Management Accounting Systems, Costing, and Reporting for Pavestone

This report examines management accounting practices within Pavestone, a US-based stone and concrete manufacturer. It explores various management accounting systems like cost accounting, price optimization, inventory management, and job costing, detailing their benefits and applications. The report further analyzes different management accounting reports, including budget, performance, accounts receivable, and inventory reports, highlighting their roles in decision-making and performance evaluation. It then delves into costing techniques, specifically marginal and absorption costing, providing calculations and demonstrating their impact on profit determination. Additionally, the report includes a break-even analysis to assess the point at which Pavestone's total revenues equal its total expenses. Finally, it discusses the integration of management accounting systems and reports within organizational processes, emphasizing their contribution to performance measurement, market analysis, and overall business strategy. The report provides valuable insights into how management accounting supports effective operational management and strategic planning.

MANAGEMENT
ACCOUNTING

INTRODUCTION
Management accounting can be defined as the preparation of management and
operational reports, that may provide actual information of business to the internal stakeholders
and managers. It helps to improve the efficiency of decision making ability of managers. It helps
internal as well as external stakeholders to get insider information of the company (Management
Accounting, 2018). These reports consist various informations such as cash and cash equivalents
information, sales, profits etc. Main objective to prepare management reports is to analyse the
actual performance of the company. It helps to forecast future and make various decisions. It is
used to look at the events that happen in and out of the organisation.
Pavestone is a stone and concrete manufacturer and supplier company. It is mainly based
in US. The managers of the company use management accounting to administrate operational
activities of the company. This assignment consist various topics that are management
accounting its systems and reporting, various costing techniques, planning tools used in
budgetary control and various financial problems that an organisation have to face. Different
type of techniques that are used to resolve financial problems, are also discussed in this report.
TASK 1
P1 Management accounting and different types of its systems
Management accounting is the procedure of formulating various reports that helps the
management in tactical decision making. It is a function that is used to analyse costs and
appropriate selling price for the products. It provide accurate informations that is helpful while
planning for future and forming various strategies to achieve organisational goals (Al-Mawali,
Zainuddin and Nasir Kader Ali, 2012). The managers of Pavestone use management accounting
system to analyse customer demand, setting appropriate prices, keep a track record of customers
and their outstanding demands etc. To maintain above information management of Pavestone use
different management accounting systems, that are as follows:
Cost accounting system:It is a system that is used by organisations to estimate the
manufacturing cost involved in their production. It provides accurate cost information that helps
the management to control running operations of the company. It is a process that include
various steps such as recording, classifying, summarizing, allocating and examining cost
associated in the production. Management of Pavestone use cost accounting system to analyse
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accurate cost of their products. It helps them to know that products are profitable or not. The
information gathered form cost accounting system is mainly used in financial accounting system
to analyse financial strength of the company, but the main function of cost accounting system is
to facilitate the management's decisions. It is very helpful for the company because it provides
actual information related to costs (Chiu, Teoh and Tian, 2012).
Price optimisation system: This system is mainly used to determine customers reaction
toward prices changing strategies of the company. It helps the management to find the perfect
price for the products that can acquire more and more customers and increase profitability of the
company. Pavestone use price optimisation system to match the price level to the customer's
perception toward products. The main objective of the management is to provide products to
customers at a satisfactory price. This system is also used by the managers of Pavestone to find
out the balance between values and profits. It is highly profitable for the organisation as it may
help to set suitable value for the goods that is affordable for the customers.
Inventory management system: It is mainly used to get the direct evidences of the
inventory, that is in the warehouses or in transit or sold. Effective management system helps the
company to easily meet customer's demand and fulfil the demand within a short time period.
This system is used in Pavestone for various purposes such as for purchase planning, gather
information of inventory etc. It also help the managers to track inventories through the entire
supply chain of business operations. It is very helpful for the company because it provides
information of concrete status of the stocks and help the managers to pre plan the purchase of
goods before the warehouses goes empty (Eierle and Schultze, 2013).
Job costing system: It is a system that is used to assign manufacturing cost to the
products or bulk of products. This system is only used by those manufacturing companies who
are manufacturing different kinds of products. It also helps to record cost of various jobs that
different from each other. Pavestone's management authority use this system to analyse various
costs such as direct material, labour and overheads of different jobs. It is an expenditure
monitoring system that is used to determine manufacturing cost of each job. It also helps the
managers to keep a record to various expenses. It is very advantageous for the company because
it delivers detailed material of various jobs and cost tangled in those jobs.
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P2 management accounting reporting and its methods
Management accounting reports are the tools that are used to analyse business position
and market image of the company. These reports are used by the managers to plan, regulate and
control the business execution process of the company. Managers analyse these reports and then
make strategic decision that help to reach the organisational goals (Granlund and Lukka, 2017).
Management of Pavestone prepare various management accounting reports to analyse
performance of the running business, market trends, customer demand and inventories of the
company. These reports help the managers to meet objectives of individuals as well as
organisation. Various management accounting reports are explained below:
Budget reports: These reports are generated to measure company's performance.
Managers prepare budget reports to analyse the productivity of the organisation. Budgets reports
are mainly based on past data and current market trends. A manager plan for every activity of the
company with the help of these reports. In Pavestone these reports are generated to evaluate the
expenses that are involved in the manufacturing process of its products. These reports show the
monetary resources of the company that helps to provide benefits and incentives to the
employees. Budget reports are very helpful for the managers of Pavestone because it help to cut
the cost of the company and negotiate terms with the suppliers (Morden, 2016).
Performance reports: These reports are mainly used to analyse performance of the
individuals as well as the organisations. It shows the actual position of the company and also
provide idea of such fields where improvement is required. Managers of Pavestone generate
performance reports to make strategic decision for the company. These reports also help the
management of Pavestone to examine employee's performance and award them for their work
and commitments to the company. The main objective to generate these reports is measure the
strategies that are implemented by the managers of Pavestone. These reports are very
advantageous for the company because it offer deep insight into the working of the company
(Ittner, 2014).
Account receivables reports: If a company is relaying heavily on extending credit, then
these reports are helpful for it. These reports help the managers to identify the payment defaulter
client of the company and issues with the collection process of the company. These reports are
generated in Pavestone to possess a record of such clients who are not capable to pay the amount
at the time of sales but agrees to reimburse the amount after a convinced date. It also help the
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managers to identify actual owed amount of various clients. If there is significant number of
customers who are not able to pay their amount on due date, than the managers should try to
tighten the credit policies to reduce the risk of bad debts (Lääts and Haldma, 2012).
Inventory and business reports: Such type of reports are used to get the exact
information of inventory and manufacturing process. It consist information of material waste and
labour cost. In small companies like Pavestone these reports are prepared to keep track record of
different assembly lines. These reports help the company to reduce the waste in manufacturing
process by analysing actual cost of manufacturing process and also help to get the exact
information of inventory. It is very helpful for Pavestone because this reports can show the
current status of inventory and production process.
M1 Benefits of management accounting systems
Management accounting system Benefits
Cost accounting system  It helps to control material, labour and overhead
cost.
 It is used to measure the efficiency of the business
policies.
Price optimisation system  It assist to collect proximate financial benefits.
 It is helpful while forming pricing strategies.
Inventory management system  It helps the management to track the inventory.
 It provide assistance to the managers in purchase
planning with valuable informations.
Job costing system  It is used to identify profitable contracts which will
help to increase profitability.
 It provide access to the expenses involved in each
job.
D1 Management accounting system and its reports are integrated with organisational processes
Management accounting system and its reports are used within Pavestone, to analyse
various functions of the company which include performance measurement, market analysis,
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cost controlling, price setting, inventory management etc. Various management accounting
system help to evaluate cost effectiveness, customer's demand, inventory waste, profitability and
productivity. Management account reports help to gather various business related informations
such as performance of individuals as well as organisation, owed amount by customers,
manufacturing waste, inventory location, expenses involved in each product. It also help the
managers to set goals and make strategies to achieve those goals.
TASK 2
P3 Calculation of cost using an appropriate technique
Cost: It is an amount that has to be paid by the buyer to the seller for a purchase. It is a
type of expenditure which includes labour, material and overheads. Cost is a monetary measure
of a product. Setting right cost will lead the organisation towards success. It is an amount which
is required to a company to produce product (Mussnig, 2013). Pavestone which is a supplier and
manufacturer company of concrete, has to set a cost that can attract the customers and increase
profits for the enterprise..
Marginal costing: It is a costing method which is used to determine the additional cost of
extra units of production, the additional cost is called marginal cost. It is variable cost but consist
a few portion of fixed cost. Pavestone use marginal costing system to regulate the additive cost
of the manufacture.
Calculation of net profit by using marginal costing method:
Particulars Amount
Total sales 33000
Marginal Cost of sales 9600
Total Production 12800
Stock at the end 3200
Contribution 23400
Fixed cost 5900
Net profit 17500
Absorption costing: This costing technique is used to assure that the cost related to the
manufacturing process of the units, are going to be absorbed from the revenues of same units. It
includes both fixed and variable costs such as direct material, labour and overheads (Myers,
2013).
Computation of net profits by using absorption costing method:
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Particulars Amount
Total Sales 33000
Cost of sales 14025
Gross profit 18975
Selling & Administrative expenses 3300
Net profit/ operating profit 15675
Break-Even analysis: It can be defined as a method which is used to examine the
equilibrium point where total revenues and expenses of organisations become equal. It is a point
whch shows that the market price of the product is equal to its original price. This mainly helps
the managers to analyse how much production of sales is required to generate minimum profit
(Namakonzi, and Inanga, 2014).
a. Calculation of total number of products sold
Particulars Amount
Selling price per unit 40
Variable costs 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. Calculation of break even point in amount
Particulars Amount
Selling price per unit 40
Variable costs 28
Contribution 12
Fixed costs 6000
Profit volume ratio (PV ratio) 30.00%
BEP in sales 20000
c. Calculation of sales if the company is willing to earn a profit of 10000
Particulars Amount
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
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Margin of safety: The difference of actual sales and break even sales is calles margin of
safety. It is a point where the company is in no profit and no loss state. It is mainly used to
reduce the circumstances and issues related to shortage of minimum stock level and production
level (Qian, Burritt and Chen, 2015).
D. Margin of safety if the organization is selling 800 units
Particulars Amount
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
M2 Various types of accounting techniques
Standard, marginal and historical costing are few techniques that are adopted by
Pavestone to calculate operating incomes. These techniques are explained below:
Standard costing: It is a estimated cost of performing an operational activity of
producing goods. This technique is used by Pavestone to determine difference of actual cost and
budgeted cost.
Marginal costing: It is a technique which is used by various companies to determine the
additional cost of extra unit of production. This technique is used by Pavestone to analyse
decrement or increment of cost with extra production.
Historical costing: This techniques is used to measure original value of the asset. In this
technique assets are evaluated on their purchase price (Schuster, 2015).
D2 Data interpretation
From the above calculation, it is cleared that marginal costing technique is more money -
making for Pavestone as associate to absorption costing method. Marginal costing technique
shows £17500 as net income and absorption costing techniques shows £15675 as net profit.
When break even point is calculated, the total numbers of units sold are 500 and total BEP sales
is £20000. If the Pavestone is willing to generate a minimum profit of £10000 then it has to sale
1333.33 units. When 800 units are sold by the company, then margin of safety is 37.5
TASK 3
P4 Advantages and disadvantages of planning tools that are used in budgetary control
Budgetary control: It is a system of regulating costs which includes the formulation of
budgets, coordination with various departments, distribution of responsibilities and comparison
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of actual budgets with forecasted to enhance the profitability of the company. It refers to the
ability of the managers, how well they utilize the monetary resources of the company. It is used
by Pavestone to regulate the operational activities of the company. Budgetary control include
various factors such as establishing a plan, analyse the performance, comparison of actual
performance with forecasted, calculation of variances etc. (Storey, 2014). Various planning tools
are used in budgetary control, these tools are explained below:
Forecasting tools: These tools are mainly used by various companies to predict future
that is based on present and past data. Pavestone use these tools to analyse risk and uncertainty
before it occurs. It provides the estimation of customer demand for products in future. It helps
the management to cope with the uncertainty of the future.
 Advantages: It provides valuable information to the management that helps in strategic
decision making. It also aware the management about future uncertainty or risk. Disadvantages: As it is based on past data, so it is not possible to accurately predict the
future. Making a decision on wrong forecasted event will affect the management process
and production process of company.
Contingency tools: It is basically related to unfavourable events that might occur in
future. These tools help the management of Pavestone to determine the possible negative event
that might happen but it is not sure that it will happen.
 Advantages: It helps the managers to be ready to face the possible risk. It estimates the
uncertainty that reduce the waste of production. Disadvantages: It is very complex, so it is not easy to implement. The cost involved in
the implementation process of this tool is very high, thus small companies like Pavestone
are not able to invest money for this purpose.
Scenario tools: These tools are used to determine the effectiveness of strategies,
execution of plans, results of decisions. The managers of Pavestone use this tool to make
strategic decisions and long term plans that help to improve the productivity and organisation's
profitability. This tool is used to evaluate a range of scenarios which has possibility to occur in
future.
 Advantages: It helps to gather the information of implemented strategies. It also help to
make appropriate decisions to improve the work quality of the employees.
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 Disadvantages: It requires high skills and high cost to implement, and Pavestone is not
able to bear high cost. This tool is uncertain and subjected to risk.
M3 Uses and applications of planning tools for preparing and forecasting budgets
Pavestone is a supplier and manufacturing company and it uses numerous types of
planning tools to formulate budgets. These planning tools are forecasting, contingency and
scenario. These planning tools help the managers to forecast budget and determine the future
risk. These tools provide various informations like possible future events, risk or uncertainty etc.
to the managers. This also help to determine future conditions, that an organisation have to face.
These tools are also used to forecast the customer demand so that the organisation can easily
meet their demand. Planning tools are also beneficial in dealing with uncertain events.
TASK 4
P5: Responses of management accounting system to deal with financial problems
Financial problems is state where shortage of money cause an issue for business
activities. Now a days many small company faces hard financial time which impact on its
working. Lack of budgeting, improper money management, low profits, due bills etc. are the
financial problems that various companies are facing. Pavestone is a small size company and
wants to expand in future but it faces various financial issues such as lack of funding, large
number of creditors, excess of expenses. For resolving these issues company adopt three
techniques such as Key Performance Indicators, Benchmarking and financial governance. These
tools are explained below:
Key Performance Indicators: This techniques is used to analyse company's current
performance and financial position with other company under similar industry. Pavestone uses
this tool to resolve it financial issue i.e. excess of spending on its expenses. Company finds KPI
as a key success indicators for resolving this issue. Company uses two key performance
indicators such as leading and lagging KPI for improving its performance in order to reduce
expenses. Type of KPI are explained below:
 Leading KPI: In this type of key performance indicator manager estimate future events,
evaluate market trends and helps in decision making. Pavestone use leading KPI in
measuring inputs which are hard to measure but easily influenced. With the help this tool
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company estimate expenses spending and forecast sales in order to generate revenue. It
also control it excess of expenses with the use of this tool (ter Bogt and Scapens, 2014).
 Lagging KPI: This technique is used as output oriented that are easy to measure but
difficult to improve or implement. Lagging KPI tool focus on success or failure of its
activities.
Benchmarking: Now a days every organisation is adopting the practice of measuring
their performance with their competitor. It is a continuous process where company seek
improvement of their practices with help of measuring value cost, quality and time value.
Pavestone use benchmarking for resolving its financial problem i.e. large number of creditors.
Company wants to set credit policies standards that are already followed by other successful
competitors. By this practice Pavestone improve its performance and recover the amount due
(Van Dooren, Bouckaert and Halligan, 2015).
Financial governance: In this tool management collect, manage, control and direct
financial data that is useful in operations. These are important for small size company like
Pavestone adopt this tool for responding financial issue related to lack of funding. Management
manage company's performance by recording financial transaction, managing performance and
controlling information that are used in operations. Company use these information in making
correct details which attract more investors. By this funding problem resolved.
Pavestone Airdri
 Company use KPI tool for resolving
issue related to excess of spending.
 Financial governance tool helps in
collecting more and more funds for the
company.
 Benchmarking technique helps to
reducing number of creditors.
 It use Benchmarking for setting
performance standards.
 Company use KPI techniques for
improving its employees efficiency.
 It use finance governance tool for
evaluating its financial data.
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M4 Responding financial problems management accounting can lead organisation to sustainable
success
A company always have to deal various type of problems and financial problems are also
part of those problems. Pavestone also have to face them and have to deal with the same. The
managers use three techniques to deal with financial problems that are improper money
management system, lack of budgeting and extra spending on expenses. These techniques are
KPI, benchmarking and financial governance. These techniques help the managers to overcome
financial issues. Financial governance help the managers to maintain financial information in a
proper way. Benchmarking is used to meet the targets of the company. KPI is used to evaluate
performance of the company and improve productivity of the company. These techniques help
the managers to form strategies to resolve financial problems.
D3 Planning tools respond appropriately to resolve financial problems
Planning tools help to reduce the risk of uncertainty in business. The managers of
Pavestone use various planning tools. These tools are forecasting, contingency and scenario.
These tools are mainly used in budgetary control but these tools also help to deal financial
problems. Forecasting tools are used to predict future conditions and effectiveness of
implemented strategies. Contingency tools are used to determine unfavourable events such as
lack of financial resources. So it can help to resolve the issue of less monetary resources and
many other financial problems. Scenarios tools help to form long term strategies that will help to
reduce production waste and improve profitability of the organisation.
CONCLUSION
Management accounting system and its reports help a manager to get effective
information of the company. It also provide various informations to the internal and external
stakeholders. Management reports are prepared to improve productivity of the products and
enhance the profitability. These reports provide information of customer demand, business
performance, market trends, owed amount of various clients and waste in manufacturing process.
Management accounting systems are used to gather various business informations such as cost
reduction, appropriate prices, expenses involved in various jobs. Managers use various costing
techniques to evaluate profits of the company. Different planning tools such as scenario,
contingency and forecasting are used in budgetary control to determine risks and uncertainty that
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might occur. Company also have to face various financial problems and the managers use three
techniques to overcome these problems. These techniques are KPI, benchmarking and financial
governance.
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