Management Accounting: Financial Consultancy Report Analysis

This report delves into the realm of management accounting, presenting a comprehensive analysis of its core principles and practical applications within a financial consultancy context. The report begins with an introduction to management accounting, distinguishing it from financial accounting and highlighting its importance for internal decision-making. It then explores various management accounting systems, including cost accounting, inventory management, price optimization, and job costing, along with their respective advantages. The report further examines methods of management accounting reporting, emphasizing the importance of understandable information presentation and detailing different types of reports such as cost accounting reports, account receivable aging reports, inventory management reports, and performance reports. The report also discusses costing techniques for preparing financial statements, including cost volume profit analysis, flexible budgeting, cost variance, absorption & marginal costing, and cost allocation, along with the concepts of fixed and variable costs. The report concludes by addressing how management accounting can be used to overcome financial issues. The report uses Bright star financial consultancy and its client Stitchland Ltd to illustrate the concepts.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Explanation of management accounting and essential requirement of various accounting
systems........................................................................................................................................3
P2. Explanation of various kind of methods of management accounting reporting...................6
TASK 2. ..........................................................................................................................................7
P3 Costing Techniques for preparing the financial statements...................................................7
TASK 3..........................................................................................................................................12
P4 Benefits and drawbacks of different planning tools............................................................12
TASK 4..........................................................................................................................................16
P5 Management accounting in response to overcome financial issues.....................................16
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Management accounting is an accounting system that arranges financial and non-
financial information in a systematic manner which becomes a basis for the managers for internal
management (Carpenter and Mahoney, 2012). In other way, this accounting system can be
defined as a type of accounting process, which provide reports to the managers so that they can
make competitive policies and plans for future. In the project report, management accounting is
defined in a broad sense including demonstration about various management accounting systems,
use of costing techniques for presenting the income statements. As well as use of planning tools
and management, accounting systems in overcoming from the financial crises is mentioned. For
better understanding about these a financial consultancy, company is selected that is Bright star
financial consultancy and it is located in UK. This company provides consultancy services to
different companies and Stitchland Ltd is one of them which manufacturer the cloths.
TASK 1.
P1 Explanation of management accounting and essential requirement of various accounting
systems.
Management accounting- Management accounting is an accounting system which is linked
with the internal management of the companies so that they can take maximum use of available
resources (Ross, 2017). Such as the Stitchland Ltd company, use this accounting system in their
operations of manufacturing process.
Management accounting system- The management accounting is a kind of system that arranges
the monetary and non monetary information of company in an effective manner for the purpose
of internal decision-making. It is important to know about the management accounting system
that it is beneficial for only to the internal stakeholders not for external stakeholders.
Importance to integrate different accounting systems within the organisations: Different
kind of accounting systems are useful in the Stitchland Ltd company. Like the cost accounting
system helps in computing the cost as well as inventory management system is beneficial in
effective management of stock (Munday,Turner and Jones, 2013). Apart from it price
optimisation system provides a framework for determining the prices. So this is why these
accounting systems have their importance.

Origin, role and principle of management accounting system:
Origin- The origin of management accounting system can be tracked during the time period of
revolution of industries in England (Parker and Northcott, 2016). As well as the conceptual
framework of this accounting system was evolved in 500 BC.
Principles- This accounting system includes mainly four types of principles like influence,
relevance, trust and value. All the principles have their importance for effective result of
management accounting.
Difference between financial and management accounting system:
Basis Management accounting system Financial accounting system
Importance The management accounting system
is useful for internal stakeholders.
On the other hand, this accounting
system is beneficial for external and
internal stakeholders.
Time period There is no specific time of
preparation of reports in this
accounting system.
Under this, financial statements are
prepared at the end of financial year.
Various kind of systems of management accounting: Cost accounting system- It is an accounting system is also known by costing system. In
general terms, this an accounting system which provides a framework for the purpose of
estimating the cost of products. As well as due to this accounting system companies can
calculate total cost of production and services. Eventually, it is useful for those
organisations which operates in the manufacturing sector. Such as the Stitchland Ltd
company, they implemented this accounting system and through this they are able to
manage and control their cost of manufacturing of cloths. So overall cost accounting
system is essential for predicting the cost and evaluating the profitability of various cost
of activities. Inventory management system- The inventory management system is an accounting
system that is associated with the tracking the goods in the supply chain or in
manufacturing process (Correa and Larrinaga, 2015). As well as it manages the quantity

of raw material and finished goods so that companies can take suitable steps accordingly.
This is why because on the basis of it, companies make further decisions about
purchasing of raw material. Basically, it is essential for effective management of
inventories whether it is raw material or prepared products. The client company,
Stitchland Ltd of Bright-star financial consultancy applies this accounting system.
Eventually, this system is required to track the quantity of raw material such as woollen,
cotton etc. As well as they produce cloths in accordance to available stock which helps
them in satisfying the demand of customers. Price optimisation system- The price optimisation system is a type of accounting system
of management accounting that provides a basis for determining the price at an effective
level. It assigns the price by considering cost and required profit of the organisation along
with considering customers satisfaction. So this accounting system is essential for fixing
right price for products and services. Such as in the above mentioned respective
company, this management accounting system is required for the purpose of getting right
price of their cloths from the customers. As well as to evaluate the impact of customers
on different pricing levels.
 Job costing system- The job costing system is an accounting system that assigns and
computes the job of cost of different activities individually (Nakajima, Kimura and
Wagner, 2015). Eventually, this accounting system is useful in those entities in which
there are lot of activities and jobs are assigned to each activity. Such as in the Stitchland
Ltd, accounting system is essential as they get the information about cost of jobs in their
manufacturing activities.
Advantage of management accounting systems:
 Cost accounting system- This accounting system has its importance for calculating the
cost of various activities and operations. For Stitchland Ltd company, this accounting
system is useful in getting information about overall cost of manufacturing of cloths.
 Inventory management system- It is beneficial in tracking the availability of stock in
warehouses. Such as in the above respective company they manage the stock of their
prepared cloths by this accounting system.
 Price optimisation system- This accounting system is useful in determining the prices of
products of Stitchland Ltd company.

 Job costing system- The job costing system is useful for providing information about cost
of job individually. As well as it is beneficial in getting information about the cost of job
of different activities assigned in manufacturing process of Stitchland Ltd company.
P2. Explanation of various kind of methods of management accounting reporting.
Features of effective information system:
 Reliability- This is the main feature of an information system that information should be
reliable as per the activities of the organisation.
 Accuracy- It is mandatory that information should be accurate so that internal reports of
management accounting can be prepared without any error (Antipova and Bourmistrov,
2013).
 Up to date- As well as financial and non financial information should be up to date as per
the day to day transactions.
Importance of presenting the informations understandable: The presentation of information
should be understandable for the purpose of preparation of internal reports. Along with these
information provides framework for better decision-making.
Different types of management accounting reports:
Management accounting reports- These reports are important elements of the management
accounting system on which managers take internal decisions. As well as on these reports are
produced by help of financial and non financial transactions of the organisations. Like in the
Stitchland Ltd company, they prepare different kind of reports which are elaborated below:
 Cost accounting reports- The cost accounting report is a type of report that includes
information about the total cost of different functions and operations. Like the above
respective company produce this report that helps them in maintaining the cost of their
manufacturing activities.
 Account receivable ageing report- It is a report in that all the information is included
regarding to the collection from the debtors in the market (Collison, Ferguson and
Stevenson, 2014). As well as it consists time period also on which credit transaction
happened. For example in Stitchland Ltd company, they tracks the debtors in the market
whose payment is due.

 Inventory management report- This is a type of report which provides information about
the quantity of stock available in the warehouses. In the Stitchland Ltd company, they
take important decisions about manufacturing of new products as per the information
provided by this report.
 Performance report- It is a kind of report that contains information about the
performance of employees and various activities. Due to this companies can evaluate
each factor's performance separately. Such as in above respected company, they control
the performance effectively by help of this report.
TASK 2.
P3 Costing Techniques for preparing the financial statements.
Cost- The cost is an addition of all the expenditures that incurs in different kind of
activities and operations of organisations. It can be categorised into different types such as
direct , indirect, fixed and variable cost etc. Like in the Stitchland Ltd company, different kind of
costs occurs for example cost of material, labour etc.
Cost analysis is a process of computing total cost of various activities so that each
activity's cost can be evaluated.
Cost volume profit analysis- This is a type of analysing technique that is associated with
the analysing the difference in the cost and profits. The basic objective of this type of analysis is
to measure the financial condition of the companies as per the variation in cost and volume. In
the above respective company, they evaluate the difference in cost and volume by this analysis.
Flexible budgeting- It is a kind of budgeting technique in which values of budgets can be
change in relation to change sales and volume (Hoque, 2018). Like in the Stitchland Ltd
company, they apply this budgeting method so that they can change in relation to change in sales
of cloths.
Cost variance- The cost variance can be defined as a variation in the estimated cost and
actual cost. Such as in above mentioned company they analyse the variance between their actual
cost of manufacturing and estimated cost.
Absorption & marginal costing:

Absorption costing- The absorption costing is a type of costing technique under which
fixed and variable costing are taken as the cost of product.
Marginal costing- This costing technique is different from the absorption costing
technique. Under this, variable cost is taken as the unit cost while fixed cost as period cost.
Cost allocation- The cost allocation may be defined as a process of allocating the
overheads as per the activities. Such as the respective company, they assign the expenditures as
per the different activities of manufacturing.
Fixed cost- This is a type of cost which is not based on the level of output (Gooneratne,
and Hoque, 2013). In other words, it is a kind of cost which do not varies as per change in the
quantity of production or sales. Rent, telephone charges etc. are common example of the fixed
cost.
Variable cost- It is a kind of cost that can be change as per the variation in quantity of
production and sales. So overall this cost has different nature from the fixed cost. Some example
of this cost is variable overhead, material cost.
Normal costing- The normal costing is a type of cost that includes cost of any product
including cost of labour, material etc.
Standard costing- The standard costing is a cost which is predicted for future time period
for various kind of activities. As well as it acts as basis for comparing actual performance. Such
as in Stitchland Ltd company, they use this costing for measuring the actual cost.
Activity based costing- The activity based costing is a type of costing system in that cost
is allocated to various activities individually.
Inventory cost- As the name assists, this a kind of cost which includes cost of ordering,
cost of storing and carrying etc. In the above respective company, they calculate the cost of
inventory so that they can manage the cost.
Valuation methods:
LIFO- The LIFO is a type of method in which those raw materials are use that came in
last but being used first (Saleem Salem Alzoubi, 2016). For example in Stitchland Ltd company,
they use the raw materials which brought last.
FIFO- This method is opposite of above mentioned method. In this stock which brought
first is being used first.

Overhead- The overheads are kind of expenses that are associated with the direct material
and labour. Like rent, salary are some common example of overhead of above respective
company.
Income statement under absorption costing method for month of May & June
Particulars May June
(in £) (in £)
Total sales 50 15000 25000
Less: Cost of Goods sold
Opening stock
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable production cost 3 1500 1140
Fixed indirect production expenditure 4000 4000
Closing stock -4800 2122.4
Total cost of goods sell 7200 7957.6
G.P. (Gross profit) 7800 17042.4
Selling & Distribution expenses 4000 4000
Administrative cost 2000 2000
Sales commission expenditure 750 1250
N.P. (Net profit) 1050 9792.4
Absorption Cost per unit
Direct labour cost per unit 5 5
Direct material cost per unit 8 8
Variable cost per unit 3 3
Fixed indirect production expenses per unit 8 10.53
Total Absorption Cost per unit 24 26.53

May June
Opening stock - 200
Units produced 500 380
Sold units 300 500
Closing stock 200 80
Income statement under Marginal costing method for month of May & June
Particular May June
(in £) (in £)
Total Sales 50 15000 25000
Less: variable cost
Opening stock - 3200
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable Cost 3 1500 1140
Less: Closing stock -3200 -1280
Total Variable cost 4800 8000
Contribution 10200 17000
Fixed indirect production cost 4000 4000
Selling & Distribution costs 4000 4000
Administrative costs 2000 2000
Sales commission cost 750 1250
N.P. (Net profit) -550 5750
Absorption Cost per unit
Direct Labour cost per unit 5 5
Direct Material cost per unit 8 8
Variable cost per unit 3 3

Marginal Cost per unit 16 16
May June
Opening stock - 200
Produced units 500 380
Sold Units 300 500
Closing stock 200 80
Material cost variances:
Given information is as follows-
Standard price(SP)- £10 @ per kilograms
Actual price (AP)- £ 9.5 @ per kilograms (20900/2200)
Actual quantity (AQ)- 2200 Kilograms
Standard quantity(SQ)- 1000 Kilograms
Material price variance (MPV)= (SP-AP) * AQ
(10-9.5)* 2200= £1100 F
Material usage variance (MUV)= (SQ-AQ)*SP
(1000-2200)*10= £12000 A
Material cost variance (MCV)= Standard material cost- actual material cost
(10*1000)- (2200*9.5)= £10900 A
Valuation of closing stock using LIFO and Weighted average method:

Weighted Average method: