Management Accounting Systems for Financial Analysis

This report provides a detailed analysis of management accounting principles and their application within LM Engineering Ltd., a manufacturing company. It explores various management accounting systems, including cost accounting, inventory management, and price optimization, highlighting their benefits. The report examines different methods used for management accounting reporting, such as budget reports, inventory reports, and performance reports. It delves into cost accounting techniques for preparing income statements, including absorption and marginal costing. Furthermore, it analyzes the advantages and disadvantages of planning tools used for budgetary control and compares organizational approaches to solving financial problems using management accounting systems. The report concludes with a discussion on the role of management accounting in responding to financial problems and ensuring sustainable success.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Explain management accounting and give the essential requirements of different types of
management accounting systems...........................................................................................1
P2. Explain different methods used for management accounting reporting..........................3
M1 Evaluation of benefits of various management accounting systems...............................4
D1 Management accounting reporting and management accounting system that is related with
organisation process...............................................................................................................5
TASK 2............................................................................................................................................5
P3: Cost accounting techniques to prepare an income statement...........................................5
M2. Management accounting techniques that is used to prepare financial reporting documents
................................................................................................................................................8
D2 Financial reports that interpret data for different types of business activity....................8
TASK 3............................................................................................................................................8
P4 Advantages and Disadvantage of planning tools that are used for budgetary control .....8
M3 Analyse of different planning tools and their application in organisation to prepare and
forecast budget......................................................................................................................10
TASK 4..........................................................................................................................................11
P5 Comparison of organisation to solve the financial problem with the help of management
accounting system................................................................................................................11
M4 Responding to financial problems and management accounting to sustainable success13
D3 Planning tools of accounting period for responding financial problems appropriately. 13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is used by business to analyse their internal financial reports and
statistical information. Preparation of this reports will help the business in their decision making
process. It can also be termed as the process of collecting, interpreting and summarising all the
financial and non financial data. To understand the concept of management accounting in
broader sense, the chosen association in this project is LM engineering Ltd. which is the largest
manufacturing company it deals in manufacturing for both, commercial and domestic market.
LM engineering Ltd. Manufacturer is the foremost manufacturer of glue mixer, doctor roll glue,
mortar glue mixer and plywood machinery. The company has built trust among their customers
(Jamil, and et. al., 2015). In this assignment the company has focused on the certain areas that
are various techniques of management accounting, different tools of planning used in
management accounting in order to enhance their business. Here, company also looks into the
matter of total production cost, cost per units, sales cost and profit and loss statements of the
business so that the amount of profitability can be determined. Apart from this, at last the
company has focused on the role of management accounting in solving the issues and financial
problems of the business.
TASK 1
P1. Explain management accounting and give the essential requirements of different types of
management accounting systems.
To monitor the financial condition, every business is required to record their financial as
well as non financial data. Management accounting helps the organisation's in determining their
expenses and income (van Helden, and Uddin, 2016). LM engineering Ltd. Is required to
implement this concept of management accounting in their business so that they can evaluate the
performance of their business can predict about the company’s financial condition and status.
This would also help the business in developing the strategies so that they can operate their
operations effectively. These are prepared as per the requirement of the companies for
understanding budgeting, break even charts, products cost analysis, trend charts and forecasting.
For maintaining this the company is required to cover various types of management accounting
which are mentioned below:
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Cost accounting system: This concept of management accounting has been designed for
manufacturer so that they can easily track the flow of inventory continuously through the phases
of productions. This would help the business of LM engineering Ltd. in computing the overall
cost of operation separately and will also help them in determining which product is beneficial
and which is not by providing them the exact information of inflow and out flows of inventory.
Company can also use the different type of cost accounting in order to identify the amount of
inventory the firm needs to produce (Shields, 2015). These types are job order costing and
process costing.
Job order costing: This type of cost accounting will help the business of LM engineering
Ltd. In calculating the cost of each job separately and will record all the cost more accurately and
efficiently to facilitate the cost control in the business operations. This will also support the
organisation in evaluating the spoilage and defective products in the process of production so
that they can smoothly compare their actuals with their estimates.
Process costing: This will support the business in calculating the cost of manufacturing
for the each process individually. It would also help LM engineering Ltd. In allocating their
expenses to each process so that they can compute the exact cost.
Inventory management system: To maintain the levels of raw materials, finished goods stock
the organisation uses inventory management system. The company like LM engineering Ltd.
Would used this to balance the level of inventory and to determine how much inventory is
needed exactly by the organisations to carry out their operations smoothly. This would also help
the company in maintaining high efficiency. The company here can also adopt some techniques
in order to maintain their level of inventory these are :
Just in time method : This is the method of controlling inventory which will allow LM
engineering Ltd. To control the level of inventory. As this concept states that no extra amount of
inventory should be produced if it is not required during the production process.
Economic order quantity: This techniques is used by the company to minimise the total
holding cost and ordering cost. (Tappura, and et. al., 2015). This will also help the business in
saving the cost of ordering as this involves producing an inventory at the time only when the
order is placed. Through this the business will be able to place the right amount of inventory that
is required by the business.
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Price optimisation system: These are the type of management accounting system which is used
by the organisation in order to identify the reactions of customer on different prices of products
and services. This would help the business of LM engineering Ltd. In allocating optimised
prices to the products which benefits company as well as their customers. This would also help
the business in their initial pricing, promotional pricing and discount pricing.
Initial pricing: This price optimisation tool works well when the organisation has a
stable base and long lasting life of their services. This would help the organisation in building the
goodwill, recovering the cost and in earning high amount of profitability.
Promotional pricing: This will help the organisation in setting temporary prices of their
services to build large customer base (Quattrone, 2016). This would also help the business of
LM engineering Ltd. in increasing the amount of their cash flow, and will also leads to the
revenue growth of the company.
Discount pricing: This would help the business to sell short term services like insurance,
credit facilities. This would help the business of LM engineering Ltd. in identifying the customer
to whom they should reward and who purchases in bulk, so that their can come up with the
customer loyalty for their business.
P2. Explain different methods used for management accounting reporting.
Every organisation as to prepare their accounting reports in order to compare their actuals
performance with the targeted standard. There are various type of reports which an organisation
need to prepare such as -
Budget report: These are the reports which are prepared primarily to compare the actual
budgets with the estimated ones. It is the blueprint for the organisation's objective (Cuganesan,
Dunford, and Palmer, 2012). This would help LM engineering Ltd. In comparing their
performance with the standard one and would allow them in identifying the amount of expenses
that incurred during a year.
Inventory reports: This is the type of report which is prepared by every organisation in
order to evaluate the level of inventory an organisation holds. This will help LM engineering
Ltd. in determining the current level of inventory available to them and the cost and prices to
maintain that amount of stock in the organisation so that they can achieve their targets.
Cost managerial accounting report : This report is prepared to know the cost of amount
spent on manufacturing the product. It provides full detail about the money invested in carrying
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out business operations. LM engineering LTD. needs to prepared this, to control the cost which
unnecessarily affects the profitability of the business and to understand the exact expenditure of
the organisations so that the optimization of resources can be done properly.
Performance report: This report is prepared to evaluate, analyse, and in identifying the
performance level of organisation as well as employee's. It is design to measure the performance
of something (Caglio, and Ditillo, 2012). LM engineering Ltd. Will use this type of management
accounting reports to measure the performance of their employees and organisations and to
compare it with the standard one so that they can analyse the difference and keeps on improving
it to achieve the efficiency in the performance of the organisation.
Account receivable ageing reports- Account Receivables are the expected payments
due from the customers. Accounts receivable ageing report is a list of customers of the
organization that provides necessary informations about sum of amount due from the customers,
due dates for receipts, over due receivables' dates, interest on due amount, contact details of
debtors, bad-debt and other important details regarding payments from the customers of selected
organization . The management of respective firm LM engineering Ltd. prepares accounts
receivable reports on a regular basis so that it can manage records of its debtors and decide the
potency of its credit collection period.
M1 Evaluation of benefits of various management accounting systems
Management accounting provides different benefits to the organisation that is uses by them
to accomplish their desired goals and objectives. In this task some system of management
accounting and its benefits are discussed in the organisation.
Advantage of cost accounting system
 This is useful for the management because it helps them to decide the price of product or
service through analysing the cost that is invested y them to complete the process. The another benefit that measure by LM Engineering Limited is to reduce their
production cost by cutting the extra expenses that incurred in their production process.
(Tucker, and Lowe, 2014).
Advantages of inventory management system
 This system helps LM Engineering limited to manage their inventory that is required by
them to manufacture their products by utilising their resources in optimum way.
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 Accurate inventory management system helps an organisation to manage their inventory
position effectively that is useful for making effective decision of the organisation.
D1 Management accounting reporting and management accounting system that is related with
organisation process
LM Engineering limited is integrated their accounting system as well as their reporting
system with each other that assist their financial department to make accurate decision and plans
to achieve their desired goals and objectives. Example- In order to maintain the financial records
management of LM Engineering Limited makes effective reports which generates long term
profits for the organisation. Like cost accounting system helps them to decide the price of
products in order to ensure their specific profits.
TASK 2
P3: Cost accounting techniques to prepare an income statement
Cost- The term cost refers to the value or amount that is charged by the organisation for
their products or services from the customer. It includes the price that is invested by them to
produce the goods. This process is required on every stage from operations to functional
department of the organisation.
Absorption costing- This process is defined as the technique that is used to compute the
figure which is invested for manufacturing different products or services. This includes fixed as
well as variable cost for the organisation to enhance the overall productivity of the organisation.
Marginal costing- This method is used by the organisation to calculate the net profits by
including all of its variable cost (Merchant, 2012). Mostly small and medium organisation adopt
this method that show profitability by preparing financial statement of them. LM Engineering
Limited uses this technique in order to identify their current financial position in the market.
Some calculation of LM Engineering limited by using the both method is mention as
below:
Annex (A)
Budget 2019 2020 2021
Cost
Budgeted
production
Basis of
production
Cost
per Hours Cost Hours Cost Hours Cost
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Centre
overhead
costs in £)
(overhead
absorption) Hour
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
6

Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
7

*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M2. Management accounting techniques that is used to prepare financial reporting documents
Techniques of management accounting plays an essential role to prepare the financial
statement for an organisation (Cooper, Ezzamel, and Qu, 2017). Most of the organisation uses
this technique to formulate an effective framework that considers their financial reports within
appropriate way. In this task LM Engineering limited records all of their financial transaction
that is useful for them to prepare an accurate income statement through use of marginal costing
method.
D2 Financial reports that interpret data for different types of business activity
The above part of the organisation show that project Y required investment more than
the project X. This data undertakes fixed cost that refer to machine cost. Moreover it also
involves variable cost which determine cost of raw-material and other expenses directly impact
on cost. LM Engineering limited prepares financial reports such as cash flow statement, fund
flow statement, balance sheet and profit & loss account to keep records all the financial
transaction that take place while performing their operations. This helps them to evaluate their
current financial position. For performing this management first interpret the data that is useful
for perform various business activities which is invested for each business activity.
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TASK 3
P4 Advantages and Disadvantage of planning tools that are used for budgetary control
Planning tools work as effective instrument for the organisation that helps them to
achieve their plan through implementing specific plans for the organisation. Budgetary control is
formulated as written document or booklet that considers the objective which are required to
perform daily operations of the business ( Morales, and Lambert, 2013). The major intention of
budget document is to achieve organisation objective within the specified budget that is decided
by the management. In this task some type of budget along with their advantages and
disadvantage are mention that are executed by the HSBC in order to attain their goals.
Static budget- Budget plays an essential role in the organisation they help them to track
their current financial position. It helps them to analyse their expenses with different alternative
through to enhance their profits. Static budget is always remains similar for the organisation
either there are changes in the volume of their sales or not. With implementation of static budget
an organisation will follow them on regular basis in order to track their actual expenses. Some
advantages and disadvantage of them is mention as follow:
Advantages
 The major benefit of formulating static budget is that they are easy to follow and
implement in the organisation because of their stable nature. Static budget allow a company to keep monitoring their regular expenses so if they are
overestimate or underestimate organisation control their variances to follow the budget
effectively (Cadez, and Guilding, 2012).
Disadvantages
 Drawback of static budget is that they are not flexible. In a situation if there is increase or
decrease in the sales that organisation does not modify their business resources.
 Static budget are based on the data of previous years therefore new organisation face
challenges in order to develop or formulate them.
Zero based budget- Zero based budget of management accounting formulate the budget
that is started from zero. It undertakes several aspects like re-evaluating of cash flow statement in
order to justify all expenses that are incurred by LM engineering limited. Therefore, zero based
budget develops a new method in which they calculate all the actual expenses that take place in
the organisation. Advantages and disadvantage of zero based budgeting:
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Advantages
 Zero based budget helps an organisation to increase the accuracy in their operations by
justifying, explaining and managing the expenses of the organisation. In helps an organisation to identify different opportunities that generates unnecessary
expenses in their operations. It results that they create more effective results for LM
engineering limited.
Disadvantage
 In order to formulate an effective zero based budget management need to invest too much
time. It creates an intensive exercise for the organisation which is complex and hard
method for organisation (Schaltegger, Gibassier, and Zvezdov, 2013).
 It is difficult for LM engineering limited to explain their all activities because it requires
trained or experienced employees.
Flexible budget- This types of budget are flexible and adopt changes whenever there is
change in the volume of product sales. Moreover, it is beneficial for organisation because it
develops with the cost that changed with the rate in per unit of their operations. It undertakes all
the aspects that directly impact on budget such as sale of products, purchase of raw-material etc.
therefore, it is easy for LM engineering limited to measure and evaluate the efficiency of their
manager.
Advantages
 Flexible budget is beneficial for an organisation as they are easy to develop and modify
them according to the needs of market (Contrafatto, and Burns, 2013). This types of budget modifies themselves as per needs of the functions. So it is easy for
organisation to collect resources that are required to complete their operations.
Disadvantage
 Sometimes due to flexible nature of budget different changes in the organisation impact
on their functions. It creates confusion for the management because of regular changes in
their figures.
 Flexible budget is not disciplined in nature so for every month there is change in
organisation that develop hindrances to achieve their objective.
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M3 Analyse of different planning tools and their application in organisation to prepare and
forecast budget
Planning tools are the most effective that helps an organisation to prepare a control
budget for LM engineering limited. It plays a crucial role for different departments because it
helps them to complete their functions within the specified amount that is decided by the
management. Apart from budgets increases the profitability of an organisation by reducing and
cutting extra cost that take place while performing their operations. In context of LM
Engineering limited static budget helps them to control and monitor their regular expenses.
Similarly, Zero based budget helps an organisation to formulate and calculate cost that related
with organisation.
TASK 4
P5 Comparison of organisation to solve the financial problem with the help of management
accounting system
It is an essential part for an organisation to implement management accounting
effectively in the organisation as it is not bound themselves within the internal department of the
organisation (Soin, and Collier, 2013). Management of LM Engineering limited involves several
factors that helps them to make effective financial decision for the organisation.
Financial problem- It is essential for organisation to manage their funds to complete
their goals effectively. So they manage their funds through an appropriate approach that helps
them to utilise their funds in positive way. Usually organisation avoid problems that impact on
their profits therefore to overcome from this they implement management accounting system.
Some problems that related with financial issue are mention as follow:
Poor cash flow management- Cash is the crucial factor for the organisation as it helps to
complete their functions. Like raw material is purchased by LM engineering limited to make
finished goods. So it is mandatory for them to manage their cash. Each and every organisation
formulate cash flow statement on mandatory bases in order to prepare effective budget for the
organisation. This helps them to track out their needs that create positive results through
managing effective cash flow for organisation. The main purpose of them is to record their
financial statement rather than to manage a business (Fullerton, Kennedy, and Widener, 2014).
11

Decision making- Financial decision show the current financial position of the
organisation that help to attract more investor. Therefore it is important for financial department
to make effective decisions. The decisions that are related with the financial terms of LM
engineering limited need to take within minimum time period. It helps them to manufacture or
produce their goods on timely basis which determines that management fulfil need of customers
quickly to complete their goals effectively.
Technique of management accounting to solve financial problems
Managing payroll- In context of LM engineering limited the major problem that it faced
by them is related with their cash flow statement. Due to this it is complex for them to manage
their payroll effectively. So to overcome from this management executed method of job costing
in order to complete their goals within minimum time period. Further it also helps the
organisation to manage their gaols within quick through deciding margins for each unit. With
this they consider their performance does not go beyond organisational limits.
Benchmarking- This is the process by which an organisation defines certain levels or
particular standards in order to formulate the products within the specify criteria that is managed
by the organisation. Organisation like LM engineering limited execute benchmarking for their
products through which they complete their work with more efficiency. It helps an organisation
to understand the importance of all resources that are used by organisation to manufacture their
products or services (Parker, 2012).
Comparison between LM engineering limited and TPG processing company:
LM Engineering Limited TPG
LM engineering limited faces the actual
problem of managing their cash. It creates
barrier in the organisation to attain their goals
effectively. Therefore it is essential for them to
develop an alternative to overcome from this
situation.
The major issue that is faced by the TPG is
excessive cost that incurred due to unnecessary
expenses in the organisation. This results that
TPG earn low amount of profit that is available
in the organisation. To overcome from this an
organisation need to increase the price of their
products.
In context of LM Engineering limited job
costing is the system which help them to
Benchmarking system is useful for the TPG it
helps them to maintain the quality of their
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manage their cash. Along with this it also helps
them to invest their money appropriately that
help them to earn good amount of profit. With
implementation of job costing it helps an
organisation to keep track their records that
impact on the profitability of the organisation.
products. This is the method of management
accounting. It governs that is there is increase
or decrease in the price of product organisation.
Sale of products is not impacted because of
similarly quality maintain by them through
implementing the technique of benchmarking.
This also help them to increase their profits.
M4 Responding to financial problems and management accounting to sustainable success
In order to achieve success in the market it is essential for any small or medium size
organisation like LM engineering limited to solve the various issue that are related with the
finance. Without facing the challenges of financial problems management is not able to achieve
their objective and targets. In this situation organisation uses cost accounting system which
undertakes several types of planning tools for recognising the loopholes that generates due to
mismanagement of cash. While the focus of management accounting is to respond on different
financial problem for sustaining a longer period in the industry. In context of LM Engineering
management accounting helps them to develop plans and strategy which are useful to respond for
the financial problems through implementing effective methods and techniques.
D3 Planning tools of accounting period for responding financial problems appropriately
In present organisation management accounting helps an organisation to perform their
work smoothly (Otley, 2016). It governs that it is easy for organisation to predict out the
solutions of different problems generates barrier in achieving their finance goals. For example-
Master budget helps an organisation specifically for LM Engineering Limited to predict and
evaluate the internal environment of the organisation. This helps them to take their decision on
calculation basis. Moreover, planning tools helps to develops detailed solutions of financial
problems that are faced by the organisation. While it is also useful to make decision that solves
different issue of finance for shorter period.
CONCLUSION
By combining all the above facts, it is concluded that management accounting plays an
crucial role in the organisation. It helps them to keep the transparent record of their financial
transaction. In this an accounting manager is liable to formulate all types of financial accounts
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which includes balance sheet, cash and fund flow statement, profit & loss account etc. along with
this it helps them to keep their financial records on annual basis, quarterly basis as well as half-
yearly basis. Further it is also useful for manager to complete their goals with in minimum time
period. Along with this it helps them to calculate their cost with implementing different methods
in order to calculate their profit accurately. KPI, Job costing system and benchmarking are some
of the tools that protects an organisation from facing financial loses and instability in the
organisation.
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