Management Accounting Report: Analysis of Financial Statements

This report provides a comprehensive overview of management accounting principles and their application within a business context, specifically referencing Imda Tech. It explores the core functions and importance of management accounting, differentiating it from financial accounting. The report delves into various management accounting systems, including inventory management, job costing, cost accounting, and price optimization systems, highlighting their significance in informed decision-making. Furthermore, it examines the preparation of income statements using both marginal and absorption costing methods, and discusses the merits and demerits of different budgeting types. The balance scorecard approach is also introduced as a tool for performance measurement. The report emphasizes the role of accounting in strategic planning, cost control, and overall business profitability, making it a valuable resource for students studying finance and accounting. The report concludes by reinforcing the role of management accounting systems in achieving organizational objectives, improving efficiency, and facilitating effective decision-making in a competitive business environment.

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Various functions and importance about management accounting...................................1
P2 Various systems of management accounting....................................................................3
M1 ..........................................................................................................................................4
D1...........................................................................................................................................4
TASK 2............................................................................................................................................5
P3 Preparation of income statements.....................................................................................5
M2...........................................................................................................................................8
D2...........................................................................................................................................8
TASK 3............................................................................................................................................8
P4 Merits and demerits in relation to different types of budgets...........................................8
M3.........................................................................................................................................11
D3.........................................................................................................................................11
TASK 4..........................................................................................................................................11
P5 Balance scorecard approach............................................................................................11
M4.........................................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting is the process in which all the transactions which are undertaken in the
business will have to be recorded. For this there will be requirement of the proper management
in which various processes will be used and this whole system is known as management
accounting (Strumickas and Valanciene, 2015). In this information will be needed so that it can
be used in the formation of reports and that will be collected by using various systems which are
available for this purpose. Also there are various tools that are used for the purpose of decision
making and they will be discussed in this report together with other aspects which are related to
management accounting. In a business various problems arise and in order to deal with them
there are various approaches and techniques that can be used and the understanding in relation to
them will also be provided in the report presented below in context of Imda tech.
TASK 1
P1 Various functions and importance about management accounting.
In the management accounting there will be various things that will be covered such as
here there are different methods and techniques which can be used for the enhancement of the
value of company (Vakalfotis, Ballantine and Wall, 2013). In an organisation there are various
policies and strategies that will have to be formulated and for that it will be needed that the
required information shall be collected. After this it will be required that the collected data will
have to be summarised so that proper conclusions can be drawn and also it will be possible to use
the data for the future reference. Then the framed policies will have to complied by in the most
appropriate manner so that the objectives and targets that are specified will be achieved.
In this there are various modifications which are required to n be made so that the
information that will be entered will be correct. With the help of all the data the management will
be taking the decisions that will prove to be beneficial for the company. In the accounting there
is another form of accounting which will be used which is financial accounting. In this the
financial aspects of the business will be covered. The difference that exist in the management
and financial accounting is provided in the table below:
Basis Management accounting Financial accounting
Purpose Managers will be required to Financial statements will be
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take various decisions and for
that various information will be
required and that will be
provided by this accounting.
prepared with the use of this form
of accounting.
Information There are two types of
information which are financial
and non financial and they both
will be included in this.
The financial information is the
one that will be provided in this
form.
Time period In this there is no time limit
which has been specified in this
respect.
They are required to be prepared
for the particular period of time
which is generally a duration of
one year.
Format In this there is no format that is
required to be followed by the
company for the purpose of
accounting.
In this preparation of the financial
statements is required and so a
particular format has been
specified for this.
Legal requirement In this the requirement to
comply with the legal aspects is
not specified anywhere.
Here there are various laws and
regulations which are specified
and are required to be followed.
Importance of management accounting.
In the business there are various decisions which are required to be taken so that the
objectives and targets which are specified will have to be achieved. For this there are various
tools and techniques which will be used and they will be covered in the management accounting.
This will help in the effective conduction of the operations and there will be less issues that will
have to be faced by the company (van der Steen, 2011). By this many benefits will be achieved
and they are described below:
 In the production of the product there are various cost which will be incurred and in them
some of the cost are such which are not important for the business and will not be
contributing to the profits of organisation so by this all the activities which are irrelevant
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will be identified and then the cost in relation to them will be saved as the processes will
have to be eliminated.
 In the company there will be various strategies which will have to be formulated and for
that all the required data will be provided with the help of the management accounting.
 In the process of control that is to be established there is the need to plan the activities
and it will only be possible with the help of this and by this the performance of the
company will be improved as all the work will be carried out according to the plan made
and by this the overall profitability of the company will be improved.
P2 Various systems of management accounting.
In the process of collection of the information there are various systems which will have
to be used and they are known as management accounting systems. By the help of the
information the required decision will be made and that will be very important (Ward, 2012).
The data will be analysed and by that all the shortcomings in the business will be identified and
then the steps will be taken by which they will be removed and the company will achieve the
targets specified. The important systems involved in this are provided below:
 Inventory management systems: In the process involved in the production there are
various material which will be used and for that there are various decisions will be
required to be taken. For that the information will have to be obtained so that it can be
identified that how much of the inventory id to be maintained so that problem of the
shortage can be avoided. In this the methods that will be used are activity based costing
and by that the work will be completed in the time limit that has been specified and also
the waste that is faced by the company will also be eliminated.
 Job costing system: There are many jobs which are undertaken in the business and in
them the cost will be incurred and that will have to distributed in the total number of units
which will have to be produced (Parker, 2012). It is not possible to do it for all the jobs so
for this the total cost which is incurred in all the jobs will be accumulated and then they
will be divided with the total units by which the cost per unit will be calculated. In this
manner the maximum profitability will be achieved and all the other aspects will also be
fulfilled. All the measures that are required to be taken to remove the cause of the failure
will have be done with the help of this.
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 Cost accounting system: In the process of production the cost which are incurred are of
various types such as fixed and variable. In this the fixed is the cost which will not be
changed with the change in the units of the production. Variable cost is the cost which
changes with the change in the units and in this their will be direct impact of the quantity
change (Zadeh, 2011). There is the relation between the variable cost and profits as if the
cot will be increasing then the profits will be decreasing so it can be said that the cost will
have to be controlled. For this there is the method in which standard cost is decided and it
is needed that all the expenses shall be made in relation to them only. By this the
comparison will be made of the actual and standards and it will be identified that whether
the same are complied with or not and if there are any variances then the reason for the
same will be determined and corrective measures will be taken in this respect.
 Price optimisation system: Price is the main factor to be taken into consideration so that
the profits of the company can be maximised and for that there is the need that the price
which will be decided shall be optimum which means that if the price will be set on the
appropriate level so the demand of the company will be maintained at good level (Otley
and Emmanuel, 2013). There id the inverse relation between the price and demand as if
the demand will be more then the price will be low as at that price more customers will
be attracted to the products. So it will be required by the Imda tech that the prices shall be
set in the manner by which the benefit of it can be provided to both the company as well
as the customers.
M1
There are various benefits which will be achieved by the company with the help of the
systems that are included in the management accounting. With the help of them there are various
decisions that will have to be made and will be done by which the overall cost will be reduced
which will help in increasing the profits of the company. The data that will be collected in this
will be very much appropriate and can be used by managers by placing all the reliance on them.
The targets which have been set will be achieved by the company without any problem.
D1
In order to achieve the required objectives and targets it will be required that plans that
will be formulated by the company shall be such which will help in the completion of the task in
the most appropriate manner. In the process of decision making the data that will be used will be
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very reliable so it can be said that they will prove to be beneficial for the company. In the market
there is high level of competition and for dealing with that it will be required that proper
evaluation of performance shall be done so that additional aspects can be covered which will
help in attaining extra gain.
TASK 2
P3 Preparation of income statements.
Income statements are required to be prepared so that profits of the company can be
determined and then the decisions will be taken in this respect. For this purpose it will be
required that cost shall be calculated so that it can be used in this process (Renz, 2016). For this
there are two methods which can be used and they are absorption costing and marginal costing.
There are various aspects which will be required to be considered in it and they have been
discussed here under:
Marginal costing: In this process which is used in the production there are various costs which
are included in this and they are variable and fixed cost. In the calculation of this the fixed cost is
not taken into consideration so no apportionment of this is done in case of marginal costing.
Variable cost is the cost which will be affected greatly with the change in the units of the
production and so there is the relation which exist in between them. In this contribution is
calculated in which the fixed cost will not be deducted from the amount of sales and then on the
basis of this all the decisions will be made by the company.
Absorption costing: This is the process in which the profit will be calculating by taking all the
cost in consideration. In this the variable as well as fixed cost will be included in the calculation
and the fixed cost in relation to production will be allocated among all the units which are
manufactured. By this the over or under absorption of the cost, if any will be identified. That will
be required to be used while making the income statements so that correct profit can be
calculated and the management can use the information for various purposes.
In the business it is very important that the objectives that have been specified shall be
accomplished and also the identification of the financial viability will be required and that all
will be done with the help of both of the above mentioned methods. It is important that all the
changes which take place in the cost shall be identified so that the factors by which the profits of
the company will be affected will be determined and then actions will be taken so that all the
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irrelevant cost will be avoided and the overall development will be attained (Hansen, Mowen and
Guan, 2007). By determination of the total cost it will be used in the preparation of the income
statements which are given here under:
Income statement on the basis of Absorption costing method
Selling Price per unit ￡35
Unit costs
Direct materials cost ￡8
Direct Labour cost ￡5
Variable Production overhead ￡2
Variable sales overhead ￡5.25
Budgeted production during the year is 3000
units
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: In this budgeted cost is £10,000and Actual cost is £7875
Absorption costing working notes
Working Note 1: Calculate full production cost
Direct material ￡8
Direct labour ￡5
Variable cost ￡2
Fixed cost ￡5
Total ￡20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40,000 500*20 = £10,000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: ￡15000
Fixed overhead: ￡10000
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Total £5000 (under absorbed)
Net profit using absorption costings ￡Amount £Amount
Sales value
Less: Cost of Sales:
Opening stock
Cost of production
Closing stock
(Under)/Over absorbed fixed prod. O/h
Gross Profit
Less: Selling Expenses
Variable sales expenses
Fixed selling expenses
NIL
40000
(10000)
7875
10000
52500
(30000)
(5000)
17500
17875
Net loss -375
Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
Direct labour cost 5
Variable production expenses 2
Total Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
Nil 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing ￡Amount £ Amount
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Sales value
Less: Variable costs
Stock at the opening
Cost of production
Stock at the closing
Variable sales overheads
Contribution
Less: Fixed costs:
Fixed Production overheads
Fixed Selling overheads
NIL
30000
(7500)
15000
10000
52500
(22500)
(7875)
22125
(25000)
Net loss -2875
M2
In the business there is the requirement that various reports shall be made so that decision
can be taken on the basis of it and by that the measures will be taken so that company can
achieve the growth (Herzig and et.al. 2012). The income statements will be made with the help
of the information that will be collected by using the marginal and absorption costing. In the
business there are limited resources and it is needed that they shall be utilised in the best manner
so by the use of the various techniques this will be made possible and all the other factors will
also be considered by them.
D2
It can be seen above that profits have been calculated by using both the marginal and
absorption costing and then the results that are found will be recorded in the reports that will be
prepared by the company for the future reference. It can be said that profits are different by both
methods and this is due to the difference in the treatment that is provided to the fixed cost in both
cases. In the given scenario company is facing losses and that is more in case of marginal costing
which is 2875 and in case of absorption it has been derived at 375. The difference between the
amounts in result of the manner in which the fixed cost has been dealt with by the company.
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TASK 3
P4 Merits and demerits in relation to different types of budgets.
In an organisation there are various tools and techniques which are used with the help of
which the company will be able to take the relevant decisions and other factors affecting the
performance of the company will also be identified with the help of them (Hoque, 2002). The
best tools among all is the budget which is a statements in which the expenses and incomes will
be recorded so that they can be controlled. In the figures that will be recorded will be either on
the basis of the past years data or the future estimates which are made by the company. The limit
will be specified in relation to the expenditures that should be incurred and this will be done for a
specified period of time. With the help of them comparison will be made between the actual
values and the valued in the budget and then the deviation among them will be determined
(Bodie, 2013). Then the steps will be taken to rectify them or eliminate them so that efficiency of
the activities can be improved. Different budgets that will be made by the company are described
here under:
Master budget: All the various activities that are to be performed in the business will have to be
recorded in the budget. As in this all the functions are entered so this will be known as the
summary budget and will be used by all the departments.
Advantages: With the help of this budget all the information will be obtained at one place so the
time wasted in finding the information at different place will be saved and can be used for the
other purposes. The growth will be achieved as by this the plan will be formulated which will be
used in the various purposes.
Disadvantages: As in this there are many functions so it will not easy for the company to update
the budget which is a drawback of it. Also in this the check system will be required to be
established so that control can be kept in the organisation.
Cash Flow budget: All the transactions which are undertaken in the business in the form of cash
will be recorded in this and by that the amount of cash in the business will be identified. In the
business cash is required in all the activities and so it is very important to mange it in the best
possible manner which will be possible with the help of this budget.
Advantages: The main merit of this is that the requirement of cash in the business will be
identified and then measures will be taken to arrange that amount so that business can be carried
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out in the most effective manner (Cinquini and Tenucci, 2010). Also the problem in relation to
the cash shortage will be dealt by company in the better manner.
Disadvantages: The exact identification of the cash balance is not possible as there are high
amount of fluctuations which take place and it is not possible to record all of them. So the results
that will be drawn will not be correct and so business may incur losses due to it.
Operating budget: In this budget the information in relation to the various operations will be
recorded in it and the requirements in relation to all of them will be identified with the help of
them. The material and other cost which will be incurred in it will be managed with the use of
this budget.
Advantages: By this all the expenses whether they are related to the current period or are
predictions in relation to future will be managed and by that the company will be able to
establish the control on all of them.
Disadvantages: The figures which will be entered in this will not be accurate as there are
changes which take place in the operations and they will not be recorded so risk of taking wrong
decision will be present.
Steps in formation of budget:
In this process there will be various steps that will be taken such as in this firstly the evaluation
of the past data will be done so that it can be used in the current budget also research will be
carried out so that the future aspects can also be taken into consideration (DRURY, 2013). Then
they will be entered and the risk involved in them with the other factors will also be included so
that the measures in relation to all of them will be decided in advance.
Stages Description
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
Stage 6
In this the realistic goals will be required to be set
After this all the incomes and expenses will have to be identified
All the needs and wants are to be separated so that it can be achieved
Then the budget will be made by involving all of these factors and in this the
amount that can be spend will be determined
after the formation the plan will have to be implemented so that it can be
identified that whether the working is carried out according to the plan or not.
Last will be to evaluate the whole process so that the limitations can be
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