Evaluation of Management Accounting System for Pavestone

This report delves into the realm of management accounting, focusing on the application of various systems and techniques within the context of Pavestone, a UK-based building materials supplier. The report initiates with an overview of management accounting, its types, and its significance in facilitating internal decision-making. It then explores diverse reporting methods, including budget reports, job cost reports, and accounts receivable aging reports, highlighting their advantages and integration within organizational processes. The core of the report examines costing methods, specifically marginal and absorption costing, providing detailed calculations and income statements. Furthermore, the report analyzes budgetary control, planning tools, and their role in preparing and forecasting budgets. Finally, it addresses how management accounting systems respond to financial problems, concluding that these systems lead to sustainable success. The report includes tables, calculations, and critical evaluations to support its arguments.

MANAGEMENT
ACCOUNTING SYSTEM

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and its types..............................................................................1
P2 Different methods of management accounting reporting..................................................2
M1 Advantage of applications of management accounting system.......................................3
D1 Critical evaluation on how management accounting system and its reporting can be
integrated within organisational process................................................................................4
TASK 2............................................................................................................................................4
P3 Calculation of costing........................................................................................................4
M2 Different types of accounting techniques.......................................................................8
D2 Data interpretation............................................................................................................8
TASK 3............................................................................................................................................9
P4 Budgetary control and different types of planning tool and their advantages and
disadvantages used in budgetary control................................................................................9
M3 Uses and applications of planning tools for preparing and forecasting budgets............10
TASK 4..........................................................................................................................................11
P5: Responses of management accounting system to deal with financial problems............11
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems................................................................................................................13
D3: Planning tools respond appropriately to resolve financial problems.............................13
CONCLUSION..............................................................................................................................13
REFERENCE ................................................................................................................................15

INTRODUCTION
Management accounting refers to a process of preparing reports and accounts which
gives accurate information about internal state of a company. It helps managers of a firm in
making decisions related to short-term and day-to-day operation. The present assignment is made
on Pavestone of UK which deals in small sector. This firm supplies building materials to
construction companies on reasonable and affordable price rates (Hilton and Platt, 2013). This
report includes a critical discussion of different types of management accounting systems and its
methods of reporting. It includes a preparation of income statement of this company on the basis
of marginal and absorption costing. Along with this, various types of planning tool used in
budgetary control also discusses with some of its advantages and disadvantages. In order to
resolve financial problems, a comparison is made to show how management accounting helps in
dealing with such issues.
TASK 1
P1 Management accounting and its types
Management accounting is a process of analysing cost and operations of business which
helps in preparing internal report and account. It is also termed as cost or managerial accounting
through which managers of a company can make decisions related to achievement of business
goals (Otley and Emmanuel, 2013). Therefore, it is an important concept in business which
enhance efficiency of operations. In context with Pavestone, which deals in manufacturing
sector, through management accounting, managers can plan, control and manage entire activities
in systematic manner.
Managers of Pavestone can compare actual performance of business with expected
outcome. It sets out some major deviations on which essential steps can be taken as well as
implemented. In this regard, some important methods of management accounting are
explained as below:-
Cost accounting system – This method helps a company in estimating its product cost
for analysing organisational profitability and inventories valuation. Since the accurate cost of
goods is critical for small companies therefore, in context with Pavestone, it is required to
analyse which product will be profitable. This firm manufactures a wide variety of pre-cast
concrete walling and paving products. Thus, to serve goods to landscapers and other companies
1

in profitable manner, this company use two methods of accounting system that are job order and
process costing. Job order costing accumulates cost of manufacturing separately for each job.
While process costing accumulates the same for each process. Therefore, both methods help in
getting participation and cooperation of executives required by different departments.
Price Optimisation system – Using this system, Pavestone can determine how demand
of goods will fluctuate with different price rates and formulate strategies accordingly. As this
system of accounting consider various factors like category goals, competitors price strategy and
product life cycle (Christ and Burritt, 2013). Therefore, it is used in controlling the price of
different resources of a company, a firm can decide price of multiple products in a single time
period. Along with this, it also aid in deciding price structure for initial and promotional pricing
strategies.
Inventory management system – This type of accounting system is concerned with
management and supervision of stock. It also helps in tracking availability of company's stock
and non-capitalised assets. Henceforth, integrating this system with organisational process,
Pavestone can achieve effective and efficient flow of inventory. Inventory management system
includes many methods like– FIFO, LIFO and weighted average. This firm follows FIFO
inventory management system under which valuation is done by selling those products which are
manufactured first. Along with this, management of inventory in both monetarily and physical
manner, gives various advantages like cost reduction. All these processes help in forecasting and
replenishing strategies which aids Pavestone in advance management and planning of cost
requirement.
P2 Different methods of management accounting reporting
Accounting report is considered as crucial part of organisations which depicts a complete
picture how business is performing. As in small and medium sized companies every pound is
counted therefore, keeping an eye on bottom line is essential for review process (Banerjee,
2012). In this regard, managerial accounting report provide the information related to trim cost.
There are several methods of management accounting reports which assist Pavestone to develop
on regular basis as stated below:-
Budget Report: This report assist small companies like Pavestone in analysing
performance of business, different departments and controlling costs as well. Managers can also
use this budget report in providing incentives to workers on the basis of performance. As
2

estimated budget for a particular period is mostly based on actual performance of past record.
Therefore, if budget goes over and Pavestone is not in condition to trim cost then future budget
also not increases in order to meet specific goals. Thus, in such case it is necessary for
management to control cost of products.
Job Cost Report: This report shows expenses for a particular product which is financed
by small companies. Through this information, managers of Pavestone can evaluate profitability
of certain type of jobs as well as optimise operations also. Since this firm deals in manufacturing
sector which supply a range of materials such as stones and concrete to other construction
companies (Nahar and Yaacob, 2011). Therefore, this kind of report helps in controlling extra
expenses and reducing wastage of production also.
Accounts Receivable Aging Report: It is a critical tool used for managing business of a
company and estimating potential bad debts. Information regarding to bad debts generally used
to revise adjustment for doubtful accounts also. Thus, using this report, managers of Pavestone
can evaluate a list of customer invoices or which invoices are overdue for payment. Along with
this, credit department of this firm use aging report to analyse the current payment status related
to outstanding invoices. It will aid in determining if credit limit of customers are required to be
changed or not.
M1 Advantage of applications of management accounting system
System Advantages
Cost Accounting System This method management and accounting helps
Pavestone in meeting requirement of customers
as well as gives various techniques for
ascertaining the cost of products.
Price Optimisation System This system assists Pavestone in determining
price strategy of products at different level.
Inventory Management System Integrating this accounting system, Pavestone
can achieve appropriate inventory
management.
3

D1 Critical evaluation on how management accounting system and its reporting can be
integrated within organisational process
Type of reporting Integration with organisational process
Accounts receivable aging report The integration among organisational activities
of Pavestone and in this report can only be
achieved when managers collect information
related to accounts receivable on timely basis.
They should monitor credit policies regularly
for its flexibility and accuracy. It will help in
determining the effectiveness of credit as well
as collection function (Herzig and et. al., 2012).
Job Cost Report It is required by Pavestone to concern on
different activities which can be directed
towards achievement of cost objectives. It
helps in deciding pricing strategies of different
products in more easy manner.
Budget Report This report helps Pavestone in analysing
progress of a particular project so that if need
necessary changes can be made in order to
control wastage.
TASK 2
P3 Calculation of costing
Costs refers to an amount which has to be paid to get something. In business
organisation, this term is usually considered as a monetary valuation of material, efforts , utilities
and time consumed, resources as well as all expenses. It is found in many forms like historical
and replacement cost, variable and fixed cost, total, average and marginal costs etc. Among these
costs, in business, fixed and variable costs are used much. In this regard, fixed cost represents
costs which does not fluctuate and remain constant for a specific level of output. It includes rent,
4

building etc (DRURY, 2013). On the other hand, variable costs include materials used in
production, wages, utilities and more therefore, it increases at a constant rate.
In order to gain maximum profitability and enhance customer base, managers of
Pavestone has formulated a specific price strategy of each product. As this firm is a concrete and
stone supplier therefore, setting right price of each manufactured product helps in attracting
minds of customers more. Thus, in this regard, to measure and set price of each product, some
methods of costing are given below which helps in preparing an income statement also:-
Marginal Costing: The concept of this term is also referred as variable costing because it
is based on cost behaviour which vary with volume of output. It implies the additional cost that is
involved in manufacturing an extra unit of output, which may be reckoned by total variable cost
assigned to one unit (Adler, 2013). Therefore, using this technique, management of Pavestone
can take decisions related to production. On the basis of marginal cost, this firm can determine
selling price of each product also, which can be calculated as-
Marginal Cost= Direct Material + Direct Expenses + Direct Labour + Variable Overheads
Absorption Costing: It is defined as a technique to accumulate costs which are
associated with a production process. Pavestone use this concept for determining inefficiencies
in supply chain management by which managers can ensuring if business is operating with
maximum efficiencies or not. For this process, it links all production cost with cost unit. It will
help in preparing a full cost per unit. Therefore, it can be calculated as:
Unit Cost of Product = Direct Cost + Production Overhead Cost
As per case study, the cost card of Pavestone is given as beneath:-
£
(GBP)
Direct Labour 6
Direct Material 7
Variable Production Overhead 2
Fixed Production Overhead 1
Fixed Production Overhead incurred
actually
£6000
5

Variable selling & distribution expenses 30% of sales value
Selling Price 55
Sales 20000
Working Notes:
Formula of marginal costing:
sales revenue – marginal cost of goods sold = contribution – fixed cost = net income
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200+1200+1500 ) 5900
Net profit 17500
Formula of absorption costing:
Net Profit = (Sales revenue) – (Cost of goods sold) = (Gross profit – Selling and
Administrative expenses)
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
6

Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break-Even Analysis: This tool is helpful in studying the relationship between variable
and fixed cost organisations with revenue. In other terms, BEP shows at which point investment
of company will start generating return in positive manner. Therefore, Pavestone use this tool in
determining amount of sales unit to cover production cost. In context with Pavestone, break-even
analysis calculates size of production at selling process which is necessary to cover all the
incurred cost.
a. The no. of products that are required to be sold in a particular period for break even point can
be calculated as
Sales per unit 40
Variable costs VC = DM +
DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. According to sales revenue, break even point can be obtained as
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution /
sales * 100 30.00%
7

BEP in sales 20000
c. Calculation to obtain required profitability of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
d. When 800 products are sold then Margin of safety will be acquired as
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
Margin of safety (MOS)- It shows difference between actual and break-even sales of a
company. In short, sales revenue above BEP represents the margin of safety. As calculated
above, when actual sales of Pavestone and its BEP is 800 and 500 units respectively, therefore,
in this case 37.5 will be its margin of safety for a particular period. Henceforth, it is an important
figure for an organisation which tells changes in break-even point by reducing revenue. Thus, a
higher reduction in MOS helps in minimising risk of business losses as well.
Formula for MOS
Margin of Safety = Budgeted or actual sales – Sales required to Break-Even
M2 Different types of accounting techniques
For ascertaining cost of products, there are several techniques of accounting are available
which includes uniform, marginal, historical, standard costing and more. In context with
Pavestone, its managers use following three major accounting techniques:-
Standard costing: This technique of management accounting refers to the establishment
of standard costs. For this process, a comparison is made between actual cost with pre-arranged
standard one and variances that analyse by causes (Agbejule, 2011). Therefore, using this
8

technique, Pavestone can investigate adverse reasons which causes variances and take remedial
actions accordingly so that such things will not happen again.
Marginal costing: It refers to ascertainment of marginal cost which analyse by
differentiating variable and fixed cost. Management accountant of Pavestone use this technique
of accounting for controlling cost and taking appropriate decisions related to production. It will
help in maximising profitability of business during a financial period.
D2 Data interpretation
Interpretation of Data:
It has interpreted from above data that both techniques of accounting management via
absorption and marginal costs, use different-different methods to calculate the estimated unit cost
of product. In this process, fixed cost has been totally written off in marginal costing to
contribution. While, all cost has been utilised properly in absorption costing. Therefore, for
Pavestone, net operating income as per marginal costing comes out to be £17500 whereas
absorption technique obtains £15675. This indicates that Pavestone has encountered with a
significant growth in terms of revenue. Along with this, by the technique of BEP analysis, it has
interpreted that in order to reach a break-even point which is 20,000, company requires to sell
500 units.
TASK 3
P4 Budgetary control and different types of planning tool and their advantages and disadvantages
used in budgetary control
Budgetary control refers to a financial process, which is used to manage income and
control expenditures. In this regard, management of Pavestone used various tools to plan manage
and forecast budget of company. Currently this enterprise wants to expand its business market in
another locations of UK. Therefore, preparation of budget in systematic manner help this firm in
achievement of its targeted objectives and goals in set period of time (Ramljak and Rogošić,
2012). For this process, its managers use online budgeting tools which provide many options for
managing budgets in an organised and streamlined way.
Types of planning tools for budgetary control:
One of the best advantage of use budgetary control is to gain opportunity by which a
company can move forward and keep business on track. It helps in getting success in business.
9

For Pavestone, budgetary control tools help in identifying discrepancies between revenue and
project cost. Therefore, in case of discrepancies, necessary adjustment can make to overcome
from an issue. Thus, it is necessary for this company to use following tools to address budget
issues and make corrective decisions as well.
Forecasting tools for production planning and budgetary control: This planning tool
of budgetary control refers to simply a projection of future business or production. Production
planning contains a number of steps under which forecasting is an essential step which facilitates
the management of Pavestone in projecting its needs into future. As this tool looks more
hypothetical but utilising it, help in providing much accuracy in production. Under this process,
projecting for future, past information is required (Suomala and Lyly-Yrjänäinen, 2012). As
managers can utilise production result of past to make forecast for the future. Along with this, it
also aid in determining demand of customers in future for a particular products.
Advantages Disadvantages
 This process gives valuable information
related to future prediction by which
managers of Pavestone can take
appropriate decisions.
 Forecasting also helps in improving
utilisation of resources as it address
issues where budgetary control may
loose.
 As forecasting based on hypothesis so,
results or predictions obtained may not
be accurate perfectly.
 It is much complicated process to
evaluate future result.
Contingency Planning tool: This tool is considered as best method which helps in
preventing a company from major disasters. It includes loss of data or any valuable resources,
staff members, customers, suppliers and more. In this regard, management of Pavestone prepares
contingency plans to address risk faced by business. It also identifies all critical operations and
functions of business as well as outline process by which risk can be minimised. In risk analysis,
a huge list of potential threats is obtained. Therefore, to produce a contingency plan, it is
necessary to prioritise risk (Senftlechner and Hiebl, 2015). Along with this, managers of
Pavestone are required to make carefully balance between adequate preparation and over-
preparation of something which may not happen in future. It will help in responding in quick and
effective manner for handling a critical situation.
10

Advantages Disadvantages
 Using contingency tool, help managers
of Pavestone to give safe working
environment to workers.
 Preparing contingency plan help in
protecting business from failure in the
event where risk materialise.
 Due to increase in demand and conduct
day-to-day operations, probability of
disruption in significant business is
quite much small. Therefore, it is hard
to make time for preparation of a good
plan.
 Contingency planning requires an
investment of resources and time which
is not possible to be invested by smaller
firms like Pavestone.
M3 Uses and applications of planning tools for preparing and forecasting budgets
Planning tools like forecasting and contingency help Pavestone in utilising resources
more specific manner. As forecasting tool used to address issues of business before time so that
necessary actions can be taken which reduce occurrence of the same. Moreover, this tool also aid
in making necessary changes in budget so that requirement of production needs in context with
future, can be met. Other than this, by contingency planning tool, Pavestone can prepare
necessary plans which helps in overcoming from those issues which may harm business and its
resources. As Pavestone deals in manufacturing business where concrete and other construction
materials are produced (Schäffer, 2013). So, occurrence of discrepancies and major disaster can
be generated. Therefore, management of this company also provides essential training to
workers so that they can prepare themselves to respond under critical situation.
TASK 4
P5: Responses of management accounting system to deal with financial problems
Managerial accounting concerns more on internal requirement of a business instead of
external users of financial information. As key purpose of information related to information is
to assists managers, investors and government agencies to take proper decisions. Therefore,
managerial accounting develop such reports which include information related to products and
market research. In context with Pavestone, these reports are prepared by conducting a survey
11

and competitor analysis. It helps managers to set objectives as well as outline how these will be
achieved. Thus, all these things of management accounting system help in resolving issues
related to finance which generally arise due to:-
Lack of finance management system: It is one of the main issue which generally faced
by small companies of UK including Pavestone. As if a company has no proper finance
management system then it will fail to manage account or budget of business.
Lack of proper information related to cash transaction: It is also considered as main
issue i.e. if managers of small firms fail to keep or maintain information about every transaction
of business then further operation of company cannot operate in appropriate manner (Bovens,
Goodin and Schillemans, 2014).
Over expenses: For making business more effective, sometime companies have to
expense more without willingness which are not forecasted generally in budget. Therefore,
overload or extra expenses also arise financial issues for small companies including Pavestone.
Therefore, Pavestone is required to implement proper finance and management
accounting system. It also needs to provide proper training to managers so that they can learn
how to manage budget and keep record of every transaction in well-defined manner.
Applications for tools for overcoming from such financial issues:
Key Performance Indicator (KPI): This tool refers as a measurement tool which
measures current financial and non-financial condition of business. It indicates whether in a
financial period, a company gains success or failure. Information related to liquidity, solvency,
profitability and revenue ratio is taken as financial indicators. On the other hand, working
capability of human resources, product and service quality etc. termed as non-financial indicators
(Shields, 2015). Therefore, managers of Pavestone use this tool to measure the current condition
of business profile and brand image. It reflects how business will grow and develop in future.
Therefore, analysing these process, this construction company can take necessary actions to
resolve financial issues by enhancing productivity of workers, giving high quality of products
and improvement in operations.
Benchmarking: It is also an important technique which evaluate internal performance of
different departments of a company by comparing their contribution in business success.
Therefore, Pavestone use this tool for developing such practices which enhances performance of
each department. As benchmarking is considered as core component of improvement programs
12

on continue basis therefore, it helps this company in improving and enhancing performance. As
currently, this firm is facing financial issues like over expenses so, through benchmarking tool, it
set a budget for an accounting period. It includes a set of planned activities and requirement of
finance will define accordingly. After end of period, managers of Pavestone will evaluate is
expenses are covered in limited budget or not. If expenses are more than budget then further
improvement plans will be made. So, all these processes of benchmarking technique, help
Pavestone in resolving its finance related problems.
Pavestone Carillion
 Pavestone use KPI system to measure
performance of financial and non-
financial conditions of business. It will
help in implementing techniques by
which performance of business can be
improved in future.
 It also use internal benchmarking
system to evaluate performance of each
department so that necessary actions
can taken to enhance productivity of
divisions.
 Carillion also deals in construction
sector so it use different approaches of
managerial accounting system like
financial governance to reduce risk of
uncertainties in business.
 This firm use competitive
benchmarking system in order to
implement better strategies in business.
It helps in gaining high competition at
marketplace.
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems
In order to get sustainability in business, it is necessary for Pavestone to implement major
techniques of management accounting. It helps this firm in handling major issues related to
finance and gain sustainable success of business organisation in following manner:-
 Tools and techniques of management accounting like marginal and absorption costing,
break-even analysis and so on, help managers of Pavement in integration of sustainable
matters into different process of decision making. can build strong and unique strategies
through which sustainability of business can be earned ( Callahan, Stetz and Brooks,
2011).
13

 These techniques also aid this firm in development of reporting strategies. It will aid this
firm in integrating sustainability issues which will give allowance for reporting of
financial as well as non-financial information.
 Along with this, management accounting also proves beneficial in preparation of reports
which include information related to sustainability impact. It will aid to understand
pricing and budgeting decisions.
D3: Planning tools respond appropriately to resolve financial problems
Planning tools provide various techniques for a company in managing its business
operations. These tools help in identifying financial issues which affects budgetary plans. It
provides ways through which enterprises can take appropriate actions for improvement of their
performance. Tools like contingency and forecasting assist a company how to manage budget
and prepare plans to respond future issues (Islam and Hu, 2012).
CONCLUSION
According to mentioned report, it has summarised that management accounting system
plays a crucial role in attaining success of a company. Through this system, managers of an
enterprise can obtain and retrieve information for conducting functions of business. It provides
concept of marginal and absorption costing which assist organisations how to prepare financial
reports which are based on set of preferences. Moreover, applications of different management
accounting tools aids a firm in measuring its current performance so that necessary actions can
taken for further improvement.
14

REFERENCE
Books and Journals
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Christ, K. L. and Burritt, R. L., 2013. Environmental management accounting: the significance
of contingent variables for adoption. Journal of Cleaner Production, 41, pp.163-173.
Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
Nahar, H. S. and Yaacob, H., 2011. Accountability in the sacred context: The case of
management, accounting and reporting of a Malaysian cash awqaf institution. Journal of
Islamic accounting and business research, 2(2), pp.87-113.
Herzig, C., and et. al., 2012. Environmental management accounting: case studies of South-East
Asian companies. Routledge.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Adler, R., 2013. Management Accounting. Routledge.
Agbejule, A., 2011. Organizational culture and performance: the role of management accounting
system. Journal of Applied Accounting Research, 12(1), pp.74-89.
Ramljak, B. and Rogošić, A., 2012. Strategic management accounting practices in
Croatia. Journal of international management studies, 7(2), pp.93-100.
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
Lessons learned from an interventionist approach. Routledge.
Senftlechner, D. and Hiebl, M. R., 2015. Management accounting and management control in
family businesses: Past accomplishments and future opportunities. Journal of
Accounting & Organizational Change, 11(4), pp.573-606.
Schäffer, U., 2013. Management accounting research in Germany: From splendid isolation to
being part of the international community. Journal of Management Control, 23(4),
pp.291-309.
Bovens, M., Goodin, R. E. and Schillemans, T. eds., 2014. The Oxford handbook public
accountability. Oxford University Press.
Shields, M. D., 2015. Established management accounting knowledge. Journal of Management
Accounting Research, 27(1), pp.123-132.
Callahan, K. R., Stetz, G. S. and Brooks, L. M., 2011. Project Management Accounting, with
Website: Budgeting, Tracking, and Reporting Costs and Profitability (Vol. 565). John
Wiley & Sons.
Islam, J. and Hu, H., 2012. A review of literature on contingency theory in managerial
accounting. African Journal of Business Management, 6(15), pp.5159-5164.
Van der Stede, W. A., 2015. Management accounting: Where from, where now, where
to?. Journal of Management Accounting Research, 27(1), pp.171-176.
Online
Management Accounting: Scope and Techniques. 2018. [Online] Available Through:
<http://www.yourarticlelibrary.com/management-accounting-2/scope-management-
accounting-2/management-accounting-scope-and-techniques/65346>
15

Budgetary Control: Definition, Objectives and Benefits. 2017. [Online] Available
Through:<http://www.businessmanagementideas.com/management/functions/
budgetary-control-definition-objectives-and-benefits/3590>
16