Detailed Report on Management Accounting and Costing for Austin Fraser

This report offers a comprehensive analysis of management accounting, using Austin Fraser, a recruitment consultant, as a case study. It delves into key aspects like financial planning, financial statement analysis, and the importance of various management accounting systems. The report explores different costing methods, including absorption and marginal costing, and their impact on net profit calculation. It also covers various reporting modes, such as performance reports, sales reports, and inventory costing reports. Furthermore, the document highlights the differences between absorption and marginal costing techniques, providing insights into their applications and implications. The report emphasizes the role of management accounting in making informed decisions, monitoring risks, and achieving sustainable development within a business context. This assignment is a valuable resource for students seeking to understand the practical application of management accounting principles.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 ..........................................................................................................................................1
1.2 ..........................................................................................................................................2
TASK 2............................................................................................................................................3
2.1 Calculation of net profit using absorption costing and marginal costing techniques.......3
TASK 3 ...........................................................................................................................................8
3.1 ..........................................................................................................................................8
3.2 ........................................................................................................................................11
CONCLUSION..............................................................................................................................13

INTRODUCTION
Management system is a process through which cited entity can reports of management
and financial statements which provides a detailed description of the financial position of cited
entity which is required by the stakeholders of cited entity. All the material information that is
necessary for stakeholders which can affect their decisions regarding a business organisation are
included in those financial statements. Reports which are prepared as per management
accounting shows amount which is available with the cited entity as well as revenue generated
out of sales. Further, these reports also give a detailed information regarding account payables
and account receivables(Christ and Burritt, 2013). In this report, a detailed description on the
working of accounting will be done along with the need of various systems is done. This
document is based on the case study of Austin Fraser which is a recruitment consultant that deals
in engineering, information technology and sectors related to life sciences sectors. Through this
report, management accounting methods and income statements using techniques of cost
accounting such as marginal and absorption costing will be discussed.
TASK 1
1.1
Management accounting: It is refers to be the process of identifying, measuring,
summarising and analysing the various financial transaction which are done by the company
during the year. It is based on display of professional skills and ability which is required to
manage accounting information.
Importance of MA:
 It is use to avoid seasonal fluctuations.
 It also help in ascertainment of cost.
 Management accounting helps to determine unprofitable activities.
Administration system is a process through which several reports have been prepared so
that management of cited entity can make suitable decisions regarding various financial and non-
financial factors. Absorption and marginal costing are some tools or techniques of cost
accounting through which cited entity can prepare better strategies for maintaining its
productivity. Management accounting combines various aspects of a business enterprise like
finance, accounting and management so that better strategies can be planned or framed and value
of cited entity could be increased (Cinquini and Tenucci, 2010). Management accounting does
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research over financial and non-financial data so that cited entity can achieve sustainable
development. Unlike a normal accountant who deals in figures to report his financial statements,
a management accountant frames business strategies for the development of cited entity and
monitors risk which is involved in operational management.
Primary need of various variety of management accounting: There are certain
necessary needs for which various kind of management accounting are to be managed. These
essential needs of requirements are mentioned as below: Traditional Management Accounting: It focuses on cost by the means of job order or
methods of process costing. Through these methods, Austin Fraser can allocate different
types of costs related with direct material, direct labour and manufacturing overheads. Requirements for Traditional Management Accounting: Generally, job order costing
technique is used in manufacturing industry which has large projects as in such case,
various types of costs are easily traceable and further, cited entity can easily allocate
them to respective project. On the other hand, process costing techniques allocate cost to
various processes which produces homogeneous goods. Lean Accounting: It is a newly emerged technique of management accounting. Lean
accounting is really revolutionary because it does not only concentrated over cost, but
also it supports strategy making to reduce or control the cost by management of waste.
 Requirements for Lean Accounting: Through lean accounting, management accountant
can make strategies regarding cost reduction and he can implement such strategies for the
benefit of Austin Fraser. Through the same, managerial personnel can take required
decisions.
Different types of costing system:
1. Inventory management system – Keeping in mind the end goal to complete the
production procedure stock is required in an association. For this it is extremely pivotal
that administration of same is done in such a way, to the point that viable utilization of
stock is done as such that yield can be expanded which is done trough this system.
2. Job costing framework – To give the final products different employments are performed
in an association. Keeping in mind the end goal to quantify the execution of each
occupation it is essential that assessment of each is done independently with the goal that
likewise results can be learn.
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3. Price optimisation plan – Cost of any item assumes an extremely centrality part in the
decision determination of the clients. In this manner, it is exceptionally fundamental for
an association to set the most appropriate cost of the item which can full fill the
prerequisite of both customer and maker. Through this arrangement of bookkeeping it
can be ascertained what cost can give greatest advantage to maker without having loss of
potential clients.
4. Cost accounting system: The management accounting is used to maintain extra cost
which are used by the company during the process of product development. It consist of
various costing methods such as standard costing, normal costing and actual costing.
1.2
A variety of modes are used for reporting under management system (Dillard and
Roslender, 2011). They are based on various aspects of business enterprise such as financial and
cost accounting information based on mathematical aspects and information available regarding
future projects. These methods or techniques are mentioned as below: Financial Planning: Financial planning is really important for Austin Fraser as planning
for financial factors. Main objective for any entity is profitability(Schaltegger and
Zvezdov, 2013). They want to increase their profit by reducing cost and maintaining
quality in their products and services. Financial planning can be considered as a vital tool
for the achievement of various business objectives. Planning of various factors related to
finance through financials can help stakeholder of Austin Fraser to make better decisions
related with cited entity. On the other hand management accounting officer can make
better financial structure which fulfil requirements of firm through its available resources.
Other than this financial planning helps to employ available resources in better projects
are potential enough to give more returns so that the financial resources can be utilized in
a better way. Analysis of Financial Statements: There are several financial statements which are
required to be prepared by the cited entity(Schaltegger and Zvezdov, 2013). Austin Fraser
needs to prepare final accounts, statement of alteration in business position and notes to
accounts. These financial statements reflect the financial position of cited entity.
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Management of Austin Fraser can analyse these statements for different period of time so
that they can get information about their current financial position. Through such analysis Cost Accounting: Cost accounting is a method through which organisation can allocate
its cost and it can present its cost figures as per the unit of product, process involved in
production and also, according to various departments and branches of cited entity.
Through a better cost allocation system, Austin Fraser and its management can
implement better strategies which can assist them in the cost reduction. Fund Flow Analysis: Through fund flow analysis, cited entity can analyse the movement
of funds for a particular period. They can also compare such movement of funds for
current period with the movement of funds of some other or previous period. Through
such analysis, they can get information regarding the utilization of funds, its sources and
application.
 Cash Flow Analysis: Management accountant of Austin Fraser can use cash flow
analysis to analyse the flow of cash during financial year. Thus, he can get a clear cut
information about various sources through which cash has been generated in the cited
entity in which projects or activities cash has been employed (Lee, 2011). movement of
cash and its tracking can assist an entity to employ available funds in required areas. As a
cash flow statements is divided into three sections i.e. Cash flow from operating,
investing and financing activities. Hence through analysis of cash flow cited entity can
get a detailed information with figures that in which activities how much of cash is
employed and weather they returning adequate cash flow or not.
There are different reports which are utilised in order to keep check over the operations of the
organisation:
 Execution report – In an association assessment of results is especially required so
deviations in the required and real outcomes can be recorded. Through this report the
consequences of a specific undertaking are exhibited in a compact shape which unveil all
the related information with respect to the work done.
 Target costing report: Under it data about target use will be given. The cost will be stayed
aware of the objective that the appealing advantages can be accomplished.
 Sales report – It is an archive which incorporates data with respect to the offers of a
specific period. It is keep up by the either the business division or their management.
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 Inventory costing report: In this technique the whole cost will be recognized on the
introduce of the activities led in a money related year. Cost instrument will be settled in
association with the unmistakable costs that are procured and after that they will be
dispersed by them
 Job costing reporting: Under this, those costs which are recognized by the organization
from the individual items are recorded in it. The aggregate incomes are decide by primary
with a specific end goal. The fundamental analysis which should be considered under this
revealing is to record each part points of interest those are delivered at the time. Those
stages are maintained as strategic distance from which are creating less benefit.
 Performance reporting: In the 4COM organization, the performance report of every
individuals are set up keeping in mind the end goal to break down position of items and
administrations. In connection to create points of interest from the referred to
organization's they generally performed.
TASK 2
2.1 Calculation of net profit using absorption costing and marginal costing techniques
Net profit can be calculated through various techniques in the management accounting.
Net profit of Austin Fraser as per the absorption costing and marginal costing is shown as below:
Absorption Cost accounting: Absorption costing is a method of management accounting
through which various costs which are related with different types of production processes are
absorbed on a product. Further, this method is required to evaluate the inventory of an
entity(Busco and Scapens, 2011). Forecasting is the main element of management accounting.
All expenses are ascertained on a certain basis hence when those expenses actually occur, at that
time, it may be possible that budget expenses may vary from the actual one. Through absorption
costing, such over or under absorption can be treated accordingly.
Marginal Costing: Marginal costing principles are used for the internal decision making
purpose for short term. At different levels of activities, purpose of marginal costing can be
determined about the level to which contribution can be generated(Lukka and Modell, 2010). In
other words, marginal cost can be defined as change in cost of opportunity which changes due to
change in production. Change in opportunity cost due to increased production by one unit hence
cost of producing that one unit above a certain level can be determined as marginal cost for cited
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entity (van der Meer-Kooistra and Vosselman, 2012). Marginal costing deals with marginal cost
of producing that extra unit.
Difference between absorption and marginal costing techniques :
Minimal Costing Absorption Costing
 In this system variable costs related
with production are exclusively
apportioned.
 Costs related with products include
only variable cost.
 In this, overheads are divided into two
categories, i.e. fixed and variable
overheads.
 Profit in marginal costing can be
 In this technique, all types of costs are
absorbed on a certain basis and then
that cost is apportioned to various
products.
 Absorption costing absorbs and allocate
both fixed and variable costs related to
production.
 It divides overheads into three
categories, i.e. production,
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ascertained through profit-volume
ration (PV Ratio)
administration and overheads related
with selling and distribution.
 In absorption costing technique, net
profit as per income statement is
considered as a profit under absorption
costing.
Application of management accounting techniques in case of Austin Fraser :
Austin Fraser is an entity which has less than 50 employees in its organisational structure.
The net turnover of Austin Fraser is £500,000 hence it can be seen that the revenue of cited
entity is very low as compared to other companies working in the same sector and performing
same operations(Quinn, 2011). Management accounting and its techniques are very essential for
better operational and functional management. They coordinate with each other in assisting
management of cited entity in achievement of its objectives and goals(Nandan, 2010). Now a
days business environment managerial personnels needs to track performance of cited entity so
that they can trace that business organisation and its development is going in the right direction
and does it achieving desired targets(Macintosh and Quattrone, 2010). There are several
techniques of accounting and its management which can be used by management of Austin
Fraser , these techniques are mentioned below :
 Cost Volume Profit Analysis(CVP Analysis) : Cost volume profit analysis is a technique
which is used by management of organisation for determining the impact of change in
cost of product and its volume on Austin Fraser's operating income and net income. Cited
entity needs to make an assumption that selling price will remain constant during course
of business. Reliability of CVP analysis depends on the fact that cost of production is
fixed during a given period of time(Sánchez-Rodríguez and Spraakman, 2012). In given
period actual production overhead, administration cost and selling cost is more than
budgeted cost, as collectively budgeted total cost of these three element was £ 2600 but
actual cost is £ 3300.On the other hand Budgeted selection of candidates through Austin
Fraser was 600 candidates during a particular time period but the actual population of
recruitment was 700 candidates during a particular period. Hence management
accounting officer of can analyse through cost volume profit analysis that how volume of
recruited candidates impacts the total cost.
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TASK 3
3.1
There can be two type of control, i.e. budgetary control and financial control in
management accounting. Budget can be defined as a statement for forecasting of expenses over a
project. Through it Austin Fraser and its managerial team can decide that how much of fund is to
be employed on a particular project. Budgetary control assist an entity and its department to
coordinate with each other(Setthasakko, 2010). It is actually a technique through which the
budgeted or forecasted facts and figures are compared with the actual figures. Through such
analysis variances if any can be controlled easily and effectively(Pipan and Czarniawska, 2010).
The different type of budgetary tools are mentioned below : Master Budget : This is a comprehensive projection through which it can be explained
that in which manner cited entity wants to conducts its business operations for budgeted
period. Master budget is supported through cash budget, budgeted outgo statement, and a
budgeted statement for changes in business position. Cited entity requires to relate
various budgets of different departments of cited entity for preparation of a master
budget.
 Operational Budget : it deals with revenue and expenses which are related with operating
activities(Renz, 2016). Proceeds from selling activity is considered as revenue and the
expenses which occurred in this process are considered as operating expenses. These
budgets are usually divided into various small reporting periods.
Advantages:
Regular maintain of expenses records are controlled and managed under this reports. It is
easy to maintain daily or monthly reports.
Disadvantage:
It is difficult to manage their daily transactions. Because they are in large amount. Cash Flow Budget : A cash flow budget is actually prepared so that cash flows which
arises during the course of business operations can be managed in a proper way.
Management Accounting Officer prepares cash flow budget to get information regarding
shortfall if any in sales and expenses(Shah, Malik and Malik, 2011). Through this an
entity can monitor the movement of cash and management can utilize such available cash
in better projects which can cultivate better results.
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Advantages
Cash budgets are used to estimated the total cash expenditure which are done by the
company during the year.
Disadvantage:
It is difficult to control the extra cost which are incurred on production of a product
but one they can be control up to a extent. Financial Budget : A financial budget provides a detailed view over how Austin Fraser
procures funds and how and where it employs such available funds. It also provides
information about revenue form main business activity and return from other capital
expenditure. Management of organisational assets like building and other property where
cited entity has invested its fund needs to be managed so that they can provide better
return on investment(Jansen, 2011). Management accounting officer of Austin Fraser can
manage assets and other investment of Austin Fraser through preparation of financial
budget. Further financial budget can assist him in valuation of company in case of
mergers.
 Static Budget : A static budget contains such elements which are not changed as per the
level of sales. Cost related with overheads shows a type of static budget(Vaivioand Sirén,
2010). Austin Fraser has certain department which has fixed budget hence head of such
departments needs to frame such strategies so that the expenses of departments will not
go over budget. Static budgets are mostly used by non profit sectors and small business
enterprises as they usually have less finance available as a result they allocate a limited
budget having a limited expenditure limit.
Benefit and limitations of various budgets:
Benefit Limitations
 Planning tools of budgetary controls
can assist management accounting
officer in preparation of strategies
related to future operations. It can be
considered as most prominent feature
of budgetary control. Because through
they can make plan and after
 Planning tools which are used in
budgetary control may put a certain
pressure over the employees of Austin
Fraser. As it creates a target to be
achieved but problem arises when such
targets are not easy to achieve hence in
this case a work load has been created
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implementation of such plans they can
control over future activities.
 It can assist in coordination of different
department of Austin Fraser(Van
Helden and et. al., 2010). Hence they
can work in accordance with each other
and at last they can get satisfactory
results. Planning tools of budgetary
control can also help departments of
Austin Fraser to communicate various
important facts and figures with each
other that can affect cited entities
operations(Weißenberger and
Angelkort, 2011). Coordination and
communication between various
departments of cited entity helps them
to collectively achieve goals and
objectives of Austin Fraser.
 Through planning tools of budgetary
control Austin Fraser has made a
system through which its limited
number of employees can acknowledge
of their responsibilities(Håkansson,
Kraus and Lind, 2010). So that it
becomes easy for them to achieve such
responsibilities. Budget managers can
be held responsible for managing
budgets of different departments and to
achieve forecasted output.
 It also works as a base for performance
appraisal of employees who are
on employees through budgeting.
Which results in bad human relation in
business enterprise and inaccurate and
ineffective record keeping.
 Resources are allocated through
planning tools of budgetary control.
Hence it may be possible less effective
allocation or improper allocation of
organisational gives rise to dispute
between various departments of Austin
Fraser.
 If targets are not achieved then it may
be possible that all the department start
blaming each other(Ward, 2012). This
will increase disputes between various
departments and various employees.
 It may be possible that managers of
Austin Fraser may estimate a high cost
at the time of preparation of budget so
that they will not get blamed in case of
over spending on a certain project.
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