Management Accounting Report: Techniques and Financial Issues

This report provides a detailed analysis of management accounting principles and practices, focusing on their application within the context of Heatrod Elements Ltd, a small manufacturing company. The report explores various management accounting systems, including price optimization, cost accounting, job costing, and inventory management, highlighting their benefits and applications. It examines different reporting methods such as performance reports, budget reports, inventory management reports, and accounts receivable reports. Furthermore, the report delves into costing techniques, specifically marginal costing, and demonstrates how these techniques can be used to calculate costs and address financial problems. The report also discusses the advantages and disadvantages of different planning tools and compares ways in which organizations can use management accounting to respond to financial challenges. The conclusion emphasizes the importance of management accounting in supporting internal decision-making, improving overall business performance, and increasing profitability, supported by the use of various accounting and planning tools.

Management Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Management accounting and various types of essential systems. .........................................3
P2 Methods used for management accounting reporting.............................................................5
TASK 2............................................................................................................................................6
P3 Calculation of costs using appropriate costing techniques.....................................................6
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different types of planning tools.......................................8
TASK 4..........................................................................................................................................11
P5. Compare ways in which organisations could use management accounting to respond to
financial problems......................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES ............................................................................................................................14
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INTRODUCTION
Management accounting is a set of skills that presents the accounting information in such
a way that it can assist the management for a better understanding of accounts to prepare and
formulate the policies and decisions for the organisation (Abdel-Kader, 2011). It is also known
as Cost Accounting or Managerial Accounting. Management accounting is totally used for
internal purpose and not mandatory by law. Some tools are used in and assist the management in
decision-making. In this report, to better understand the topic of relevant topic small
manufacturing Heatrod Elements Ltd is selected (About Heatrod Elements Ltd, 2019). The
respective company manufacture household heaters at reasonable prices.
The overall report shows the understanding about management accounting system and
reports to specific company. Report also covers the range of management accounting techniques
used to calculate net profit. In addition, various planning tool and accounting tools are discussed
that help to overcome different financial problem.
TASK 1
P1 Management accounting and various types of essential systems.
In current era, there is a need of systematic approaches by internal manager that use to
manage and control the basic need of business. Management accounting is a detail process that is
used to collect, analyse, measure, evaluate meaningful financial information and posting them in
correct accounts so that valuable decision is made to improve and increase profitability of
business operations. The concept of management accounting is totally different from financial
accounting such as financial accounting is procedure of recoding, summarizing and reporting the
crucial business transaction within income statement, cash flow and balance sheet happing from
different operation in a specific time. There are various types of important system to
management accounting that are discussed underneath:
Price optimisation system
Price optimisation system is a mathematical analysis that contains the information about how
the demand of a product or service varies by the variation in price (Akbar, 2010). It records the
information and then applies it on cost and inventory to aid in deciding the price that improves
the profit. For collecting the information and observing costumer behaviour on different pricing,
different channels are used. In Heatrod Elements Ltd this system helps to set the best prices of
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heater so that maximum number of customer can purchase them as per there need. This also
helps company to grow profit and provide strength to increase production.
Cost accounting system
Cost accounting system is mostly used by manufacturing industry. Cost accounting is a
type of accounting in which the cost of production is calculated for valuation of inventory,
profitability and cost control. In this accounting system, a proper record of inventory through the
various stages (i.e. raw material, work in process, finished goods) is maintained. Thus this
system helps selected company to determine the total cost involved while producing valuable
product.
Job costing system
Job costing is a type of cost accounting where cost of a single unit has been calculated.
When a small contract or a production of a specific product has been manufactured by the firm,
the method is used for valuation of the product is called job costing. This method is mostly used
in the firms that provide customised product and services. In context of Heatrod Elements Ltd
this system is used to determine the number of worker involved in production unit and also
ascertain the cost incurred by company on these jobs. This helps them to fix the prices of heater
accordingly in order to cover overall expenses and maintain a good profit margin.
Inventory management system
Inventory management system is a system that contains the procedure of maintaining and
oversees the inventory of the firm (Callahan, Stetz and Brooks, 2011). It is important for a firm
to maintain and track a record of the inventory whether it is raw material, finished stock in
warehouses, goods dispatched for delivery to vendors or customers. Inventory is an important
asset for the firm and it is necessary to maintain record of it. For this purpose, so many hardware
and software are used by the firms.
Benefits of management accounting system
System Benefits
Price optimisation system It provides quality products with minimum
price to customers. Respective company can
also get to know the maximum profit with
minimum cost
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Inventory management system It controls the cost of inventory stock and
provides an informational transparency.
It increases inventory turnover and customer
satisfaction.
Job costing system It evaluates the quality of the work or job.
Duplication of work and unnecessary costs can
be prohibited.
Cost accounting system It reduces the production cost, saves time, and
improves efficiency.
It helps in fixing the prices, identify
unnecessary activities.
P2 Methods used for management accounting reporting.
Management accounting reporting is a process of providing accurate financial and
statically reports and records of accounts on time to the management for making short term
decisions. It may be on daily, weekly, monthly or quarterly basis (Hilton and Platt, 2013). This
reporting system is useful for internal stakeholders of the organization such as managers and
CEOs.
Management accounting reports are different from financial reports. There are some
types of the reports which are prepared in management accounting reporting:
Performance Report
A performance report is a report that provides information about the difference between
budgeted or standard and actual outcome of a person or an activity. It provides the variance
between standard and actual performance. The recipient of the performance report is liable to
take an action if the variance is unfavourable and may get reward if the variance is favourable.
Internal manager of Heatrod Elements Ltd use to prepare this report for each department so that
performance of every employee can be measured and following steps are made for better
improvement if required. This will be beneficial to increase the entire performance of company
as maximum efforts are forwarded in right direction.
Budget Report
A firm or organization prepares an estimate for the costs and expenses before starting a
job. Budget reports are those which provide the variance between the estimated and actual
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expenses at the end of the project or job. An ideal budget report allows the users to make
comparison between estimated and actual outcomes. Thus respective company uses proper
planning and execution of these plans in order to prepare quarter budgets so that every operation
is performed in profitable manner (Hopper and Bui, 2016). Budgets are essential as they help
company to maintain reserve to meet any future contingencies.
Inventory Management Report
Inventory or goods are very important part of a business. Maintaining an accurate record
of the inventory is necessary. Keeping proper record of inventory or goods available for sell is a
part of inventory management. Information about raw material, work in progress, finished goods
in warehouse; goods available in showroom, goods sent to delivery etc. are kept in inventory
management report. This report plays a major role in Heatrod Elements Ltd as company increase
the production capacity by holding maximum quantity of raw material that is essential for
production. This system help company by providing strength in supply chain as goods are always
delivered to customer on their request.
Accounts Receivable Report
An accounts receivable report is a summary of the accounts receivables. Accounts
receivables are the payments that will be received by the company from its customers and
unused credit memos which are not collected yet. It provides information about debtors and bills
receivables, credit and collection period and overdue of payments. To increase sales volume
company, use to sell heater on credit basis and make easy instalment for customer. Thus, this
system helps the management to maintain a systematic list of customer form whom money have
to be collected in upcoming period. The update list on regular basis to make sure that pending
money can be collected on time and in case if any customer makes delay in payment appropriate
plenty can be charged.
TASK 2
P3 Calculation of costs using appropriate costing techniques
Marginal costing:
It is costing Technique where the variable cost is charged to production cost units and Fix
Costs are not considered for evaluating total production cost. It conclude cost of material, cost of
labour, selling and distribution overhead, office and administrative expenditure, production and
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manufacturing expenses which are applicable in term of the valuation of production cost.
Basically, Marginal cost is the cost that one additional unit of output. The concept is used to
ascertain the optimum production measurement for a company, where it costs minimize the cost
of produced additional units. Heatrod Elements Ltd uses marginal costing for a unit cost of
production for its electrical heater to produce an additional unit to certain sum of cost by using
this technique. This is cost control in nature for cost production often premeditated when enough
items have been produced to cover the fixed costs and production is at break-even point.
Calculation of costs:
A. Marginal Costing
Statement of profit or loss for
January2019
PER
UNIT Budgeted Actual- Q1 Actual- Q2
80000
Sales Revenue 1 80000 66000 74000
COST OF SALES
Cost Of Production: Variables
Direct Material 0.65 52000 50700 42900
Opening Inventory 0 0 7800
Less : Closing Inventory 0 52000 7800 42900 2600 48100
CONTRIBUTION 28000 23100 25900
Fixed Overheads 16000 16000 16000
Fixed selling and administration costs 5200 5200 5200
Profit 6800 1900 4700
Absorption costing:
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Absorption costing is a method of calculating the cost of a product with indirect expense
as well as direct costs (Absorption costing, 2018). According to this concepts of costing all the
variable and fixed cost are assigned to unit of production which an organisation is manufactured
in specific time period. For example, Heatrod Elements Ltd is production based organisation
which applied this costing technique to control its cost by minimizing utilisation of resources.
All the costing which are taking part to produce a unit assigning and absorbed by its own unit to
figuring out total cost of production. With the help of this costing jaguar can accurately track
their profit by using this technique.
B. Absorption Costing
Statement of profit or loss for
January2019
PER
UNIT Budgeted Actual- Q1 Actual- Q2
80000
Sales Revenue 1
8000
0 66000 74000
COST OF SALES
Cost Of Production: Variables
Direct Material 0.65 52000 50700
4290
0
Fixed Overheads 0.2 16000
1600
0 16000
1600
0
Opening Inventory 0 0
1020
0
Less : Closing Inventory 0
5200
0 10200 56500 3400 65700
CONTRIBUTION
2800
0 9500 8300
Fixed selling and administration costs 5200 5200 5200
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Profit 6800 4300 3100
There is a differences between these result because to calculate net profit under marginal
and absorption method is always be different because fixed overhead cost in considered as period
cost in marginal costing method. Where as in absorption method all production whether fixed or
variable is classified as cost of production.
TASK 3
P4 Advantages and disadvantages of different types of planning tools
Budget: In simple words, budget is a plan to spend the money. In other words, budget is a
financial statement estimate of expenditures, revenues and resources for a particular time period.
A budget is always prepared for future time. In Nero Ltd manager use to prepare financial budget
that is further classified into functional budgets such as assets, liabilities, cash flows, sales,
purchase, resources etc.
Budgetary control
Budgetary control is a process of controlling the costs by making and following budgets,
coordinating departments and comparing budgeted outcomes with actual outcomes. If budget
preparing is initial stage for any project or work then budgetary control is the end result for the
same (Lavia López and Hiebl, 2014). Budgetary control involves a regular check or continuous
comparison between budgeted plans and actual activities. Budgetary control involves not only
making comparison but also taking strict actions for major or unfavourable variances.
Process of preparing budget
Budgeting is based on estimates that are why it starts before the project or financial year starts.
Most companies go through some stages in process of making budget. Initial stage for preparing
a budget is to obtain the estimates. Information’s about estimates of costs, sales, purchases,
availability of resources etc. are collected from all the departments, divisions and sub-divisions.
These estimates are submitted to budget committee (Wickramasinghe and Alawattage, 2012).
Committee evaluates the different plans submitted by different departments of the organization
and check the potentiality of the plans in interest of the organization's goal and objectives.
Committee also determines what resources are available and can be allocated. For better
understanding, prepared budgets for different units are sent to the departments and related
managers. If any changes are made in the final budget, managers are indicated about the
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modifications. Coordination and healthy communication among all the departments are
necessary for the success of a budget. After approval of all the departments and managers, the
budget is implemented. All the departments are required to provide the budgeted resources. In
the feedback, budgetary control process is followed. Performance reports, budget reports,
inventory reports are prepared.
There are many types of budgets prepared in an organization for different units. Some of
them with their advantages and disadvantages are discussed below:
Operating Budget:
This kind of budget is that includes all the costs and expenses over revenue. It is basically
prepared for a set period of time which may be quarterly, half yearly or yearly.
Advantages of operating budget:
 It helps to achieve the goals and objectives of the organization on time.
 It improves a better coordination among the units of the company.
 It provides information about the strengths and weaknesses of the company.
 Problems can be identified and solved on time (Leitner, 2013).
Disadvantages of operating budget:
 Sometimes it is difficult to estimate the data properly.
 It demotivate the employees, if the budgeted aims are too high to achieve.
 Lack of communication among the departments makes the budget ineffective.
 Variance analysis reposts takes time to reach to the management so that it has no use.
Master Budget:
Master budget is an overall budget of the organization which contains all the divisional or
lower budgets. It is a summary of all the budgets that prepared by the different departments of an
organization. It is mostly prepared for a year time.
Advantages
 It provides an overall view of the financial state of the organization.
 It helps in providing the resources to each division fairly.
Disadvantages
 It contains a brief information of divisional budget. It doesn't provide minor data of the
lower budgets.
 It is difficult or hardly possible to update a master budget.
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Cash Budget:
Cash budget is a statement that provides estimates about all the cash revenue and
expenditures for a particular time period. It is prepared after preparing all budgets like sales
budget, purchase budget, capital budget etc. It includes all the capital and revenue receipts and
payments. Cash budget is a document that published to external stakeholders. It is impossible to
make any change after publishing (Modell, 2014).
Advantages
 It helps in minimize the cost and profit maximization.
 It aids in maintaining and determining a required amount of cash in hand.
 It forces to think critically and predict carefully about company's financial situation
Disadvantages
 It is difficult to use cash budget for financial analysis because it doesn't contain non-
financial elements.
 Estimates and figures can easily be influenced or manipulated by ulterior motives.
Pricing strategies: In business scenarios, different types of pricing policies are helpful fr
company to evaluate the cost and expensed incurred within different activities in a specific time.
The Nero Ltd adopt the two kind of pricing policies that support them to cover the costs of
product that are being manufacture during an accounting year (Nielsen Mitchell and Nørreklit,
2015). It is also observed that competitive valuation of a commodity is supported on the request
of customer and change from business to business organization. These two methods are defined
below:
Cost plus pricing: It is considered to be most important approach which is used by Nero
Ltd for fixing the cost of goods they produced during the period of time. The methods mainly
include cost of labour, overhead cost and material so these can be recovered by selling these
goods.
Full costing pricing: This happens to be an effective practices the cost of a product is
being analyse from as firms on the basis of their direct cost as per units as produces during the
period of time.
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TASK 4
P5. Compare ways in which organisations could use management accounting to respond to
financial problems.
The management accounting plays an important in solving the financial issues. This is
why because it consists various kind of tools and techniques which becomes basis to overcome
from any kind of problems (Senftlechner and Hiebl, 2015).
Financial problem- It is a kind of problem which is related to the lack of money or fund.
Due to these problems companies face many other issues because finance is the key of operating
the activities and operations. Herein, below some issues that are faced by Nero Ltd are
mentioned below:
Spending more then income-It is a kind of issue which occurs when a company spends
more money but earns less in comparison. Due to this issue company face the lack of fund.
Unequal cash flow- This is a kind of problem under which company 's cash flow does
not match. Eventually, it is necessary that cash inflow and outflow should be match but in the
absence of it financial crises occur.
Methods to indicating the financial issue:
Key performance indicator- This is a kind of technique which is related to the focusing
on those activities that are profitable and non-profitable. By this technique company can easily
evaluate about the financial issue of spending more than earning (Soin and Collier, 2013).
Benchmarking- It is a type of technique that is associated with the comparing an
organisations plans and policies with other company. Due to this organisation can find out about
actual financial issue such as unequal cash flow that reduces profitability of business.
Financial governance- It is a kind of method that is related with the collecting,
monitoring and managing the financial transactions. This plays a significant role in measuring
the financial problems. Eventually, it works as the monitor strategy so that company can identify
about the financial problem (Ward, 2012.).
Herein, below comparison of two organisation is mentioned below:
Basis Nero Ltd TPG processing
Financial problem The company is facing the
issue of spending more then
This company is also facing a
financial issue. They are facing
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