Management Accounting: An In-depth Analysis of Systems and Reporting

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Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Task 2...............................................................................................................................................8
Conclusion.....................................................................................................................................14
Reference list.................................................................................................................................15
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Introduction
Increasing complexity and threats to business entities across various parts of the world have led
to management accounting becoming one of the imperative factors of every business entity in the
current world of business. This study would be outlining various details and aspects concerning
management accounting and will practically illustrate on how and why it has turned out being an
impeccable part of business entities. Starting from management accounting systems as well as
reports, the study would be discussing regarding how financial statements within business
entities could be drafted via management accounting and how their financial analysis could be
performed through its tools as well.
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Task 1
Part 1
Introduction
The Colt Group, based in UK, works as a leading producer of machineries and devices
associated with solar shading, smoke control, climate control as well as natural ventilation. The
report encompasses a detailed assessment and examination of what managerial accounting
means, its systems, their advantages, reporting principles, their integration into processes of
business entities while focusing on how planning tools from this managerial accounting could be
used within them.
A. Explain management accounting and give the essential requirements of different types
of management accounting systems.
The simplest way in which management accounting, which is otherwise known as managerial
accounting is that it is the provision in the branch or field of study related to accounting wherein
information associated with organisations could be determined and are provided to managers for
activities such as planning, directing, controlling, taking decisions, organising, coordinating and
such others (Otley, 2016). There is a wide-ranging range of systems lying inside management
accounting that are readily available to business entities and in the current situation act as
necessary requirements (Kaplan and Atkinson, 2015). A discussion on them has been attached
below -
 Cost accounting system - Often termed simply as the costing system, this managerial
accounting system serves as the framework utilising which business entities can
conducting detailed cost estimation while performing profitability evaluation (Modugno
and Di Carlo, 2019). Necessary requirement within Colt Group for this system is for
managing overall cost structure.
 Inventory management system - Systems that act as the aid for business entities for
keeping an effectual track of the level of stock within it, orders related to them, delivery
of the orders on time while ensuring proper sales are called the inventory management
system (Atieh et al., 2016). Necessary requirement within Colt Group for this system is
for maintenance, production and monitoring of its stocked products and their
management.
 Job costing system - Aiding in the accumulation of expenses that business entities make
for the execution of the differing sorts of jobs in them, job costing systems hold the
capacity of accumulation of costs spent for jobs while allotment of them to all individual
output units (Sarkar et al., 2015). Necessary requirement within Colt Group for this
system is for determination of income earned from jobs while deciding on what are the
future jobs that can be undertaken.
 Price optimising system - Aiding in the decisions business entities take related to prices,
the price optimising system is responsible for the enhancement of satisfaction of a
business entity’s customers while conducting an examination of the reactions they have
to prices (Nagle et al., 2016). Necessary requirement within Colt Group for this system is
for the analysis of demand, product costs and expenses, customer expectations and such
factors followed by making enhanced decisions to price products.
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B. Explain different methods used for management accounting reporting.
Methods for reporting in the profession of management accounting are different by nature
(Appelbaum et al., 2017). The points below discuss related to the differing methods that could be
used within business entities so that management accounting reporting can be done -
 Variance report - This type of reporting encompasses the recording of information
associated with discrepancies determined in a business entity’s budgets or anticipated
results relative to its original results (Crowder, 2017). Colt Group would be led towards
removal as well as reduction of variances that are not favourable in nature to the best
possible extent because of this type of reporting.
 Departmental report - It is one of the main targets of managerial accounting to enhance
departmental performances in business entities. The records and details that management
accounting gathers related to a business entity’s performance is included in the
departmental report and is of great importance (Patiar and Wang, 2016). Colt Group
would be led towards higher departmental performances because of this type of a
reporting.
 Accounts receivables aging report - This type of reporting means the reporting methods
using which business entities can be summarising information regarding the debtors who
have ended up paying constantly late and all relevant details about them (Date, 2016).
Colt Group would be led towards reduction of all its bad debts because of the report
while ensuring that its debt collections are enhanced.
C. Evaluate the benefits of management accounting systems and their application within an
organisational context.
In the words of Maas et al. (2016), importance or benefits of application of all the systems
management accounting offers are huge within every business entity. For example, the below
points provide a discussion on what are the actual benefits that business entities could be
enjoying when their operations are applied with managerial accounting systems -
 Starting from measuring costs to cost object analysis, cost accounting system applied to
business entities are highly beneficial (Kokubu and Kitada, 2015). Colt Group is also
enabled in conducting trend analysis on costs; discover reasons behind excess costs and
such other ways through the system.
 Inventory valuation and optimisation are not the only benefits that inventory
management system applied in business entities offers (Sayed et al., 2018). Colt Group
could be reducing wastage of inventories, protect them from stacking up and becoming
obsolete, and such other ways through the system.
 Job costing systems and their application in business entities are not only advantageous
for the quantification of costs business entities spend on their jobs but also in terms of
gauging job profits (Maskell et al., 2016). Colt Group could be making essential job
associated decisions such as removal of jobs and others through the system.
 Lastly, taking proper decisions for the setting of prices is not only the only benefit that
business entities enjoy when price-optimising systems are applied in them (Ceraolo et al.,
2016). Business entities, for example, Colt Group could be attracting attention of
consumers while leading to enlargement of client volume through the system.
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D. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
Not only departments or operations of a business entity can be integrated using management
accounting and its reports and systems, but also its processes (Horngren et al., 2013). For
example, the primary processes in business entities that are integrated using reports or systems
from management accounting include the manufacturing and the decision-making process. The
Colt Group, for example, integrates into its production process, systems such as that of inventory
management as well as cost accounting along with reports such as the variance report. These
integrations are done for various purposes and provide various inputs for their efficacy.
For instance, cost accounting in the manufacturing process gives information about how much
costs are to be incurred in manufacturing and how much is being incurred, whereas systems such
as the inventory management give inputs on how much stock-in-hand is needed and how much
has to be manufactured. Variance reports offer information regarding to the uncontrollable
variances associated with manufacturing goods so that they can be used in the manufacture of
goods in a way such that variances could be minimised to the best possible extent. In a similar
manner, various processes present in business entities could be implemented using reports as
well as systems presented by management accounting. For example, Colt Group’s process for
decision-making as well as the processes for customer service, product development, order
fulfilment and others could be integrated using systems and reporting principles evaluated above.
Part 2
Analyse three planning tools used in management accounting, indicating how effective you
judge each to be and why.
It is not only through reports or through managerial accounting systems that a business entity can
achieve their effectiveness. Planning tools of a wide variety are provided from the field of
managerial accounting and all of them prove advantageous to business entities in some way or
the other. The below discussion has been done on planning tools of widespread use in managerial
accounting along with indication of their individual effectiveness and the possible factors that
can act as their cons -
 Breakeven analysis - One could refer to breakeven analysis the method or the tool via
which business entities could be analysing all variable and static costs incurred within it
and sales made by it along with finding the point for ensuring that it has neither any gain
nor any loss, known as the breakeven point (Batkovskiy et al., 2017). With the medium
of the tool, one can find out the margin of safety of a business entity. The tool is effectual
by nature, as it assists in the derivation of the profits or losses that they can be earning at
differing sales level or production level, and with the analysis of relationships among a
business entity’s expenses, thereby envisaging the changes taking place within sales price
while planning desired sales and target profits (Crowder and Reganold, 2015). However,
the assumptions made for it such as no closing stock, all goods produced are sold and
such others are its limitations.
 Activity based costing - The tool provided from managerial accounting for planning via
the medium of which business entities could be tracing the overhead expenses that they
spend followed by their assigning to diverse aspects in them is called activity based
costing (Dale and Plunkett, 2017). Activity based costing is effectual by nature, as it
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assists in the improvement of the business entity’s efficacy for the planning of cost or
expense of products appropriately. At the same time, it provides all sorts of information
necessary for the analysis of cost behaviours along with taking improved decisions so
that costs can be planned and managed. However, complexity of the use of the tool is
high and it is expensive as well, which are its limitations.
 Benchmarking - The tool with the facilitation of which business entities could be
conducting a detailed comparison of its business procedures as well as performance
metrics for the best practices as well as best financial position in the entire industry
(Castro and Frazzon, 2017). Benchmarking aids in verifying the internally available
opportunities of a business entity so that enhancements can be brought about within them.
At the same time, it provides aids for increasing quality of goods and services that
business entities offer to their clients and while planning how they can be leading to the
reduction of the labour costs that they spend, which act as its effectiveness. Effectualness
of the tool also lies in terms of aiding in a business entity’s cost and profit planning along
with enhancement of departmental accuracy. However, since goals, objectives and
policies used in business entities are different from one another, considering industry’s
best and using them for comparing performances is difficult, which acts as its limitations.
The Colt Group can be using all the three planning tools discussed above. Each of them would be
acting as the aid for planning its activities, its costs, its profits and various other activities.
Conclusion
Therefore, the report facilitated in the enhancement of knowledge on managerial accounting
along with understanding the various means via which managerial accounting aids business
entities in diverse manners.
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Task 2
Part 1
Complete a simple statement of profit or loss, under absorption and marginal costing
principles for the months of May and June.
Among all principles that managerial accounting offers to a business entity, two most widespread
are the principles associated with marginal costing and absorption costing (Ray and Gramlich,
2015). While absorption-costing deals with cost quantification and profit evaluation via
considering all costs that a business entity spends for producing its goods, marginal costing deals
with variable costs consideration only (Collis and Hussey, 2017). Depending upon these two
principles, the following financial statements have been drafted for Eymen Ltd -
May June
Amt (£) Amt (£) Amt (£) Amt (£)
Earnings made from sales (10.5
charged for every unit)
4,200,000.
00
3,780,000.
00
(-) Cost of sales (consideration of all
costs)
Inventory at the starting of the month 0 0
Production associated expenditure
Overhead expenditure (static) 600,000.
00
600,000.
00
Direct labour cost 750,000.
00
750,000.
00
Direct material cost 550,000.
00
550,000.0
0
Total production associated
expenditure (550000.00 + 600000.00 +
750000.00)
1,900,000.
00
1,900,000.
00
(-) Inventory at the ending of the month
(40000 x 4.75) 0
190,0
00.00
Total sales cost 1,900,000.
00
1,710,000.
00
Net income 2,300,000.
00
2,070,000.
00
Table 1: Profit & Loss statement drafted for Eymen Ltd using principles relating to
absorption costs
(Source: Learner)
May June
Amt (£) Amt (£) Amt (£) Amt (£)
Earnings made from sales (10.5
charged for every unit)
4,200,000.
00
3,780,000.
00
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(-) Cost of sales (consideration of
all costs)
Inventory at the starting of the
month 0 0
Production associated expenditure
Direct material cost 550,000.00
550,000.0
0
Direct labour cost 750,000.00
750,000.0
0
Total production associated
expenditure (750000.00 +
550000.00)
1,300,000.
00
1,300,000.
00
(-) Inventory at the ending of the
month (40000 x 4.75) 0
130,000.
00
Marginal sales cost
1,300,000.
00
1,170,000.
00
Contribution
2,900,000.
00
2,610,000.
00
(-) Costs spent during the month
Overhead expenditure (static)
600,000.0
0
600,000.
00
Net income
2,300,000.
00
2,010,000.
00
Table 2: Profit & Loss statement drafted for Eymen Ltd using principles relating to
marginal costs
(Source: Learner)
Thus, contrasting the net income that Eymen Ltd could earn under the two differing principles of
marginal costing and absorption costing, it can be found that same amount of income has been
achieved under the principles during the month of May. However, in June, absorption-costing
shows more profit for the business entity by an amount of £60000.
Part 2
Write a business memo to the management of the organisation to communicate the results
of your financial analysis and recommendations
MEMO
Date:
To:
From:
Subject: Results of the financial analysis conducted for GSK Plc along with
recommendations
One of the chief tools used for financial analysis and ensuring the soundness in a business
entity’s financial situation is ratio analysis (Easton and Sommers, 2018). GSK Plc is one of the
most renowned business entities operating worldwide. The below discussions consist of
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evaluation of GSK Plc’s performance based on financial ratios -
Profitability ratios 2018 2017 2016
Gross profit ratio 66.772655 65.73908 66.6894
Operating profit ratio 17.789819 13.53939 9.3155
Net profit ratio 13.127413 7.18545 3.80795
Table 3: GSK Plc’s profitability ratios
(Source: Gsk.com, 2019)
2018 2017 2016
0
10
20
30
40
50
60
70
Operating profit ratio
Gross profit ratio
Net profit ratio
Figure 1: Graph showing GSK Plc’s profitability ratios
(Source: Learner)
Evaluating GSK Plc’s profitability ratios indicate that profits earned by the business entity has
largely enhanced in these last three years. Though the gross profit of the business entity has not
changed much, the operating profit margin as well as the net profit margin has shown
considerable improvements in these years, thereby showing improved performance of the entity.
Efficiency ratios 2018 2017 2016
Inventory turnover 1.8701607 1.861076 1.82085
Total asset turnover ratio 0.5307925 0.535393 0.47205
Table 4: GSK Plc’s efficiency ratios
(Source: Gsk.com, 2019)
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2018 2017 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Inventory turnover
Total asset turnover ratio
Figure 2: Graph showing GSK Plc’s efficiency ratios
(Source: Learner)
Efficiency of using assets in GSK Plc is not that satisfactory. A poor performance of the business
entity can be seen not only in terms of the assets turnover within it but also in terms of the
inventory turnover in it. Despite of slight changes, no such improvement can be noticed in them.
Liquidity ratios 2018 2017 2016
Current ratio 0.7526122 0.598705 0.87948
Quick ratio 0.509137 0.389552 0.61097
Table 5: GSK Plc’s liquidity ratios
(Source: Gsk.com, 2019)
2018 2017 2016
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Current ratio
Quick ratio
Figure 3: Graph showing GSK Plc’s liquidity ratios
(Source: Learner)
Liquidity position of GSK Plc has been poor in all these three years. Instability can be noticed in
the last three years and the end of the previous year, which is 2018; both quick and current ratios
of the business entity are poor.
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Solvency ratios 2018 2017 2016
Debt to Equity ratio 14.813181 15.15964 10.9043
Debt ratio 0.9367616 0.938117 0.916
Table 6: GSK Plc’s solvency ratios
(Source: Gsk.com, 2019)
2018 2017 2016
0
2
4
6
8
10
12
14
16
Debt to Equity ratio
Debt ratio
Figure 4: Graph showing GSK Plc’s solvency ratios
(Source: Learner)
Solvency in GSK Plc based on total assets is quite good in the all the three last years. However,
the solvency of the business entity depending upon its equity is still quite poor. It can be seen
that the business entity is dependent more over debt financing than equity financing.
Investment ratios 2018 2017 2016
EPS 73.7 31.4 18.8
Price Earnings ratio 20.447761 42.11783 83.0851
Table 7: GSK Plc’s investment ratios
(Source: Gsk.com, 2019)
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