Management Accounting Report: Analyzing Costs and Profits

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Management Accounting
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Table of Contents
Introduction...............................................................................................................................................3
LO1.............................................................................................................................................................4
P1............................................................................................................................................................4
P2............................................................................................................................................................5
M1...........................................................................................................................................................7
D1............................................................................................................................................................7
LO2.............................................................................................................................................................9
LO 3..........................................................................................................................................................17
P4..........................................................................................................................................................17
M 3........................................................................................................................................................20
D 3.........................................................................................................................................................21
P5..........................................................................................................................................................22
M4.........................................................................................................................................................23
Conclusion................................................................................................................................................25
References................................................................................................................................................26
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Introduction
The Objective of every organization is to acquire high profits by creating more sales. There are
various organizations that have different visions. Few companies want to expand their business
and involve in the sale of multiple products which can be of different industries.
There are Small and Medium-sized enterprises that have less capital structure and its revenues
for the year are pretty much the same. These enterprises provide a large number of employees.
To achieve its goals, companies have to consistently monitor their performance from every
single aspect and measure the performance to evaluate the effectiveness of the operational
activities.
It is also very important for firms to control the costs that are incurred. Excessive costs can
increase the overall price of the product. The costs are spread into segments such as inventory,
valuation, transportation and so on.Companies implement various tools and techniques of
management accounting to overcome various issues that act as hurdles in the path of success.
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LO1
P1
Management AccountingThe process of preparing reports that provide data for the purpose of
making decisions to achieve the short-term and long-term goals of the company is known as
Management Accounting (Ali, et.al., 2016). It is used by managers to forecast the future
performance of the company, compare the performance, analyze the costs involved in the
production process and so on.
There are various segments in an organization that needs to be closely monitored to determine
the productivity of each and every input. This is done by applying different types of accounting
systems. It helps in analyzing the financial and non-financial aspects of the company. Different
types of systems include:
 Job-Costing SystemsIt is the system that is assigned to the manufacturing cost of an
individual product. This system is very efficient when the firm is producing products out
of specifications. The costs incurred in these products are different from the ones which
are being manufactured in the company.
 Inventory Management SystemsIn a manufacturing firm, it is easy to keep track of all
the goods that are being produced. This enables the organization to monitors the position
of the no of goods produced, sold and distributed. Inventory management channelizes
the supply chain by using products such as Barcode, labels. The inventory of the system
is also managed through software (Appelbaum, et.al., 2017). It has a complete database
and keeps each and every record for future reference.
 Cost Accounting SystemsIt is a very important system that determines the cost attained
in the production process of the organization. The costs are different in different
departments of the organization but it is cumulatively used to make the total price of the
product. There are different types of methods for calculating the costs involved while
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estimating profit. There are two types of method namely: Marginal and Absorptional.
Marginal costing envelops only variable costs while calculating the price of the product,
whereas Absorptional uses all types- fixed and variable while calculating the profits.
 Price Optimising SystemsOrganizations have to determine the price of the product on
various factors. These also include the response of the customers to the price. In a
homogeneous market, the company has to track the prices its competitors are assigning
to the product. This may deviate the customer base of the company.The system that
guides the company to fix a price that satiates the needs of the customers and also
generates profit margin is known as Profit Optimising Systems (Kogan, 2018).
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P2
The reports prepared by the managers are reported to higher authorities to present the
performance of the company. It is important as key decisions related to future endeavors such as
investing in an asset, purchasing a smaller company or expanding the production.Reporting is
accomplished by these techniques:
 Budgeting ReportThis presents the revenues and expenses the company is expecting in a
fiscal year. The budget allocates the costs departmental wise and evaluates the
effectiveness of each cost in the total productivity.
 Accounts Receivable ReportIt is useful for companies which deal with lots of
customers. The report shows how much credit has been collected in the time period of
30,60 and 90 days.Delay in collection results in a decrease in the revenue earned.
 Order Information ReportIt is an important report for the manufacturing companies. It
presents the no. of orders received for the production of goods. It mentions each and
every detail about the orders placed in the quantities and time of delivery.
 Inventory and Manufacturing ReportThis report presents all the data which is required
to present the status of inventory in the business. In a manufacturing firm, there are
various items such as raw materials, semi-finished goods, and finished goods. The
application of these products is according to the stage of production level (Boučková,
2015).It helps the managers to make figure out any leakages in between the whole system
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M1
The aim of accounting is to guide the managers in taking key decisions on the basis of reports
which are framed by applying different tools and techniques. There are various benefits of the
systems that the company enjoys in order to maximize its productivity and profitability.
Benefits:
1. Maximizes ProfitabilityThe application of the accounting system provides an in-depth
analyzation of the operational and functional activities of the company. It helps the
managers in eliminating all the unnecessary costs and focus on areas that would
contribute to generating profits (Burritt and Christ, 2015).
2. Increase in EfficiencyAccounting systems helpsin increasing the efficiency of the
performance of the company.It is important for the organization that the resources are
utilized efficiently and are not wasted. This also surges up the expenses of the company.
3. Decision MakingThe objective of management accounting systems is to provide data
and reports to the managers for making decisions that would enhance the growth of the
company and will guide them for further actions to be taken in the future.
D1
Every Organization is integrated with various departments that are responsible for the overall
production. The tools and techniques of management accounting are reflected in the reports
generated.There are certain ways that describe how management accounting and reporting are
integrated and how they team up to increase growth.
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 Quality Management It is noted that the proper utilization of resources affects the
quality of the products. This would increase the demand for the products in the market.
Good quality of goods increases the customer base of the organization.
 Continuous ImprovementWhen the activities are analyzed and the tools are
implemented, measures are taken to improve the performance (De Baerdemaeker and
Bruggeman, 2015). This is either done gradually or within set time frames.
 Elimination of ErrorsContinuous monitoring leads to the elimination of errors in the
operational and financial activities. This improves efficiency in work and the resultsget
better comparatively.
 Cost ManagementWith the amalgamation of accounting systems and reporting methods
the costs of the company get organized and balanced. For a manufacturing firm, it is
important that the costs are appropriately assigned and the price of the product is framed
accordingly (Johnson, 2015).Cost plays a key role in the business for forecasting the
margins of profit that a company can achieve.
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LO2
Marginal Costing
It is a costing technique where the variable cost is charged to units of cost and the fixed costs are
not considered. The term marginal cost implies that whenever there is an addition in the total
number of units produced, the impact will also be felt in the costs (Seethamraju, 2015).
Marginal Costs= Direct Material + Direct Labor + Variable Overheads + Direct Expenses.
There are certain characteristics of Marginal costs that are very important in evaluating the price
per unit and the total profits achieved.
Characteristics of Marginal Cost
1. Valuation of Stock When the finished goods are valued, only variable costs are taken
into consideration. But, the distribution overheads and variable selling are not included
when the inventory is being valued.
2. Determination of PriceThe price of the product is determined on the basis of marginal
contribution and marginal cost.
3. Classification of Fixed and Variable CostThe costs are segregated into different types
of costs such as fixed, variable and semi-variable. These have different importance in the
calculation of the final price of the product.
4. ProfitabilityThe profits are earned by the application of costs. Companies witness a
difference in profits when they apply different methods of costing.
Absorptional Costing
It is also one of the methods that are applied to value the inventory. This method absorbs all
types of costs – fixed and variable while calculation of the price of the product. It includes all
direct and indirect costs like material costs, overhead costs and so on. Absorption Costing
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provides a much better and accurate view of how much costs are required to produce the
inventory (Taticchi, et.al., 2015).
Absorption costing involves the presentation of the cost structure of the products and services of
the company, such that they help the company in ascertaining the costs involved in the
manufacturing process of the products (Uddin, 2016). Absorption costing involves the absorption
of the fixed overheads on the basis of the absorption rate calculated considering the normal
capacity of the company. Marginal costing's main purpose is the analysis of the overall
performance of the company and hence the assessment of the profitability of the company. The
reason in the difference in the profits calculated using 2 methods is the differential treatment of
the closing stock.
Characteristics of Absorption Costing:
1. Recognizes the importance of considering both the costs to determine and frame a
suitable policy.
2. It presents accurate profit calculation.
3. It has been most valued for preparing external reports and the valuation of inventory.
4. It avoids the separation of costs into different elements.
5. It discloses an efficient and inefficient utilization of production resources.
6. It helps in the calculation of gross profit and net salary separately in the income
statements.
Production of units:
Particulars November December
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Sales (Units) 10,000
1
2,000
Production (Units) 12,000
1
0,000
Opening Stock (Units) - 2,000
Closing Stock (Units) 2,000 -
Absorption rate:
Particulars
Amount
(£)
Budgeted overheads
99,
000
The normal level of Activity
11,
000
Absorption rate 9
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Income Statement as per Absorption Costing:
Cost Sheet as per Absorption Costing:
Particulars
November December
Amount
($)
cost
pu
Amount
($)
cost
pu
Direct Material
216,
000
18
.00
180,
000
18
.00
Direct labour
48,
000
4
.00
40,
000
4
.00
Prime Cost 264,000 22.00 220,000 22.00
Variable Production Overheads
36,
000
3
.00
30,
000
3
.00
Fixed Production Overheads
108,
000
9
.00
90,
000
9
.00
Factory Cost
408,
000
34
.00
340,
000
34
.00
Fixed Admin Overheads
26,
000
2
.17
26,
000
2
.60
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