Financial Reporting and Decision-Making in ABC Ltd

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MANAGEMENT ACCOUNTING
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Contents
INTRODUCTION............................................................................................................................. 3
LO1.................................................................................................................................................4
P1............................................................................................................................................... 4
P2............................................................................................................................................... 6
M1............................................................................................................................................. 8
LO2............................................................................................................................................... 10
P3 AND M2.............................................................................................................................. 10
M2............................................................................................................................................14
LO3............................................................................................................................................... 15
P4 AND M3.............................................................................................................................. 15
LO4............................................................................................................................................... 19
P5 AND M4.............................................................................................................................. 19
CONCLUSION............................................................................................................................... 21
REFERENCES.................................................................................................................................22
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INTRODUCTION
Management accounting can be defined as the process undertaken by organizations through
which the business reports and records are analyzed so that essential management decisions
can be taken (Malina, 2018). In the report, a management accounting report has been prepared
as a Junior Management Accountant in ABC Ltd Though this report, requirements of
management accounting shall be understood and its different techniques of reporting shall be
reviewed. The report would also cover the importance and use of management accounting
planning tools and the use of management accounting in taking vital business decisions.
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LO1
P1
Management accounting is one of the two accounting that is undertaken by the organizations
and stands of huge importance for the perspective of business decisions. Management
accounting is the analysis of business data through the application of acquired knowledge and
skills so that significant decisions of the business can be taken successfully (Adler, 2018).
Management accounting is being applied in the organizations for internal purposes so that the
organization can be effectively managed.
In management accounting, both monetary and non-monetary information is considered for
analysis and is generally used for planning of the management in the organization. It presents
different charts and forecasts through conducting the analysis so that required decisions can be
taken and future changes that should be adopted by the organization are also represented
(Kaplan and Atkinson, 2015).
For management accounting to be conducted efficiently in ABC Ltd, there are various
requirements that are required to be determined so that the effectiveness of the reports and
decisions made by the management accounting system can be maintained. Following are the
certain essential requirements of different types of systems in management accounting:
 Structure of the Organization
For adopting a management accounting system, it is essential to understand the
organizational structure followed in ABC Ltd In management accounting, data is being
analyzed so that required decisions can be taken for management of ABC Ltd which is
majorly impacted by the type of organization structure followed in ABC Ltd so that the
information can be communicated to the relevant source effectively (Ward, 2012).
 Accounting Systems
Every organization follows different types of accounting systems at different levels of
the organization. In management accounting, to analyze the information that has been
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received by the manager has to be ensured with the type of accounting system followed
while recording the information so that its correct analysis can be done.
 Management Approach
For management accounting to determine decisions of management, it is very
important for the managers to consider the style and approach of management used in
ABC Ltd so that it can suggest the recommendations accordingly (Parker, 2012). Also,
the management style adopted by ABC Ltd impacts the reach of management
accounting and its decisions.
 Source of Information
To derive information for taking decisions for ABC Ltd, the management accounting
system has to essentially consider the source from which the information is being
extracted (Otley and Emmanuel, 2013). For taking important business decisions, the
accuracy and reliability of the source of information is an essential requirement for
management accounting in an organization.
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P2
For taking relevant decisions of the management, the management accounting produces
various types of reports through which the organizational decisions can be taken efficiently
(DRURY, 2013). Following are the certain methods through which the reporting of the
management accounting in an organization is being done:
 Cost Schedules
In management accounting, costs incurred at different sources have to be determined
so that its comparison can be done with the income that has been generated
(Wickramasinghe and Alawattage, 2012). Management accounting uses the method of
cost schedules so that the price of the goods can be overviewed through considering
standard costs, budget costs, overhead costs, etc.
 Budget Reports
Budget reports are the most commonly used method of reporting by management
accounting through which a strategy can be made by the management undertaking
future incomes and expenses (Lanen et al., 2013). Producing budgets allows
management in controlling the overhead costs and examining the actual costs on the
basis of budgets.
 Inventory Reports
Management accounting increases the efficiency of the production department by
producing the inventory reports which allow them in examining the level of output
produced over the level of input invested (Nixon and Burns, 2012). It considers all the
costs incurred by ABC Ltd right from the acquisition of the raw material till the
generation of finished goods. It also examines the efficiency of the production system in
producing goods.
 Variance Reports
This is one of the crucial reports that are generated by the management accounting
through which the variation between the actual result and the expected result is being
demonstrated (Banerjee, 2012). The management accounting system of an organization
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compares the actual result with the standard result and defines the efficiency of the firm
in meeting its objectives.
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M1
There are various types of management accounting systems that are used in ABC Ltd depending
upon their applicability, which have been described in the following:
 Cost Accounting System
The cost accounting system is a type of managerial accounting through which ABC Ltd
examines the costs incurred by the firm into its inputs at different levels of production
so that they can be compared to the level of output generated from them (Kaplan and
Atkinson, 2015). The cost accounting system allows the firm in recording and measuring
all the various types of input costs so that the performance of ABC Ltd can be measured
by comparing them with the achieved level of output. The cost accounting system in
management accounting covers various types of costing such as standard costing,
marginal costing, activity-based costing, etc.
 Inventory Management System
The inventory management system is one of the most significant systems in
management accounting which allows ABC Ltd inefficient management of its inventory.
Generally, the manufacturing processes in organizations are found to be very complex.
Therefore, the inventory management system allows the inventory managers of the firm
in maintaining sufficient inventory to meet the market requirements and handle any
kind of hindrances occurring in the manufacturing process (Bauer et al., 2012). There are
various technological tools that have been developed to assist the inventory
management of a firm. Majorly, there are two methods of inventory management that
are adopted by ABC Ltd that are Materials Requirement Planning (MRP) and Just-in-time
(JIT).
 Job Costing System
This system of management accounting allows ABC Ltd in specifying the costs related to
specific activities or jobs performed in ABC Ltd Through this process, ABC Ltd is able to
determine the costs incurred for a specific product or job and it is easy for them to
compare it with the generated income from the same job or product (Drury, 2013). This
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method is generally used by the organizations that have a varied range of products and
allocation of costs into each product is essential. The job costing system works upon
three basic expenses being the cost of direct materials, cost of direct labor and
overhead costs.
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LO2
P3 AND M2
MARGINAL COSTING
Marginal costing is a practice in cost accounting through which the influence of the variable
cost over the production value can be determined. Marginal cost can be defined as the change
in the total cost due to a change in the production quantity by one unit (Christian, 2018). It is
the cost which is incurred by the organization for the production of an additional unit. Through
the technique of marginal costing, the contribution of each product produced towards the
profitability of the organization.
Production Cost per Unit
Direct Material £10
Direct Labor £20
Variable Production Overhead £5
Variable Production Cost £35
Total Production Cost
Total Production Cost= 18000*35 = 630000
Total Cost of Sales for January
Cost of Sales for January= 90000-10000 = 80000
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Marginal Costing Income Statement
Particulars Amount (£) Amount (£)
Revenue from sales (16000*50) 8,00,000
Marginal Cost (Sales)
Opening Inventory 0
Add: Cost of Production (18000*5) 90,000
Less: Closing Inventory (2000*5) (10,000) (80,000)
7,20,000
Less: Variable Costs (720000*35/100) (252000)
Contribution 468000
Less: Fixed Costs (1,00,000)
Profit 368000
ABSORPTION COSTING
Absorption costing is a method of management accounting based on which all the costs
incurred for the production of a product are charged on the product itself. In other words, the
technique of absorption costing allows the organization to charge all the costs associated with
the product to its price (Fisher and Krumwiede, 2015). Adoption of absorption costing is
mandated by the GAAP (Generally Accepted Accounting Principles) and is generally considered
as full costing.
Production Cost per Unit
Direct Material £10
Direct Labor £20
Variable Production Overhead £5
Fixed Production Overhead (20000/2000) £10
Unit Product Cost £45
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Total Production Cost
Total Production Cost= 18000*45 = 810000
Total Cost of Sales for January
Cost of Sales for January= 135000-15000 = 120000
Absorption Costing Income Statement
Particulars Amount Amount
Revenue from sales (16000*50) 8,00,000
Cost of Sales
Opening Inventory 0
Add: Cost of Production (18000*7.5) 135000
Less: Closing Inventory (2000*7.5) (15000) 1,20,000
Gross Profit (Normal) 6,80,000
Under/Over Absorption (20000-18000) (2000)
Gross Profit (Actual) 5,78,000
Less: Administration and distribution costs (Fixed +
Variable)
(57800)
Net Profit 5,20,200
Notes
Absorption Rate per Unit
Absorption Rate per Unit= Variable Production Overheads per Unit + Fixed Production
Overheads per Unit
= 5 + 10
=£15
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