Management Accounting Report: Costing Techniques and Reporting

This report, prepared for a management accounting officer, delves into the intricacies of management accounting systems, particularly focusing on their application within a small firm, Unicorn Grocery. It explores diverse management accounting systems, including inventory management, cost accounting, job costing, and price optimization. The report details various reporting methods such as inventory control, performance, budget, account receivable, job cost, and variable analysis reporting. A significant portion of the report is dedicated to explaining and contrasting marginal and absorption costing methods, key components of management accounting. Furthermore, the report analyzes planning tools used in budgetary control, highlighting their merits and drawbacks. Finally, the report addresses how management accounting systems can be strategically adopted to effectively respond to financial difficulties, providing valuable insights for businesses facing economic challenges.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
P1 Various management accounting system...............................................................................1
P2 Various methods for management accounting reporting.......................................................3
TASK 2............................................................................................................................................5
P3 Income statement and difference between marginal and absorption costing.........................5
TASK3.............................................................................................................................................9
P4 Merits and disadvantages of various kind of planning tools that are used in budgetary
control.........................................................................................................................................9
P5 Adopting management accounting systems for responding financial troubles..................11
CONCLUSION ............................................................................................................................13
REFERENCES ............................................................................................................................14

Report
From: Management Accounting Officer
To: General Manager
Subject: To write a report to GM covering management accounting and management accounting
system together with different costing techniques and reporting to enable the organization
implement them.
1

INTRODUCTION
Globalisation helped many organisations in expanding their area of operation which
ultimately made a positive impact on their business but with also bring complexity in the
business. Companies have to follow various norms which are present in different nation.
Management accounting is a process where financial data is gathered and analysed so a firm can
allocate their resources in right areas. Some people think that tools of managerial accounts only
assist finance division of an organisation, this is a myth because all the department of an
enterprise take its assistance. It provide different information and necessary guidance to all the
wings of a company (Cokins, 2013). This form of accounting basically focus on two areas, first
is minimising wastage of resources and second is expansion of business. Both activity aims at
maximising profit. Unicorn grocery is a small firm, their main area of operation is Manchester,
England. Their outlet offer different type of eatables. This report will concentrate on different
kind of management accounting system, reporting methods of this topic will also become crucial
part of this project. Difference between marginal and absorption costing will be included under
this project. Significant budgetary tools will be discuss in this file. Management accounting
techniques which can help an organisation in coping up with financial problems will be
explained at the end of this assignment.
TASK 1
P1 Various management accounting system
In old days, doing business was not considered as a difficult task because business person
just need to find manufacture the product and sell them in the market. But with time, the process
of trading got complex as new techniques and system of accounting got developed (Lavia López
and Hiebl, 2014). In present era, companies understand the importance of managerial accounts
because it help them in managing their organisation and its different operations in an effective
manner. As discussed above, management accounting is a procedure where managers try to
identify and analysing financial and non-financial data. It assist an enterprise in optimum
utilisation of available resources which can be considered as most important part for a business.
Its main objective is to support a firm in planning so they can organise their funds in an effective
way. This is crucial for directing whole company is one directions so various kind of confusion
and conflicts can be avoided.
2

Costing is a significant part of management accounting because its various techniques
help an enterprise in reducing total cost of production (Weikart and Williams, 2014). It directly
impact profit on a firm. If manager take right decision is necessary time then they can get
impressive results in short period of time. Management accounting play crucial role in improving
communication system of in an organisation at different level, this is essential for choosing
correct option. It provide huge assassinate to the managers in understanding policies of
government. Nowadays, external environment made significant amount of impact on a business
enterprise. Financial accounting do not consider them at the time of recoding and analysing
relevant data. If a company manages their cash properly then they can avoid most of the short
term problems who can create hurdle in attaining yearly targets.
Besides some advantages, there are some limitation of management accounting. All the
decisions taken by using its various tools is dependent on financial and cost accounts. If they
provide wrong figures then company may see huge loss at the end of the year. Small firms do not
like to adopt this form of accounting because it is very expensive. People often argue that
managerial accounts only help key player of a company and avoid interest of many shareholders.
Below are some essential needs of management accounting systems:
Inventory management system – An organisation often face trouble in deciding the right
amount of stock that they should keep in their warehouse. If they store more goods than they
need than it enhance carrying cost of the inventory, if they put less commodities than they may
fail to fulfil demand of customer in right time which may cost large number of costumers. This
system can solve this serious trouble for cited company, this will also support them in reducing
wastage of resources (Fullerton, Kennedy and Widener, 2014). In modern era, their are various
soft-wares relating to inventory management which can help managers of Unicorn grocery in
making right call in less time. They can also adopt manual methods which does not involve
much cost. All the details regarding movement of goods is necessary at the time of
implementation of this system.
Cost accounting system – Its mainly provide assistance in reducing cost of production.
This is essential maintaining growth of an organisation because it the minimise their cost
continuously than they will earn more revenue in upcoming time. Records relating to inventory
and total output is necessary part of this accounting system.
3

Job costing – This concept is getting popularity in modern era because it help in
ascertaining the profit that is given by every job. This technique try to find the cost which
company have to incur on every occupation. Cited organisation can use this system for finding
the revenue which firm earn form every job. Various data regarding different operations of
company is essential for executing this technique.
Price optimisation – Most of the small enterprise like unicorn grocery face serious
problems regarding selection of right price for a commodity which they are offering in their
store. This system can help these organisations in deciding best price of a product. It would not
be too high so most of their customers cannot bear it and ,at the same time, it will not be very
low so firm face loss by selling a commodity (Maiyaki, 2011). Information relating to market
and production cost is essential for part of this system.
P2 Various methods for management accounting reporting
Manager make different types of report in order to show significant plan and information
to the top level management. Following are some of the popular methods of reporting:
Inventory control reporting – This main purpose of this report is to find the problems
relating to stock management. Unicorn grocery is a small firm, they face issue regarding
overstocking which enhance their overall cost of business (Burritt, Schaltegger and Zvezdov,
2011). In case of under-stocking, an organisation can lose some customer because they will buy
necessary items from other stores if they do not get desired product in right time. This troubles
can get resolved by using management accounting tools like Economic order quantity, it provide
right amount of goods than an enterprise should keep in their warehouse so they can reduce their
carrying cost. This report also reveal right time for ordering a order which is significant in
reducing total expenditure on an item.
Performance reporting – A company has to performance various task in order to
accomplish their set targets. This report help in depicting the success or failure which
organisation has achieved in a particular time period. It can help Unicorn grocery in finding the
cause of various problems (Zoni, Doss and Morelli, 2012). This is crucial for solving different
issues at the point of their generation. Employees are one of the most important asset that is
available to a company, if their performance is reviewed on continuous basis then firm can
attaining their objectives in an effective manner.
4

Budget reporting – The prime goal of this report is to record and analyse data relating to
expenditure and income (Financial Reporting Center. 2017). It cover all the department of a firm
so most of the manager like to make it because if its effectiveness. When all division of an
organisation has clear idea about the money which they have to spend in upcoming year then
they can use it in an impressive. This will also reduce the number of conflicts that can happen
between two department as they have a plan and targets which they have to achieve in
forthcoming time so they will not get confuse with strategy of other companies who are
operating in same industry (Foster, Hart and Lewis, 2011). This report can assist Unicorn
grocery determining their real position where firm is standing in present time.
Illustration 1: Financial Reporting
Source: Financial Reporting Center. 2017
Account receivable reporting – Cited firm is operating in retail industry. They have to
give product to some of their permanent customer on credit, this facility is also available for
people who bulk order. This report help in finding the buyer who are not paying their due
amount in decided time. If company feel that they to tighten the rule then they can use this form
of reporting. This can support cited organisation in reducing their bad debt which is not good for
their business specially at this stage when they are operating at a low level. This report can be
made on weekly, monthly or quarterly bases, it depends on size of enterprise and complexity of
business (Moser, 2012). Some companies also make according to the due amount, it sum is more
then managers use strict approach but in case of less money, they do not put much pressure on
the debtor.
5

Job cost reporting – It was basically used by production units but now enterprises are
using it in various department of this organisation. In this method, they ascertain the cost that is
incur on every job, it help firm in increasing the profit per job. It assist company in determining
the activities which is not providing them necessary amount of revenue. They can also focus on
the problems that are becoming the main hurdle in enhancing profitability of every job. If these
small things are reported to management then they can make effective long term plans which
may earn some competitive advantage to any enterprise. By using this method of reporting,
Unicorn grocery can find out the jobs which hare not providing return according to the
expectation of management (Weißenberger and Angelkort, 2011).
Variable analysis reporting – Their are two types of expenditure that a company have to
incur. First is fixed and second is variable. Prior one is one time cost and later one changes every
year. If a firm focus on their variable expenses then they attain their short term targets relating to
profit. By using this report, an organisation can bring stability in their business, it is essential for
achieving major goals of objectives of the company.
TASK 2
P3 Income statement and difference between marginal and absorption costing
Costing is integral part of management accounting (Renz, 2016). It help an organisation
by reducing their cost of business which indirect make a positive impact on profit of the firm.
Following is explanation of marginal and absorption costing:
Marginal costing – It is the expenditure which a company has done on production of an
extra commodity. It can be divided into two parts, manufacturing and non-manufacturing cost.
Material, labour and overhead are main expenses which is considered in this report. Beside
production it also focuses on other expenditure like period cost. One of the main point that is
needed to be considered at the time of adopting this form of costing is that is closing stock is
treated in same year. It decreases the level of profit that is earned by a company (Aminbakhsh,
Gunduz and Sonmez, 2013). Break even analyses is significant part of this method because it
show the level where variable cost is covered and an organisation stands in a situation where
they face no profit or loss. Work in progress is also considered in this type of costing.
6

Absorption costing – Besides direct material and labour, fixed manufacturing overhead
also considered as the time of using this method. Closing stock is included at the time of
implementing this system which is the prime reason that a company earn more revenue. Fixed
overhead which is incurred in this process is ignored if the goods are not sold in same year. This
form of costing cover all the areas relating to production process, this is main cause that
absorption method is also known by the name of full costing.
Difference between marginal and absorption costing
Basis Marginal Absorption
Inventory level If closing inventory level is
less this method will report
more profit.
Closing inventory do make any
impact on the profit level.
Cost Fixed overhead cost is not
considered in this method.
Fixed overhead cost is taken in
account at the time of
following this method.
Measurement Contribution margin is
considered for measuring
profit, applied overheads are
excluded from it.
Gross margin is focused for
measuring net profit, applied
overhead are included in this
form of costing.
Profitability In case of individual sale,
profit will be high in this
approach.
Low profit will be ascertained
in case of individual sale.
Calculation as per Absorption costing.
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
7

Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less Expenses
Variable sales expenditure
Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
0
11200
(1600)
600
700
600
(100)
21000
(9600)
11400
(1800)
9600
8

Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
Sales value
Less: Variable costs
Opening stock
Manufacturing
Closing stock
Contribution
Less Fixed costs
Variable Production expenses
Administration cost expenditure
Selling cost
Net Profit
0
9100
(1300)
2000
1300
600
21000
(7800)
13200
3900
9300
If cited organisation will adopt absorption costing then they will earn more revenue.
Marginal costing will provide them £9300 which is less than absorption. The reason behind this
difference is the way closing stock is treated in both approach. In prior one, company do not
9

have to include the cost which they have incurred on the goods in present. If a commodity will
be sold in next year then its treatment will also done in forthcoming time. Another reason behind
this difference is the way fixed cost is allotted in both method (Parker, 2012). In marginal
costing, fixed expenditure is considered in last time i.e. expenses are not allotted on every single
unit. By analysing above income statement, it can be said that Unicorn grocery should go with
absorption costing as they will register a profit of £9600 adopting this approach.
TASK3
P4 Merits and disadvantages of various kind of planning tools that are used in budgetary control
Budgetary control play crucial role in providing stability to an organisation. Budget is
made for a special time period, generally one year. It assist management in seeing company as a
whole which is essential for removing various type of confusions that is present in a firm. Most
of the managers make plans because they understand that it support company in moving in one
direction (Delafrooz and Paim, 2011). Sometime firm get confuse due to aggressive plans of
competitors, budget bring their focus back by telling them the right strategy which they had to
follow for attaining their long as well as short term goals. One of most important part of an
organisation is proper communication, if this area is focussed on continuous basis then enterprise
can stop various kind of conflicts which arises in regular interval of time. Proper coordination
can give surprising result to the managers.
Source: What is Budgetary control? 2017
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Illustration 2: Budgetary control