Management Accounting Report: Nisa Retail Case Study Analysis

This report analyzes management accounting principles and their application within the context of Nisa Retail. It begins with an introduction to management accounting, differentiating it from financial accounting, and then delves into the calculation of costs and the preparation of income statements using both marginal and absorption costing techniques. The report explores the role of management accounting systems, highlighting their importance in forecasting, decision-making, and cash flow management. It also examines the principles of management accounting, including influence, relevance, value, and trust, along with various management accounting systems like cost accounting and inventory management. Furthermore, the report covers the integration of management accounting into an organization, the benefits of these systems, and compares different planning tools used in management accounting. It concludes with a discussion of pricing strategies, costing systems, and methods for identifying and resolving financial shortfalls, and the skills required of an effective management accountant, all illustrated through the case study of Nisa Retail.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1: ASSIGNMENT 1.............................................................................................................1
PART A...........................................................................................................................................1
P3. Calculation of costs and preparation of income statement...............................................1
PART B............................................................................................................................................2
P1. Role of Management Accounting System........................................................................2
P2. Principles of Management accounting System................................................................4
M1. Benefits of Management accounting system..................................................................5
D1. Integration of management accounting into the organisation.........................................6
M2. Techniques and methods used in management accounting:...........................................8
TASK 2: ASSIGNMENT 2.............................................................................................................8
PART C............................................................................................................................................8
P4 Comparing and contrasting three planning tools which are used under management
accounting...............................................................................................................................8
M3 Pricing strategies as well as common costing systems..................................................10
PART D.........................................................................................................................................11
P5 Comparing different ways through which financial shortfalls identified and resolved in
firm.......................................................................................................................................11
M4 Skills of an effective management accountant...............................................................13
D3 Effective strategies and systems.....................................................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting as the name suggests is basically for the use of management.
Management accounting uses accounting principles, this aids them in managing the activities and
performance of control functions. This includes management accounting tools that helps
management in making future economic decisions. The present report will shed some light on
practical approach of management accounting by preparing income statement using marginal and
absorption costing techniques along with the description of various types costing system.
Management accounting is mostly confused with financial accounting, in this report a clear
difference between management accounting and financial accounting has been provided. The
report also includes planning tools that are used for budgetary control with its advantages and
disadvantages. For the purpose of pricing and costing goods and services, management can also
use various pricing in costing system explained in this report. The present report also explains
the use of management accounting in responding to various financial problems. Management
accounting is the combination of accounting, finance, business skills, techniques and
management that adds real value to the organisation. For the better understanding of the study,
SME Nisa Retail store has been taken into account.
TASK 1: ASSIGNMENT 1
PART A
P3. Calculation of costs and preparation of income statement
Cost is an amount that is given up for the exchange of receiving an asset. It includes all
the related amounts of an asset to make that asset ready for use. Accounting of cost aids to
decision making by providing the relevant information of cost to the management. For the
purpose of calculating the cost of the products, Nisa Retail have a choice to adopt any method
from marginal costing and absorption costing.
 Cost- volume Profit: Cost volume profit analysis helps in determining the impact of
changes in the cost and volume to the operating income of the organisation (Joshi and Li,
2016).
 Flexible budgeting: flexible budgeting refers to the preparation of flexible budget that
adjusts the changes in the volume of the activities.
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 Absorption costing: For the purpose of valuing inventory, absorption costing is used. It
absorbs all the manufacturing cost of a product including variable as well as fixed costs.
 Marginal Costing: this method changes in the total production cost by increasing or
decreasing if there is a change in output by one unit.
Income statement for ABC Ltd.
Absorption costing Amount (£) Amount (£)
sales 10816000
less: cost of production 6916000
less: closing stock -2028000
4888000
less: fixed production overheads -975000
production cost of sale 3913000
Gross profit 6903000
less; variable sales overheads nil
less; fixed cost and administration cost nil
Net profit 6903000
Marginal costing Amount (£) Amount (£)
sales revenue 10816000
less: direct material 1976000
direct labour 3458000
variable production overheads 1482000
contribution 3900000
less: fixed production overheads 975000
net profit 2925000
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Reason between the results of two is because, under absorption costing all the costs are
included while in marginal costing only variable costs are considered.
PART B
P1. Role of Management Accounting System
Management accounting or managerial accounting are the same thing. These refers to the
decision making tool that is used by management. This helps in assisting the management in
achieving control over the organisation and better planning. Management accounting provides
timely and accurate financial and statistical information to the management for the purpose of
short-term and long-term decisions by preparing management reports and accounts. Following
are the roles of management accounting in Nisa Retail:
 Helps in forecasting the future: Management accounting helps in forecasting that aids in
decision making like whether the company need to make more investments or is there is a
need to diversify the products or should acquire or merge with another company (Groot
and Selto, 2013).
 Make or Buy Decisions: It also helps in determining whether it is cheaper to produce a
product or it will be economical to buy from the outside market. Management accounting
helps in making insights for decision making at both the level i.e. strategic and
operational level.
 Cash Flow Forecast: Impact of flow of cash to the business is essential. Therefore, it
helps in predicting the cash flow. This includes answer to the questions like the estimated
cost of future, increase or decrease of revenue in the future and the source of revenue.
Management accounting tools includes budgets and trend charts, these are used to decide
the allocation of resources and money.
 Rate of return: Nisa Retail needs to analyse the expected rate of return before
commencing any project that requires heavy investments. Management accounting tools
helps the management in choosing the best investment opportunity that will provide
better profitability (Khodzytska and Ivchenko, 2014). It also helps in determining the
break even sales and in how much time the company will be able to reach its break even
point of sales.
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Management accounting and financial accounting are different from each other. Below is
the difference between two:
BASIS MANAGEMENT
ACCOUNTING
FINANCIAL ACCOUNTING
Objective To assist the management in
decision making and policy
formation.
Record transaction and determine
financial position and profit and
loss.
Users of
information
Internal users, mainly for
management.
For external as well as internal
users.
Data and records It uses past data for future
decisions.
It represents historical records.
Rules Not bound by any outside rules. Must follow the principles of GAAP
or IFRS in a prescribed format.
Audit Audit of reports is not mandatory. Audit of reports is mandatory by
statutory auditor.
Time of presenting
the report
Management reports are prepared
as per the needs and requirement of
management (Klemstine and
Maher, 2014).
Financial reports are generally
prepared at the end of the financial
period.
P2. Principles of Management accounting System
Effective use of management accounting practices, helps the management in improving
decision making. Management accounting lacks some level of guidance according to the Charted
institute of Management accounting (CIMA) and American Institute of CPA's (AICPA). For this
purpose of providing proper guidance to the management CIMA and AICPA has released some
“Global Management Accounting Principles”. These principles can be applied universally to the
organisations whether small, private or public to make better decisions and for the better
response to the risky situations. Following are the Global management accounting principles:
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 Influence: Management accounting involves communication of insightful information.
Communication of insightful information will helps in decision making at all stages of
Nisa Retail (McLellan and Sherine, 2013). This communication must be influential. Good
influential communication helps in identifying the loopholes in the management and also
facilitates integrated thinking. By the way of influential communication, consequences in
various segments of the organisation that can have significant impact on the other can be
understood, accepted and repaired in the better form. Knowing the needs of decision
maker and discussing it will allow to source and analyze the relevant information. Relevance: Information that is being communicated and presented must be relevant.
Management accounting helps in identifying the best sources of relevant information that
would be helpful in making decisions and also for the persons who are making decisions.
The most relevant information for decision making can be identified and analysed by
understanding the needs and wants of shareholders (Nørreklit, 2014). Information to
relevant must contain appropriate balance between future, present and past related
information, external and internal information, financial and non- financial information. Value: Impact of information to the value must be analysed. With the help of
management accounting, organisational strategy can be connected to the business model
of Nisa Retail. Analysing of information involves evaluation of opportunities, value
generation of path, and focus on risks and costs of the organisation.
 Trust: Management and supervision builds trust among the organisation. Supervision of
activities includes scrutiny and accountability of decision making process that makes the
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process more objective. Management accounting makes a balance between short-term
organisational interests and long-run interests of stakeholders that increases the trust and
credibility (Ward, 2012).
M1. Benefits of Management accounting system
Before evaluating the benefits of management accounting system, types of management
accounting system must be known. Following are the different types of management accounting
system that can be used by Nisa Retail:
 Cost- accounting system: For the purpose of reporting accurate cost and amounts to the
financial statements, cost accounting is used which includes methods of evaluating costs
of products and services. It is also known as product costing system. Basically, cost
accounting system is used by the management in order to estimate the cost of products
and services, control of cost and for the valuation of inventories. It also helps in
identifying the profitable operations and non profitable operations of the organisation by
estimating the actual cost of products.
 Inventory management system: Inventory management system helps to Nisa retail in
controlling and supervising the stock orders and storage management of finished goods
and raw material. Unlike the old times, the inventory management system in today's time
can be managed by any available inventory management software (Weil, Schipper and
Francis, 2013.).
 Job costing system: Job costing system accumulates all the manufacturing cost and then
assign this manufacturing cost to the individual products or batches of products. This
method is used where there are significant differences in the manufactured products.
 Price optimising system: A Mathematical system is used in order to calculate the
variations among the demand of product at different price levels. Information derived
from the mathematical system is then combined with the inventory levels and the
information of cost to provide the best price of the product.
Benefits of these accounting systems to Nisa retail store:
 These accounting systems will help the management in estimating the cost of their
products and will also help in identifying the profitable operations of the company.
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 Management accounting system will enable the management to manage the inventory.
Availability of the volume of finished goods and raw material can also be determined.
 Actual manufacturing cost of different products of different segments can also be known
(Weygandt, Kimmel and Kieso, 2015).
D1. Integration of management accounting into the organisation
Nisa Retail can integrate Management accounting by:
 Price setting
 Cost centres
 Decision making
 Departmental Budget
 Central Budget
The information present in the financial report must be relevant and understandable to its
users. Along with the quantitative characteristics, information must also contain some qualitative
characteristics. Qualitative characteristics of information includes:
Understandability: The information presented in the report must be in such a form that could be
understandable. A financial report having no understandability would be of no use to both
internal users and external users (Zimmerman and Yahya-Zadeh, 2011).
Reliability: The information must be reliable to the organisation and not hypothetical. Only
reliable information can present the actual view of the organisation.
Managerial accounting reports can be of various types:
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 Budget report helps the management in making budgets of the organisation and also
controlling the cost of products in the organisation.
 Accounts receivable ageing report is the most crucial tool for the management. This
report is generally prepared in the organisations where credit is provided to the
customers.
 Job costing report identifies the relationship between actual cost of a specific product and
revenue yielded from the same product.
 Inventory and manufacturing report is prepared by the management for the verification of
physical inventory. This makes their manufacturing process more efficient (DRURY,
2013).
M2. Techniques and methods used in management accounting:
Following are the techniques that are used by Nisa Retail in management accounting:
Standard costing: standard costing records the variances between expected and actual cost by
substituting expected cost for actual cost in the reports. This system maintains large amount of
information about historical cost for the items that are held in stock. This system involves
creating of standard cost for the various activities of the organisation.
Activity Based costing: activity based costing system helps in assigning the manufacturing
overhead cost to the various products of the organisation. The assignment of cost is based on the
level of resources that are absorbed by the activities. In comparison to the conventional costing,
indirect costs are assigned to direct cost in this method (Fullerton, Kennedy and Widener, 2013).
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TASK 2: ASSIGNMENT 2
PART C
P4 Comparing and contrasting three planning tools which are used under management
accounting
In the workplace of each and every organisation, there are different systems of
management accounting are applied on the workplace. Further, when any kind of financial plan
is required to prepare and implement in the business environment then various tools and
techniques are taken into account. In the present case scenario, Nisa retail enterprise is used
which has presence in the retail industry of UK. Further, it is one kind of small business due to
which operates in the UK only rather than international level. From various planning tools it
considers mainly three which are related to the budget. It is a statement through which financial
information forecasted for the upcoming year which include cost, cash, incomes, expenditures,
material purchase, production etc. Nisa retail store uses cash, sales and production budgets under
the management accounting which are stated below:
Cash budget
The tool in which cash incomes and payments for the next year ending are analysed in
proper way is known as cash budget. Apart from this, it reflects about the cash availability in the
upcoming accounting period which helps to make highly fruitful financial plan. If the
management of Nisa retail store founds that cash is available in adequate or enough proportion
then will increase expenses in the financial plan. On the other hand side, if position of cash is in
inverse condition or low then not make huge expenses in the firm. It helps to the management for
allocating financial resources in adequate way among each and every business function like
marketing, HR, IT, R&D, production etc (Merits and Demerits of Cash Budget, 2016). Further,
decisions related to fund raising and source of finance is also properly taken out using cash
budget. However, time taken for implementation and accomplish the target of cash budget is
huge which is key issue associated with this tool.
Sales budget
Second planning tool used by Nisa retail store is sales budget which provides amount
which must be earned by the firm for next financial year. Further, it provides one kind of revenue
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target to the company which mandatory to meet in the upcoming period. Until and unless this
budgeted value is not achieved then it can be said that firm performs poor. Apart from this,
selling price is also determined with the help of sales budget of each and every unit produced or
sold in the workplace. It consists with basically three factors which are like selling price,
production units and closing stock. At the time of preparing plan about the sales generation then
market conditions are identified by the Nisa retail store.
Production budget
Apart from sales and cash, the third or last planning tool used by Nisa retail store is
production budget which gives target for manufacturing and selling specific units. On the basis
of this, the management clearly able to determine total units which must be produced in next
financial period (Nuhu and et.al., 2017). Under this combination of two values is considered
which is closing stock of finished products and sales or demand forecasted from market research.
When the cited firm apply this planning method in the workplace then able to reduce
unproductive expenses and utilise resources appropriately.
Comparison among cash, sales and production budget
When comparing to all the above stated planning techniques undertaken in management
accounting then all have nature of estimations for next year. With the help of these all the ways,
the Nisa retail store able to make targets for next financial year which will help to fulfil desired
objectives in adequate manner. Further, these are interrelated with each other because when these
combined and executed in workplace then support to meet the aims. Apart from this, to forecast
important financial information like cash availability, revenue and production units these are
highly supportive. Moreover, these all the tools have high degree similarity in specific aspect
which is forecast and estimate data for the next fiscal year.
Contrast between cash, sales and production budget
When considering to the contradiction then these all the planning tools differ with each
another. The cash budget shows about only cash position and availability of the liquidity in the
workplace of Nisa retail store. The second planning tool undertaken provide information about
the particular amount which required to generate by the firm in next year (Messner, 2016). These
both are totally different from each another and only one is not enough for preparing the
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