Management Accounting Techniques and Financial Reporting

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DANNY- UNIT 5: MANAGEMENT ACCOUNTING (LEVEL 4)
(COPY 1)

Executive summary
Management accounting helps in finding out the variances and issues that on the other hand help
in preventing large amount of money being spent on a particular activity. In this study, the
importance of managerial accounting has been understood. Moreover the study has also helped
in analysing the merits and limitations of management accounting system. For example in case
of Easy seat ltd, it has been observed that the standard costing techniques are utilised to find out
per unit cost of the products. On the other hand, determination of this per unit costs helps in
preparation of income statements. Integration of the system found under management accounting
and the financial reports that are prepared as a part of the accounting system has also been
discussed. Marginal costing method has also been used in the study to ensure that appropriate
cost is determined. On the other hand it has been seen that management accounting has large
number of benefits to offer.
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Table of Content
Introduction......................................................................................................................................4
LO1: Understanding of management accounting systems..............................................................4
P1: Requirements of management accounting.............................................................................4
P2: Methods used for reporting of management accounting.......................................................5
M1: Advantages of management accounting...............................................................................7
D1: Integration of system and reporting......................................................................................8
LO2: Techniques under management accounting...........................................................................9
P3: Determination of per unit costs and preparation of income statement................................9
M2: Financial reporting.............................................................................................................11
D2: Interpretation of data with the help of financial reports......................................................11
LO3: Use of planning tools............................................................................................................11
P4: Benefits and limitations of planning tools...........................................................................11
M3: Usage of planning tools......................................................................................................13
LO4: Comparing ways in which financial issues are addressed by organizations........................14
P5: Comparison of different accounting management techniques.............................................14
M4: Analysis of response...........................................................................................................15
D3: Addressing the issues and attaining sustainable success....................................................15
Conclusion.....................................................................................................................................15
References......................................................................................................................................16
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Introduction
Management accounting system helps in controlling the internal management of an organisation.
In this study, the importance of managerial accounting has been understood. Moreover the study
has also helped in analysing the merits and limitations. Integration of the system found under
management accounting and the financial reports that are prepared as a part of the accounting
system has also been discussed. Per unit costs has been determined under costing methods like
marginal costing and absorption costing for Easy Seat Ltd. On the other hand, the study has
helped in evaluating budgetary control system. The problem statement analyses the use of
managerial accounting in order to achieve sustainable success.
LO1: Understanding of management accounting systems
P1: Requirements of management accounting
Management accounting
Management accounting is a system of collecting and assessing of data related to internal
organisation’s operation. In the opinion of Collis and Hussey (2017), with the help of these data,
financial reports like budget reports, standard cost income statement and others are prepared.
These reports are then presented to the top management for making effective decisions regarding
the operations of the business. It thus helps in controlling operations efficiently and effectively.
The types are discusses as given:
Marginal costing
Marginal costing is the most used managerial accounting system. It helps in calculating costs
related to goods and services accurately. It has been found out that it helps in finding out the
contribution margin. With the help of contribution margin an organisation is able to understand
the exact level of contribution that a firm would receive of it produces and sells a particular
product (Patassini, 2017). It is deduced by deducting the variable overhead from that of sales.
The essential requirement of marginal costing lies in the fact that it helps in calculating the
contribution made by the product. It does not take into account fixed expenses hence per unit
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costs is found out to be accurate (Bragg, 2016). Marginal costing method has also been used in
the study to ensure that appropriate cost is determined.
Budgetary control
Budgetary control helps in controlling costs and expenses to a large extent. It has been found out
by Kamal (2015), that budgeting system helps in collection of data from different branches or
departments of the organisation. After collection of data, expenses are influenced by past trends
or as per the market trend seen. Thus preparation of budgets helps in setting targets for the
departments and for the overall organisation. Hence the essential need of the budgetary control
system lies in the fact that the organisation is able to take preventive steps and earn high amount
of profits.
Standard costing
Standard costing helps in comparing original expenses with standards set. On the other hand, it
has been seen that using standard costing techniques helps in reducing costs and elimination of
unnecessary activities. Moreover it also helps in calculating the standard hours, expenses and
others (Messner, 2016). In addition to this, it has been seen that standard costing also helps in
finding out the variances if any are there between actual expenses and the standards set (Ameen,
Ahmed and Hafez, 2018).
P2: Methods used for reporting
Budgeting
Budgeting system helps in reporting about the different activities and departmental expenses. It
also helps in reporting about those activities that would require large amount of funds as
expenditure. The top management of a company like that of Easy Seat Ltd can take the help of
budgets and take effective actions so that expenditure can be controlled and revenues can be
improved. On the other hand, it has been seen that budgeting helps in reporting about the most
costly activities as well as the least expensive activities (Ray and Gramlich, 2015). If the
revenues are found out to be lower than the expected level, organisation can take essential steps
to improve them.
Variance analysis
Variance analysis report helps in determining the variances if there are any in case of a particular
financial year. It helps in contrasting incurred expenditure or received revenues for a particular
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financial period. Variance analysis refers to quantitative investigation of contrast among planned
and actual behaviour. This appraisal maintains control in business through sales budget.
Transfer costing
Transfer costing helps in determining the pricing strategies for the internal branches or
departments. It helps in calculating the prices for a particular material of goods that can be sued
an intermediate product by other departments in the same organisation. In certain cases it is
found out that the prices of materials that the departments are required to use in order to produce
finished goods is too high externally. Thus with the help of transfer pricing techniques, goods
can be assessed by other departments at lower costs.
Terms of difference Management accounting Financial accounting
Meaning It helps in collection,
assessment and analysis of the
data related to internal
organisation. It helps in the
decision making process
(Chenhall and Moers, 2015).
Financial accounting helps in
recording of transactions into
different formats such as
ledger, income statements and
balance sheet. It helps in
analysing the performance of
a company based on various
financial parameters
(Parkinson, 2015).
Users of accounting
techniques
The users of accounting
techniques that are found
under management
accounting are limited in
number. It has been seen that
users include top
management, departmental
managers and other functional
managers (Kaplan and
Atkinson, 2015).
Users of financial accounting
have been found to be large in
number unlike that of
management accounting. It
has been seen that users
include employees, top
management, shareholders
and other stakeholders (Otley,
2016).
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For the management of It is used for the internal
management of an
organisation.
It is used for extrinsic and
intrinsic management.
Table 1: Difference between accounting styles
(Source: learner)
M1: Advantages of management accounting
● Helps in controlling costs
Cost is controlled through marginal costing, budgeting and others. This is done with the help of
assessing the ineffective activities or the identification of those activities that consume lots of
funds of the organisation. Moreover it has been seen that with the help of managerial techniques
such as marginal costing correct costs of the goods or services are determined.
● Helps in improving revenues
It helps in finding out those areas which appear to be costly and ineffective. Thus revenues if are
found to be low or insufficient then, the application of management accounting techniques would
help in improving it (Brewer, Garrison and Noreen, 2015). On the other hand, it also helps in
increasing the rate of revenues earned for upcoming years with the use of different forecasting
techniques.
● It provides different parameters based on which the performance of the activities in
terms of expense can be compared
With the help of balanced scorecard approach, various parameters are used to assess the
organisational performance along with its employees. In case of the organisation like Easy seat
ltd, it has been found out that use of variance analysis helps in finding out favourable and
unfavourable variances (Ossimitz, Wieder and Chapman, 2016). This is considered to be a
strategy equipment for performance management. The structure of a a semi-standard report helps
to analyse the issues by managers and record tracks of activity execution by staff within monitor
and control of arising consequences from actions.
● It helps in making effective decisions
Top management is benefited a lot from the application of different management accounting
techniques. It has been seen that the organisation’s top management is benefited due to the
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various type of reports and costing techniques being available under management accounting.
The managers at the top level of hierarchy are able to take decisions regarding prices and costs
related to a particular product. It also helps in assessing the performance of employees on various
parameters.
D1: Integration of system and reporting
Integration of managerial accounting system and other financial reporting techniques is evident
by the fact that organisations apply techniques to produce reports that help the managers to take
decisions (Konchitchki et al. 2016). Easy seat ltd uses standard costing techniques to find out per
unit cost of the products. On the other hand, determination of this per unit costs helps in
preparation of income statements. In addition to this managers of the organization are able to
understand the different factors responsible for increase or decrease in net profits. Thus
accounting offers integration of both financial reports as well as different system like marginal
costing or standard costing. Integration of the system found under management accounting and
the financial reports that are prepared as a part of the accounting system has also been discussed.
LO2: Techniques under management accounting
P3: Determination of per unit costs and preparation of income statement
Figure 1: Per unit costs
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(Source: Created by Author)
The methods of managerial accounting include marginal costing and absorption costing. It has
been seen that as per absorption costing the total costs is similar to that of standard costs. This
has been found out to be £ 69. This is because, determination of total costs has been found out to
be including fixed cost of £ 20 and total cost is £ 49.
Figure 2: Income statement (absorption costing)
(Source: Created by Author)
Income statement is done through absorption costing for two halves of the year. One period ends
on 31st December, 2018 and the other ends on 30th June, 2019. It has been seen that the total
costs of goods sold have been calculated by deducting closing stock of 1500 units with that of
the sum of opening stocks and production. On the other hand, it has been seen that the
organisation makes a gross profit of £ 462500 for the first part of the year and for the second half
it makes a gross profit of 563500. On the other hand, it has been assumed that the organisation
has an opening stock of 500 units.
In case of the second half it has been found out that Easy seat ltd has a opening stock of 1500
and there is no closing stock. Net profit has been found to be equal to £ 266500 for the first part
of the year and for the second part, net profit has stood at £ 339500.
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Figure 3: Income statement (marginal costing)
(Source: Created by Author)
Under marginal costing it has been seen that the gross profit and net profit are more than in
comparison to that found in absorption costing. In case of the marginal costing techniques;
production units and closing as well as opening stocks have been multiplied with that of £ 49.
This is due to the fact that variable costs are only considered as a part of cost and fixed cost is
deducted in total from the contribution margin. Therefore in case of easy seat ltd, the
contribution margin for first part of financial year has been calculated to be £ 612500. On the
other hand, for second part of the year, the contribution margin has been calculated to be £
703500. On the other hand, it has been seen that net profit has been determined to be £ 326500.
Moreover, the net profit for second part of financial year is observed to be £ 389500.
Reconciling the two methods used to determine costs
Total costs, contribution margin, gross profit and net profit are found to be different under both
the methods. This difference is due to the reason that fixed costs are not included in case of
marginal costing unlike that of absorption costing. On the other hand, it has been seen that the
organisation had no closing stock for the second part of financial year (Otley, 2016). As a result
the total costs, gross profits, contribution margin and others have been found out to be different.
M2: Financial reporting
The financial reporting that have been followed are marginal costing, absorption costing,
standard costing and variance analysis. It has been seen that the total costs and net profit have
been found out from the reports prepared. Net costs have been calculated differently under each
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and every reporting system. Easy seat ltd has been found out to use variance analysis reporting
because it helps in comparing the actual costs found with that of the total costs.
D2: Interpretation of data with the help of financial reports
Data interpretation has been found to be in use in case of management techniques applied. It has
been seen that with the help of standard cost report, standard prices and costs related to products
can be used. On the other hand, in case of the income statements data related to net profit and
contribution margin can be interpreted. Moreover with the help of this information gathered
through different reports, improvements in the organisation can be brought about. On the other
hand the use of other form of reporting that are found to be significant as per managerial
accounting, organisation can become efficeient.
LO3: Planning tools
P4: Benefits and limitations
As stated by Kleinman et al. (2017), planning tools are a certain mechanism that guides action
steps of an organisation, in relative to implementations of certain programs or initiatives.
Planning tools usually provide descriptive knowledge about the development and
implementation plan of certain strategies of an organisation (Schlosser and Schlosser, 2016).
The benefits of planning tools are as follows:
● It helps in attaining faster and more effective achievements in an organisation.
● Planning tools help to forecast the future of an organisation. Hence, it provides additional
strength to an organisation for its continuous prosperity.
● Planning tools effectively reduces the operational costs of an organisation.
● Planning helps in decision-making processes.
● The efficiency of several managerial functions are largely enhanced by planning tools
● Planning tools allow the management of an organisation to implement several future
programs in an organised way. Hence, the management is able to get huge benefits out of
those framed programs.
(Jarzabkowski and Kaplan, 2015)
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The limitations can be used to understand the gaps that must be mitigated in this area to ensure
appropriate utilisation of the planning tools. Despite several advantages of planning tools, there
also exist a lot of limitations.
1. Implementing planning tools may be time-consuming. In order to plan efficiently, it is
very important to collect accurate data, perform an accurate analysis of data and
forecasting. These activities require a lot of time
2. Planning tools are often rigid. They do not tend to change relative to the change of
environment. Neither planning tools can be modified. Hence, organisations face many
problems due to such rigidity.
3. Planning tools are often known for killing the innovative and creative ideas of employees.
This is because, due to the implementation of planning tools, employees are forced to
work according to the plan. Moreover, employees cannot implement their innovative
ideas for the benefit of the organisation. This may even lead to a loss in the organisation.
4. Planning tools are implemented for better future of an organisation. Hence, lack of
accuracy is a major limitation of planning because since future is certain, there always
remains a scope of planning data becoming inaccurate.
Although planning tools have advantages and disadvantages, majority of organisations consider
developing planning departments (Porter and Kramer, 2019). This is because planning is an
important aspect of management.
M3: Usage of planning tools
Planning tools are independently developed by people in order to achieve diverse results.
Planning tools are the set of ways that help in the achievement of efficient planning and
operations in management (Kleinman et al. 2017). A brief description of usage of planning tools
is given below:
1. Affinity diagram: Affinity diagram is mainly used to organise a vast number of
disorganised pieces of information. The information is organised into groups on the basis
of their affinity and natural relationships.
2. Tree diagram: Tree diagram is basically a systematic diagram. It contains all the
methods in a systematic order that are required in order to complete a particular task or
objective.
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