Management Accounting Report: Cost Analysis and Budgetary Control

This comprehensive report delves into the core principles of management accounting, emphasizing its crucial role in organizational decision-making. It explores various types of management accounting, including cost accounting, price optimization, job costing, and inventory management, highlighting their significance in controlling costs and optimizing resources. The report discusses different methods of management accounting reporting, such as segmental reports, performance reports, and inventory management reports, and explains how these tools aid in financial analysis and decision-making. Furthermore, it provides detailed computations using marginal and absorption costing techniques to prepare income statements, along with an appendix containing working notes. The report also outlines the merits and demerits of different planning tools used in budgetary control, such as zero-based budgeting, and examines how companies adapt management accounting systems to address financial challenges. The report concludes by summarizing the key benefits of management accounting systems, including reduced expenses and improved decision-making capabilities.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
(P1) Management accounting and essential requirements of its various types......................1
(P2) Discuss the methods used for management accounting reporting..................................3
(P3) Compute costs using techniques of cost analysis to prepare income statement using
absorption and marginal costing.............................................................................................5
APPENDIX......................................................................................................................................7
Working Note 1......................................................................................................................7
Working Note 2......................................................................................................................7
Working Note 3......................................................................................................................7
(P4) Outline merits and demerits of different types of planning tools used in budgetary control
................................................................................................................................................8
(P5) Discuss how company is adapting management accounting systems to respond to
financial................................................................................................................................10
problems..............................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is needed for organisation to make vibrant internal decisions
which is required so that organisation may achieve its objectives in effectual manner. The
enclosed report deals with importance of management accounting in firm as it produces effective
results (Advantages of Management Accounting, 2015). It has been used as budgeting forecasting
tool which is essential so that organisation may anticipate its output in effectual manner.
TASK 1
(P1) Management accounting and essential requirements of its various types
Management accounting is quite useful for managers as it helps them to take decisions
which are required for the effective functioning and working of company. Zylla also prepares
management accounting as it is really helpful for them for making fruitful decisions.
Management accounting is used only for the purpose of internal reporting as well as decisions
are made by managers by using management accounting reports. External parties are not allowed
to take in information for their use as it is only for management to take decisions about the
company so that performance can be maximised. Outside parties are not allowed to view the
information.
Management accounting is derived from financial accounting. It is so because as
financial accounting gives information regarding financial statements such as balance sheet,
income statement and prepares cash flow statement. These financial statements provide clear
picture of financial strength of organisation in effective way. This information is then interpreted
into meaningful report which is available to managers. By analysing the accounting information,
management comes to know about financial strength of firm. This information is known as
management accounting information (Collier, 2015). Managers take valuable information from it
to take vibrant decisions which are necessary for development of organisation in effectual
manner.
Management accounting report guides managers in making effective decision making and
any deviations or discrepancies are observed, it helps to rectify the same. This is the essence of
management accounting which helps organisation to produce effective results so that it may
flourish throughout its survival in effectually. Internal factors are taken into account because it is
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necessary that company should make internal atmosphere better to achieve its set targets. It is
necessary that employees fulfil their assigned roles in best and efficient manner so that they may
help organisation to accomplish set goals and objectives.
Different types of management accounting are as follows:
1. Cost accounting-
It is a type of accounting which aims to control the cost of firm so that resources are
completely optimised by firm. Cost accounting helps in assessing expenses of processes,
products as well as projects which assists Zylla in determining its expenses in effective way
(DRURY, 2013). It provides information to management by imparting cost behaviour and cost
profit volume analysis. Cost accounting helps firm to be effective in its way so that it can control
costs in that way which help in quoting its price of products. Cost accounting will measure and
records the expenses and then will compare output results with input that helps management in
assessing financial performance of company in effectual manner. It also consists of operating
costs which are incurred on daily basis by organisation.
2. Price optimisation-
It is a type of management accounting which involves preparation of mathematical
models that are used to determine whether demand varies with the price of product or not. It is
used to check that how much money customers can pay with regards to price. It assesses how
demand fluctuates with the change in price levels. It then combines data to suggest price that will
aid in maximising profits. Zylla effectively utilises price optimisation technique so that it may
quote the price of products in that way by which customers will prefer to buy it at that price
level.
3. Job costing:
It is a useful method which assess the cost of manufacturing such as labour cost, cost of
material and overhead costs. These are related to specific job. Job costing is an effective tool
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which is used by company to track the expenses which are incurred on specific jobs and how in
future it can be reduced so that expenses incurred in performing job can be minimised
(Schaltegger and Burritt, 2010). This method helps organisation to save its resources and full
optimisation of resources are made and expenses are cut down too much extent. Job costing
involves three parts such as cost of material which means expenses of using components and
then allocating these costs once components are utilised. Labour costs and overhead costs are
analysed so that related to each jobs can be analysed and may be reduced so that it may improve
the profits of firm.
4. Inventory management:
This method of management accounting is essential from the perspective of managers. It
defines the process of ordering the required inventory for the production purpose and adequate
amount of required inventory is stored in the warehouse of company. Te inventory management
is used by Zylla which helps to reduce the inventory so that it may not lead to spoilage of it. This
additional expense will increase its cost and will deteriorate the revenue. Inventory process
includes components, raw materials and finished goods. For Zylla firm, inventory is valuable and
precious asset which needs to be preserved so that it may not deteriorates the benefits from it. If
large inventory is acquired by company then this will lead to spoilage of it and as a result, it will
have negative impact on firm's revenue.
(P2) Discuss the methods used for management accounting reporting
The methods used for management accounting reporting are as follows-
1. Segmental report:
This report deals with operating segments of the company by using financial statements
in effective way (Fullerton, Kennedy and Widener, 2014.). It is being used by creditors and
investors of company so that they are able to make decisions regarding financial strength of
company whether to provide funds to firm or not. It is very much useful information that aids
creditors and investors in decision making process. Segment reporting is used and require for
public firm and not for private ones. It includes revenue information, types of products which are
sold by each segment and many more.
2. Performance report:
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This report is quite useful for organisation as it addresses the outcomes of work of an
individual. Performance report is essential requirement of Zylla company so that it may track the
performance of employees by analysing with the budgeted outcome to be compared and matched
with the actual results (Renz, 2016). This is essential so that if any variance is found in
performance, it can be resolved by taking corrective action by organisation in effectual manner.
It is method which found out the deviations if prevailing in the performance of workers and take
measures to remove it totally to enhance performance of employees.
3. Inventory management report:
The inventory management report deals with inventory to make effective the process of
manufacturing in the concern organisation. Zylla company efficiently uses this report so that it
may track the inventory waste if any. It also includes labour costs as well as overhead costs.
Inventory management reports is useful for managers so that they may make decisions whether
inventory is in adequate manner or it is excessive in firm's godown. Excessive inventory leads to
wastage of resources and adds to additional expenses to organisation. It leads to decrease in
profits.
4. Accounts receivables ageing report:
This report deals with the information of the customer invoices that are become overdue
for payment. It lists down unpaid invoices and credit memos of customer. It helps management
to make effective transparency as to how many payments are pending from customers on their
invoices (Cooper, Ezzamel and Qu, 2017). Manager may be able to manage the cash flows of
organisation. Manager can use accounts receivables ageing report to find out difficulty that is
being aroused in collection process. If customers are not paying their obligations, then firm need
to tighten its credit policies.
5. Job cost report:
Job cost report deals with the cost that is involved in carrying out job. By analysing job
expense, company may be able to ficus on high profit margin areas and exclude the low profit
margin so that wastage of resources are not incurred on low profit earning jobs. It helps mangers
to analyse the specific job areas so that profit may not get reduced. This helps company to
manage its job's profitability to those areas which yield best results to it in effectual manner. It
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beforehand assesses the job cost so that expense on it may not incur and wastage of resources is
not made by company (Suomala, Lyly-Yrjänäinen and Lukka, 2014).
The benefits of management accounting systems are:
1. Reduce expenses-
Zylla company can reduce its operational expenses too much extent with the help of
management accounting system. This helps it to have adequate quantum of profit which can be
used in further activities.
2. Decisions-
Business decisions are made inn effectual manner as management accounting provides
good source of information which is required by manager to make better internal decisions for
organisation in effective way.
(P3) Compute costs using techniques of cost analysis to prepare income statement using
absorption and marginal costing
Statement of profit and loss on the basis of marginal costing:
Marginal costing-
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Marginal costing is useful in analysing cost (Ax and Greve, 2017). It is the increase or
decrease in total production cost if one unit is increased in the output. In the above table, net
profit is 9300 which is quite good for the firm. Marginal costs may be used for production related
decisions.
Statement of profit and loss on the basis of absorption costing:
Absorption costing-
The absorption costing is used as primary tool in absorption of manufacturing costs in
organisation. It means that direct as well as indirect costs are taken and absorbed in the
production process (Otley, 2016). As per the above table, over absorption has been detected
which has been deducted from income statement.
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APPENDIX
WORKINGS OF P3
Working Note 1
Fixed Production overhead absorption rate (OAR)= £1,800/600 = £3 per unit
Working Note 2
Working Note 3
The management accounting techniques and produce financial reporting documents are:
1. Cost volume profit-
It is an important management accounting technique which is used to assess how cost and
volume affects the operating profit. It is used to determine operating income or net income of
organisation. In this technique, sales price per unit is kept constant for the company.
2. Cost variance-
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Cost variance is the difference between actual cost and budgeted cost. It is the variance
which rises out of these costs (Anessi-Pessina and et.al, 2016). It is useful for producing financial
reporting documents.
3. Revaluation accounting-
It is an adjustment made to value of asset to correctly analyse its current market value.
(P4) Outline merits and demerits of different types of planning tools used in budgetary control
1. Zero based budgeting-
This budgeting is quite useful for the management. In this budgeting, preparation of
budget involve from the completely new one for the current year. It means that budget is
prepared with reference to zero bas and past budget is not being utilised in this budget type.
Merits:
1. It is accurate in preparing the budget. Unlike other budgeting it does not take into
account the past figures in the preparation of budget. As such, accuracy is being achieved in zero
based budgeting.
2. It is also efficient enough as it takes in account only actual numbers and not using past
or historic budget. As a result, efficiency is observed in zero based budgeting.
Demerits:
1. It is time consuming as it takes entire budget from the scratch. It consumes time as full
budget need top be created which is a disadvantage of using zero budgeting tool.
2. It also requires lot of human resources as entire line items need to be framed for
preparing budget which requires lot of man power (Malmi, 2016).
2. Incremental budgeting-
This budgeting is quite easy to prepare the budget fort the firm in effectual manner. It
tales into account historical data and only changes are made on incremental basis. This means
that if any department require funds, then this budget just increments the fund value for their
demand fulfilment.
Merits:
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1. This method is very easy to use and to implement as it does not involve any complex
computations. It recreates the past budget on the incremental basis.
2. It ensures continuity of resource or funds for various department without much delay.
As a result, time is saved and functioning of departments are not stopped (.Covaleski, Dirsmith
and Samuel, 2017).
Demerits:
1. The incremental budgeting may lead to wastage of funds and unnecessary use of it as
departments may use the funds because it is easily available to them.
2. Incremental budgeting may lead to higher spending as budget is maintained next year.
It may not lead to optimization of funds.
3. Fixed budgeting-
This budgeting states that whatever sales is generated or some other activities increases
or decreases, company's budget will remain fixed. It means that remains static when any
activities either increases or decreases. It is also called static budget. Fixed budgets are based on
the collected data before the period begins.
Merits:
1. Major advantage of fixed budget is that it need not be updated throughout the period.
As a result, no fluctuations are observed and is easy to implement in firm.
2. It offers string insight into expenses of the company and profits as variance analysis is
performed (Ueno and Scarbrough, 2016).
Demerits:
1. It is not flexible as budget cannot be updated in the year because it is static one. It is
not suitable for changing environment in which organisation operates.
2. If any changes are to be incorporated regarding allocation of resources, it cannot alter
it.
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4. Variance analysis-
This is helpful tool in budget as through this organisation ia able to match the budgted
results with the actual results and as such, if any variances is found corrective actions may be
taken by it.
5. Capital budgeting-
The capital investment appraisal technique like NPV (Net Present Value) is useful for
organisation so that they may forecast whether to invest in particular project or not. Greater NPV
is better for the firm.
6. Contingency planning-
This is important as in the event of risks, organisation may face several deviations and as
such, it is necessary to execute other plans. In simple words, contingency plan means having
other plans if one fails in the event of contingency.
The use of different planning tools and their application for forecasting budgets are as
follows:
1. Cash flow forecasting-
Cash flow forecasting is more useful for preparing and forecasting budget. It helps firm
owner to find out peaks and low in bank finance.
2. Fund flow statement-
It shows inflows and outflows of funds between two balance sheets of company and is
used to forecast budget (Kolb and Kolb, 2011).
(P5) Discuss how company is adapting management accounting systems to respond to financial
problems.
 Key performance indicators (KPI)-
It is a type of measurement of performance. It highlights how effectively company is
achieving its objectives. It focuses on overall performance of organisation. KPI is used to track
factors which are utmost essential for corporate managers to evaluate the success of organisation
in effectual manner. KPI Indicates that organisation is performing well and is achieving its goals
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and objectives. It helps to prevent financial problems as by this organisation may assess which
are the sources which are using many funds and by determining it, corrective action may be
taken by it to enhance overall productivity of employees.
 Financial governance-
Financial governance means that all rules and regulations regarding financial processes
are maintained. It is very useful tool to organisation to respond to its financial problems. Several
regulations are to be followed by organisation so that financial governance is being observed in
it. It is vital factor in organisation so that funds are fully optimised and no wastage is being found
in it. Internal audit helps to inject more enhance value of operations.
 Budgetary target-
It is a target which is used to estimate amount of funds required for accounting period. It
is also key combination for operating expenses and capital expenses. Budgetary target is used to
set up financial goal. It is useful method to forecast budget and helps in responding to financial
problems. Budget is very important as it measures actual results with the budgeted one and
deviations can be easily analysed and company can implement corrective actions (Lussier, 2011).
As such, setting budgetary target is important for planning financial goal of organisation.
 Balanced Scorecard-
It is a performance measurement technique to identify various internal functions and
external outcomes are analysed in the manner which is used to provide feedback to Zylla
company. It is useful technique to analyse internal functions and giving feedback to organisation.
Organisation can effectively analyse its weaknesses and it helps to achieve goals in effectual
manner. Company may use balanced scorecard to form and implement strategies for businesses
so that objectives can be achieved by it (Linnenluecke and Griffiths, 2010).
Management accounting can lead organisation to success in following way:
Cash flow statement is enhanced as a result of management accounting because it helps
to analyse the cash generated and utilised in several activities. Operating expenses are lower
down as a result, organisation can produce more goods.
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Business decisions are enhanced by way of accounting and management can take internal
decisions quite easily.
CONCLUSION
Hereby it can be concluded that management accounting information is useful for
managers to recreate the internal factors. It provides information which is utilised by managers to
make decisions. Various methods of management accounting such as cost accounting, job
costing, price optimisation and inventory management which are quite relevant and helpful to
organisation. Also, various budgeting tools are used to prepare and forecast for requirement of
departments for their effective functioning. Management accounting helps in achieving
organisational goals.
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Advantages of Management Accounting, 2015 [Online] Available Through:
<http://smallbusiness.chron.com/advantages-management-accounting-3983.html>
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