Management Accounting Systems & Techniques: Oshodi Plc Case Study

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Management Accounting Systems & Techniques
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Table of Contents
Introduction......................................................................................................................................3
Scenario 1........................................................................................................................................4
Scenario 2........................................................................................................................................9
Conclusion.....................................................................................................................................16
Reference List................................................................................................................................17
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Introduction
As the world of business is progressing and globalisation is enlarging at a rapid pace, it is
becoming more and more difficult for business enterprises to operate effectually while ensuring
that they are able to attain sustainability. However, management accounting provides substantial
level of support and aid to business enterprises in their dealing with the differing sorts of risks
and threats posed due to globalisation as well as the enlarging complexities existent in the world
of business. This study involves a detailed discussion over the topic management accounting and
elucidates on how business enterprises, especially the manufacturing firms can be benefitting
from management accounting.
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Scenario 1
Introduction
The enterprise Oshodi Plc is a producer of drinks named JOHO fruit juice for people belonging
to all age groups. This report has been created for the enterprise Oshodi Plc for the explanation
of the functions and usefulness of management accounting systems to the internal stakeholders
of the enterprises, such as its management. It will also elucidate over the how planning tools are
advantageous to the organisation.
LO1 Demonstrate an understanding of management accounting systems
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems
Explanation of management accounting, acknowledged also as managerial accounting, can be
done as the provision of financial as well as non-financial data provided to a business enterprise,
which supports internal management in devising of planning, performance management systems
along with managerial decisions (Weetman, 2019). It largely benefits companies in reporting its
performance while also helping in cost derivation and computation. There are significant ways in
which managerial accounting can be distinguished from financial accounting, as shown in the
table below -
Financial Accounting Management Accounting
 Focused over creating and presenting
financial statements of business enterprises
 Focused in strategic planning and running
of business activities of enterprises
 Compulsion  Non-compulsory or mandatory
 Deals with only monetary data and
information
 Deals with non-monetary data and
information in addition to monetary
information
 Done utilising standardised guidelines  No standardised guidelines needed
 Used by external parties in addition to
internal parties
 Used only by the internal stakeholders,
specifically management
Table 1: Distinguishes amongst management and financial accounting
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(Source: Weygandt et al., 2015)
There is a presence of four differing and most significant systems in the managerial accounting
field. In the below section, these four systems have been elucidated in detail -
 Cost accounting system - The system is involved in the quantification of the expenditure
that a business enterprise has made (Guenther et al., 2015). It supports companies in the
reduction and minimisation of costs to the highest possible extent.
 Job costing system - Within this system, there is an evaluation conducted over the job
relating expenditure in a business enterprise (Pollard, 2018). It also assigns and
accumulates costs of manufacturing within an enterprise regarding individual output
units.
 Inventory management system - Detailed track of the flow as well as movement of stock
materials in a business enterprises are kept with the means of the inventory management
system. The system is also helpful for the maintenance of stocked items, removing
availability uncertainties while monitoring them continually (Sayed et al., 2018).
 Price optimising system - Product prices in a business enterprise are set using this
managerial accounting system (Ceraolo et al., 2016). It considers the reactions amongst
consumers within the market so that accurate pricing decisions could be implemented in
enterprises.
However, good information systems must possess certain characteristics. Management
accounting systems are good information systems and the information presented from them must
be consisting of certain characteristic features including accuracy, reliability and up-to-dated
(Rasool and Warraich, 2018). Reliability and accuracy is needed being present in management
accounting systems in order to create ease of jobs and increase effectualness of operations so that
company performance can be enhanced. At the same time, management accounting systems must
be consisting of up-to-date data and information so that tasks can be performed with
effectualness and efficacy while the decisions made using them are correct.
P2 Explain different methods used for management accounting reporting
Managerial accounting comprises of a wide-ranging reporting methods. A few methods that are
utilised in the context of Oshodi Plc have been elucidated below -
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 Aging reports - This category of reports are concerned with the listing and evaluation of
the aging debtor existent within a business enterprise along with their dues and the span
of delay in their payments. It improves the debt collection within enterprises.
 Budget reports - Budget reports consist of the financial data relating to a business
enterprise along with including the actual results of the enterprise in relation to its pre-
established budgets (Church et al., 2019).
 Cost reports - It is another sort of a managerial accounting report wherein costs spent in a
business enterprise are identified and the charges relating to its differing activities are
recorded and summarised (Iacona et al., 2018). The report also predicts the future costs
and expenditure of a business.
 Performance reports - The performances shown in a business enterprise in addition to
the performances of its differing departments and segments are summarised in this report
it measures outcomes of performance of a business’s employees and their departments
relative to their success during a particular time span (Van de Walle and Cornelissen,
2016).
M1 Evaluate the benefits of management accounting systems and their application within
an organisational context
Essential requirements of the managerial accounting systems have been found above. These
systems are of large amount of benefits whenever their application takes place in organisational
contexts. For example, Oshodi Plc is largely benefitted from the application of managerial
accounting systems within its context. Cost accounting system benefits Oshodi Plc through its
application because of properly planning costs while keeping a deep control over them through
spotting out profit generating and loss generating activities. Job costing system also benefits
Oshodi Plc through its application in a way of deriving profits earned from individual jobs and
quantifying costs spent over those while effectual job decision-making.
Inventory management system benefits the organisation because of its application due to
optimising inventory maintenance and lowering inventory expenses. Lastly, price-optimising
systems are beneficial because of their application within Oshodi Plc because the system helps it
in the accomplishing of customer satisfaction and retention.
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LO3 Explain the use of planning tools used in management accounting
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Business enterprises all over the world make use of planning tools that managerial accounting
provides them for the enhancement and establishment of their budgetary control. Oshodi Plc
makes use of a number of planning tools, which aids it in the accomplishment of stronger
budgetary control. These tools have been explained below with their pros and cons -
 Zero based budgeting - It is a tool used for planning wherein expenses of a business
enterprise need being justified for all new periods starting from “zero base” with each
function analysed for their costs and needs (Oraka et al., 2016). Planning of finances is
done in this tool without considering prior budgets.
Advantages -
 Leads to improved efficacy and accuracy because of freshly justifying costs
 Reduces redundant activities due to beginning from the scratch
Disadvantages -
 It is time consuming because it is done from the scratch
 Detrimental towards long-term goals since prepared for short-term
 Incremental budgeting - In this planning tool, the previous year’s actual performance or
its budget is utilised as the basis for planning the next year’s budget through adding up
incremental amounts for every new period of budget (Myers, 2018).
Advantages -
 Easily computed and implemented because of the requirement of simply adding
increments
 Suitable for organisations in accomplishing stability since no fast changes are
involved in it
Disadvantages -
 Results to overspending because of adding increments
 Lack of innovation and cost reduction because of using previous budget as base
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 Variance analysis - This tool is concerned with the verification of the distinctions in the
budgeted outcomes determined in a company against the actual outcomes determined
(Chambers et al., 2017).
Advantages -
 Aids in enhanced budgetary decisions because of identifying uncontrollable
variances
 Acts as control mechanism because of aiding in variance control
Disadvantages -
 Results depend upon efficacy in budgeting, as budgetary results are used as its
base
 Lack of expertise is not advantageous for using the tool
M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets
Planning tools can be differently used in organisational contexts, a common way being for
budget preparing and forecasts (Brusca and Labrador, 2016). The above-discussed planning tools
are advantageous to organisations in differing ways for budgeting. For instance, zero-based
budgeting helps in analysing costs and expenses from the scratch through their justification from
an entirely fresh manner, which is beneficial for budget forecasting as well as preparing for the
next period. Contrastingly, incremental budgeting acts advantageous for creating budgets and
their forecasting during every new budget period through means of using prior budget and
adding up increments to it.
At the same time, variance analysis aids business enterprises for the derivation of uncontrollable
and adverse variances occurring within organisational contexts. These in turn are focused on and
implemented within budgets for the next period, thereby helping budget forecasts and their
preparing. Thus, planning tools act beneficial for budgeting in business enterprises such as
Oshodi Plc in the above-discussed ways.
Conclusion
Thus, the report helped in understanding the necessities behind the utilisation of management
accounting systems while focusing on how they can be applying planning tools not for budgetary
control only but also for budget creation and their forecasting.
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Scenario 2
Introduction
In this report, a detailed analysis will be conducted on the costs and expenses of Oshodi Plc
through applying managerial accounting techniques. At the same time, it will be utilised for
applying managerial accounting as the solution for financial troubles being encountered within
organisations.
LO2 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
Absorption costing
Per unit cost November December
1. Variable costs of production (variable costing) £ 25 £ 25
2. Fixed manufacturing overhead expense (Fixed
manufacturing overhead expense ÷ Manufactured units)
£ 8.25 £ 9.9
Per unit cost £ 33.25 £ 34.9
Table 2: Per unit cost under absorption costing
(Source: Learner)
Oshodi Plc’s Statement of Income according to absorption costing
Particulars November December
Sales revenue earned from selling juice £ 500000 £ 600000
Less: Cost of goods sold (full costs)
Beginning stock (stock at the starting of the month) £ 0 £ 66500
Manufacturing relating expenses:
1. Costs relating to direct material £ 216000 £ 180000
2. Costs relating to direct wages (labour) £ 48000 £ 40000
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3. Costs relating to variable overhead expense £ 36000 £ 30000
4. Costs relating to fixed manufacturing overhead expense £ 99000 £ 99000
Ending stock (stock at the ending of the month) £ 66500 £ 0
Total cost of goods sold £ 332500 £ 415500
Gross income £ 167500 £ 184500
Charging of under and over absorption £ 9000 £ 9000
£ 176500 £ 175500
Less: Non-manufacturing expenditure
1. Selling overheads (fixed) £ 14000 £ 14000
2. Administration overheads (fixed) £ 26000 £ 26000
3. Selling overheads (variable) £ 50000 £ 60000
Total non-manufacturing expenditure £ 90000 £ 100000
Net income £ 86500 £ 75500
Table 3: Income Statement under absorption costing
(Source: Learner)
Workings -
1. Sales in November = 10000 * £50 = £500000
Sales in December = 12000 * £50 = £600000
2. Variable selling overhead in November = 10% of £500000 = £50000
Variable selling overhead in December = 10% of £600000 = £60000
3. Ending stock in November = £33.25 * 2000 units = £66500
Beginning stock in December = £33.25 * 2000 units = £66500
4. Uncharged overheads during November = (99000 + 9000) - 99000 = £9000
Overcharged overheads during December = 99000 - 90000 = £9000
Marginal costing
Cost per unit November December
1. Costs relating to direct material £ 18 £ 18
2. Costs relating to direct wages (labour) £ 4 £ 4
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3. Costs relating to variable overhead expense £ 3 £ 3
Per unit cost £ 25 £ 25
Table 4: Per unit cost under marginal costing
(Source: Learner)
Oshodi Plc’s Statement of Income according to marginal costing
Particulars November December
Sales revenue earned from selling juice £ 500000 £ 600000
Less: Cost of goods sold (only marginal costs)
Beginning stock (stock at the starting of the month) £ 0 £ 50000
Manufacturing relating expenses:
1. Costs relating to direct material £ 216000 £ 180000
2. Costs relating to direct wages (labour) £ 48000 £ 40000
3. Costs relating to variable overhead expense £ 36000 £ 30000
Ending stock (stock at the ending of the month) £ 50000 £ 0
Total cost of goods sold £ 250000 £ 250000
Other variable expenditure:
Selling overheads £ 50000 £ 60000
Contribution margin £ 200000 £ 290000
Less: Non-manufacturing expenditure
1. Selling overheads (fixed) £ 26000 £ 26000
2. Administration overheads (fixed) £ 50000 £ 60000
3. Fixed manufacturing overhead expense £ 99000 £ 99000
Total non-manufacturing expenditure £ 175000 £ 185000
Net income £ 25000 £ 105000
Table 5: Income Statement in marginal costing
(Source: Learner)
Workings -
1. Sales in November = 10000 * £50 = £500000
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Sales in December = 12000 * £50 = £600000
2. Variable selling overhead in November = 10% of £500000 = £50000
Variable selling overhead in December = 10% of £600000 = £60000
3. Ending stock in November = £25 * 2000 units = £50000
Beginning stock in December = £25 * 2000 units = £50000
M2. Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents
Within companies operating across the world, there are differing sorts of management
accounting techniques, which are used and applied so that they can be producing the documents
for financial reporting (Hoglund et al., 2016). This application of the management accounting
techniques along with their use for producing suitable documents for financial reporting can be
determined through the example of Oshodi Plc. According to the information that can be
accessed about Oshodi Plc, one can be finding out the below details -
Selling price = 50.00 per unit
Fixed expenditure = 14000 + 26000 + 99000 = 59000
Variable expenditure = 25.00
Suitable documents for financial reporting in the company can be determined via the means of
application of techniques that are available from management accounting such as the breakeven
analysis, also recognised mostly as CVP analysis. One can be elucidating the CVP analysis as
the technique within managerial accounting that assists in the identification of the effects that are
posed by a company’s product cost as well as sales volume over the operating income of the
company (Bauer and Bauer, 2018). Depending upon the information that is available on Oshodi
Plc, the following is the application of the managerial accounting technique called CVP analysis
-
Breakeven point (sales) = Fixed Expenditures / (Per unit contribution / Selling prices of each
unit) = 59000 / (25 /50) = £118000
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