Management Accounting Report: System, Costing, and Budgeting

This report provides a comprehensive overview of management accounting principles and practices, focusing on their application within an organization. It begins by defining management accounting and exploring various system types, including batch costing, process costing, and contract costing. T...Read More

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management Accounting System and its various types.......................................................1
P2. Methods of Management Accounting Reporting..................................................................2
M1. Advantages of Management accounting systems................................................................2
D1. Integration of Management Accounting System and its reporting......................................3
TASK 2 ...........................................................................................................................................3
P3 Cost per unit and its usage for Income statement under absorption costing and marginal
costing.........................................................................................................................................3
M2 Income statements under Marginal and Absorption costing................................................5
D2 Financial report of the business activities.............................................................................6
TASK 3 ...........................................................................................................................................6
P4 Advantages and limitations of Budgetary Control.................................................................6
M3 Planning tools and there uses................................................................................................9
D3 Planning tool respond appropriately for resolving conflicts...............................................10
TASK 4 .........................................................................................................................................11
P5 Comparison between Dell and its competitor in order to adopting management accounting
system........................................................................................................................................11
M4 Management accounting in respond to financial issues.....................................................12
CONCLUSION..............................................................................................................................12

INTRODUCTION
Management accounting is a complete and practical concept of gathering information of
financial accounting and cost accounting in the organization. It helps managers in taking short
term and day-to-day decisions by preparing managerial reports and accounts that provide correct
and reliable information. For improving the performance level, many organisations are adopting
this system in operations. Likely, company Dell also applies the tools and techniques of
management accounting (Bennett, Schaltegger and Zvezdov, 2013). The report reveals
advantages of this system in an organisation and connection between system and its reporting in
the process of organisation. The cost has computed by both the methods i.e. absorption and
marginal costing. This assignment expresses that organisation can solve its financial issues with
the help of different planning tools.
TASK 1
P1. Management Accounting System and its various types
Introduction: - Management accounting includes the methods and concepts which are
essential for effective planning, selection of business actions among various alternatives and for
controlling by the evaluation and accurate interpretation of reports. The information is to be
collected, classified and summarized by management accountant and presented in such a way
which suits managers, need to review for taking decisions (Busco and Scapens, 2011).
Definition: - Management accounting is the process of analysing, evaluating and
presenting information of accounting that is collected through financial and cost accounting
which supports management for policy creation, formulating strategies and taking decisions for
routine activities of the business.
This plays a crucial role in the business activities of Dell. By adopting management
accounting system, company becomes more efficient in measuring the performance, assessing
risk, allocating resources and presenting different financial statements
(Kaplan, and Atkinson, 2015).
Types of Management Accounting System are: Batch costing – The group of costs incurred when a bunch of goods or services are
produced is to be termed as batch costing. It is always evaluated for a group of products
or services and particularly (Macintosh and Quattrone, 2010). For the purpose of cost
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accounting the cost may be considered as essential for assigning the batch cost to
individual unit within a batch. Process costing – This is one of the important types of accounting systems. Process
costing is the method of allocation of cost to the produced units for production of huge
quantity of homogeneous products in Dell. It is to be considered as operation costing as it
shows the cost of product at each level of production process.
 Contract costing – It is the method of identifying and tracking of costs that is attached
with a particular or specific contract to a client (Modell, 2010). Here, both the parties of
contract are agreed to company with a particular amount of reimbursement.
P2. Methods of Management Accounting Reporting
Management accountant uses various reports for analysing the company's information.
These reports are as follows: Cost reports – Management accounting calculates the cost of items produced. It consists
of cost of raw material, labour and overheads. The complete related information is
classified and summarized into the cost report which is used by the managers for
evaluating cost and managing margin of profits. Budgets – Budget preparation is a crucial task for management because this is the base
for upcoming activities. It involves all the possible sources of income and expenditure of
company. Dell tries to achieve its targets and goals by staying with the budgeted figures. Performance reports – In this report, comparison of budgeted amount with the actual
performance of organisation is to be done. The information related to differences and
deviations in accounts are covered under the performance report which helps to take
corrective actions (Parker, 2012).
 Other reports – Other reports are prepared and used by the management accountant of
Dell. Comparison of order placed and received are to be mentioned in other information
reports.
M1. Advantages of Management accounting systems
There are several benefits of management accounting that helps to promote business
operations of Dell. The advantages are as follows:
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 Planning – Management accounting supports in the planning process of business
activities in Dell. Different functional budgets are prepared and accounting information
are arranged for the planning purpose. Controlling – For controlling the differences and evaluating level of performance,
management accounting helps very much. The deviations are to be identified by
comparing the actual outcomes with the budgeted ones. This supports to Dell for taking
corrective actions if needed (Siegel and et.al., 2010). Coordinating – Management accounting builds coordination between all the departments
of Dell like finance, personnel, sales, marketing, purchase and all others. This helps to
employees to perform in an effective and efficient manner by the employees. Improvement in efficiency – It helps in improving work level of people in the company.
It makes them more efficient by reducing the wastage, and unnecessary activities.
 Motivating – Management accounting maintains the motivation level among the
employees regarding their work. Management can find out the person who is to be
rewarded and also, those who are to be penalized with the help of management report.
D1. Integration of Management Accounting System and its reporting
The existence of management accounting system shows that there is presence of
management accounting reporting. Thus, the integration and dependableness can be seen easily.
Dell follows the management accounting system and prepare reports for the same in generation
of managerial information (Simons, 2013). This tends to increase the performance level of Dell
and also supports in achieving the goals and objectives of firm. Company can also use the same
for gaining competitive advantages.
TASK 2
P3 Cost per unit and its usage for Income statement under absorption costing and marginal
costing
Calculation of cost per unit:-
Absorption costing
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Marginal costing
It is critically evaluated that cost per unit under both the methods are not the same. This is
due to the fixed overhead cost which is covered under absorption costing method and it is
avoided in the marginal costing method. But most of the companies follow absorption costing
method for the calculation of cost per unit and it is more appropriate method. Dell is also
following the same for the identification of unit cost. This proves more suitable method because
it covers all the cost which has occurred in the production of goods. For the computation of net
profit in the income statements of these two methods, the total cost per unit is to be multiplied by
the number of production units. The cost of direct expense can be also used separately.
Total number of production units is = 50000 units
Under absorption costing method = 50000 * 42 = 2100000
Under marginal costing method = 50000 * 32 = 1600000
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For the calculation of gross profit the above mentioned cost are to be deducted from total
sales amount. The net amount of profit will be same, only when the opening inventory and
closing inventory are not given. Otherwise, the amount of net profit always differ.
M2 Income statements under Marginal and Absorption costing
Income statement under Marginal costing
GBP GBP
Sales 2700000
Less: Cost of sales:
Opening inventory 0
Direct material 1000000
Direct labour 400000
Variable factory OH 200000
Less: Closing inventory -320000 -1280000
Contribution 1420000
Less: Variable Sell. & dist.
Exps.
240000
Fixed Sell. & dist. Exps. 600000
Fixed factory OH 500000 -1340000
Net Income (loss) 80000
Income statement under Absorption costing
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GBP GBP
Sales (40000*67.50) 2700000
Less: Cost of sales:
Direct material (50000*20) 1000000
Direct labour (50000*8) 400000
Variable OH (50000*4) 200000
Fixed OH (50000*10) 500000
Add: Op. Inven. 0
Less: Cl. Inven. -420000 -1680000
Gross profit 1020000
Less: Non mfg cost:
Variable Sell. & Dist. OH 240000
Fixed Sell. & Dist. OH 600000 -840000
Net income (loss) 180000
D2 Financial report of the business activities
To
Managing Director
Dell company
Date:- 24th March 2017
Subject: Financial report of the business operations.
The calculation of cost per unit has done by both the methods that is absorption costing and
marginal costing. As per the result, the cost is different in both the condition. This is the impact
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of fixed overhead. The income statement of marginal costing is showing high gross profit in
comparison to income statement of absorption costing (Meer-Kooistra and Vosselman, 2012).
But the net profit of absorption is more than marginal and which is more reliable and accurate.
Therefore, Company should continuously follow absorption costing method.
Sincerely,
Management Accountant
TASK 3
P4 Advantages and limitations of Budgetary Control
Advantages of budgetary control:
 Budgetary control establishes base for internal audit by regularly evaluating the results of
department.
 The allocation of scarce resources in an optimized manner the control over expenditures
can be maintained. It also pressurise management for future planning.
 It enhances the communication and coordination among the employees, throughout the
organisation(Advantages and Disadvantages of Budget Control. 2014). It supports in the
alignment of individual objective and organisational objectives at common level.
 The effective mechanism of budgetary control allows and encourages the employee to
take participate in the formulation of budgets. This brings motivation among them with
respect to work (Vosselman, 2014).
 It evaluates the effective and ineffective section of activities through analysis of variance.
And this supports to take corrective action if needed.
 This mechanism is more appropriate for making the comparison between actual results
and budgeted figures, instead of comparing with previous performance.
 It gives proper direction and also intimates that the responsibility areas of each person
(responsibility regarding the items of income and expense).
Limitations of budgetary control:
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 The adverse effect of budgetary control can be made on the relation of workers, because
the budgets are to be taken as work force means the management puts pressure to comply
with the budgets.
 The pressure of work can generate the wrong record keeping. It becomes difficult for
management to motivate lethargic work force (Ward, 2012).
 The chances can be raised of over estimation of cost by the side of management in order
to not taking the responsibility for the over spending on expenses.
 Due to the allocation of resources, the chances of arising competition and conflicts
among the departments. And in the case of not achieving targets they may point out each
other.
 The element of uncertainty present in this mechanism such as inflation, over demand,
recession, changes in technology, etc (Siegel and et.al., 2010). And this system uses
historical analysis for the comparison of present cost and budgeted cost.
A. Calculation of standard cost and standard quantity of PVC sheets
Standard cost of PVC sheets for the production of 4000 units of keyboard
Analysis of difference between standard and actual figures for PVC sheets which is required for
the manufacturing of 4000 keyboards.
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B. Calculation of Material Price and Quantity Variance
The material price variance is to be calculated by the given formula:
Material Price Variance = [Actual Quantity * Actual Price per unit] – [Actual quantity *
Standard Price per unit]
MPV = [AQ * AP] – [AQ * SP]
= [11000 * 3.40] – [11000 * 3.60]
= 37400 – 39600 = -2200
The material quantity variance is to be calculated by the given formula:
Material Quantity Price = [Actual Quantity* Standard Price per unit] – [Standard Quantity *
Standard Price per unit]
MQV = [AQ * SP] – [SQ * SP]
= [11000 * 3.60] – [10000 * 3.60]
= 39600 – 36000 = 3600
M3 Planning tools and there uses
Various tools of planning are applied by Dell for the preparation and forecasting of
budgets which are very effective from the performance angle. Some of them are mentioned
below:
Material price and usage variances: The main focus of material variance is on its price and
usage. The result is unfavourable when it is positive. When the result is negative then it is to be
considered as favourable.
Material Price Variance -: The difference between standard cost and actual cost for the purchase
of actual quantity of material, it is to be considered as material price variance. Formula for
calculation is as follows:
Material Price Variance= (Actual quantity* Actual price per unit) – (Actual quantity* Standard
price per unit)
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MPV = [AQ * AP] – [AQ * SP]
Material Usage Variance – The identification of difference between actual quantity of material
used and the standard quantity, this is to be termed as material usage variance. Formula for
determining this variance is given below:
Material Usage Variance = [Actual quantity * Standard price per unit] – [Standard quantity *
Standard price per unit]
MUV = [AQ * SP] – [SQ * SP]
Labour rate and efficiency variance: Labour variances mainly focused for the rates and hours
of labour. The positive outcome is to be considered as unfavourable and negative outcome as
favourable.
Labour Rate Variance – This variance is to be determined by the difference between actual rate
and standard rate with the multiplication of actual hours of labour (Parker, 2012). The formula is
as follows:
Labour Rate Variance = [Actual hours* Actual rate per hour] – [Actual hour * Standard rate per
hour]
LRV = [AH * AR] – [AH * SR]
Labour Efficiency Variance – This variance is to be calculated by the difference actual hours
multiplied by the standard rate and standard hours multiplied by the standard rate.
Labour Efficiency Variance = [Actual hours* Standard rate per hour] – [Standard hours *
Standard rate per hour]
LEV = [AH * SR] – [SH * SR]
With the computation of these variances Dell can identify the differences and can take
remedial actions if it is required and improve the performance level.
D3 Planning tool respond appropriately for resolving conflicts
There are different planning tools that respond correctly for removing the problems and
helps in developing sustainability. Some of them are applied by Dell in its organisation are as
given below:
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 Activity Based Budgeting:- The tool of generating greater transparency into the process of
budget is to be termed as Activity Based Budgeting (ABB). It computes the generated
income from instructional and research activities that are allocated directly to the unit,
which is responsible for the activity. By using ABB, Dell allocate overhead costs that
reduces the unnecessary wastage of cost. Balanced Score Card (BSC):- This planning tool is used as framework of organisation
that tracks and manages the strategies. There are two indicators on which this tool is
based, these are leading and lagging (Macintosh and Quattrone, 2010). These two key
indicators help to know that, whether the objectives are achieved or not are per the time
limit to the company like Dell. And also supports in analysing the right way for the goals
of future.
 Value chain analysis:- The internal activities of Dell are to be identified by value chain
analysis, which is a strategic tool. It analysis that the more valuable activities and the
activities which required more improvement. This planning tool helps in recognizing the
ways by which Dell company develops value for its stakeholders and also recommends
for the possible ways to increase the value chain.
TASK 4
P5 Comparison between Dell and its competitor in order to adopting management accounting
system
The major competitor of Dell as per the study of market is HP. So, it is considering for
the comparison in the adoption of management accounting system.
Dell company HP company
By the adoption of management accounting
system Dell has improved its core
competencies in order to take competitive
advantage in the current market situation. With
the use of different planning tools company
identifies opportunities and threats in the
external business environment. The reports of
management accounting helps in taking
As it has mentioned above that HP is the major
competitor of Dell. It is also performing as per
the management accounting system. The only
difference is that its way of working. They uses
marginal costing method for the calculation of
profits, that does not provide appropriate
results.
The reports of management accounting are
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effective decisions to the mangers of the
company (Macintosh and Quattrone, 2010).
With the utilization of variance analysis the
company identify deviations and try to rectify
them by taking appropriate remedial actions.
The proper estimation of sale budget provides
the idea for sale in the future. And if the
company is not achieving the nearly results
then there may be low demand, competitor's
strategic effect of may be some other economic
reason. It is the responsibility of company that
identify the reason in such situation and take
suitable decision.
valuable only when the interpretation has done
correctly by the management of the company,
because all the operations are based on their
decisions. This also helps in the distribution of
resources among all the departments. Most of
the time, the sales budget of HP has proved
exactly or nearby which shows that the way of
estimation done by them are effective. They
maintain their profit levels.
M4 Management accounting in respond to financial issues
The problems may take place in every type of organisation. Similarly, Dell also has to
face some kind of financial problems. It is the responsibility of managers to give solutions for the
problems. Management accounting is the system that helps in finding the solutions to the
financial problems in an effective manner. It is based on financial accounting and cost
accounting (Siegel and et.al., 2010). Therefore, it gives solution to both of the accounting
techniques. The information which has gathered from the management reports helps in taking
decisions by the managers of Dell. Financial issues which have to face by Dell, such as increase
in outsiders debt which tends to fix liability, shortage or excess of funds, continuously increase
in cost, insufficient of working capital, budget preparation and its forecasting etc. All these are
considered by management accounting and helps in finding the solutions. By taking right
decisions with the right time Dell can resolve its financial problems effectively and efficiently.
CONCLUSION
It has been concluded by the above report that management accounting system gives
support to organisation in achieving its objectives more effectively. It also increases the
efficiency level of employees. The management accounting system and its reporting are
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integrated terms in the process of organization. Dell is following absorption costing method
which is more accurate than marginal costing method. Income statement under marginal costing
does not provide appropriate profits. Dell's decision of adopting this system is more appropriate
for solving financial problems. The use of planning tools for preparing and forecasting budgets
in a better way. Its also leads to the sustainable development of the company. Company should
continue with management accounting system as this helps in decision making process by the top
management which shows the effective control over the activities.
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REFERENCES
Books and Journals
Bennett, M. D., Schaltegger, S. and Zvezdov, D., 2013. Exploring corporate practices in
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Busco, C. and Scapens, R. W., 2011. Management accounting systems and organisational
culture: Interpreting their linkages and processes of change. Qualitative Research in
Accounting & Management. 8(4). pp.320-357.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Macintosh, N. B. and Quattrone, P., 2010. Management accounting and control systems: An
organizational and sociological approach. John Wiley & Sons.
Modell, S., 2010. Bridging the paradigm divide in management accounting research: The role of
mixed methods approaches. Management Accounting Research. 21(2). pp.124-129.
Parker, L. D., 2012. Qualitative management accounting research: Assessing deliverables and
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Siegel, G., and et.al., 2010. The ongoing preparation gap in management accounting education: a
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Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Te
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van der Meer-Kooistra, J. and Vosselman, E., 2012. Research paradigms, theoretical pluralism
and the practical relevance of management accounting knowledge. Qualitative Research in
Accounting & Management. 9(3). pp.245-264.
Vosselman, E., 2014. The ‘performativity thesis’ and its critics: Towards a relational ontology of
management accounting. Accounting and Business Research. 44(2). pp.181-203.
Ward, K., 2012. Strategic management accounting. Routledge.
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