Management Accounting Report: Costing, Planning and Analysis

This report delves into the core concepts of management accounting, exploring various systems, and their reporting requirements. It examines costing methods, specifically marginal and absorption costing, calculating net profit and highlighting their differences. The report also analyzes plannin...Read More

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting concept and related requirements of different types of system....1
D1: Critical evaluation of accounting system reporting.............................................................4
M1: Benefits of management accounting system.......................................................................4
P2: Various types of methods used in management accounting reports.....................................4
TASK 2:...........................................................................................................................................6
P3: Calculate net profit using marginal and absorption costing and explain difference between
these two management technique................................................................................................6
M2 Various types of management accounting techniques..........................................................1
D2: Critically analyse the data collected from the Income statements.......................................1
TASK 3:...........................................................................................................................................1
P4: Advantages and Disadvantages of various planning tools used for budgetary control........1
M3 Analysis of use planning tools..............................................................................................4
D3: Critical evaluation to reduce the financial issues of the company.......................................4
TASK 4............................................................................................................................................4
P5: Responding to financial problems by adapting management accounting systems...............4
M4: Analysis of financial problems............................................................................................5
CONCLUSION................................................................................................................................5

INTRODUCTION
Accounting is the process that is undertaken by the accountants of the company for the
purpose of recording, classifying, summarising , analysing and interpreting the transactions of
the business. Accounting also deals with preparations of the financial statements of the company
such as statement of profit and loss account, balance sheet, and cash flow statements. This part of
accounting is called financial accounting. In the modern era, the accounting has been divided
under two major heads which is financial accounting and management accounting (Yeshmin, and
Fowzia, 2010) Management accounting is the form of accounting which is done for the internal
management of the company so that they can make efficient decision for the operations of the
company. Management accounting plays an important role in the organisations like “Rowlinson
Knitwear” in the modern world. This project report deals with the discussion regarding
managerial accounting and various systems of accounting and their reporting systems. The
discussion regarding various costing systems of accounting such as marginal and absorption
costing has also been performed here with the practical examples. The role of budgets as
planning tool for controlling the performances and operations of company has been undertaken.
TASK 1
P1: Explain management accounting and give the essential requirements of different types of
management accounting system
In modern world, management accounting plays a significant role because it provides the
managers of the company with the relevant information which assists them in formulation of
policies of company. Managerial accounting is the process of summarising the information
contained in the financial statements of the company and also the other relevant information that
is contained in the footnotes of those statements. ( Nakajima, 2010)The managerial accounting
information also includes the future economic and non-economic policies of the country that is
going to be prevalent in the coming period. The managers of the company use these managerial
reports made by the accountants and then make the policies of the company for making the
objectives and policies of the company so that the future economic condition that will be
prevalent in the economy does not hinder the operations of the organisation. The significant
accounting systems are as follows:
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Planning: Planning process is undertaken by every company in order to achieve the
targets and objectives of the company in an efficient manner. Planning is done for the
achievements of both long term and short term objectives of the company. The managerial
accounting process assists the managers of the company in setting objectives and formulating
policies according to the requirements of the company and as per the external environment.
Organising: This tool deals with the management of the employees and other people of
the organization according to a well-defined framework that is formulated by the managers. In
this process the managers define the role and responsibilities of personnels and different
departments of the organisation.
Decision making: The main purpose behind managerial accounting reports is to assist
the management of the company in the process of decision making. Managerial reports provide
the internal management with the relevant information regarding the financial health of the
company and also about the external economic environment which may impact the functioning
of the business so that they can make decisions by using these trends.
Controlling: In this process the budgets and performance standards are used to measure
the performances of the individual employees and the whole departments so that the managers
can take corrective actions if necessary on the persons which are not working according to pre-
defined standards. These budgets and performance standards are created by the managers using
the managerial accounting reports.
Various costing systems:
Actual costing: According to this costing system, accountants considers the
measurement of actual expenditure that is occurred in the process of production and other
operations of the company. In this method of costing, the actual cost related to all the job
activities are taken into consideration such as direct material cost, labour cost and other
production overheads. ( Victoravich, 2010)
Standard costing: In this costing process, the estimation of the standard cost is
determined that should be incurred in the process of production that will be done in the future.
The department heads then have to consider these standards for incurring expenses, if the cost
goes higher then these set standards then the managers are held responsible for that.
Inventory management system: this system is undertaken by the managers of the company for
the purpose of solving the issues related to the management of the inventory. This system assists
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the company in maintaining optimum stocks of raw material and finished goods such that there is
hindrance occurred in the process of production as well as the demands of the consumers are met
in an efficient way. There are various inventory management systems that are adopted by the
organisations for efficient management of inventory, these are discussed as under in brief:
FIFO: This techniques of inventory management means First in first out. According to
this system, the inventories which came into the stocks of the companies are supposed to be sold
first and the rest of unsold inventory is transferred into the closing stock of the company. In this
the COGS represents those goods which were purchased first, and closing inventory includes
goods which were purchased later.
LIFO: In this inventory management system, the goods that were purchased in the end
by the company are sold or utilised firstly. The full form of LIFO is last in first out which
interprets its procedure. In this method, COGS represents the goods which were manufactured
recently by the company and earlier purchased goods goes into closing inventory.
Weighted average cost method: Under this method of inventory management, the
weighted average cost of all the purchased goods that is in the inventory of the company is find
out using a formula, which equates the prices of all the goods that is existing in the stocks of the
company and then the goods are transferred into COGS and closing inventory. Under this
method the price of inventory is same in cost of goods sold and the ending inventory of the
company.
Job costing system: this system represents and allocates the cost of production of for a specific
product or the cost related to particular job. This system of job costing takes into consideration
the cost of direct labour and direct material that is incurred in the process of producing that
product or cost related to a specific job. The managers of the company determines the earnings
that the company can earn from a job and accordingly the management decides the expenditure
that can be incurred in the process.(Abdel-Kader, 2011)
Batch costing: this kind of costing considers the cost that in incurred in producing a
particular batch of products.
Contract costing: this costing process involves that cost which is incurred in the specific
contracts undertaken by the company.
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Normal costing: This costing process is used to in deciding the cost of production of
goods. In this the cost of material, cost of labour and other production overheads are prices
according to the pre-determined rates that were decided at the initial stage of accounting year.
D1: Critical evaluation of accounting system reporting
As per the above, accounting reports this has been examined that it plays an crucial role
in incurring the maximum outcomes of the business. The main purpose behind this is to achieve
all the objectives and targets that are being set by the company. According to this the
performance reports will be evaluated in more efficient manner.
M1: Benefits of management accounting system
The managerial accounting process helps the internal management of the company in the
formulation of policies and setting the objectives of the business by using the information that is
de scripted in the reports made by the accountants. The certain benefit of management
accounting report is determining the aims and objectives that are to be achieved by the
organisation in the upcoming period. Reducing the cost of production and increasing the
efficiency of the organisation is the primary motive of any finance manager. Every accounting
system is valuable and have their own benefits in the organisation. To increase the profitability
of the company, cost accounting system is effectively used. (Smith, 2017)
P2: Explain different methods used for management accounting reporting
The managerial reports made by the accountants of the company records every
transaction whether it is non financial or financial are included in these reports. The managerial
reports also involve all the future economic and non-economic policies that will be prevalent in
the economy which will affect the functioning of the business. Because of these reasons there is
a significant importance of managerial reports for improving the operations of the company.
These reports are discussed as below:
Budget reports: Every company prepares budgets whether it is big or small. The budgets
are prepared for every department and for every function of the company. These budgets assist
the company in estimating the total cost that will be incurred in the operations and also helps in
setting the performance standards for the employees and each department. Therefore, these
reports also help the stakeholders of the company in checking the future scenario regarding the
functioning of the business.
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Accounts receivable report: the AR report makes an analysis regarding the total account
receivables that the company currently have in the balance sheet. This report measures the
amount of debtors from the company has to receive the payments and when the amount is due to
be received. These report also tells about the bad and doubtful debts of the company from which
the receiving of payments are uncertain. With the help of the AR report company losens or
tightens it collection period policy.
Job cost reports: The job cost reports provides the information to the management
regarding the total revenues that is generated from production of batch of product or specific
product. The report tells about the the revenues or profits that is generated by undertaking a
specific product or job function and accordingly how much cost is incurred in that process. This
helps the managers of the company in choosing those products or job functions which provide
maximum profits to the company. (Harris, and Durden, 2012)
Significance of details of management accounting reports:
Increased financial returns: These reports of management accounting provides details
about the financial statements of the company and also about the future economic polices that
will be prevalent in economy, which helps the managers in the formulation of the budgets for
analysing and interpreting the projects that are more profitable for the company. Such projects
increase the overall revenues of the company and also increases the wealth of shareholders.
Cost reduction: The managerial reports prepared by the company provide guidance to
the managers in the prediction of the issues that can faced by the company in the future period.
The management identifies and eliminate these issues by using the managerial reports which in
turn reduces the cost of the operations in the future period.
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TASK 2:
P3: Calculate net profit using marginal and absorption costing and explain difference between
these two management technique
A. Marginal Costing: Marginal costing or variable costing is a decision making
accounting technique which is used to ascertain net profits by determining total production costs,
only variable costs are considered under this method. This technique is significantly easy to
understand and operate, and it does not consider cost of goods sold which reduces complications
and misleading statements.
Marginal Costing Amount
Sales revenue = (selling price * no. of goods sold = 35 * 500) 17500
Marginal Cost of goods sold: 6500
Production = (units produced * marginal cost per unit = 600 * 13) 7800
closing stock = (closing stock units * marginal cost per unit = 100 * 13) 1300
Contribution 11000
Fixed cost ( 1800+800+400 ) 3000
Net profit 8000
B. Absorption Costing: Absorption Costing or full costing is a management accounting
technique which considers all costs whether variable or fixed to determine net profits of the
organisation. This management accounting technique compares and matches all costs and
revenues to results in less profit fluctuations. As absorption costing includes both variable and
fixed costs, profitability is relatively lower than the profitability under marginal costing.
(Kinney, Raiborn, and Poznanski, 2011)
Absorption Costing Amount
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Sales = (selling price * no. Of units sold = 35 * 500) 17500
Cost of goods sold = (total expenses per unit * actual sales = 16 * 500) 8000
Gross profit 9500
Selling & Administrative expenses = (variable sales overhead * actual sales + selling
and administrative cost = 1 * 500 + 1200) 1700
Net profit/ operating income 7800
Break even analysis: It is known as the one of the crucial part at which every cost and
expenditure required to deliver equal results for the company. It is also said to be effective points
in which company neither get profit or not goes into any kind of losses.
BEP in units: Fixed cost / contribution
: 3000/11000: 27 units.
BEP in sales: sales in units * selling prices per units
: 600*27: 16200
Marginal Costing Absorption Costing
In marginal costing, marginal cost is determined
which is used to make organisational decisions.
In absorption costing, cost is calculated for
external reporting.
Under marginal costing method, inventory is
determined using marginal production cost.
Whereas in absorption costing, inventory is
determined using total production cost which
includes marginal and fixed cost.
Net profit in marginal costing is comparatively
higher as the fixed costs of current year are
charged.
Whereas in absorption costing, net profit is
usually lower than net profit from marginal
costing, as fixed costs from previous year are
charged.
PV Ratio or profit volume ratio is used to
calculate profitability.
Profitability includes fixed costs, which effects
profit making ability of the organisation.
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Marginal costing includes overheads such as:
Variable and fixed overheads.
Absorption costing includes overheads such as:
cost of goods sold, selling overheads and
distribution overheads.
Under marginal costing, only variable costs are
treated as production costs.
Under absorption costing, both variable and
fixed costs are treated as production costs.
Contribution is calculated under marginal
costing, which gives an estimate of how much
amount is available to pay of overheads.
Whereas in absorption costing, gross profit is
calculated.
Marginal costing technique is appropriate for
large organisations having complexity in their
techniques.
Whereas, costing technique is appropriate for
small organisations having simplicity in
activities.
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M2 Various types of management accounting techniques
There are number of accounting tools and method that must be formulated in corrective
manner so that final results could be accomplished in effective and efficient manner. It is the
responsibility of manager to allocate such management accounting technique so that all resources
that is available with the company in accurate way. The accounting tool delivers the information
that is relevant to measure the performance of company so that corrective actions could be
adopted wherever the improvements are required. Performance measurement is also a important
concept that measures the performance whether it is delivering correct objective or not.( Hülle,
Kaspar, and Möller, 2011)
D2: Critically analyse the data collected from the Income statements
As per the information collected from the statement of profit and loss that are analysed
with the help of marginal costing and absorption costing methods. These data were taken to
determine the actual profit of the company generated during the current financial year.
Reconciliation statements Amount
Profit under absorption 7800
Closing stock 100*13 1300
Profit under marginal 8100
From the table above it has been determined that the profit generated from the absorption
costing method includes a profit of 7800. there has been a point of difference observed because
of the fixed cost adjustments.
TASK 3:
P4: Advantages and Disadvantages of various planning tools used for budgetary control
Budgetary control is a management control system which controls all the incomes and
expenditure in order to make profit or savings using different types of budgets pricing and cost
systems. Planning tools of budgetary control are the various types of budgets and various pricing
and cost systems, which are explained below:
Types of Budget:

Master budget: A master budget reflects overall performance of any organisation it
involves all expenses, revenues, sales, production, profit etc. This budget indicates overall
profitability and financial health of an organisation, this budget is prepared for ensuring effective
management and setting organisational goals.
 Advantages: Master budget includes planning and forecasting which motivates business
personnel for the achievement of desired pre-determined objectives.
 Disadvantages: This budget is prepared involving all smaller budget which makes it rigid and
difficult to reliable on due to its complexity ( Scapens, and Bromwich, 2010)
Operational budget: A operational budget is a financial planning of regular operations
so that organisation does not have to face any financial or monetary problems in performing
business operations. Operational budgets are usually prepared on weekly, monthly or on annual
basis, management of organisation uses operational budget to compare performance of
operational activities.
 Advantages: This budget is prepared to ascertain and meet company's debt
obligations and to see where company should spend their financial sources
 Disadvantages: Operational budget requires intensive research, which makes it
time consuming and comparatively expensive approach.
Sales budget: Sales budget is a future forecast of all estimated sales expenses and
revenues, it is considered as a nerve centre of the organisation and base to all other financial
budgets. Sales budget includes sales made in a specific period not only in amount but also in
units, revenue generated from those sales, expenses occurred in the process of sales etc. Sales
budget is based on trend analysis.
 Advantages: Sales budget involves sales forecasting with sales planning which
motivates sales personnel to meet sales goals and it minimises technical errors.
 Disadvantages: Sales forecasting is based on trends analysis and assumptions
which makes it less reliable and accountable.
Production Budget: Production budget is based on sales budget, as production requires
data of sales forecast, but it also comprises system which maintain inventory level to balance the
supply and demand of produced units. This budget is accountable for raw materials, labour, plant
and equipment etc.
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 Advantages: An efficient production budget results in optimum utilisation of
plant, machinery, labour and more; it helps in reducing expenditure of
production.
 Disadvantages: This budget is based on sales forecasting, which can vary from
actual sales, in this scenario organisation may face difficulties of increased cost
of goods sold, problem of idle finished goods stock.
Cash flow budget: This budget involves all cash transactions of a organisation including
cash inflow, cash outflow on regular basis to ensure sufficient cash availability for day to day
operations of a business organisation. By reviewing this cash budget, manager of the enterprise
can find ways to manage cash wisely, and also to ascertain cash productivity of the organisation.
 Advantages: This budget indicates actual cash position of the organisation and also
helps to make reliable forecasts about future availability of cash or liquidity.
 Disadvantages: This budget only shows cash position and does not involves any non-
monetary transactions of the organisation which makes it impossible to portray actual
profit or loss of the business. (Klychova, and et. al. 2015)
Types of pricing systems:
Cost-based pricing: Cost based is a pricing technique which determines the price of the
specific product by adding a certain percentage of profit margin in the cost of product.
Demand based pricing: According to this pricing method, price of a specific product is
determined according to the demand of that product. Fluctuations in the demand of the product
effects the price of the product to gain opportune profits.
Competition based pricing: In this pricing method, prices of the products are fixed
according to the prices of the competitors' products. Fluctuations in the prices of competitors'
products have direct effect on organisation's products.
Types of costing systems:
Direct costing: According to this costing method, only direct costs are charged to the
products. These direct costs are direct labour, material, variable overheads and more.
Marginal Costing: According to this costing technique, costs are classified into two
costs fixed and variable respectively, which are then written off to first calculate contribution and
then net operating profit.
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Standard Costing: Standard costing includes ascertainment of standard to budgeted
costs which further used to compare standards with actual performances. Standard costs are
budgeted costs which are pre-determined by trend analyses.
Historical Costing: According to this costing technique all costs are recorded only after
they are incurred. The main objective of this costing technique is to ascertain actual profit and
losses of the organisation.
M3 Analysis of use planning tools
Planning is an important process that provide framework to take decision in effective way
so that all actions could be taken. Plans helps in carrying out the work task which also include
optimum utilisation of resources. There are number of planning tools that are available with
management which guides the future action so that overall cost could be minimized. It also
included number of risk factors that come across on the way. Planning also formulate such plans
that is beneficial for the management so that all aims and objectives could be achieved in set
time period (Maas, Schaltegger, and Crutzen, 2016)
D3: Critical evaluation to reduce the financial issues of the company
For generating more reliability and profitability in the operations of the business, it is
significant for the company to take into consideration various types of indicators such as key
performance indicators and balance scorecard approach which will enable the managers of the
company in properly responding to the issues of the company for a better and sustainable future
operations. Many of these issues are resolved with the utilisation key performance indicators.
TASK 4
P5: Responding to financial problems by adapting management accounting systems
Key performance indicators(KPI): This is very effective tool in indication of the
performances of personnel’s. In this method the actual performances of the personnel are
measured using pre-determined standards which were created in the beginning of the financial
year. If the internal management finds any variations in the performances after the comparison,
then they are required to take corrective actions for the rectification of those issues. The
utilisation of KPI can be done at every level of an organisation for evaluating the capability and
success in the achievement of desired of objectives.
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Balance scorecard approach: This approach is helpful in aligning the business activities
in accordance with targets, objectives and policies made by the company so that the operations of
business properly coordinated and evaluated. For solving this purpose, the management can
focus on providing training programs such as classroom training to the personnel’s which will
enable them in performing the allotted task in much efficient and effective way.
Balance scorecard approach perspectives are discussed below:
Financial: The primary focus of any company is to maintain a sound financial health and
a strong financial position in the industry. This purpose can be achieved only when the managers
allocate the funds of the company in most profitable projects.
Customers and stakeholders: It is the obligation of every company to provide good
quality products which have an affordable price to the customers of company and thereby
increasing the wealth of shareholders of the company (Jansen, 2011).
Comparison
Sollatek UK Rowlinsons
As this company is functional for the business
of grocery substances. They used to solve their
financial problems by implementing key
performance indicators on regular basis.
In order to deal with all kind of financial issues
company need to make use of just in time or
benchmarking tool to deal with those issues.
M4: Analysis of financial problems
There are certain types of financial issues that are related with the production of goods
and services of the company. Many of such issues are related with preparation of budgets and
costs related to the process of production. For approaching these issues of the company, different
types of financial tools are used by the companies so that the company can reduce the impacts of
them on the organisation. Examples of these tools that are used to overcome are benchmarking,
key performance indicators, balance scorecard approach and financial governances.
CONCLUSION
This has been concluded from the above report that management accounting plays a
significant role in providing the relevant information to the internal management of the company
by summarising both company's financial and the external economic conditions so that they can
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make better policies for efficient functioning of the organisation. In this project, various reports
like budget report, account receivable reports are discussed that assist the managers in the
management of operations and increasing profitability of company. The application of marginal
and absorption costing has also been done in the profit and loss statement of company. Finally,
the discussion regarding how management accounting systems like key performance indicator
and balance scorecard approach assist the companies in responding to financial problems.
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REFERENCES
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