Management Accounting Report: Financial Performance of Oshodi PLC

This report provides a comprehensive overview of management accounting, focusing on its significance and application within Oshodi PLC. It begins by defining management accounting and its role in financial decision-making, contrasting it with financial accounting. The report then explores various management accounting systems such as job costing, inventory management, and cost accounting, evaluating their benefits and uses. It details different reporting methods, including budget reports, performance reports, and accounts receivable reports. The analysis extends to the preparation of income statements using both marginal and absorption costing methods. The report evaluates the benefits and limitations of planning tools for budgetary control and analyzes the application of different budgets. Finally, it compares management accounting tools to solve financial problems within an organization. The report highlights the importance of integrating management accounting systems and reporting for effective financial management. This assignment is published on Desklib, a platform providing AI-based study tools for students.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1. Describing management accounting and the significance of its systems..............................1
P2. Explaining various methods that are been used for the purpose of reporting.......................2
M1. Evaluation of the MA systems through its uses and the application....................................3
D1. Evaluating systems and the reporting of the management accounting with their
integration....................................................................................................................................4
LO 2.................................................................................................................................................4
P 3 Preparation of income statement by marginal and absorption cost.......................................4
LO3..................................................................................................................................................8
P4. Evaluating benefits and the limitation of the various kinds of the planning tools that are
been used for the budgetary control.............................................................................................8
M3&D3. Analysing the uses and the application of the different budgets................................10
....................................................................................................................................................10
LO 4 ..............................................................................................................................................11
P 5 Comparison of management accounting tools to solve the financial problems..................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is the process of analysing the business performance by
evaluating the cost and operation of the company. The cost and operation analysis help the
organisation to prepare the internal report to evaluate their market share and growth in compare
to their competitor and provide detail information to the internal and external shareholders. MA
is used to provide the critical information about the company. Oshodi PLC company is a
manufacturing company which use the management accounting system to prepare the annual
report by getting information from various sources. The report highlights the requirement of MA
system in company to get financial and non financial information. Different management
accounting system such as cost accounting, financial accounting, inventory management
accounting, job costing etc. help to analyse the different factors of accounting system and take
effective and efficient decision. It explains the different methods of MA reporting like budget
report, sales report, purchase report, account receivable aging report to record the information for
the future needs. It also demonstrates the use of marginal and absorption costing method to
prepare the income statement of Oshodi PLC company. The report also highlights the advantages
and disadvantages of planning tools and the use of different MA tools to resolve the financial
problem in the organization.
LO1.
P1. Describing management accounting and the significance of its systems.
MA refers to the process that facilitates the financial information and the resources to
managers of Oshodi Plc in making suitable decisions (Bogsnes, 2016). It involves preparing of
the management accounts and the reports for the purpose of providing an accurate statistical and
the financial information to the users. Management accounting is entirely different from financial
accounting as follows-
Management accounting Financial accounting
It is mainly used by the internal stakeholders
that is employees, managers and the owners.
This accounting is been used by both internal
and the external users that includes
shareholders, managers, lenders, employees
etc.
The main purpose of the MA is to helps
Oshodi Plc in controlling, decision-making
and planning.
Its objective is to record for the financial
performance and position of an entity for a
particular period at the end of the accounting
year.
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The nature of MA is counted as financial as
well as non-financial because it records for
both monetary and non-monetary information.
It involves mainly the information that are
financial in nature.
Essentials of MA systems-
Job costing system- It refers to the system that accumulates and assigns the production
cost in relation to an individual output or the unit. It is the costing system that is been used at the
time when several items are been produced that are different and has significant cost (Boyabatlı,
Leng and Toktay, 2015). This system plays a crucial role for Oshodi Plc in developing the
information relating to identifying the accuracy of an estimating system of an organization,
which helps in fixing the price that allows for generating larger profits.
Inventory management system- This system of MA makes supervision of the non-
capitalized assets and the inventory items. It is the system helps in the tracking the flow of the
items from the manufacturer to the warehouses and to the POS that is point of selling (Craig and
et.al., 2018). It is been counted as the most significant system for Oshodi Plc as it helps in
maintaining the adequate record of the inventory and in controlling the handling cost attached to
the goods.
Cost accounting system- This MA system referred as the method in which the
production activities are been recoded as per the system of perpetual inventory. This system is
been designed and essential for Oshodi Plc in tracking the cost involved in the manufacturing its
article. It helps the organization in assessing the present and the prospective cost that is and will
be incurred in the process of producing the product.
Price optimization system- It is the mathematical tool that analyse the response of the
customers at various price levels of product (King and Clarkson, 2015). It is the most vital
strategy that has been used by the Oshodi Plc in order to arrive at the setting up the most suitable
price within the defined level of profitability and in developing an understanding regarding
sensitivity of the existing clients in relation to the changes in the price of the product.
P2. Explaining various methods that are been used for the purpose of reporting.
Managerial reporting refers to the formulation of the reports that focuses on the inside
information that is been received through the use of financial accounting. MA reports are been
formulated for regulating, decision-making, planning and in measuring the performance. There
are large number of the reports that is been prepared by the management are as follows-
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Budget report- It refers to the report that includes detailed analysis of the budgeted
revenues, expenses and the income for Oshodi Plc that is to be achieved by performing the task
effectively and efficiently (Lees, Malik and Williams, 2019). This report plays a critical role in
guiding the managers for offering better incentives to the employees, renegotiating the terms and
cutting the cost as it lists down all the assumptions regarding the sources of the expenditure and
the earnings of the company.
Performance report- This MA report is been created by the managers of Oshodi Plc for
measuring performance of the entire company and the employees at the end of the period. This
report is been used by the managers for making the important strategic decisions in relation to
the future of an entity (Maas, Schaltegger and Crutzen, 2016). It helps in depicting the under-
performers within the company so that corrective measures can be taken by the managers like
training them to perform better in towards achievement of the mission.
Accounts receivable reports- This report is framed for recording the remaining balances
that JoJo Fruit comapny has to recover. It assists the managers in determining defaulters and in
finding the issues within the collection process of the company. It provides for tightening the
credit policies of the company in case there are large number of defaulters present because cash
flow is considered as the critical aspect for operating the business smoothly.
Other reports- It refers to the reports that includes other major management reports that
are very essential such as information reports, competitor’s analysis and the project reports. Such
reports are been prepared internally or outsourced from the professionals (Mirgorodskaya and
et.al., 2017). The most suitable action course is dependent on the capabilities in handling the
requirements of the firm.
Thus, for reaching towards the major decisions, managers must have to access to these
authentic and the credible reports.
M1. Evaluation of the MA systems through its uses and the application.
Management accounting systems benefits
Job costing : It helps the Oshodi PLC company to evaluate the qualitative and
quantitative data to take the effective and efficient decisions. It helps to analyse the different
organisational activity and measure their cost and performance of each job to take the decision of
improvement (Iacob and Constantin, 2015).
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Price optimization system: It is a continuous and ongoing process which help the
company to plan the different activities and associated cost to achieve the aim on time by
estimating the price of each activity. The preparation of proper plan regarding setting price of
each activity help the company to attract customer by identifying their need and demands
(Abdallah, 2017). Oshodi PLC company use price optimisation system to prepare plan for
increasing the profit and sales in the market by analysing the behaviour of customer regarding
the price.
Inventory management system: It helps the company to manage the inventory level in
the organisation order the quantity when they required the material. Oshodi PLC company use
the inventory management tool to identify and address the cost of maintenance of inventory level
(Bendell and et.al., 2017). It is used to report the information and help managers & employee's
to take major decision regarding the company performance in market.
Cost accounting : cost accounting system help the company to estimate the cost of each
and every activity & identify the measure to minimize their cost for the effective and efficient
results. It helps the company to measure the performance in the market via comparing
performance through the different accounting tools such as balance scorecard, benchmarking,
key performance indicator etc.
D1. Evaluating systems and the reporting of the management accounting with their integration.
Management accounting reporting and the systems are highly integrated as effective
preparation of the reports is based on the systems like inventory management system helps in the
framing of the accounts receivable reports and the budget report so that accurate measures can be
taken with appropriate estimations. Oshodi Plc can make use of the cost accounting report in
order to manage its cost system effectively and efficiently which in turn helps the firm in keeping
the control over the cost so that higher profitability could be gained.
LO 2
P 3 Preparation of income statement by marginal and absorption cost
Marginal cost : Marginal cost refers the cost incurred in one additional unit of production. It
helps to identify the optimal level of production for the company. In marginal cost method fixed
cost of the company can be considered as the accounting period cost and variable cost is taken as
product cost.
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Under marginal costing
Cost per unit
Direct material 18
Direct labour 4
Variable O/H 3
Marginal cost/ unit 25
SP 50
Less : Marginal
cost/unit -25
Less : variable selling
price -5.00
Contribution per unit 20.00
Total production cost = direct material + direct labour = variable overhead
contribution = selling price – (marginal cost per unit + variable selling cost)
Absorption cost : It refers to the method used for calculating the cost associate with the
production activity. It refers to charge all overhead cost in the period when expenses incurred. It
includes the various factors such as direct material, variable manufacturing overhead, direct
labour and fixed manufacturing overhead. It is required by the company for income tax reporting
and financial reporting. It considered both the variable and fixed cost as the product cost.
Per unit cost by absorption cost method
particulars Amount Cost / unit
Normal level of
production 11000
Fixed overhead cost 99000
Fixed production
overhead 99000/11000 9
Total production cost
variable cost 25
Fixed cost 9
Total 34
Total production cost = variable cost + fixed cost
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Preparation of income statement using absorption cost method
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Preparation of income statement by using absorption cost method
Income statement using Absorption costing
November December
Units Amount Amount Units Amount Amount
Sales @ 50 10000 500000 12000 600000
Less: Cost of sales
Opening stock @ 34 2000 68000
Variable cost of production @
34 12000 408000 10000 340000
Less: Closing stock @ 34 2000 68000
340000 408000
Gross profit 160000 192000
Adjustment for over / under
absorption of overheads 9000 9000
169000 183000
Fixed overheads:
Variable selling overhead 50000 60000
Fixed selling overhead 14000 14000
Fixed Administration overhead 26000 90000 26000 100000
Net profit 79000 83000
Calculation of over and under absorption for November and December month
Months Production unit O/H unit Total overhead O/H incurred
Over/ under
absorption
November 12000 9 108000 99000 9000
December 10000 9 90000 99000 -9000
Interpretation: It can be concluded from the above table that by using marginal cost
method company able to generate £61000 in November month and £101000 in December month
while using the absorption cost method company generate £79000 in November month and
£83000 in December month. The absorption cost method is the best method to prepare the
income statements because it considered all production cost while marginal cost only considered
the cost which was incurred at the time of production. Absorption method provide more accurate
and reliable result to the company in compare to the marginal cost method.
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LO3.
P4. Evaluating benefits and the limitation of the various kinds of the planning tools that are been
used for the budgetary control.
Incremental budget- It refers to the budget which is been prepared on the basis of the
past years’ budget or the actual performances in consideration with the incremental amounts. It is
an important tool for as it attempts to make changes in the existing allocations in order to arrive
at the budget for the new period.
Advantages Disadvantages
It is counted as the easiest method in executing
for implementing and not involves any
complex calculations (Novas, Alves and Sousa,
2017). It could be attained for several
departments as it does accounts for any
detailed assessment because same allocations
are taken from the previous periods.
It ensures the continuity in relation to the
funding of divisions without making a detailed
analysis regarding the funding requirement.
This approach helps Oshodi Plc in eliminating
the deviations as it provides for a gradual
change in the requirement of the budget from
one period to another.
Incremental budget enables Oshodi Plc in
seeing towards the effect of change within its
business operations and departments.
It is the most suitable budgetary tool in making
fixed funding requirement which in turn causes
very little deviation.
The nature of this budget is incremental as it
assumes that the current year requirements is
marginally different in relation to the past
years’ budget requirement. It does not account
for the major changes that occurs within the
structure of Oshodi Plc which in turn results in
inaccurate evaluation of the company's
performance.
It is the approach that leads the managers in
making more and more spending which highly
impacts Oshodi Plc as it results in unnecessary
spending which might not be warranted by the
firm.
Incremental budget assumes a very slight
changes in the budgetary allocations that are
been formed based on prior periods (Oraka,
Sopekan and Udeh, 2016). It also anticipates
that the way of the working will be remaining
same as previous years. This results in lack of
the innovation and leads to no incentives for
the managers of Oshodi Plc in reducing cost.
It is the planning tool that causes a budgetary
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slack in within the management of Oshodi Plc
where the managers build lower growth in the
revenues and the higher growth in the expenses
in order to attain favourable variances.
Cash budget- It refers to the assumptions that are made in relation to the cash outflows
and the inflows for the business over the particular time period. This budget is been used for
assessing that Oshodi Plc is having sufficient cash for operating its business.
Advantages Disadvantages
It is the planning tool that helps the company
in determining the accurate cash balances in
order to fulfil the routine obligations (Surianti
and Dalimunthe, 2015). It shows that the firm
is maintaining the minimum liquidity and the
requirement of the cash balances that are
provisioned by the banks and internal
regulations are been maintained.
Cash budget also helps Oshodi Plc in
determining the cash needed in making the
operational activity more and more productive.
It assists an enterprise in maintaining its
liquidity position as it provides the detailed
analysis regarding the cash receipt and the
expenditures.
It helps in identifying the cash amount that is
been required for fulfilling the short term and
the immediate obligations without making use
of any credit lines or the overdraft protection.
This budget can cause distortions as the cash
inflows does not equate to the profits. Cash
inflows that are resulting from the fines,
security deposits, selling of the capital assets or
any other activity.
It is the budget that are very much susceptible
to the manipulation as it restricts the cash flow
for a particular period and in inflating the cash
flow for next period. Under this budget, in case
the operations of the company are experiencing
the loss, postponing the payouts may show the
positive value of the cash flow.
The major limitation of this budget is that it is
based on the estimates (Wildavsky, 2017).
Revenues and the expenses for the future
period are estimated which could be wrong in
case of the uncertain or the changing
conditions.
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Flexible budget- It is the budget that adjust for the changes with change in the level of
the activity and the other resources. It is also known as variable budget as it varies with the level
of the production.
Advantages Disadvantages
It allows for preparation of the budget for a
different range of the activities within the
business.
It helps Oshodi Plc . In making the comparison
of the actual output, performance and the cost
with that of the budgeted output, performance
and the cost.
This planning tool is considered as the cost
control tool as it reacts to the adverse situation.
It enables the managers of the company in
measuring the managerial and the operational
performance of the business.
Flexible budget assumes for the linearity in the
cost and thus does not consider discount the
and the labour cost changes.
It is counted as time-consuming method as
adjustments are to made on a frequent basis
which is lengthy process for the managers of
Oshodi Plc .
A huge cost is involves in formulating the
flexible budget as it requires highly skilled
managers which in turn increases the cost
relating to training.
M3&D3. Analysing the uses and the application of the different budgets.
.
Management accounting systems Uses and application
Incremental budget It is the budget that is most useful for Oshodi
Plc as it helps in eliminating conflict and builds
value the equality among all the departments
(Craig and et.al., 2018). It allows for seeing an
influence of the change on an immediate basis.
Cash budget This budget is been used and applied for
making optimum use of the resources with the
goals of retaining the minimum working
capital, making the investment in the surplus
cash into the productive ventures like making
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