Management Accounting Report: Costing and Profitability Analysis

This report delves into the core concepts of management accounting, emphasizing its role in decision-making within organizations. It examines various management accounting systems, including stock management, cost accounting, job costing, and price optimization systems, highlighting their benefits and applications. The report focuses on TPG Processing, a manufacturing company, and applies absorption and marginal costing techniques to prepare income statements. It also explores the advantages and disadvantages of different planning tools and compares how various organizations utilize management accounting to address financial challenges, ultimately demonstrating how management accounting contributes to sustainable success. The report further analyzes the importance of management accounting reporting, detailing account receivables, cost, performance, stock and production, and budget reports. It also critically evaluates the management accounting system and its reporting methods, while comparing and contrasting absorption and marginal costing methods.

MANAGEMENT
ACCOUNTING
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Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
P1. Requirement of management accounting systems................................................................1
P2. Methods of management accounting reporting.....................................................................3
Benefits of management accounting system................................................................................4
Critically evaluate management accounting system and reporting.............................................4
P3 Preparing cost and profitability statement using absorption & marginal costing system......5
Interpretation:................................................................................................................................11
Part B.............................................................................................................................................12
P4. Advantage and disadvantage of different planning tool......................................................12
P5. Compare organizations that adapting to system of this accounting to respond to financial
problems....................................................................................................................................14
Conclusion.....................................................................................................................................16
REFERENCES..............................................................................................................................17
Books and journals....................................................................................................................17
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INTRODUCTION
Managerial accounting (MA) is that branch of accounting which is concerned with
recording and analysing the cost related, financial information along with qualitative information
of the business. The main purpose of management accounting is to assist the managers of a
company in their decision-making process. Techniques of managerial accounting system are
applied by the companies for deriving the meaningful information from cost data that eventually
helps them in taking quality-decision for the entire organization. In the present report, concept of
MA will be discussed, various kinds of management accounting systems along with their
benefits will be highlighted. Further, why integration of management accounting is required is
going to be covered in the report.
The report is about TPG Processing, a company belonging to manufacturing sector. The
company deals manufacturing, transportation, distribution and services relating to business.
Different techniques of management such as absorption and marginal costing will be applied for
preparing the income statements. Moreover, a comparison will be seen in the project report
regarding how different organizations apply management accounting in dealing with their
financial issue and how management accounting leads an organization to sustainable success.
PART A
Requirement of MA System
Definitions of management accounting
Managerial accounting is defined as a procedure of evaluating and analysing the
expenses and costs of a business organization for preparing financial report meant for internal
use by the management of the company (Krishnan, 2015).
Management accounting implies for the process which in turn lays emphasis on providing
managers with financial information and resources for decision making purpose (Langfield-
Smith and et.al., 2017).
The aim of managerial accounting is to facilitate the manager of a business enterprise
with the much-needed information relating to costs through which manager becomes enable in
setting the prices of company's products and services. Management accountants focuses on
predicting the future expenses and income of then company by preparing budgets. They very
thoroughly analyse each and every activity of the business for the purpose of appropriately
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allocating and assigning the costs and other resources to each of the responsibility centre in the
business.
The primary difference between the managerial accounting and financial accounting is
that latter is concerned with the presenting and reporting the financial information for the
external use by different stakeholders such as customer, investors, government etc. While former
is concerned with the presentation and reporting of financial data for internal use by the
management for decision-making.
Role of management accounting :-
Managerial accounting plays an integral role within the business as :
 It facilitates managers with necessary planning tools through which they undertake their
short and long term planning.
 It aids in developing a management information system as reports from all other
departments are forwarded to management accountant for taking corrective actions (7
Roles of Management Accountant, 2019).
 Managerial accounting helps the managers in exercising the controlling functions by
performing various techniques of measuring performance such as variance analysis,
budget etc. and evaluating it in order to find the reasons for deviations so that needed
actions could be taken.
 It facilitates the managers in accurately forecasting the costs and income of the business
for a future accounting period.
 It also allows the managers in keeping a check on the cash inflow and cash outflow which
takes place in the business, which in turn aid the managers in making more effective
strategies for increasing the cash inflows and reduce unnecessary cash outflow.
Different types of MA systems exists which different organizations employs in
accordance with their business requirements. They are as follows:
Stock management system:- This system of management accounting is a process of
tracking inventory, order, sales and deliveries of products. Through this system, managers of
organization evaluate and analyse to movement of stock from production to storage and from
storage to delivery (Hald and Thrane, 2016). It includes FIFO and LIFO method and managers
making decision about to order and maintaining to manufacture process.
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LIFO :- it is the method of stock management that means product that recent purchased on
particular cost so it first to be sale.
FIFO :- it stands for first In first out and it refers that the oldest inventory recorded swill be sold
first.
In addition to this, there are several tools available which can be used for inventory
management include EOQ, JIT etc. Stock management tools provide deeper insight about stock
which need to maintain within an organization for ensuring smooth functioning of operations.
This in turn helps in maximizing profitability by reducing the cost associated with holding and
ordering aspects.
Cost accounting system :- It is an essential type of management accounting that is used
by management of TPG to estimate the cost of their product to analysis profit. Production
process includes fixed and variable cost. Cost that never changing with quantity and quality of
product is called fixed cost. Those cost that changing with unit of production, is called as
variable cost (Schaltegger and Burritt, 2017). It also reduces difficulties because many
departments includes in organization and all have different income and expenditure. Managers
use to this system and calculate to cost very effectively and efficiently. For example – labour
cost and overhead. Cost management system is highly significant which in turn helps in turn
helps in setting appropriate prices of products or services. It clearly presents expenses incurred
for offering products or services. Hence, by dividing total costs from number of items per unit
cost can be assessed. Further, by adding gross margin % in per unit cost price can be determined
effectually.
Job costing system :- It can be defined as the framework for allocating and accumulating
the costs of manufacturing of a particular product or job. It uses by manufacturing organization
who produce products according to demand and order of customers. This system makes to easy
process of organization because in TPG, many types of job considered and every job consume
cost like labour, overhead and material. Mangers also keep records in proper manner through it
(Armitage, Webb and Glynn, 2016).
Price optimization system :- Management of TPG use to this system of accounting that
helps to evaluate and understand behaviour of customer with changing price of products. It also
helpful for organization because they understand through fluctuation in demand and supply and
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then change prices of product (Lapsley and Rekers, 2017). That consumer can easily afford and
organization achieve goal and meet objective.
Methods of management accounting reporting.
Reporting of management accounting helps to evaluate and analyse accuracy of data and
informations of all reports of TPG. All report of organization provide helps to managers in
making effective decision, and they easily achieve goal and objective. Reports of management
accounting is essential and useful for stakeholders because they can measure performance and
situation of organizational profit. Stakeholders like CEO, owners and investors.
Account receivables report :- This report includes those types of customers that they
used to products and services of TPG but not yet paid by customers. That means customers owe
organization's payment. On the bases of those customers, management make to this report. TPG
also evaluate to health of customers related to finance. Account receivables is the assets of
organization.
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Cost report :- TPG prepare report related to cost and it helpful to analyse cost and
charges related to job, products and activity and process. Through this report managers can
control to cost in effective manner. All expenses and revenue also considered in this report and
management use for making decision (Armitage, Webb and Glynn, 2016). It also makes to
calculation process effective so members of organization can calculate to all types of cost that
occurred and use in organization.
Performance report :- Individual performance in organization is recorded by
management in this report. Data and informations related to operation also includes in it. TPG's
performance present by this report in front of stakeholders, so stakeholders evaluate and
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understand performance of organization before invest their capital. Mangers of TPG analyse the
performance report and if they get any types of weakness and loophole, so they make strategies
to overcome and developing their action to increase profit.
Stock and production report :- It contains all types of data and information related to
stock and manufacturing so management of TPG evaluate this report and find wastage of time
by labour and wastage of products. The process of Elimination of wastage of products and hours
influence to profitability and productivity. This report is very effective because wastage put more
effect on organizational profit.
Budget report :- Budget report is an internal report that js used by management of TPG
and make estimate. Different department and function includes in organization so management
prepare budget for all of them. It makes for future on the basis of current budget. They also
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measure past and present performance in given budget. Organization get helps in making
effective decision for future. It is an estimation of revenue and cost for particular period.
Sales report :- TPG earn profit and revenue through sale of product so it includes and
considered in this report. It sales their products through wholesaler and retailer and management
observe through this report that who make more profit in organization. They also make strategies
and provide motivation through provide bonus, incentives and reward against to their work.
Through all these employees and members get motivation and do work with their full efforts.
Benefits of management accounting system.
Management accounting system is very beneficial for organization because management
of TPG measures past results and make action plan for future (Christ and Burritt, 2015). It also
beneficial in making decision about future and measures actual performance with given budgets.
All these things useful in raising profitability and productivity of organization.
Critically evaluate management accounting system and reporting.
Accounting system of management in TPG play vital role because they make future
decision with the helps of past financial data. Managers understand all condition and situation of
future related to budget so this system provide major helps to them in making decision.
Efficiency of business increasing through this and customer get quality services and products so
all these things increasing profitably and productivity. Its negative aspect that it has a futuristic
nature and future is uncertain so it provides data and informations for planing and decision-
making and it not necessary that plan of management provide positive and expected results. This
process consume more cost and time.
Management accounting report is also effective tool and it helpful for business. All
stakeholders get many types of data and informations, and they can easily understand to
performance of TPG. It has negative aspect that it takes higher cost and time because managers
of organization has to make many rules and regulations.
Preparing cost and profitability statement using absorption & marginal costing system
As per marginal costing
Year 1
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Year 2
8

Year 3
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Absorption costing
Year 1
10

Year 2
11

Year 3
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Interpretation:
From the above calculations, it can be observed that net profits calculated under the both
the methods are different. This difference is a consequence of treatment of fixed and variable
costs by the both the costing techniques. Since, in marginal costing only variable expenses has
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been charged to unit cost of production, from which t he closing stock for the year has been
valued, the net profit calculated is different from the net profit calculated under absorption
costing. Absorption costing has considered all the expenses for determining the unit cost of
production. This is the reason that net profit for the year 1 under marginal costing 586440 while
under absorption costing it is 590448.
Pricing strategies :
Pricing refers to the prices of fixing a specific amount which a company is going to
charge, for selling its products and services to its customers. There are different pricing strategies
which are as follows:
 Value based pricing strategies : These prices are not based on the grounds of costs,
instead it is based on perception of customers of the value of the product or service
 Teaser Pricing Strategies :These strategies are based on the concept of luring in
customers with a few low-priced or free products or services, and then cross-selling them
higher-priced items.
Part B
Advantage and disadvantage of different planning tool.
Planning tool is the instruments that used by TPG in formatting of plan and different
kinds of organizational operations effectively. Following are the planing tool that organization
use in process of budgetary control and carry out all operational activities.
Budgetary control :-
It is a procedure of making budget for the future and compared with the actual
performance for finding out variances. Management take action to detect and prevent variances.
Through this tool TPG maximize their profitability because budget is a base of every
organization and if management command control on budgets so this helps in increasing profit
(Pavlatos and Kostakis, 2015). Though this budget related consciousness increase among
members and employees of organization and managers fix target of all members.
Fixed budget :- This budget refers that it do not change with increasing and decreasing number
of products. It is a financial plan that based on the assumption of selling goods at specific amount
during a period.
Advantage :-
 Fixed budget easily implement by management of organization.
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 It not needs to update time to time and according to work.
Disadvantage :-
 fixed budget has major disadvantage that lack of flexibility.
 This budget made in organization according to past data so it creates difficulty in the
future.
Flexible budget :- this budget refers that if volume and quality of products change so this budget
also flexes with it. It is more sophisticated and useful for TPG compare than fixed budget.
Advantage :-
 Flexible budget has advantage that it is make by management according to needs because
this budget has flexible nature and it changes with volume and quality of products. It is also helpful in comparison of actual budget with pre determined budget because
management of TPG compare actual output.
Disadvantages :-
 This budget does not pre loaded in software of organization so accountant must wait until
a financial reporting period that has been completed.
 It creates confusion because management has to make different types of budget for
particular work.
Incremental budget :- This budget refers to that management of TPG has to evaluate past year
budget and add more things in budget for increment in the present year. It is called incremental
budget (Lapsley and Rekers, 2017.). So this budget includes all types of addition in present
budget and improve to resources for do work with efficiently and effectively.
Advantage :-
 It is a simple and easy to operate and management also easily understand. Through this budget all departments get similar treated so conflicts detect and prevent.
Disadvantage :-
 This budget consumes more time and cost because it has incremental nature and major
changes occur in this budget.
 This budget looking backward that means it focuses on the past instead of the future and
it is not good model for planing.
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Zero based budget :- this budget is a method of budgeting in which all expenses must be
justified for each period. That means this budgeting process starts from zero base and it prepares
by management from starting process without using the prior year's budget or spending numbers.
Advantage:-
 This budgeting helps to eliminate waste and optimum utilization of resources. Through this budget management of TPG compare to new and old budget.
Disadvantage :-
 It is very costly and complex because management has to make and prepare budget from
starting without any budget.
 Managers also feel demotivated because it consumes more cost and time.
Variance analysis :- it is a study and investigation of deviations of actual behaviour and planned
behaviour in budgeting. Through this management understand and gather information about
reasons for the difference between a budgeted amount and actual amount.
Advantage :- Variance analysis has main advantage that it control to expenditure because through this
management take action in case of adverse variance result.
Disadvantage :-
 It consumes more time and cost and it is not useful for services industry (Hald and
Thrane, 2016). It is only useful for manufacturing industry.
Compare organizations that adapting to system of this accounting to respond to financial
problems.
Many types of accounting system and techniques available in organization that use by
management of different organization ton evaluate and analyse all situation. They also
investigate that which barrier increase risk and reduce profit of organization. Following system
hat use by organizations for detect financial problem.
key performance indicators :-
key performance indicator is a measurable value and method that helps to organization in
fulfil target and achieve goal. Organization use to this system for getting success at reaching
targets. High level of KPI emphasize on measuring and evaluating the performance of the overall
success of organization but low level KPIs helps to measure and evaluate performance of
departments and employees of organization.
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This technique of management accounting commonly use by managers of all types of
organization and detect top problem related to financial. It makes many types of strategies for
future business operations and all many organization use to this tool (Alawattage,
Wickramasinghe and Uddin, 2017). So through using of this tool goals and objective also
common of all organization like increasing productivity, profitability and increasing sale.
TPG use to this technique for detect and prevent to financial problem because through
this they evaluate and analyse performance of competitors like Cisco and IBM. It evaluates cost
of good sold, profit, cost and customer lifetime value of own KPIs and other organization KPIs
and then make effective strategies for improve and develop to their all aspects. After that it make
plan to take action for development and improvement is very best to detect financial problems.
Benchmarking
It is a technique of analysing and evaluating the performance of organization in term of
products, processes and employers. If organization who fulfil all these criteria, so they can take
and get better and high benchmarking in their industry. These techniques helpful to improving
performance and get best benchmarking in market.
Benchmarking has disadvantage that it is the danger of complacency and arrogance. This
tool is not sufficient and enough to measure and evaluate to whole business entity (Bobryshev,
2015). Organization can not gather all informations and due to lack of information they can not
resolve to financial problems.
Cisco is a competitor of TPG and it applies to this method for eliminate and detect
financial problems. Management of this organization developing and improving performance
and profit of organization. This organi9zation use to functional benchmarking that means it helps
to compare easily with other competitors time to time. So through the use of this method,
organization developing their performance and product effectively.
Ratio analysis :-
Ratio analysis is a process of examining and comparing financial information with other
organization because through this system organization detect and reduce their financial related
problems. Through these techniques of problem solving, organization get accurate data and
information about competitors in the form of ratio. It includes liquidity, profitability ratio and
financial ratio. All these ratios helps to compare clearly and effectively each other.
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Ratio analysis has disadvantage that it ignore price level due to inflation. It also can not
solve financial problem of organization perfectly.
IBM using to this technique for detect financial problems, and they collect and gather
more data and information related to liquidity and profitability of other organization (Järvinen,
2016). These things help to compare effectively and evaluate loopholes and weakness of
organization than make strategies to overcome.
TPG used to the best technique to resolve financial issue because they are using to KPIs
and this is very effectively helps to compare with other organization and competitors. KPIs
includes all elements and factors that very essential and useful to increasing profit and
productivity of organization. Management also can make effective and efficient decision about
organization.
Comparison
Problem Ikea Starbucks
Cost reduction and profit
maximization
Variance analysis is used by
Ikea for analysing deviations
take place in income &
expenditure.
It uses KPI’s for taking
decisions pertaining to cost
and profitability aspect.
Moreover, KPI’s enables
firm to assess the extent to
which standards are met.
Hence, on the basis of
evaluation, firm can develop
competent strategic or policy
framework.
MA systems Ikea is focussing on making
its inventory management
system by the way of which it
can control its wastage and
reduce its unnecessary cost of
production.
Starbucks is focussing on
price optimization
management accounting
system for the purpose of
determining the most right
price for its products. This
will help the company in
bringing a balance between
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what a customer can pay and
what maximum profit it can
earn.
Four phases of MA evolution are enumerated below
Stage 1: Cost determination
In the first phase or evolution of MA, focus of the companies was mainly on the aspects
of cost determination and financial control.
Stage 2: Information for management planning and control
This stage of MA focuses on identifying problem taking place in internal operations
financially. Hence, it focuses on taking actions when deviations found in against to the
predetermined objectives.
Stage 3: Cost reduction
In 1980’, focus of MA shifted on reducing wastage and enhancement of efficiency level.
Hence, from this period with the motive to attain high profit business units started to apply
techniques like ABC, target costing, quality investment and product life cycle management.
Stage 4: Value creation
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At this phase, for the purpose of value creation emphasis is placed on applying balance
scorecard strategy. This helps in developing strategies by taking into account both monetary as
well as non-monetary aspects and thereby facilitates value creation.
CONCLUSION
From the above study it has been summarized that management accounting is very
essential for organization because through these managers of organization evaluate and analyse
books and record of financial accounting and then making decision for long term and short term.
This report also concluded essential requirement of system like job costing, price optimization,
cost accounting and stock management. Report also include such as sales, cost, account
receivable etc and planing tool highlighted and also its advantages and disadvantages. Budget
concluded in above report that fixed, flexible, incremental and Zero based budget.
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REFERENCES
Books and journals
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Armitage, H.M., Webb, A. and Glynn, J., 2016. The use of management accounting techniques
by small and medium‐sized enterprises: a field study of Canadian and Australian
practice. Accounting Perspectives. 15(1). pp.31-69.
Christ, K.L. and Burritt, R.L., 2015. Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production. 108. pp.1378-1389.
Pavlatos, O. and Kostakis, H., 2015. Management accounting practices before and during
economic crisis: Evidence from Greece. Advances in accounting. 31(1). pp.150-164.
Lapsley, I. and Rekers, J.V., 2017. The relevance of strategic management accounting to popular
culture: The world of West End Musicals. Management Accounting Research. 35.
pp.47-55.
Hald, K.S. and Thrane, S., 2016. Management Accounting and Supply Chain Strategy. In 1st
InternationalCompetitiveness Management Conference.
Alawattage, C., Wickramasinghe, D. and Uddin, S., 2017. Theorising management accounting
practices in Less Developed Countries. The Routledge Companion to Performance
Management and Control, pp.285-305.
Bobryshev, A.N. And et.al., 2015. The Concept of Management Accounting in Crisis
Conditions. Journal of Advanced Research in Law and Economics. 6(3 (13)). p.520.
Järvinen, J.T., 2016. Role of management accounting in applying new institutional logics: A
comparative case study in the non-profit sector. Accounting, Auditing & Accountability
Journal. 29(5). pp.861-886.
Krishnan, R., 2015. Management accountant—What ails thee?. Journal of Management
Accounting Research, 27(1), pp.177-191.
Langfield-Smith, K and et.al., 2017. Management accounting: Information for creating and
managing value. McGraw-Hill Education Australia.
Online
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