Management Accounting Analysis and Reporting for O'Keefe Construction

This report delves into the core concepts of management accounting, emphasizing its significance in internal decision-making within organizations. It explores various accounting systems, including inventory management, price optimization, and cost accounting, illustrating their application within the context of O'Keefe Construction Limited, a UK-based civil engineering company. The report details different management accounting reporting methods, such as budgetary reports, cost managerial accounting reports, and inventory cost reports, highlighting their benefits and integration within organizational processes. Furthermore, it provides practical examples of marginal costing and absorption costing methods, presenting income statements for both methods across different periods to demonstrate their application in financial analysis. The report underscores the interrelation between management accounting systems and reporting, emphasizing their combined role in providing valuable financial insights for effective business management and strategic planning. The report includes the income statement by marginal costing method and absorption costing method for the first and second quarters.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
PART (A).....................................................................................................................................1
PART(B)......................................................................................................................................5
ACTIVITY 2....................................................................................................................................8
PART (A).....................................................................................................................................8
PART(B)....................................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is a type of accounting system that is related to the monitoring,
analysing and interpreting the financial data for taking internal decisions(Kaplan and Atkinson,
2015). Eventually, this accounting system is very important for the organisations because it
contains all needed financial data and information that can become basis for future planning and
policies. As well as it consists both type of information, including monetary and non monetary.
This accounting system is a wide term that includes various kind of other accounting systems.
Herein, the project report various types of management accounting and their advantages are
discussed. Apart from it, project report highlights on the different method of budgetary control
and role of management accounting techniques in solving the financial issues. To understand in
detail about the management accounting, an engineering company is selected that is O'Keefe
construction limited. This company is located in the London UK and deals in providing
construction services, ground work services etc.
ACTIVITY 1.
PART (A)
Management accounting and essential requirement of different accounting method.
Management accounting system may be defined as a kind of accounting system that is
related to the providing the needed information to the managers for decision making. Though ,
management accounting system is very important but it is not a compulsory part and it is not
prepared as per the accounting rules, concepts. As the time passing, the organisations are using
this accounting approach widely because it consists various kind of approach and techniques that
have own importance. In broad sense, the management accounting includes different types of
accounting systems which are being used by the companies. Herein, the context of O'Keefe
construction limited company, they applies a wide range of accounting systems which are
required for their various civil engineering projects. Some of them are mentioned as below:
Inventory management system- Inventory management system is a type of accounting
system which is involved in the accurate management of raw material and finished
products(Ward, 2012). Basically, inventory management system keeps an extra sight of eye on
the movement of raw material and finished goods in entire supply chain system. Apart from it,
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this accounting system has its own importance in the evaluating the quantity of available stock
and material in the warehouses. Due to this, companies can manage the purchase and sell of
products and services. Majorly, this accounting system is required for management of raw
material and prepared goods so that companies can make purchase of new material as per the
requirement. Like in the aspect of O'Keefe construction limited company, they apply this
accounting system for proper management of available raw material for civil engineering
projects. As well as due to this, they can aware about how much of quantity of raw material
(cement,concrete,steel) is available in their stock.
Price optimisation system- Price optimisation system may be defined as the type of
management accounting system that is involved in the assigning a right level of price of products
and services(DRURY, 2013). Additionally, this system offers a framework for reviewing the
customers reaction on different level of pricing. The price optimisation system is not only
beneficial for the companies but also for the customers too. This is why because if companies
use this method then they will be able to decide an accurate price that can suit both to the
customers and companies. In the absence of this system, organisations can not determine the
right price and because of this their can be conflict in the relation between price and cost. The
price optimisation system is required to fix the price at the level which is beneficial for both to
the customer and company. For example the O'Keefe construction limited company implements
this method of analysing and determining the price of various civil projects. Due to this system
company is able to satisfy their clients in the terms of price.
Cost accounting system- Cost accounting system is an accounting system that is used
for evaluating the total cost of products and services(Wickramasinghe and Alawattage, 2012).
This accounting system, computes total cost in entire process of service providing or product
manufacturing. Basically, this accounting system is important to apply in the companies because
due to this they can check which products are beneficial and which ones are not. This can be
possible by evaluating the total cost of different products and services. In the O'Keefe
construction limited company, their engineers apply this system for checking the cost of various
projects and with the help of this they can evaluate efficiency of civil projects. So majorly this
system is required for computing overall cost that occurs at different steps. In broad sense, cost
accounting system is divided into two types which are as follows:
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Job order costing- This system calculates the cost by computing each job cost that is
assigned in different activities. Like in O'Keefe construction limited company, they analyse the
cost by calculating each job's cost that is involved in various activities of civil projects.
Process costing system- The process costing system calculates the cost of each step of
any process of manufacturing. Herein, the aspect of above mentioned company they calculate the
cost of engineering projects by computing cost of entire process of construction.
Different methods of management accounting reporting:
Management accounting reporting is a process of preparing the reports on the basis of
information provided by the management accounting systems(Otley and Emmanuel, 2013).
There are many kind of reports which are being prepared by the with the help of management
accounting. The O'Keefe construction limited company makes different kind of reports some of
them as follows:
Budgetary reports- Budgetary reports are those reports which are prepared for
measuring the actual performance by comparing actual result with the estimated targets. It is an
internal report that is useful for performance management and analysing the issues. As well as on
the basis of these reports manager take important decisions. The O'Keefe construction limited
company prepares these type of reports to evaluate the actual level of performance. It can be
understand by an example like company estimates the income of £150000 from a civil
engineering project and if they earns more in compare to £150000. Then it would be symbol of
good performance and budgetary report will include this in the report.
Cost managerial accounting reports- Cost managerial accounting report is a kind of
accounting report that contains all the information regarding to the cost that occurs in the
process of service or product offering(Renz, 2016). This accounting report includes different
information like material cost, labour overhead, direct cost etc. Due to these reports companies
can check the entire information regarding to the cost and can evaluate the those activities which
are high cost consuming. Eventually, these reports are being prepared with the help of cost
accounting system. Herein, the aspect of O'Keefe construction limited company, they prepares
theses cost reports for evaluating the cost different projects activities. Like due to these reports,
they can aware about the each activity cost in the construction.
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Inventory cost report- Inventory cost reports have the information regarding to the
availability of raw material and other stocks in the warehouses. Due to these reports, organisation
can check about how much quantity is available in the stock and how much they need to
purchase. As well as with the help of these reports companies can match the balance between
supply and demand of products and services. Apart from it, the inventory cost report consists the
information regarding to the storage, ordering and carrying cost. In the O'Keefe construction
limited company, they make this report for proper management of raw material of construction
as well as for analysing the different cost of inventory management.
Benefits of management accounting systems and their application in organisational context.
Management accounting systems include various kind of systems like price optimisation
system, inventory management system and cost accounting systems(Kotas, 2014). All these
systems are beneficial for the companies. In the context of above mentioned company these
accounting systems have following benefits:
Benefits of inventory management system- This accounting system is useful in tracking
the movement of raw materials and finished goods in entire supply chain. In the O'Keefe
construction limited company, it is beneficial for them in checking the availability of raw
material like cement concrete, iron etc. in the stores.
Benefits of price optimisation system- In general, the price optimisation system is
important for determination of right price of products and services. Herein, the context of above
mentioned company this system is important in assigning the best price of construction projects.
Benefits of cost accounting system- The cost accounting system is helpful in the
providing information regarding to the various cost that occurs in different processes. In the
above mentioned engineering company, this system is beneficial for checking the overall cost of
different engineering projects.
Management accounting system and reporting are integrated within the organisational process.
Management accounting system is helpful in preparation of management accounting
reporting. This is why because management accounting reports like inventory cost report,
budgetary etc. are prepared with the help of information which is provided by the different
accounting systems(Schaltegger, Gibassier and Zvezdov, 2013). The link between both is
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interrelated with the organisational process. Like in the O'Keefe construction limited company,
they make various reports with the help of accounting system like inventory management
system, cost accounting system etc. In the absence of this combination of accounting system with
the management accounting reporting it would be difficult to prepare the reports. So both are
interrelated within the organisational process.
PART(B)
ANNEX(A)
Marginal costing- It is a kind of method which is being used for preparation of the income
statements(Herzig, Viere, Schaltegger and Burritt, 2012). Eventually, in this method variable
costs are considered as the unit cost and fixed costs are considered as the period cost.
Absorption costing- This is a method that is totally different from the marginal costing method.
In variable costing method both costs (fixed and variable costs) are considered as the product
cost.
Income statement by marginal costing method:
PARTICULARS AMOUNT
SALES 427500 427500
LESS VARIABLE COST
DIRECT LABOUR (15*5000) 75000
DIRECT MATERIAL (18*5000) 90000
VARIABLE PROD ( 9*5000) 45000
VARIABLE 10% OF SALES VALUE 42750 252750
LESS DIRECT LABOUR (15*500) 7500
DIRECT MATRIAL ( 18*500) 9000
VARIABLE PROD (9*500) 4500 -21000
CONTRIBUTION 195750 195750
LESS FIXED EXP (180000/4) -45000
PROFIT FOR THE YEAR 150750 150750
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Income statement by absorption costing method(1st quarter)
PARTICULARS AMOUNT
SALES (4500*95) 427500 427500
COGS -231750
GROSS PROFIT AT NORMAL 195750
UNDER/OVR ABSORPTION 6800
GROSS PROFIT AT ACTUAL 202550
-FIXED EXP -45000
NET PROFIT 157550
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method(2nd quarter)
SALES (3000*95) 285000
COGS -180250
GROSS PROFIT AT 104750
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NORMAL
Under ABSORPTION -5476
GROSS PROFIT AT
ACTUAL 99274
-FIXED EXP -45000
NET PROFIT 54274
Working notes:
1.
Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
2.
Per quarter standard
production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
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.
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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
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
Interpretation
As per the above solved numerical it has been analysed that there are two products: X and
Y whose labour hour rate is of £12. Herein, the conventional absorption method, the total
overhead in product X is of £72,000 and in product Y, it is of £192,000. Apart from it, in the
ABC(activity based costing) approach machine hour rates of both products are variant. In
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product X it is of £24,000 and in product Y it is £16,000. As well as overheads are also
different. Product Y is consuming more expenditure in compare to product X which are as
follows: product X( £ 82749) and product Y(£181,255).
ACTIVITY 2.
PART (A)
Advantages and disadvantages of different planning tools of budgetary control:
Budgetary control is a kind of process that is related to the establishing the financial and
non goals with the help of budget. After that comparing the actual result with the standard goals.
This can help in evaluating the actual performance of different activities. Herein, it is important
that standards should be achievable and as per the need. There are different kind of planning
tools of budgetary control which help in analysing the actual result. The O'Keefe construction
limited company, applies a wide range of tools of budgetary control. Some of them as mentioned
as below:
Fixed budget- Fixed budgets are those budgets which are not flexible in the nature. It is
also known by the static budget(Sánchez-Rodríguez and Spraakman, 2012). These types of
budgets do not change as per change in the sales or volume. Eventually, organisations make this
type of budget for those activities which are going to remain fix in the future. The above
selected engineering company makes the flexible budget for small time period projects which
can be completed in less time. Herein, some advantages and disadvantages of this budget are
mentioned below:
Advantages-
 This budget does not require to be update each month which ultimately saves the
time of managers. In O'Keefe construction limited company they prepares this
budget for one time and after that they do not change it.
 Another advantage of this budget is that it is easy to track the information of this
budget. This is why because it does not change so it becomes easy to track.
Herein, the above company, financial managers can track the performance easily
by this budget.
Disadvantages-
9