be described as-
 Job order costing report: - This reporting system helps in the analysis of cost which is
obtained in the manufacturing of company's products and services, which includes basic
sources such as raw materials, costing for labour and others. Regarding to this, Entity
determines the price of different products and services with the expanses of tools which
are required in the production (El and Lindefors, 2016). By analysing all these financial
records the expense's costing and revenues are developed in taking further decisions and
in their implementation.
 Sale forecasting report: - This report helps in the analysis of financial data of an
organisation's marketing services and products. This report assist organisation in the
distribution of their products and services and in expenditures on production, further in
future decision making and building of strategies. Further through report marketing,
entity market position can be determined with last year performance analysis. It also
assists in allocation of funds and resources which can help in achieving systematic
management of goods.
 Budget management report: - This report help in managing accounting techniques
which assist in forecasting of futures plans and in the making of decision with better
innovative ideas which increases service quality and management (Johnson, 2014).
 Inventory management report: - This directly affects the liquidity of the company
which help in management of the operations in business. This method provides overall
goods' transaction and financial information. It can also affect the company to improves
its products and services more efficiently and effectively. Which helps in proper
management of manufacturing process and reduction of excess of waste.
 Performance management report: - It involves and focuses on several activities
regarding to disciplinary approaches in company, such as workers performance
efficiencies and effectiveness. In this process different critical evaluation is taken which
improves work efficiency and encourages them to work and provide better contribution in
team work. According to workers ability and evaluation in performance the report is
developed for its management (Laviana and et.al., 2016).
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Thus, management accountant of the organisation prepares and maintains above
mentioned reports that demon estate financial position and generates different ideas for better
quality services and improving monetary position. For this purpose, all business operations are
recorded which are identified and further decisions are made on these bases. Hence, maintaining
these reports affect management of entire business operations and its services for further years
and sustainability in market for longer time period.
3) Critical evaluation on management accounting systems
Critical evaluation essential management accounting systems can be understood as below
which can be balanced and improved regarding effective business operations for further years as:
 Budget management accounting system: - This system promotes in forecasting future
plans in an organisation along with, it encourages planning orientation, review on
profitability, Assumption of reviews, helps in evaluating performance, in the allocation of
cash, bottleneck analysis and others (Najjar, Strickland and Kaplan, 2016). But along
with these advantages it is having several disadvantages to the company as well because
of, time requirement, blame for the outcomes, allocation in expenses, rigidity in strategic
formation and others.
 Performance management accounting system: - This management system works as to
manage performance discipline in the work of employees of company. It assists on the
basis of conversation which are based on performance, targeted development and
encouragement of staff, rewarding when job is done well, and for the identification of
underperformance and their elimination. Whereas, this system is also very much time
consuming, it can discourage staff if not performed well and may give inconsistent
message or may promote biases behaviour in company (Sandborn, 2017).
 Job order costing Management accounting system: - This management system helps
in the determination of products and services Costs of company. In the form of detailed
analysis of material cost, helps to determine production cost, in reduction of unprofitable
tasks, and in the controlling of extra material and labour cost and others. Whereas, by the
use of this system company can have several disadvantages like this system is based on
hectically cost, it is quite expensive as well because of separate records and jobs, it is also
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difficult for calculation of exact cost, and methods also may not be suitable for company
sometimes (Yang and Hao, 2017).
Sales forecasting reports:- Sales forecast a report which is prepared by the company to
forecast the sales of the next quarter on the basis of the sales trend. The property of sales
forecasting is that it gives company the power to monitor and track its sales after the current
period. This strategy helps the management to formulate business strategy for the future on the
basis of sales growth. The preparation of sales forecast is dependent on historic data or sales of
the prior period, this limits its properties, as, if the business is new there is not enough prior data
so a forecast can't be prepared.
Inventory management report:-Inventory management report is prepared by the
business to track the coming and usage of inventory in the business. This report count and collect
data on all the inventory.
 This report helps the business to keep a track of all the inventory items thus there is no
chance of theft and misplacement can be identified easily.
 Book keeping of inventory is a hectic and lengthy process and takes too much time
(Agrawal, 2013).
4)
a) Comparative income statement using marginal and absorption costing
Costing is a process of price determination and setting cost associated on business
operations. It influences productivity and profitability of the organisation as well competitiveness
and further operations. However, income statement is prepared on the basis of incurred expenses
and gained revenue regarding business activities. This costing is created on behalf of different
tools such as; expenses incurred for manufacturing and production process, market demand,
competitiveness and so on. Including this, several methods are used for costing as marginal,
absorption, activity based costing etc (Akhavan, Ward and Bozic, 2016). For preparing income
statement through marginal and absorption costing for organisation, entity's profitability is
identified as below:
Income statement through different costing methods: Income statement through
marginal costing is different from absorption cost because of profit variation. It can be
understood as follows:
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Income statement through marginal costing method: For evaluating net profit, gross
profit is deducted with other expenditures incurred on overhead. In this regard, income statement
for the organisation is evaluated as:
Table 1: Income statement using marginal costing method
Quarter
1
Quarter
2
Unit £/unit £ £ Units £/unit £ £
Sales 66000 1 66000 74000 1 74000
Cost of sales
Opening inventory 0 0.65 0 12000 0.65 7800
Production 78000 0.65 50700 66000 0.65 42900
50700 50700
Less: Closing
inventory -12000 0.65 -7800 -42900 -4000 0.65 -2600 -48100
Contribution 23100 25900
Less: Other
expenses
Fixed costs -16000 -16000
Selling and
administration cost -5200 -5200
Net profit 1900 4700
It is interpreted that sales revenue on business operations is 66000 and 74000 in units for
quarter 1st and 2nd respectively. However, £/unit for all operations is 0.65 by which cost incurred
on expenses is determined. In this regard, gross profit for 2 quarters is evaluated as 23100 and
25900 sequentially. Under marginal costing method, this profit is to deducted with other
expenditures as selling and administration cost for calculating net profit. Therefore, net profit for
the two quarters is calculated as 1900 and 4700 respectively.
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Income statement through absorption costing: For preparing net profit through
absorption costing, gross profit is deducted with overall expenses incurred on business
operations including variable and fixed (Laviana and et.al., 2016). For analysing organisation's
profitability through absorption costing following calculation is obtained as:
Table 2: Income statement using absorption costing method
Quarter
1
Quarter
2
Unit £/unit £ £ Units £/unit £ £
Sales 66000 1 66000 74000 1 74000
Cost of sales
Opening inventory 0 0.85 0 12000 0.85 10200
Production 78000 0.85 66300 66000 0.85 56100
66300 66300
Less: Closing
inventory -12000 0.85 -10200 -56100 -4000 0.85 -3400 -62900
Gross profit 9900 11100
Less: Other
expenses
Selling and
administration cost -5200 -5200
Net profit 4700 5900
(Under)/ Over
absorption -2800 -1200
Reconciled Profit 1900 4700
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Under absorption costing method, for evaluating net profit, overall expenditures incurred
on fixed and variable overhead are included. However, £ per unit for both 1st and 2nd quarter is
0.85 on which gross profit is determined as 9900 and 11100 respectively. It is to deducted with
overall expenses incurred on additional expenditures evaluated as 4700 and 5900 for both
quarters. Including this, by deducting net profit with under or over absorption, reconciled profit
is evaluated that is 1900 and 4700 for 1st and 2nd quarter respectively.
Table 3: Fixed and under absorbed costs for 1st and 2nd quarter
Quarter 1 Quarter 2
Total fixed cost 16000 16000
Fixed cost absorbed 66000*0.20 13200 74000*0.20 14800
Under absorbed -2800 -1200
b) Reasons behind profit variation
One of the main reason behind marginal and absorption costing method is profit
variation. It is because for evaluating net profit, gross profit is deducted with variable and fixed
expenses under absorption costing method. While, on the other hand, under marginal costing
method, gross profit does not deduct with both expenses, only expenditure incurred on variable
expenditures are evolved (Yang and Hao, 2017). It is also emphasis on time periodicity for
decision making process. For instance; marginal costing is suitable for short term decision
making while absorption costing is appropriate for long time period. Thus, due to this variances
in expenses for calculating net profit, differences occurred.
c) Reconciled statement of profit and loss account
Reconciliation refers to creating adjustments in financial statement for reducing issues
and improving position of the organisation. However, business operations which are required to
be controlled over are created as well different ideas are generated for better services. In addition
to this, reconciliation statement is benefited for economic stability and improving monetary
position of the entity efficiently. Therefore, reconciliation is essential for financial development
and creating balance between production and distribution of goods and services adequately.
Moreover, profit increment and enhancing revenue is possible through this process also remains
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suitable for making adjustment and finding out reasons behind the difference (Akyol, Tuncel and
Bayhan, 2015). Thus, reconciliation of profit and loss account impacts on economic position of
entity and further operations effectively.
Implications of under and over absorption: Under and over absorption impacts
negatively on profitability and business operations. It is recognised that actual and expected costs
are not remained same therefore all planning and strategies get affected on decision making and
further business operations. In addition to this, basis of allocation may be incorrect as well there
can be error in data and calculation for costing and income statements (Yang and Hao, 2017).
Thus, these implications are required to be reduced affect further business activities.
SECTION 2 (Nero Ltd)
Part (a) Different planning tools
Budgetary control can be considered as the management of future budgets and plans
which are going to be applied by Nero Ltd company. It works in such a way to compare current
policies to actual helpful policies, to remove defects and work in progressive direction without
making any type of delay. Some tools which helps in Budgetary control system are: -
 Cash budget: In this budget process, cash incurred on expenditures are planned for
effective management of all business operations. However, different ideas are generated
for effective cash inflows and outflows for decision making regarding future business
operations. It is helpful for optimum utilization of fund impacts on monetary position of
Nero Ltd as well adequate decisions are made for cash management and allocating fund
appropriately (Akyol, Tuncel and Bayhan, 2015). Therefore, cash budget remains useful
for effective expenditures and increasing sales revenue of the organisation.
 Zero based budgeting: - The management of Nero Ltd company can develop budgets on
the basis of Zero based budgeting, which is in this method budgeting is done putting Zero
as base and then analysing the needs and cost budget which is associated in each
function. This provides real figures which helps management to develop future plans
more effectively and eliminates unnecessary actions which promotes saving (El and
Lindefors, 2016). It provides real figures which affects more efficient Judgement, with
assisting in suitable planning. But having all these advantages it has some disadvantages
too such as, It consumes lot of time and the requirement of big amount of funding.
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 Fixed Budgeting: - This financial plan does not change or differ in accordance with
actual or current marketing. The strategies applying on the basis of Fixed budgeting in
Nero Ltd will not change according to actual financial plans and offers targeted budgets
for fixed activities at Nero Ltd. It helps the company for the examination of its
performance and acts as a resource in strategies and plan development. It also maintains
the cost level at minimum level for to gain greater return. But having all these fixed
budgeting is unable to change according to current actual activities (Chouhan, Soral and
Chandra, 2017).
 Flexible Budgeting: - Flexible budgeting plan pays much focus as compared to fixed
budgeting plan, towards higher number of outputs in production. This Budgeting can
easily and effectively adjust itself on the basis of outcomes by Nero Ltd. It can make
changes with respect to volatility in the market which is inflation and others on the basis
of company's current strategies and assist in the making optimum percentage and changes
in resources on the basis of needs. But in Flexible budgeting it is difficult to determine
accurate data along with it also need regular monitoring to analysis modification in
external market.
Part (b) Ways to prevent financial problems obtained at Nero Ltd
Certain financial conflicts which are arising at Nero Ltd can be removed by using these
managements accounting system tools and helps in to controlling over its business operations. It
includes various indicators, and assists to management accounting system such as: -
 Cost Accounting system: - This process help to determine price on the basis of
expenditures for goods production, it is basically bases on labour, manufacturing, and
other additional expenses. Therefore, this system can help in the recording cost system
and with the help of this system proper pricing is done for decision making (Najjar,
Strickland and Kaplan, 2016).
 Ratio analysis: It is management accounting tool to analyse financial position of the
enterprise. However, different ratios are identified such as; profitability, liquidity,
efficiency ratio etc. Therefore, actual position of organisation is recognised by which
different ideas are generated for reducing monetary issues and increasing profitability
(Sandborn, 2017). Besides this, last years' financial position of the enterprise can also be
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analysed for decision making on further operations effectively. Thus, using ratio analysis
can be effective for decision-making on further business operations affect productivity
and profitability efficiently.
 Benchmarking: - With the help of this tool the performance of organisation is compared
with other competitive organisations. In addition to this, this tools helps for further
planning of different strategies and plans to become more strong in competitive market. It
therefore generates variety of ideas in the management of business operations and in the
improvement of Nero Ltd. Efficiency. Applying these Nero Ltd. can increase the quality
of their performance in more effective and efficient manner.
 Key performance indicators: - This tools indicators are very much suitable for
analysing employees performance and to promote new creative ideas for better quality
and economic growth at Nero Ltd (Johnson, 2014). By this proper management of all the
processes in an organisation can be achieved by this tool process which will assist in the
reduction of issues and formation of total growth on financial definitions of Nero Ltd.
CONCLUSION
Through this report, it is concluded that management accounting plays vital role in
decision making regarding further business operations. In this regard, management accounting
tools as costing and budgeting are elaborated briefly that are useful for decision-making and
organisation's effectiveness. In addition to this, significance of management accounting is
understood that impacts on further planing procedures and profitability of Nero Ltd. Moreover,
several management accounting systems as reports are presented for better quality services and
improving financial position of organisation through this assignment. In addition to this,
approaches of management accounting are described for further implementations and entity's
effectiveness for longer time periodicity. Overall, importance of management accounting and its
usefulness is expressed through this report.
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REFERENCE
Books and Journal
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accurately reflects costs in arthroplasty surgery. Clinical Orthopaedics and Related
Research®. 474(1). pp.8-15.
Akyol, D.E., Tuncel, G. and Bayhan, G.M., 2015. A comparative analysis of activity-based
costing and traditional costing. World Academy of Science, Engineering and
Technology. 3(2). pp.44-47.
Chouhan, V., Soral, G. and Chandra, B., 2017. Activity based costing model for inventory
valuation. Management Science Letters. 7(3). pp.135-144.
El Alaoui, S. and Lindefors, N., 2016. Combining Time-Driven Activity-Based Costing with
Clinical Outcome in Cost-Effectiveness Analysis to Measure Value in Treatment of
Depression. PloS one. 11(10). p.e0165389.
Johnson, P.F., 2014. Purchasing and supply management. McGraw-Hill Higher Education.
Laviana, A.A. and et.al., 2016. Utilizing time‐driven activity‐based costing to understand the
short‐and long‐term costs of treating localized, low‐risk prostate cancer.Cancer. 122(3)
pp.447-455.
Najjar, P.A., Strickland, M. and Kaplan, R.S., 2016. Time-Driven Activity-Based Costing for
Surgical Episodes. JAMA surgery.
Sandborn, P., 2017. Activity-Based Costing (ABC). In Cost Analysis of Electronic Systems.
14(2). pp. 77-92.
Yang, H.X. and Hao, J.Q., 2017. Evaluation and improvement of the supervision cost-efficiency
to project based on learning curve—Angle of time driven activity-based costing. Journal
of Interdisciplinary Mathematics. 20(1). pp.173-185.
Online
Agrawal, R., 2013. Traditional costing versus ABC Costing. [Online]. Available through:
http://www.yourarticlelibrary.com/accounting/costing/traditional-costing-and-activity-
based-costing-system-differences/52614/. [Accessed on 7th February 2017].
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