Management Accounting in Business Entities: A Comprehensive Study

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Management Accounting
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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Part 1................................................................................................................................................4
Part 2................................................................................................................................................6
Task 2...............................................................................................................................................9
Part 1................................................................................................................................................9
Part 2..............................................................................................................................................10
Conclusion.....................................................................................................................................15
Reference list.................................................................................................................................16
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Introduction
As time is advancing and business entities are progressing because of globalisation, the
significance and the imperativeness of management accounting is increasing with every passing
day. It has now become extremely essential for almost every entity in the present situation to
adopt diverse techniques and systems that management accounting provides, as each of them
help entities in achieving success while improving their effectiveness. In this study, management
accounting has been explained and discussed in detail in various ways. In the first place,
management accounting has been explained including discussions being made on its systems, its
reporting systems, their integration as well as their advantages. At the same time, discussions
have been conducted in detail regarding how calculations can be done in an entity related to costs
as well as profits through management accounting and its principles while how financial
statements of entities can be interpreted via management accounting’s techniques.
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Task 1
Introduction
RH Nuttall is one of UK’s leading manufacturers, which is concerned with the production of
insulation, seals, gaskets, washers and such other commodities using fibre, cork, sponge, foam,
neoprene and rubber (RH Nuttall, 2019). In this report, detailed discussion would be made
regarding management accounting, which includes reporting in the profession of management
accounting and its systems along with their benefits and how they can be integrated in the
context of RH Nuttall. Planning tools within the profession would also be discussed in detail.
Part 1
A. Explain management accounting and give the essential requirements of different types
of management accounting systems.
Extensively known as managerial accounting worldwide, one can be referring to management
accounting as the profession and branch existent in accountancy that provides substantial
information to entities regarding various aspects, thereby facilitating it with the means of
improving planning, enhancing decisions, better organising, increased controlling and various
other ways (Kaplan and Atkinson, 2015). Even if the use and adoption of management
accounting in entities is not a compulsion, it has become an essential requirement for them
(Hoozee and Mitchell, 2018). This is because of the impeccable functions that each management
accounting system plays within entities. The points underneath illustrate what are the four most
important management accounting systems and what their benefits are -
 Cost accounting system - Mostly called the costing system or the product costing system,
the cost accounting system works like a framework with which an entity is enabled for
the performing of an in-depth estimation of costs along with the performance of analysis
of profits (Brewer et al., 2015). This system’s essential requirement in terms of RH
Nuttall includes superior cost management in it and decreasing expenses largely.
 Job costing system - Widely called job order costing, the job costing system is also a
system extended from management accounting, with the facilitation of which entities can
be entities can be setting up systems for monitoring their expenses while assigning
product costs to products, thereby enabling the management for maintenance of detailed
track of its expenditure (Collis and Hussey, 2017). This system’s essential requirement in
terms of RH Nuttall includes proper job decisions and better revenues from jobs.
 Inventory management system - Yet another effectual system offered from management
accounting is inventory management system and deals with overseeing the maintenance
and monitoring of an entity’s stocked goods, whether they are its finished goods or its
raw materials (Atieh et al., 2016). This system’s essential requirement in terms of RH
Nuttall includes supervision of goods flowing from the manufacturers to the warehouses
along with its flow from these facilities until the sales point.
 Price optimising system - Finally, the fourth important management accounting system
that entities are provided with is the price optimisation or optimising system, which is a
system that acts as a facilitator for entities so that appropriate decisions are taken in it
related prices (Ceraolo et al., 2016). This system’s essential requirement in terms of RH
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Nuttall includes attracting attention from potential clients, retaining the already existing
clients, while ensuring the satisfaction of all of them.
B. Explain different methods used for management accounting reporting.
In the words of Stacchezzini et al. (2016), reporting is a basic way in which management
accounting lends a hand to entities throughout the globe for the summarisation of not only
monetary data and information but also the significant non-monetary ones. In the points
mentioned below, detailed discussion has been made on the differing sorts of methods that
entities could be using in management accounting for reporting -
 Departmental report - According to Patiar and Wang (2016), reporting of departmental
performances, efficacies and inefficacies is essential so that their effectualness in their
target achievement, productivity and such aspects can be evaluated is known as
departmental report. Via this reporting method, RH Nuttall is enabled in enlarging the
efficacies that each of its departments have while aligning their performances.
 Variance report - Reporting of differences that entities end up with in their budgeted
performances contrasted with the performances that they have had in real is done in a
report called the variance report (Simmering et al., 2015). Via this reporting method, RH
Nuttall is enabled in taking all the steps that it needs taking so that the variances
occurring in it, especially the ones that are not at all favourable in nature can be reduced
and removed.
 Accounts receivables aging report - Reporting of an entity’s aging debtors along with
reporting of all necessary details linked to them such as amounts due, and others is done
in the form of a report, which is termed as accounts receivable aging report (Nickerson
and Hall, 2017). Via this reporting method, RH Nuttall is enabled in taking all the steps
that it needs taking so that the number of aging debtors and the span of debt delay in it
are lowered.
 Investment appraisal report - Reporting of the viability that an entity’s projects or
investments have while recording all sorts of information such as their liquidity, the risks
associated to them, and such other information is done in a form of report termed as
investment appraisal report (Hsiao and Kelly, 2018). Via this reporting method, RH
Nuttall is enabled to ensure that all the investments that it makes are optimised and are
accepted with proper decisions.
C. Evaluate the benefits of management accounting systems and their application within an
organisational context.
Advantages or pros of management accounting systems are remarkable in nature, since all
systems present in this branch of accountancy are beneficial to entities in differing forms. In the
context of RH Nuttall, considerable benefits can be enjoyed when management accounting
systems are applied in it. The points underneath illustrate on what are the possible benefits that
RH Nuttall enjoys when systems from management accounting are utilised within it -
 According to Christ and Burritt (2015), whenever cost accounting system is applied
within organisational contexts, quantification of organisational costs is enhanced while
evaluation of the profitability becomes easier. RH Nuttall is benefitted from the system
since it makes possible for the entity to analyse the trends in its costs, the factors that lead
to excessive spending of costs while ensuring that optimum profits are earned.
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 Entities are benefitted with proper control over their inventories, better management of
all their materials and stock flows in it, while ensuring how they are optimised through
inventory management system (Feiner, 2019). With this system, RH Nuttall is enabled in
the ascertainment of decreasing wastage, the improvement of inventory production,
maintenance and order management.
 According to Chaudhry and Khan (2016), whenever entities use the job costing system,
costs relating to their jobs can be accumulated along with leading to the improvement or
optimisation of all sorts of decisions taken on jobs. With this system, RH Nuttall is
enabled in getting rid of the jobs that result in no considerable revenues for the entity
instead leads it towards generation of loss while focusing on accepting jobs and
optimising the existing jobs that help it in generation of better profits.
 Entities are benefitted with taking proper decisions relative to setting of product and
service prices with the medium of adopting the management accounting system known as
the price optimising system (Ceraolo et al., 2016). RH Nuttall is benefitted from the
system since it makes it possible for the entity to ensure that all its customers are satisfied
from the aspect of prices at which it offers its goods and services while attracting larger
number of consumers with prices, thereby enhancing customer volume.
D. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
As mentioned by Booth (2018), processes that are present or executed within an entity can also
be integrated with various forms of systems that management accounting has along with
differing sorts of reporting techniques in management accounting. For instance, the fundamental
processes within entities such as the process for taking decisions, the process of production, the
process of customer service, and various others can be enhanced through input and integration of
reports and systems from management accounting. In RH Nuttall, for instance, the process of
production can be integrated through the system of inventory system and the system of cost
accounting while reports including the variance report.
Integration of the system of cost accounting help out entities in their production process through
constantly updating about costs spent and the costs that are being spent in excess. Conversely,
the integration of the system of inventory management is going to help out the production
process through providing information on how much stock is left in the entity, how much
requires being produced to maintain the optimum stock level, and such other information.
Variance reports, on the other hand, provide information on where variances are being achieved
in the production process, which need being lowered to as much as possible. In such kind of
ways, all organisational processes can be integrated with systems and reports from management
accounting and can be largely optimised. RH Nuttall can use all these reports and systems while
integrating them within its differing organisational processes such as that of decision-making,
product development, customer service, order fulfilment or any other.
Part 2
Analyse three planning tools used in management accounting, indicating how effective you
judge each to be and why.
One of the key ways by which entities throughout the globe attain and ascertain their
effectiveness is with the medium of planning tools. The profession of management accounting
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comprises of a wide-ranging planning tools, all of which are effectual in differing ways and
benefit entities in differing manner. The discussion that has been presented below consists of
evaluation of three major tools extended from management accounting along with assessment of
each of their effectiveness -
 Activity based costing - Often referred to as an accounting method, this planning tool
involves the recognition and classification of activities performed in entities, especially
the overhead related activities, followed of cost and expense to them along with assigning
costs to products through recognising relations between overhead activities, costs and
goods manufactured (Cooper, 2017). It assists in ensuring assignment of indirect
expenses to goods much less capriciously than the traditional methods. Effectualness of
activity based costing involves the way in which it helps in analysing an entity’s cost
behaviour in addition to ensuring that enhanced decisions are taken in it for costs being
managed and planned efficiently (Shields, 2015). However, its major drawback is that the
complexity in the use of this planning tool is quite high and the cost intensiveness in it is
considerable as well.
 Breakeven analysis - Also called the BEP analysis, one can define the breakeven analysis
as the tool for planning that entities can be using so that they can analyse all forms of
static and variable expenses that it incurs along with deriving the point at which the entity
neither earns any profit nor earns any losses (Kampf et al., 2016). The tool helps in the
derivation of an entity’s margin of safety. Breakeven analysis has its effectiveness in
terms of the determination of an entity’s profits and losses, which they can earn at diverse
production or sales levels along with evaluating the relations between expenses of the
entity, which in turn envisages amendments occurring in selling prices (Mahtab et al.,
2018). It also assists in terms of planning the target profits of an entity while planning for
its sales. However, its major drawback is that it is based on varied number of unrealistic
assumptions such as all stock produced is same as all stock sold, which often acts as a
hindrance in planning.
 Benchmarking - According to Castro and Frazzon (2017), benchmarking could be
defined as practice or the tool utilising which entities can be measuring the quality and its
effectualness of their products, programs, policies, strategies and such other aspects as
well as finances relative to that of the entity that is considered having the best
performance within the entire sector or industry. It works as an aid for the verification of
the opportunities that are internally available in an entity for enhancement of their
performances while facilitating quality of its products and services along with helping on
planning for decrease in labour associated expenses. Effectiveness of benchmarking
being a tool for planning lies in terms of acting as the aid for evaluating an entity’s costs
while planning for its profit in addition to improving accuracy of departments
(Tasopoulou and Tsiotras, 201. However, its major drawback is that it depends on
comparison of an entity’s performance and other aspects with another one, which might
have different objectives, goals and targets to achieve, making the comparison
ineffectual.
The entity RH Nuttall can make use of all these three tools for planning, which have been
evaluated above. Through these tools, the entity can be led forward towards accomplishing
financial soundness and get rid of various issues taking place in it since each of them aids it for
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planning the activities performed by entity, the costs it spends, the profit it earns and such other
aspects.
Conclusion
Thus, to conclude, it can be said that management accounting holds a significant position in
every entity and helps entities in various ways, be it through its systems or be it through its
planning tools.
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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
Business entities all over the globe are offered with a large number of principles and techniques
from management accounting that can be used for various purposes, one of them being the
evaluation and the computation of costs (Bouwens, 2017). The two most extensive principles
managerial accounting provides to entities so that they can use them for the computation of costs
while being used for the analysis of financial statements such as the income statements include
absorption costing and the marginal costing. As stated by Goddard and Simm (2017), one can
define absorption costing to be principle extended by management accounting based on which
entities can find out their costs of manufacturing while analysing their profits through
consideration of all costs spent on products that it sells no matter it is direct or indirect, variable
or fixed. Marginal costing, however, is the principle of cost computation provided from
management accounting with the help of which entities can be conducting an analysis of the
marginal (or variable) expenses that they have been incurring while considering fixed expenses
as the expenses that an entity incurs during an entire period for execution of its operations
(Banker et al., 2017).
Based on these two principles discussed above, an entity is enabled in terms of computing the
costs it has to spend on the manufacture of its products and services through the means of
creating or preparing income statements. The below discussion involves the creation of two
differing statements of income for Eymen Ltd using the two principles - absorption costing and
marginal costing.
May June
Amt Amt Amt Amt
Amount generated from sales @ 10.50 pound
for every unit
£4200000 £3780000
Less: Cost of the products that have been sold
(full manufacturing costs)
Stock in hand when the month starts 0 0
Expenses associated to manufacturing products
Fixed or static overheads charged £600000 £600000
Variable labour expenses (direct labour) £750000 £750000
Variable material expenses (direct material) £550000 £550000
Expenses associated to manufacturing products
(Labour + Overhead + Materials)
£1900000 £1900000
Stock in hand when the month ends (£4.75 *
40,000)
0 £190000
Total cost of the products being sold £1900000 £1710000
Net amount of profit earned £2300000 £2070000
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Table 1: Absorption costing and its principles applied for preparation of Eymen Ltd’s
statement of income
(Source: Created by the learner)
May June
Amt Amt Amt Amt
Amount generated from sales @ 10.50 pound
for every unit
£4200000 £3780000
Less: Cost of the products that have been sold
(marginal manufacturing costs)
Stock in hand when the month starts 0 0
Expenses associated to manufacturing
products
Variable labour expenses (direct labour) £550000 £550000
Variable material expenses (direct material) £750000 £750000
Expenses associated to manufacturing
products (Labour + Materials)
£1300000 £1300000
Stock in hand when the month ends (£3.25 *
40,000)
0 £130000
Variable or marginal cost of the products that
have been sold
£1300000 £1170000
Contribution £2900000 £2610000
Less: Monthly expenses
Fixed or static overheads charged £600000 £600000
Net amount of profit earned £2300000 £2010000
Table 2: Marginal costing and its principles applied for preparation of Eymen Ltd’s
statement of income
(Source: Created by the learner)
By the medium of development of Eymen Ltd’s income statements with the help of absorption
costing and marginal costing, one can be finding out that the figure obtained as net profit for the
entity is same under both these principles during the month of May. However, difference in the
figure of profit arises during the month of June. This is because of the valuation of the closing
stock of the entity under the two principles. A higher profit figure can be noticed for Eymen Ltd
when the absorption costing is applied in June than marginal costing.
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:
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Subject: Outcomes determined from conducting the financial analysis for AstraZeneca Plc
and providing recommendations for bringing about further enhancements
In the words of Robinson et al. (2015), financial ratios, which are often referred to as ratio
analysis, could be defined as one of the key tools used all over the world so that a detailed
financial analysis can be conducted for an entity and the financial performance it has shown
during the past few years can be evaluated. Based in Cambridge in the UK, AstraZeneca Plc is a
multinational biopharmaceutical and pharmaceutical enterprise founded in 1999 with a diverse
workforce of about 61100 workers and a wide of products for various vital diseases such as
neuroscience, cancer, respiratory and such other diseases (Astrazeneca.com, 2019). Below is a
discussion of the financial analysis, which has been conducted in the context of AstraZeneca Plc
from the financial information that is available for the entity -
Financial ratios 2018 2017 2016 2015 2014
Profitability ratios -
Gross profit ratio (in %) 77.66 81.98 82.06 81.2 77.99
Operating profit ratio (in %) 15.33 16.37 21.31 16.65 8.05
Net profit ratio (in %) 9.28 12.77 14.81 11.44 4.65
Efficiency ratios -
Net asset turnover ratio
(times)
1.57 1.35 1.38 1.33 1.35
Inventory turnover ratio
(times)
1.71 1.42 1.77 2.26 2.98
Total asset turnover ratio
(times)
0.03 0.05 0.05 0.18 0.02
Liquidity ratios -
Current ratio 0.96 0.80 0.87 1.08 0.96
Quick ratio 0.78 0.62 0.72 0.93 0.85
Solvency ratios -
Debt ratio 0.77 0.74 0.73 2.6 0.66
Debt-Equity ratio 3.32 2.81 2.75 2.24 1.98
Investment ratios -
Price Earnings (PE ratio) 3454.71 2086.71 1596.93 2070.18 4648.47
EPS 1.7 2.37 2.77 2.23 0.98
Table 3: Ratios computed for AstraZeneca Plc during the previous five years from its latest
financial statements
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(Source: Astrazeneca.com, 2019)
Depending on the financial ratios of AstraZeneca Plc that have been shown in the table above,
the following financial analysis has been performed -
2018 2017 2016 2015 2014
0
10
20
30
40
50
60
70
80
90
Operating profit ratio
Gross profit ratio
Net profit ratio
Figure 1: Diagram showing the trends in the profitability ratios of AstraZeneca Plc in the
previous five years
(Source: Created by the learner)
Assessment of AstraZeneca Plc’s profitability ratios show that except for the gross profit ratio,
the net and operating profits of the entity have improved over the previous five years, which
shows an improvement in its financial performance and indicates its good financial position.
2018 2017 2016 2015 2014
0
0.5
1
1.5
2
2.5
3
Inventory turnover
Total asset turnover ratio
Net asset turnover ratio
Figure 2: Diagram showing the trends in the efficiency ratios of AstraZeneca Plc in the
previous five years
(Source: Created by the learner)
Assessment of AstraZeneca Plc’s efficiency ratios indicate that there has not been much
improvement in the efficacy of the entity in terms of utilising its assets and generating income
from them. The inventory turnover of the entity has fallen over the last five years while the total
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