Management Accounting Report: Analysis, Costing and Reporting Methods

This report provides a comprehensive overview of management accounting, focusing on its application within a small retail business, Unicorn Grocery. The report details the essential requirements of a management accounting system, exploring various tools and techniques such as inventory management, price optimization, and cost accounting systems. It examines different reporting methods like performance reporting, variable analyses, budget reporting, account receivable reports, and inventory control reports. The report further analyzes costing techniques, comparing absorption and marginal costing, and discusses the merits and demerits of planning tools used in budgetary control. Finally, it addresses how management accounting can be adapted to respond to financial problems within an organization, offering practical insights and strategies for effective financial management. This report is a valuable resource for students studying accounting and finance, offering practical insights into real-world applications.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting and essential requirement of its various types.........................1
P2. Methods of management accounting reporting................................................................3
TASK 2............................................................................................................................................5
P3. Income statement and difference between absorption and marginal costing...................5
TASK 3............................................................................................................................................8
P4. Merit and demerit of various planning tools that can be used in budgetary control........8
P5. Adapting management accounting for responding financial problems..........................10
CONCLUSION ...........................................................................................................................12
REFERENCES..............................................................................................................................13

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.
INTRODUCTION
With time, doing business is getting more complicated. Companies want to expand their
organisation in order to earn higher profit and become more powerful. Management accounting
includes modern techniques which do not focus only on recording data. It concentrates on
reducing the wastage of resources and help in making significant decisions relating to fixed
investment. In management accounting, financial data is analysed after completing the procedure
of collection. Unicorn grocery is a small company which is running their business in Manchester,
England. They are operating in retail industry and in the present scenario, around 40 employees
are working in their firm. This report will discuss about essential requirements of management
accounting system. Various tools and techniques of accounts will also become the part of this
assignment (Zoni, Dossi and Morelli, 2012). The way in which two organisations can respond to
their financial problems by using management accounting will be explained here as well.
TASK 1
P1. Management accounting and essential requirement of its various types
Every organisation want to expand their reach and provide their goods and services to more
people. In present era, technology made has changed the way of doing business. Companies need
new techniques of accounting in order to cope up with different challenges relating to optimum
utilisation of resources and following legal obligation made by government. People think that
accounts department of an enterprise only do work of recording financial data and make annual
reports which is mandatory for an organisation but their role in changing (Fullerton, Kennedy
and Widener, 2014). They also provide great assistance to other divisions like marketing,
production etc. The information they gather help making crucial decision relating to long term
investment and finding right source of acquiring debt.
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By using techniques of management accounting, manager of an organisation can determine
success or failure of a plan. They can find the reason between set targets and attained goals. Most
of the enterprises complain about various problems relating to cash flow, it is difficult for a
manager to decide the right amount of cash that they should keep in their firm. Management
accounting assist in solving this trouble but they cannot tell the exact figure because of the
different risks that is present in the business environment (Weißenberger and Angelkort, 2011).
Financial accounts has to follow various principles like GAAP but managerial accounting do not
have any relation with them and its main focus is to support management in reaching their long
term objectives. For a small company like unique grocery, minimising wastage of resources is
significant for attaining short term goals because they have limited resources and their financial
position is not too sound. Management accounting basically focused on two areas, first is related
to fixed investment and other is determining right sources of debt. Reducing cost of production,
managing inventory etc. are its additional advantages. Tools and techniques of this type of
accounting are bit expensive so cited organisation must think about all the pros and cons which
they may face after adopting this process. Following are some management accounting systems
and their essential requirements:
Inventory management system – An organisation who is running business of grocery should
follow proper procedure for storing and carrying their stock. This tool assist an enterprise in
delivering various goods in appropriate. By using this technique, manager can find the right
amount of quantity that they should store in their warehouse. If they keep more amount than their
storage cost will go up which will result in unnecessary expenditure (Lavia López and Hiebl,
2014). Nowadays, customers do not like to wait in line, if any organisation keep less quantity in
their retail store than they cannot fulfil the demand of buyer in an appropriate time. There are
many software for inventory management which can be considered as the necessary requirement
for this method.
Price optimisation system – When a company sell variety of product than they face problems
relating to deciding the correct price for a product. Sometime customers do not by an item
because of high rate, which is set by company for earning more profit. An organisation could sell
a commodity by charging more amount but they fail to analyse this advantage in right time. A
mathematical programme is required for implementing this system in an effective manner.
2

Historical data, competitor’s price, etc. are some additional requirement which is essential for
executing this system in a company.
Cost accounting system – This system of management account focus on minimising wastage of
resources which are used in production and other process (Cadez and Guilding, 2012). There are
basically two ways of increasing profit, first is enhance sale and second is reduction in variable
cost. Records of various expenses like labour, material etc. is necessary for using this method of
accounting. Inventory is significant part of this process, cited organisation can reach their long
term goals by managing stock in a proper way. Evaluation of carrying and ordering cost is
essential in this whole procedure.
P2. Methods of management accounting reporting
For every organisation, it is important to find the evaluate their actual work and then report it to
top level management so they can find mistake which company has done in achieving their
targets. Most of the enterprises only focus on the flaws but they should also discover the factors
which helped them in attaining success. Following are some of the popular methods of reporting:
Performance reporting – Employees are considered as one of the most important assets that is
present in cited organisation. When a company operates at low level and their area of operation
is limited then they face problems relating to employee retention. This method of reporting is
used for evaluating the performance of a worker. In this process, some standards are set and then
actual work of staff is compared to the given targets (Bebbington, Unerman and O'Dwyer, 2014).
This tool assist in determining the mistakes that is done by personnel so company can train them
and improve their performance in upcoming time. Cited organisation can evaluate success or
failure of any project by using this method of reporting.
Variable analyses report – Cited organisation is working in retail sector, they have to spend lot
of money in various areas like direct labour, material etc. Variable analyses reporting play
crucial role in reducing the cost of operation which ultimately enhance profit of a company. It is
difficult for cited firm to reduce their fixed cost but this report can depict the scope where waste
can be minimised and how resources can be used in appropriate manner. Proper control on
recurring expenses is significant for achieving short term targets. All the variable elements are
analysed in this form of reporting.
Budget reporting – Every firm allot some budget for expenditure and they set an aim for
earning decided amount of income. This report help in finding the difference between
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predetermined targets and actual result. They can discover the solution of various problems
which they face in present year and avoiding committing same mistakes for more than one time.
Budget reporting assist in determining financial inaccuracies and the reason of the behind this
failure. This report is made for all the departments of a company, this reduce the confusions that
can happen between two divisions. In Unique grocery, two wings have to share various
resources. This method of reporting remove the doubts and synchronise efforts of all the
department.
Illustration 1: Financial Reporting
§
(Source: Financial Reporting Center, 2017)
Account receivable report – Cited organisation has many vendors, they are operating in retail
sector so they have to sell goods on credit to their permanent customers. Account receivable
report is made for determining the amount which buyer had to pay in given period of time. The
main reason for making this report is to find the consumers who do not pay their due amount is
set time period. If number of defaulter is higher then, management need to take some serious
action by tightening the rule for credit service (Qian, Burritt and Monroe, 2011). If people will
not pay for the product which they have purchased from the firm in appropriate time than cited
enterprise may face huge loss which they cannot bear. Unique grocery is a small company and
they have limited resources, this report make sure that they receive complete amount for the item
that is sold from their store.
4

Inventory control report – A firm, who is operating in retail sector, has to manage their stock
in a proper manner so they can reduce various expenses like carrying and ordering cost. This
reporting is done to evaluate the number and amount of goods that came in warehouse (Financial
Reporting Center. 2017). Problems relating to under or over stocking can be resolved by using
this method of reporting, it can assist cited organisation in proving timely deliver of the products
to their customers.
TASK 2
P3. Income statement and difference between absorption and marginal costing
Cited enterprise can enhance their profit by reducing cost of their business operation (Foster,
Hart and Lewis, 2011). If an organisation manage their fund in proper way then they can get
more return by investing less amount. Unique grocery need to adopt appropriate method of
accounting so they can earn maximum benefit by utilising available resources. Below is
explanation of absorption and marginal costing:
Absorption – This method of costing include both fixed as well as variable cost. It is also
popular by the name of full costing because all the areas of business are covered under this
process (Maiyaki, 2011). One of the most important point that is to be noted while adopting this
costing procedure is related to closing stock, goods which are present in warehouse at the end of
year are not included in this method.
Marginal – Whenever a company manufacture some extra unit, they have to spend some
additional amount on its production (What is Budgetary control? 2017). This supplementary
expense is known as marginal cost. Fixed cost is not included in this method and the focus is
kept only on variable expenditure. Direct material, labour, overheads are the main factors which
decide increment and reduction in overall cost. An organisation can use marginal costing for
determining the rate of the items which they are selling in market (Nemet, Baker and Jenni,
2013). If this figure go down then they can reduce price of their product but if it is increases
then, company has to enhance the amount which they are charging to the purchaser.
Below is difference between marginal and absorption costing:
Bases Marginal Absorption
Closing stock Figure of closing stock is not
deducted in this method.
Amount of closing stock is
reduced at the end of year from
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cost of goods sold.
Purpose This types of costing mainly
focuses on attaining short term
goals, it can be done by
minimising the various kind of
wastages.
Absorption costing assist in
reaching long term targets,
they generally related to
reducing overall cost of
production.
Relation with profit Profit can only alter if volumes
of sales changes.
Variation in profit can only
happen if there is any
alteration in production
volume.
Inventory level In this type of costing, if
inventory level go down then
profit of organisation will
increase.
If inventory level is more at
the end of year then profit
earned by company will
decrease.
Calculation as per Absorption costing.
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
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
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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
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
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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
Unicorn grocery adopting absorption costing method in their organisation because they
will earn £9600 by using this process. Marginal costing will provide net profit of £9300 which
mean that if cited enterprise will use later option than they will face loss a of £300. This
difference is arising because of closing stock, in marginal approach inventory remaining at the
end of year is not subtracted by in absorption they are deducted from cost of goods sold in order
to find net profit (Fahlén,Trygg and Ahlgren, 2012).
TASK 3
P4 Explain the advantages and disadvantages of different types of
planning tools that can be used for budgetary control for the chosen
scenario. This should be supported with examples and illustrations
8

A process where managers make various kind of goals relating to financial and other
performances in budget is considered as budgetary control. All the tools which assist manager in
the process of making plans are known as planning tools. Managers face different kind of
challenges at the time relating to managing funds and controlling cost of business operation.
Some goals are set in a budget and then organisation try to achieve them in a financial year.
Company compare their actual performance with their set targets so they can determine the areas
where firm have committed mistakes. This is essential for avoiding blunders in upcoming time
and enterprise can attaining their long as well as short term objectives by injecting necessary
changes which they have discovered by comparing actual results (Cohen and Davidson, 2011).
Budgetary control play crucial role in making proper coordination between various departments,
it is necessary for avoiding confusion among employees which is generally related to utilisation
of allotted resources.
A centralised control system is essential in making fast and accurate decision so cited
organisation can attaining their desired goals in set period of time. Most of the manager raise
issues relating to the effectiveness of budget, they argue that is is not possible to allot to accurate
amount of money for a task because of various factors like inflation rate. Sometime companies
do not use budgetary tools because they are expensive and small enterprise like Unicorn grocery
cannot afford them. They have limited resource so manager has to use them in appropriate
manner. Following are some planning tools which can be adopted by cited enterprise:
Cash budget – Cash is considered as one of the most important resource that is available to an
organisation. Provisions relating to all the credit and other types of payment are made under this
tool.
Merits - This technique is beneficial in finding the needs of loan which can be needed at
the time in any month of the whole year. In this type of planning, manager can make provisions
relating to unexpected payment, this will assist Unicorn grocery in decreasing the level of risk
which his present in their business operation.
Demerits - There is other side of this planning tool which is related to various
shortcomings of a plan. Cash flow budget is basically a rough estimate, there is a big question
mark on its accuracy. This type of budgeting do not take unforeseen events in account which is
integral part of every business.
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(Sources: What is Budgetary control? 2017)
Master budget – This planning tool deals with all the kind of expenditure and income which
cited company get in a next year. It provide great assistance in removing various kind of
confusions that may arise between two departments. All the significant decisions relating to
major investment like right place to invest, launching of new products are included in this
budget. Normally a department ascertain their own profit but this planning technique estimate
revenue of company as a whole. This form of budgeting is very useful for top level management
because they get all the information about present resources and liability. It is important in
determining the current status of company.
For a small organisation like Unicorn grocery, this budget can become huge burden on their
financial resources because its formation involve lot of money and time. Success of this planning
tool is dependent on data received from various departments. If the information received from
these division are wrong or incomplete then all the efforts in making of this budget will go in
vain (Moser, 2012). This plan basically deal with big picture which is difficult to ascertaining in
current business environment because of rapidly changing technology, economic fluctuation and
political instability.
Variable analysis budget – There are many variable expenses which play crucial role in
deciding net profit. This type of planning tool is mainly focus on various direct cost which are
used in the process of production. One of the most significant benefits of this method is related to
reduction in overall cost of manufacturing. It prove great assistance in minimising the wastage
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Illustration 2: Budgetary control

which help in attaining short term targets. But this planning tool do not play crucial role in
achieving long term goals which has direct connection with mission of an organisation.
Capital expenditure budget – This budget contain information about various long term
expenditure that unicorn grocery is planning to do in upcoming time.
Merits - One of the most important advantage of this planning tool is that is help them
shows the necessary amount which cited firm will be needing forthcoming time. It also assist in
reducing the fear of uncertainty and reduce the amount of risk.
Demerits - It also has some disadvantages, most of the managers do not like to make this
budget because it is made for long term. Business environment is changing rapidly, plans make
for this year may become useless in next year. Unicorn grocery should keep this thing in mind at
the time of making this budget.
P5. Adapting management accounting for responding financial problems
Most of the business person believe that doing business is getting more and more difficult every
day. Level of uncertainties is continuously increasing and firm are facing severe problem in
finding the rights areas for doing fixed investment. Technology is changing the way of operating
companies, enterprises are entering in new economies in order to earn more profit which can be
considered as the main reason that complexity is business operation is enhancing. By using
appropriate system of managing accounting, an organisation can reduce waste of funds and they
can assure optimum utilisation of available resources. Modern tool do not concentrate only on
recoding of data, they also assist managers in making crucial decisions like where to invest, right
source of long term borrowing, etc. (Hammad, Jusoh and Ghozali, 2013). Unicorn grocery is
using leaning accounting which include modern techniques, Vectair holding in an organisation
which is using traditional approaching of accounting. Following is difference between both
firms:
Unicorn Grocery Vectair holding
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This firm has adopted leaning accounting
which is a modern approach. It provide huge
assistance in minimising wastage of various
resources that is available to the organisation.
Tools of this accounting system find major
mistake and make sure that organisation do not
commit in again in upcoming time.
This company is using traditional approach
which mainly focus on recording of data, it do
not cover most of the activities and department
like marketing.
Management can take various decision in short
period of time after using accounting tool of
this approach. This benefit provide competitive
advantage to the cited organisation over their
competitors.
Process of decision making get delayed
because manager do not get required data in
needed time.
Lean accounting is expensive and complex, it
make negative impact on small company like
Unicorn because they have limited resources.
Traditional accounting has simple methods are
do not very expensive. It cannot be used by
MNCs but small enterprises can adopt in their
organisation.
This approach include use of technology,
modern accounting software are used under
this method.
Manual tools of accounting are used in this
approach, sometimes manager use old
technology in this method.
In this era, most of the companies face various kind of financial problems because of
globalisation and rapid changing technology. By using management accounting systems they can
confront with most of the hindrance.
Key performance indicators – KPI assist an organisation in measuring their performance so
managers can find the gap between their current position and the targets which they were
supposed to or going to achieve in upcoming time (DRURY, 2013). Most of the problems
relating to finance can get resolved by using this tool, it can also support cited company in
compare their business with other player of the industry.
Benchmarking – In this process, Unicorn grocery can set some standards by their own and then
compare their actual performance with the predetermined guidelines. This will provide stability
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to finance department of cited firm because they will use available resources in an effective
manner.
Financial governance – There are some rules or practice which cited enterprise can follow in
order to balance interest of all the stakeholder (Agbejule, 2011). If this task is done in an
appropriate manner then Unicorn grocery can attain their goals in short time period because most
of the problems are related to money. Focusing of financial governance can improve overall
performance of a company.
CONCLUSION
At the end, it can be concluded that management accounting basically focus on two areas, one is
finding right source for debt and second is investing money in most productive areas. It mainly
deals with long term goals which can be achieve by adopting appropriate method of reporting.
Planning tools can solve most of the problems and reduce extent of various type of uncertainties.
Bench marking and KPI play crucial role in responding to different type of financial problems.
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