Management Accounting Report: O'Keefe Construction Analysis

This report provides a comprehensive overview of management accounting, focusing on its crucial role in organizational decision-making, particularly within the construction industry. It begins with an introduction to management accounting, emphasizing its importance in analyzing financial data for internal decisions, and then selects O'Keefe Construction Limited as a case study. The report explores various management accounting systems, including inventory management and price optimization, detailing their applications and benefits within the context of the construction firm. It also examines different reporting methods such as budgetary reports, cost managerial accounting reports, and inventory cost reports. Furthermore, the report analyzes the integration of management accounting systems and reporting within organizational processes. The report includes practical examples using marginal costing and absorption costing methods, along with calculations for overhead absorption using labor hour and activity-based costing (ABC) approaches. This report serves as a valuable resource for understanding and applying management accounting principles to real-world business scenarios.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
PART (A)...............................................................................................................................1
PART(B).................................................................................................................................4
ACTIVITY 2....................................................................................................................................8
PART (A)...............................................................................................................................8
PART(B)...............................................................................................................................12
CONCLUSION..............................................................................................................................14
.......................................................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is an accounting system which is commonly related with
analysing, monitoring and interpreting all the financial data in order to take internal decisions. It
is one of the most important accounting system for the overall organisations because it includes
all required information related to financial data which becomes the basis of future planning and
policies. In addition to this, it includes both type of data monetary as well as non- monetary
information. It includes various other accounting system (Bennett and James, 2017). In this
report, O'Keefe construction limited is chosen as the base company in this report. It is the
company which is located in the United Kingdom which provides construction as well as ground
work services and so on. This report includes different type of management accounting along
with their advantages. In addition to this, the present report includes various methods of
budgetary control along with the role of management accounting techniques while solving
different financial issues.
ACTIVITY 1.
PART (A)
Management accounting and essential requirement of different accounting method.
Management accounting system is related to the accounting system which help in providing
required information to the manager of organisation which required within decision making
process. Within organisation, management accounting system is important but not mandatory
part of an organisation because not framed according to the accounting concepts and rules.
Moreover, uses of management accounting system is increasing day by day because there are
several approaches as well as techniques involves within it which have own importance within
working of organisation. In addition to this, within wide term there are several accounting
systems included within management accounting system and used by companies within their
working (Bromwich and Scapens, 2016). In relation of the O' Keefe construction company wide
range of accounting system will be implemented that are needed within several civil engineering
project. Explanation of these are as follows: -
Inventory system management – It is type of accounting management system which
help organisation in accurately managing raw material as well as finished products. Generally,
inventory management system keep focus on the movement of raw material and finished
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products within organisation within overall supply chain management. In addition to this,
respective inventory stage-management system has their importance within organisation in
evaluating stock availability as well as raw material within warehouses. Because of this,
inventory manager within organisation assist in managing and purchasing goods and services
within business firm. Along with this, respective accounting system is needed in company for
managing raw material and prepared goods (Chenhall and Moers, 2015). So that, companies can
make purchase of new material according to the needs. In the context of O'Keefe construction
limited company, they can implement inventory management system for proper management of
available raw material related to civil projects. Along with this, they will get aware about the
quantity of raw material available within stock.
Price optimisation system – This is a management accounting method which utilise
within organisation for allotting right or accurate level of price for product and services. In
addition to this, price optimisation system provides a framework which help in reviewing
reaction of customers within different price level. Respective system is not only beneficial for
organisation but also for customer too. This is best way which help organisation is deciding
accurate price of their product and services which will be suitable for organisation as well as
their customers. Within absence of this, it will become difficult for respective construction
company to determine right offering price of their product and services. Along with this, it
results in conflict within occurring cost of offering and their price. In simple words, price
optimisation system is needed within organisation for fixing price of goods and services at every
level which will be beneficial for both company and their customers (Maas, Schaltegger and
Crutzen, 2016). For instance, the O'Keefe construction limited organisation implements
respective method of price optimisation help in analysing as well as determining the price of
different civil projects within business firm. Along with this, by the assistance of this system
company will be able to satisfy their customers’ needs in relation of price within effective
manner.
Different methods of management accounting reporting:
Management accounting reporting refers to the process of formulating reports on the
basis of data given by management accounting systems. There are various types of reports that
are being developed with the support of management accounting. In context of O'Keefe
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construction limited company, it has been analysed that the company is making various kind of
reports. Some main of them are described as follows:
Budgetary reports- Budgetary reports are seen as those reports which have been created
for measuring actual action or performance company by comparison of actual outcome with the
estimated outcomes. It is seen as internal report which is useful for the performance evaluation
and its analysis of its issues. these reports also helps manager in taking essential decisions at
workplace (Bennett and James, 2017). With reference to O'Keefe construction limited company,
it can be said that its managers prepares these kind of reports to identify the actual financial
performance of company.
Cost managerial accounting reports- It is a kind of accounting report which includes
all relevant information about cost which occurs in the procedure of service or product offering.
This kind of accounting report includes several information such as direct cost , material
cost,labour overhead, etc. With the helps of this report company check out whole information in
order to find out which department is consuming high cost. With reference to O'Keefe
construction limited company, the top management team of the company prepares cost reports
for measuring cost of various projects activities. With the helps of these reports, they can
enhance their knowledge regarding cost in construction.
Inventory cost report- Inventory cost reports includes data about the availability of raw
material and other related stocks in the warehouses of company. With the support of this report,
the manager is able to analyse that how much quantity is available in their company and what
additional is required for executing business activities ion effective manner. Apart from this, this
type of report that is inventory cost report also contains information related to the carrying cost,
ordering and storage (Bromwich and Scapens, 2016). With reference to O'Keefe construction
limited company, the top management team of the company develops this report for effective
management of raw material used in construction as well as for evaluating the different cost of
inventory management.
Benefits of management accounting systems and their application in organisational context.
Management accounting systems include different kind of systems like inventory
management system cost accounting systems and price optimisation system. It can be said that
all of these systems are valuable for the company. With reference to O'Keefe construction
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limited company, it can be said that benefits of these systems for the company are stated as
below:
Benefits of inventory management system- It can be said that this accounting system is
helpful for tracking the movement finish goods as well as raw material in whole supply chain
process (Chenhall and Moers, 2015). With reference to O'Keefe construction limited company,
the system helps its top management team in checking out accessibility of raw material like iron
and cement concrete in the outlets.
Benefits of price optimisation system- With reference to O'Keefe construction limited
company, it can be said that the system is helpful in determining actual price of products and
services. Along with this, it also guides top management team about finalising prices of the
actual products and services.
Benefits of cost accounting system- This system is aid in providing various information
which are related to the various cost which occurs in various processes. As per the above
mentioned company i.e., engineering company, cost accounting system is helpful for them to
check the overall cost of various engineering projects.
Management accounting system and reporting are integrated within the organisational process.
Management accounting system is valuable for the companies as it helps preparing
management accounting reporting. This is because, different management accounting reports like
budgetary, inventory cost report etc. are developed with the support of data which is provided by
the various accounting systems. All of these systems are interrelated to each other along with the
organisational process (Maas, Schaltegger and Crutzen, 2016). With reference to O'Keefe
construction limited company, the top management team of the company formulates different
reports with the support of various accounting systems such as cost accounting systems,
inventory management system etc. It can be said that in the absence of combination of
accounting systems with the management accounting reporting it might be difficult for them to
prepare effective report. This shows that both of them are interrelated with each other within
process of company.
PART(B)
ANNEX(A)
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Marginal costing- This type of method has been used for making income statements. In addition
to this, both Variable cost and fixed cost plays their own role. Here, variable cost taken as a unit
cost where as fixed cost is taken as period cost (McVay, Kennedy and Fullerton, 2016).
Absorption costing- This type of method is totally opposite from marginal costing method.
Along with this, here variable costing method includes both the costs i.e., (fixed and variable
costs) that are taken as the product cost.
Income statement by marginal costing method is evaluated below as:
PARTICULARS AMOUNT
SALES 427500 427500
LESS VARIABLE COST
DIRECT LABOUR (15*5000) 75000
DIRECT MATERIAL (18*5000) 90000
VARIABLE PROD ( 9*5000) 45000
VARIABLE 10% OF SALES VALUE 42750 252750
LESS DIRECT LABOUR (15*500) 7500
DIRECT MATRIAL ( 18*500) 9000
VARIABLE PROD (9*500) 4500 -21000
CONTRIBUTION 195750 195750
LESS FIXED EXP (180000/4) -45000
PROFIT FOR THE YEAR 150750 150750
Income statement by absorption costing method(1st quarter)
PARTICULARS AMOUNT
SALES (4500*95) 427500 427500
COGS -231750
GROSS PROFIT AT NORMAL 195750
UNDER/OVR ABSORPTION 6800
GROSS PROFIT AT ACTUAL 202550
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-FIXED EXP -45000
NET PROFIT 157550
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method(2nd quarter)
SALES (3000*95) 285000
COGS -180250
GROSS PROFIT AT
NORMAL 104750
Under ABSORPTION -5476
GROSS PROFIT AT
ACTUAL 99274
-FIXED EXP -45000
NET PROFIT 54274
Working notes:
1.
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Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
2.
Per quarter standard
production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
ANNEX (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
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Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Interpretation
From the above mentioned numerical, it has been evaluated that, there are two products
such as X and Y has labour cost is £12. whereas conventional absorption method is used whose
total overhead cost of both product i.e., X and Y is £72,000 and £192,000 respectively. On the
other hand, ABC approach is used for analysing machine hours of both the products. In product
X and Y is £24,000 and £16,000 respectively. Whereas cost of overhead is different. Here
product Y consume more expenditure as comparison to product i.e., for product X is £ 82749
and for product Y is £181,255.
ACTIVITY 2.
PART (A)
Advantages and disadvantages of various planning tools of budgetary control:
Budgetary control refers to a method which relates with the establishment of monetary as
well as no monetary goals with the help of budget. After this a comparison is made between the
actual performance and the standard goals. With the help of this, actual performance can be
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analysed conducting while performing different activities. The main aim of this process to meet
the requirements as per the standards. Various types of planning tools are used by companies in
order to examine the actual result (Nilsson and Stockenstrand, 2015). The O'Keefe construction
limited, apply various budgetary control tool. Some of the tools are as follows:
Fixed budget- These are the budgets which are not flexible and also known as static
budget. Such budgets does not change according to the change in sales volume. So companies
formulate such type of policies for those activities which is not going to change in near future.
The above mentioned company select fixed budget in order to fulfil their small projects in less
time. There are some advantages and disadvantages of this budget:
Advantages-
 It is the budget which does not need to update on a regular moth so it reduce the time of
managers. In O'Keefe construction limited, they only prepare fixed budget once and does
not change it.
 One of the biggest advantage is that it is quite easy and quick to track the information
(Nørreklit, 2017). Reason behind this is that it remain same, so the managers of the
company easily track the performance.
Disadvantages-
 Major disadvantage of this type of budget is that it remains same and create
confusion, as the sales and volumes changes continuously.
 This budget remains same whether there is any kind of changes occur in the sales
or volume.
Flexible budget- It is a type of budget which changes continuously according to change
in volume and sale (Otley, 2016). Also, this budget is more comfortable in order to compare the
static budget. The O'Keefe construction limited, prepares such type of budget in order to fulfil
their long term project. Reason behind this is that in long term various changes occur in the
income and expenditure, so that all these changes can be updated in the budget. There are some
advantages and disadvantage which are explained as below:
Advantages-
 This type of budget is less stressful as it helps in changing the estimated income
and expense. With the help of this, chosen engineering company can make change
according to their income in their budget.
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