Analyzing Financial Performance Using Management Accounting

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Management accounting
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Table of Contents
Introduction......................................................................................................................................4
Lo1...................................................................................................................................................5
P1.................................................................................................................................................5
P2.................................................................................................................................................7
M1................................................................................................................................................8
D1.................................................................................................................................................9
Lo2.................................................................................................................................................10
P3...............................................................................................................................................10
M2..............................................................................................................................................14
D2...............................................................................................................................................16
Lo3.................................................................................................................................................17
P4...............................................................................................................................................17
M3..............................................................................................................................................18
Lo4.................................................................................................................................................19
P5...............................................................................................................................................19
M4..............................................................................................................................................21
D3...............................................................................................................................................23
Conclusion.....................................................................................................................................24
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References......................................................................................................................................25
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Introduction
Management accounting is a tool of corporate environment analysis in which management
accounting analysis internal and external environment of the business to analyze the performance
of a company which is very important for a company to move further. The management
accounting is critically evaluating risks of management that they face in past years of the
upcoming time period. The management accounting is using various components through which
they define the position of the department of the company. Management accounting is helpful in
the risk management policy of a company through management of systematic risk analysis
through techniques of management accounting. A company is using management accounting in
its operations to formulate financial strategies of the business through financial reports of the
company, so management accounting is a crucial step for organizational growth. This study will
be clearly demonstrating the benefits that an organization gets from implantation of management
accounting in its operations. Rio Tinto Company is taking as a case study to briefly explain the
tools and techniques of management accounting. Rio Tinto Company is a manufacturing
company which is deal in the metal and mining production; Rio Tinto Company is one of the
oldest manufacturing company of UK and was founded in 1873.
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Lo1
P1
Management accounting is an important part of any business to grow in the market, management
accounting facilities many benefits to a company. The management accounting is use tools to
forecast future cash flows of the company to get an exact idea about the revenue and expenses of
the company. The risk management policy plays a useful part any company because this policy
can easily mitigate future risks of the company so the risk management policy is collect
important data from management accounting through which they reduce their future
contingencies (Chan et. al., 2014).
The management accounting is also an important tool in analyzing the competitive environment
in which management accounting carefully measure competitors of a company that they provide
guidance to a company how can they improve their competitive advantage and earn higher
profits through competitive advantage. The management accounting is analysis the sales trend of
a company and if sales of the company are stable than through management accounting a
company can easily increase their sales and get more revenue through higher sales (Zaleha Abdul
Rasid et. al., 2014).
The systems of management accounting are crucial to increase sales and grab more market share
than so these are some important systems of management accounting.
Inventory management accounting: the inventory management system is a tool of
noncapital assets profiting through which a company regularly monitor their supply
chain. The inventory management system of a company is providing products at the right
time to the customers through maintaining the proper supply chain of the company. It's
essential for the inventory management system of keep make a proper demand and
supply of a product if the demand of a product suddenly increases than the company must
provide proper supply to the customers (Chan et. al., 2014).
Cost accounting system: management accounting is quite an important tool for managing
the cost of a company. The main reason behind using cost accounting system is related to
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cost accumulation because this system is considered each expanse of the company to
arrive on final costing of a product. The cost accounting system can be further divided
into some parts such as activity-based costing, job order costing, process costing,
throughput costing, marginal costing, absorption costing and standard costing. The
above-shown costing methods are prime components of cost accounting systems
(Böcking et. al., 2015).
Price optimization system: The price optimization system is identifying the behavior of
customers towards different prices of a product. It's essential for a company to identify
price behavior of customers because through this they can easily set the price of their
products which is increasing the profitability of the company, so price optimization
system is beneficial for a company.
Job costing system: the job order costing is a tool of calculating cost per unit of
production, this system is essential for a company to grow in the product. The revenue
estimation is an important process of a company so this system is helping a lot in revenue
estimation because through this a company can easily accumulate their overall cost which
is quite useful in the determination of total cost of the production (Böcking et. al., 2015).
So the above-shown systems are the main component of management accounting and through
these systems, a company can easily gain their competitive advantage.
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P2
The decision making of a company is totally dependent on the reports of the management
accounting because these reports evolutes performance of the company in the different units of
the business. It's essential for a company to prepare reports of management accounting on a
periodical basis because through these reports a company can easily identify unprofitable units of
the business (Taipaleenmäki and Ikäheimo, 2013).
Budget report: the budget report is a quite important report for a company because a
budget report shows upcoming expenses that incur on operations of the business such as
payment made towards the supplier, labor expenses and machinery expenses. The budget
report also includes revenue estimation of a company through analyzing sales of the
product, the revenue estimation includes sales amount and revenue receipts.
Performance report: the performance report is evaluating the performance of the
employees on the basis of their contribution to the operational activities of the business.
The performance report is evaluating the performance of the company according to
department wise which is present a clear picture of the overall performance of the
company (Taipaleenmäki and Ikäheimo, 2013).
Report of account receivable: the account receivable report is providing a brief data about
market dues through which a company can easily analysis their debt structure. If a
company cannot collect their dues from the market on time then that can create a big
problem for the company in the future because the company may suffer from a shortage
of cash to run their operations smoothly.
Cost accounting report: cost accounting report is a combination of different reports which
include a report of a cost center, distribution report, summary report budget accounting
report, and reconciliation, all these reports form a single cost accounting report.
So these are some important reports of management accounting which is summarizing the data
into a different form so that managers can easily understand (Taipaleenmäki and Ikäheimo,
2013).
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M1
The systems of management accounting are improved business efficiency and operations of the
business through different tools and techniques of management accounting. The methods of
management accounting are easily determining unprofitable units of the business through which
a company improve those units and improve business profitability (Leuz and Wysocki, 2016).
The management accounting is critically analysis performance of the company, the management
accounting is not only limited to the higher authority of the business but the management
accounting is providing benefits to every department of the company.
The management accounting is using various tools to analyse the cash flow system of the
company which quite useful to reduce waste of the resources in the business. A business is
always dependent on the revenue and sales of the product so through the help of management
accounting a company can easily improve their sales (Newton. Et. al., 2012).
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D1
The activates of a company is mostly dependent on the management accounting reports because
these reports are summarized actual performance of a company in different units of the business
(Hicks et. al., 2014). The reports of management accounting are making a huge impact on the
overall growth of the company, reports such as budget report, account receivable report and
performance report. The above reports are providing a good quality of information to the
management of a company through which a company improves its business activates.
If the management accounting reports are used in the organizational process than that
organization gets a lot of benefits from those reports through which a company can easily
achieve their strategic objective and organizational goals (Hicks et. al., 2014).
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Lo2
P3
Marginal costing income statement
Particular
May June
Amount
( In Unit ) Units Amount
(£)
Amount
( In Unit )
Unit
s
Amou
nt (£)
Sales 50.00 300
1
5,000 50.00 500
25
,000
Variable Cost -
Direct material 8.00 300 2,400 8.00 500
4
,000
Direct Labor 5.00 300 1,500 5.00 500
2
,500
Production Overhead 3.00 300 900 3.00 500
1
,500
Sales and Commission 2.50 300 750 2.50 500
1
,250
Contribution 31.50 300
1
1,100 37.00 500
18
,500
Fixed Cost -
Fixed Production
overhead 13.33 300 4,000 10.00 500
5
,000
Fixed Selling Expenses 13.33 300 4,000 10.00 500
5
,000
Fixed Administration 6.67 300 2,000 5.00 500
2
,500
Total Cost of
production / Cost of 51.83 300
1
5,550 43.50 500
21
,750
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Sales
Net Profit Under
Marginal Costing (1.83) 300 (550) 6.50 500
3
,250
Absorption costing income statement
Particular
May June
Amount
( In Unit ) Units Total Amount
( In Unit )
Unit
s Total
Sales 50.00 500 25,000 50.00 380
1
9,000
Cost of Goods sold
Direct Material 8.00 500 4,000 8.00 380 3,040
Direct Labor 5.00 500 2,500 5.00 380 1,900
Prime Cost 13.00 500 6,500 13.00 380 4,940
Production overhead
Variable Production
Overhead 3.00 500 1,500 3.00 380 1,140
Fixed Production
overhead 10.00 500 5,000 10.53 380 4,000
Factory Cost 26.00 500 13,000 26.53 380
1
0,080
Administration expenses 5.00 500 2,500 5.26 380 2,000
Cost of production 31.00 500 15,500 31.79 380
1
2,080
Variable Sales
Commission 2.50 500 1,250 2.50 380 950
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Selling and distributions
expenses ( Fixed) 10.00 500 5,000 10.53 380 4,000
Cost of Sales 43.50 500 37,250 44.82 380
2
9,110
Add : Opening
Inventory - - - 43.50 200 8,700
Less:- Closing Inventory 43.50 200 8,700 44.82 80 3,585
Cost of Goods sold 43.50 300 13,050 44.82 500
2
2,408
Net Profit Under
Absorption Costing 6.50 300 11,950 5.18 500 2,592
Reconciliation Statement
Particulars May June
Marginal Costing (55
0)
3,25
0
Add - Over absorptions on cost centre 8,700.0
0
3,58
5
Add - Over absorptions of Fixed Cost on Factory
Cost
1,000.0
0
-
Add - Over absorptions’ of Fixed Cost on selling
Cost
1,000.0
0
-
Add - Over absorptions’ on Fixed Administration
cost
500.0
0
-
Add - Under-Valuation of Inventory 200.0
0
2,25
7
Absorption costing Profit 11,95
0
2,59
2
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