Management Accounting System and Reporting: A Comprehensive Analysis

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Management accounting
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Executive summary
This assignment is focused on discussion of management accounting system and
management accounting reporting. In addition to this income statement has been prepared
using both absorption costing and marginal costing. Overhead cost has also been calculated in
the assignment using ABC approach and labor hour absorption rate. At last discussion about
different planning tools for preparation and forecasting budgets has been made.
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Contents
Management accounting............................................................................................................1
Executive summary....................................................................................................................2
Activity 1....................................................................................................................................4
Part A.........................................................................................................................................4
Management accounting............................................................................................................4
Different types of management accounting systems and their requirements.............................4
Different methods used for management accounting reporting.................................................5
Evaluation of the benefits of management accounting systems.................................................6
Integration of management accounting systems and management accounting reporting within
organisational processes.............................................................................................................6
Part B..........................................................................................................................................6
Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs..........................................................................6
Calculation of overhead cost on the basis of Conventional absorption costing using a labour
hour absorption rate and ABC approach using suitable cost driver.........................................10
Activity 2..................................................................................................................................10
Part A.......................................................................................................................................10
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Planning tools used in management accounting......................................................................10
Use of different planning tools and their application for preparing and forecasting budgets..11
Advantages and disadvantages of different types of planning tools used for budgetary control
..................................................................................................................................................11
Preparation of budget for the activity level of 6200 units........................................................12
Part B........................................................................................................................................12
Adaption of management accounting systems by the organisations for responding to financial
problems...................................................................................................................................12
Role of planning tools in solving problems and supporting organisations with sustainable
success......................................................................................................................................12
Conclusion................................................................................................................................12
References................................................................................................................................12
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Activity 1
Part A
Management accounting
Management accounting is the process of preparation of management accounts and reports
which provides timely and accurate statistical and financial information needed by the
managers for making day to day operational decisions. In simple terms, management
accounting is related to the accounting information which is useful for the managers of the
entity. Despite financial accounting management accounting is used for internal purposes and
is not regulated by any law. The management accounting reports are generally made on a
weekly or monthly basis for the internal audience of the organization such as the chief
executive officer and departmental managers. The management accounting reports show the
amount of total generated revenue from sales, available cash, state of accounts receivables
and accounts payables of the company, total order in hand of the entity, outstanding debts,
inventory, raw materials, and it can also include some charts like variance analysis and other
related statistics. The management accounting reports are not subject to audit and there is no
significantly defined frequency for the presentation of preparation of financial statements
(Kaplan & Atkinson, 2015). The preparation of management accounting reports is not
mandatory and these reports include both the non-monetary and monetary information
regarding the organization.
Different types of management accounting systems and their requirements
The major objective of management accounting is to present the relevant accounting
information to the management which further helps them in planning and formulating
policies. The management accounting reports assist the organization in preparation of budgets
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and ascertaining specific cost centers. It helps the organization in coordinating the activity of
an entity by initially preparing the functional budget and then coordinating the activities by
integrating all the functional budgets.
Different types of management accounting system are used by the entity. Some of the basic
types of management accounting system are cost accounting system, job costing system,
inventory management system, and price optimization system.
Job costing system- job costing system is the system for accumulating and assigning the
manufacturing cost to the individual output units. The job costing system is used by the entity
when different types of items are produced by the organization and all the items are
sufficiently different from each other. This system involves the process of accumulation of
information regarding the cost associated with the specific service or specific job. The job
costing system accumulates three different types of information which is direct material,
direct labor, and overhead. The job costing system provides all the information which may be
needed to submit the customer under the contract where the cost is reimbursed. The job
costing system needed to be tailored to the customers’ requirements.
Inventory management system- the Inventory management system is the software system
used by the entity for keeping the track of orders, inventory levels, sales, and deliveries. The
Inventory management system helps the managers in keeping track of inventory and provide
the necessary data for managing and controlling it (Zimmerman & Yahya-Zadeh, 2011). The
Inventory management system is mostly used in the manufacturing organization for creating
material bills, work orders, and several other documents related to production. There are
mainly two types of inventory management system which is perpetual inventory system and
periodic inventory system. Further, the Inventory management system is also divided as radio
frequency identification system and bar code system. The perpetual inventory system
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continuously updates the inventory accounts and records. This system continuously subtracts
or add the inventory items when they are sold from stock or received, scrapped, picked from
inventory or moved from one location to another. This system delivers up top date inventory
information. On the other hand, periodic inventory system does not keep the track of
inventory on daily basis. The periodic inventory system allows the managers to know the
ending and beginning inventory levels during the specific period. This system usually keeps
the track of inventory through physical counts.
Cost accounting system-the costing system or Cost accounting system is the framework
which is used by the organization for estimating the product cost, valuation of inventory,
profitability analysis, and cost control. The estimation of products or services accurate cost is
crucial for every organization. There are mainly two types of cost accounting system which is
job order Cost accounting system and process Cost accounting system. The job order system
accumulates the cost of production for each job separately whereas the process costing
system accumulates the cost of production for each process separately. The job order system
is appropriate for those organization who are engaged in production of unique or special
orders. The process costing system on the other side is appropriate for the products whose
production process consist of different departments. Further the organization can also use the
combination of these two Cost accounting system which is known as hybrid Cost accounting
system.
Price optimization system- the Price optimization system uses the mathematical analysis to
determine the response of the customers on the different prices of services or products of the
entity through different channels. The Price optimization system is also used for determining
the prices of services or products which will best meet the objectives of the entity and which
will best maximize their profits. The data which is used in Price optimization system is
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operating costs, survey data, historic sales and prices, and inventories. This system is usually
implemented in airlines, retail, banking, hotels, casino, car rentals, insurance, and cruise line
industries.
Different methods used for management accounting reporting
The management accounting reports help the organization in understanding what is going on
in business. Some of the common management accounting reports used by organization are
item cost reports, sales report, pro forma cash flow reports, and financial reports.
Cost reports- the items cost reports break down the material, labour, and other expenses like
the license and fees on the basis of how the expenditure contributes to the different types of
earnings. By deducting the expenditure per category from the sales per category the
organization can calculate their net profit per category (Macintosh, et. al., 2011). This
information helps the organization in determining the aspects of the business which needs
investment in order to increase profitability.
Sales reports- the sales reports are important for management accounting because these
reports show the sources of revenue of company and highlights which avenues of the entity
are least or most successful in terms of profit maximization. The sales reports highlight the
business activities which earns the most income such as the retail sales or wholesale sales, or
sales at specific venues or accounts. The sales reports also provide information regarding the
sales people which are generating least or most income which further helps in determining
staff bonuses.
Pro forma cash flow reports- the Pro forma cash flow reports helps the organization in
determining the cash inflows which the entity should expect during the medium term or short
term accounting periods. The Pro forma cash flow reports provide monthly summary of cash
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outflows and inflows and shows when the organization should expect surpluses or shortfalls.
In comparison of the long term Pro forma cash flow reports, the short term Pro forma cash
flow reports are more useful because the farther the prediction, the less accurate they
generally are.
Financial reports- although the financial reports are considered as part of the traditional
financial accounting system, these reports provide helpful information regarding the
operations of the company. The profit and loss statement of the company provides
information about how the entity has earned or spent overall and it breaks this financial
information in the categories of how much profit the company has earned. The balance sheet
of the company summarizes the information about the borrowing and assets of the entity. For
management accounting, this information is useful because they show how the losses and
profits have fluctuated over time.
Evaluation of the benefits of management accounting systems
The management accounting system helps in measuring the actual performance of the
company in comparison to their budgets and helps the managers in getting an overview of
what is going on in the business. The management accounting system presents the required
information in such ways which is useful for the managers in order to make strategic
decisions regarding the operations of an entity (DRURY, 2013). The management accounting
system provides the advantage of relevant and current numbers which shows the parts of the
business which are profitable and how the overall financial performance of the entity has
unfolded over time. Some of the benefits of the management accounting system in
organization context are as follows:
 management accounting system increases the company’s efficiency in performing operations
by evaluating and comparing various results
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 management accounting system increases the profitability bar as it helps the company in
reducing the prices of their products and services
 it simplifies the process of decision making in financial statements
 Management accounting system enables the organization to have control over the fluctuation
in monetary funds.
 The management accounting system assists the management accountant in achieving the long
term goals of the organization.
Integration of management accounting systems and management accounting reporting within
organisational processes
The management accounting system provides the organization with qualitative and
quantitative information on financial and operational performance. The management
accounting system of the company encompasses the processes which is installed by the
organization for planning and controlling operations and supporting effective decision
making. The management accounting systems include preparation of management accounting
reports. Preparation of management accounting reports is an integral part of the management
accounting system as these assist the managers in understanding what is going on in business.
These management accounting reports provide a holistic view of the finances of the business
and are a crucial part of the management accounting system.
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Part B
Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
INCOME STATEMENT USING MARGINAL COSTING
Elegant furniture Ltd
Period 1
Chair Table
Particulars Units
chair
price
£ per
unit
value
in £
units
table
price
£ per
unit
value
in £
Sales 19100 90 171900
0
1700 590 100300
0
Less:
marginal cost
of goods
0
direct 19100 20 382000 1700 215 365500
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material
direct labour 19100 3 57300 1700 9 15300
variable
manufacturin
g OH
19100 5 95500 1700 25 42500
total marginal
cost
534800 423300
gross
contribution
118420
0
579700
less: variable
selling&
Admin exp.
19100 5 95500 1700 25 42500
net
contribution
108870
0
537200
less: fixed
cost
fixed
manufacturin
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